Tax-credit Scholarships in Maryland: Forecasting the Fiscal Impact

Released: 5/17/2010

Author(s): Brian J. Gottlob

Press Release
Executive Summary (704 KB)
Full Report (13.1 MB)
Report Brief
Tables and Figures (3.63 MB)

This study seeks to inform the debate over a proposal in Maryland to give tax credits to businesses for contributions to organizations that provide scholarships to K-12 private schools or which contribute to innovative educational programs in the public schools. The study constructs a model to determine the fiscal impact of a tax-credit scholarship program on the state and on local school districts. We estimate the impact that the scholarship portion of the tax-credit program will have on the distribution of students between public and private schools in Maryland by estimating the likely transfer of students from public to private schools depending on the average dollar value of scholarships. We use these estimates to determine the impact that tax-credit scholarships will have on state education aid to school districts and to