Educational Improvement Tax Credit Program

REACH Foundation

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Introduction

Founded in 1991, the REACH Foundation is a grassroots organization in Pennsylvania working for parental choice in education. Comprised of a broad coalition that includes parents, taxpayer groups, ethnic and religious organizations, and members of the business community, REACH–Road to Educational Achievement through Choice–was instrumental in drafting, passing and, most recently, expanding Pennsylvania’s landmark Educational Improvement Tax Credit (EITC) program.

Enacted in 2001 with overwhelming bipartisan support, Pennsylvania’s EITC program has proven that students from the same socioeconomic backgrounds, and with the same level of inherent ability, can achieve a greater level of accomplishment when freed from a failing public school and placed into the school of their parents’ choice. When students are matched with the learning environments best suited for their individual needs, academic and personal growth are enhanced.

The goals of the EITC program are to increase student achievement, ensure that parents and students realize true choice in education, and allow businesses to keep their tax dollars in their communities rather than send them to the state government. This theory is supported by Pennsylvania’s school administrators, parents, and kids, all whom have credited the EITC program for expanding student horizons.

The Problem

Pennsylvania public schools have suffered many of the shortcomings that public schools across the nation have suffered: overcrowding, substandard student achievement, unimaginative policy thinking where a one-size-fits-all approach to students trumped the view that different students have different needs, and a lack of educational alternatives. Consequently, poorly performing schools continued to perform poorly, draining taxpayer money with little achievement to show. The few alternatives that did exist were unavailable to most families, and were too costly to be implemented in a broad and sustainable manner. This began to change with the introduction of the EITC program in 2001.

The Solution

The EITC program allows private businesses to donate up to $200,000 to either a registered Scholarship Organization (SO) or an Educational Improvement Organization (EIO) of their choice. In turn, the state’s responsibility is to provide each donating business with a tax credit of 75% of their donation amount, or 90% if they pledge the donation for two consecutive years. The Department of Community and Economic Development collects the donations and allocates the funds to the SO’s or EIO’s corresponding to the donors’ wishes. This program enables businesses to contribute to their community while allowing students to use these funds to pay for their individual educational needs.

The Costs

Originally, the cap for the program was set at $30 million annually, with two-thirds allocated to SOs and one-third given to EIOs. While this division of funds has remained constant, the total cap has been increased almost annually to its current level of $75 million, including $5 million for pre-K scholarships. During the 2007-2008 academic year, approximately 40,000 students used EITC funds to attend the school of their choice.

There are currently more than 1,850,000 students enrolled in Pennsylvania’s public schools, compared to less than 285,000 students, or about 15%, attending nonpublic schools. While the 40,000 students currently benefiting from EITC scholarships may seem like a significant number, they represent a mere 2% of the state’s total student population. Thus, for every one family with the opportunity to choose the learning environment they feel is best for their child, more than 50 families don’t get this opportunity for lack of funding.

Unsurprisingly, the glaring disparity between students in public schools and those benefiting from the EITC program is reflected in the funding allocated to the two options. While Pennsylvania’s 2006-07 state budget allotted $635 million to pre-K-12 education, only $59 million, or 9.3%, went to the EITC program. That means that for every $10 spent by the state on primary education, only 93 cents is available for the EITC program.

Conventional wisdom holds that the more public taxpayer funds are allocated to public service, more people receiving that service will benefit in some way. The EITC program is unique, however, in that program costs borne by the state and taxpayers are offset by savings inherent in the program’s formula, which includes public-private partnership and an injection of market-driven capitalism into a public service. In fact, the Commonwealth saves taxpayer money as the EITC program continuesto expand and more students are able to realize their potential at the school best suited to them.

Both taxpayers and the public school districts realize savings as the program is implemented and expanded. The funding for one public school student to attend a government-administrated school comes from three sources: the federal, state, and local governments. Federal funding is by far the smallest portion of this total, followed by local funding, in the form of property taxes, while state funding represents the largest portion of the total amount designated to one student. Within the parameters of the EITC program, the school loses its funding on a federal and local level when a student moves from a public school to one using a scholarship. However, the state funding is not taken away from the district experiencing the loss. Thus, the difference in the amount allocated to a public school student and one that has used an EITC scholarship to exit his/her public school is retained by the original district and allocated to the remaining students, raising per pupil expenditures without increasing taxes or other means of funding

The Benefits

The average amount allocated to one public school student within the Commonwealth to educate him/her for one academic year is approximately $11,000, while the average EITC scholarship amount awarded to one student to use outside the system for one academic year is $1,090. That is the average amount the state designates for one student in the public school system is roughly ten times that awarded to a student using an EITC scholarship. If one multiplies the difference ($9,910) by the number of students receiving EITC scholarships (40,000), it is determined that over $396 million is saved by awarding this relatively small percentage of students with EITC scholarships. Conversely, if each of these students, representing barely 2% of the state’s overall student population, reentered the public school system, that figure would represent the costs required to educate them.

During the 2005-2006 academic year, the average annual parochial school tuition was $2,607 for elementary grades and $5,870 for secondary grades. When a student is awarded an EITC scholarship at $1,090, families must account for $1,517 for elementary students and $4,780 for secondary students. Correspondingly, during the same academic year, the average annual tuition cost for one private, non-parochial school student was $14,000 for grades 1-5, $15,000 for grades 6-8, and $16,000 for grades 9-12. When awarded an EITC scholarship at the average amount, $1,090, families must make up between $12,910 and $14,910 in private, non-parochial school tuition. Despite the relatively low income cap on those eligible for EITC funds, families readily accept this significant financial burden in order to provide their children with what they believe to be the most appropriate and beneficial learning environment.

Since its inception seven years ago, EITC funding has increased roughly 150 percent, from an original $30 million cap to the current $76 million level, including a $5 million allotment to pre-K scholarships not present under the original design. While this increased funding represents noteworthy progress towards real choice for Pennsylvania families, the benefits are available to too few students.

Governor Rendell’s 2007 budget proposal allocates $1.4 million in new funding to the EITC program. Under current program specifications, one-third ($466,666) of the funding would go to innovative EIOs, while two-thirds ($933,333) would go to EITC scholarships. If the average scholarship amount remains $1,090 per student, that means 856 more students now enrolled in PA public schools, or a paltry 0.05 percent of Pennsylvania’s total public school student population, would have the means to choose a school better suited for their individual.

Based on this proposed rate of expansion, even excluding population growth, it would take over one millennium for choice in the form of EITC scholarships to reach only half of PA public schoolchildren.

Conversely, the relative statistical triviality in terms of number of students is contrasted by the considerable savings to the state. If only those 856 students used EITC funds to enroll in a nonpublic school, given the disparity in allocation to one public school student versus one average EITC scholarship, the savings would be almost $8.5 million for just one year. Similarly, if $25 million was added to the program, an extra 15,290 students would be awarded EITC scholarships, at a savings of over $150 million. If $50 million was added to the program, 30,581 new students could receive scholarships, at a savings of over $300 million. Finally, if $100 million in new funding was added to the EITC program, 61,162 students could receive scholarships, and save the Pennsylvania General Fund over $600 million in one year–only $35 million less than the annual public school system K-12 budget.

These potential savings cannot be realized without expanding the EITC program. The good news, however, is that national and statewide surveys suggest that there is significant demand from both businesses and families to increase the EITC program. An April 2006 survey conducted by the REACH Foundation of 500 Pennsylvania parents found that 77% said they support a government-sponsored tuition scholarship program that would help them send their children to a school of their choice, public or non-public. The survey also showed that 60 percent of parents would take advantage of a $3,000 scholarship to send their children to the school of their choice.

In a 2003 Commonwealth Foundation survey of 21 parents with schoolchildren who have left Philadelphia public schools with the aid of Futuro Educacional EITC scholarships, the results show similar support. The vast majority of parents responded rated their child’s new school better than the school which he or she had left.

While these surveys provide valuable insight into the opinions of parents about the EITC program, the number of families and businesses registering to receive and donate towards EITC scholarships indicates that the demand for EITC far exceeds supply. For example, families living in Diocese of Pittsburgh requested some $11.3 million, but received only $2.2 million annually. The Neumann Scholarship Foundation puts its need at $3.2 million, while it can distribute only $1.2 million. Similarly, Business Leadership Organized for Catholic Schools (BLOCS) said only 2,971 of their 5,323 EITC-eligible applicants received scholarships.

The excess demand exists on the other side of the EITC spectrum as well. The PA Department of Community and Economic Development estimated that more than 500 businesses pledging more than $11 million to the EITC program during the 2006-07 fiscal year had their donations rejected because of the current cap.

Applicability to Massachusetts

It is this type of successful and innovative corporate tax credit program that our proposal recommends for the Commonwealth of Massachusetts. Pennsylvania currently enjoys this type of school choice, and the potential benefits available to students, schools, and businesses in Massachusetts are plentiful.

While Massachusetts public schools consistently rank very well compared to other states, myriad signs show that many schoolchildren in the Commonwealth need better educational opportunities. Students from the Commonwealth rank 30th in composite SAT score and 21st in percent change in this score over the last ten years. Likewise, according to the Education Week newspaper, 27% of Massachusetts children never graduate from high school. The National Assessment of Educational Progress determined that 51% of Massachusetts 4th graders and 57% of 8th graders are not ranked as “proficient” in mathematics. Similarly, 43% of 4th graders and 49% of 8th graders are not ranked as “proficient” in reading. In short, Massachusetts schoolchildren, confined to traditional, government-run public schools, have not reached their potential.

If Massachusetts were to implement a corporate tax credit program similar to the EITC program in Pennsylvania, donations would allow many public school students to attend private and parochial schools. If freed from the public schools where they are chronically underperforming, students in the state (and their parents) could choose the school that best suits their unique educational needs.

Conclusion

The REACH Foundation believes that student achievement increases in settings where the child feels more comfortable. Results from studies on this transition overwhelmingly support school choice. Students and schools (public and nonpublic) in Milwaukee improved once a voucher system was installed in the city. While one might deduce that students who remained in public schools would suffer, results show the opposite; that these students improved markedly because of classes that were smaller and unburdened by students for whom public school was not a good choice, and who were either disruptive or slowed down their classmates. The public school system kept a portion of funding not appropriated to follow the student to their new schools, resulting in a higher per pupil expenditure. Parents, students, and schools in Milwaukee all benefited from having school choice made available. This has lead to bipartisan praise of the program and calls for its expansion.

The Massachusetts public school system has also proven to be a serious strain on local and state budgets, and ultimately taxpayers. Massachusetts spends $12,566 for each public school pupil in the state– more than 35% above the national average–ranking it 7th in the nation on per-student expenditures. Likewise, the average salary of instructional staff in these schools is just under $50,000 per year, and ranks 10th in the nation in that category. These costs are borne disproportionately by Massachusetts taxpayers. Federal sources provide Massachusetts with 6.7% of its school funding, while the remaining 93.3% is covered by state and local sources of revenue. With a thriving economy and many metropolitan centers, the Massachusetts’ private sector would welcome the opportunity to spend its tax credits within local communities instead of sending those monies to the State Legislature.

The EITC program is an innovative and remarkably successful school choice program. Businesses, taxpayers, students, teachers, and both public and private schools benefit from this program in Pennsylvania. Our state provides a template as to how effective a school choice program can be with bipartisan legislative support, as well as the backing of school officials, business owners, parents, students, and the general citizenry.

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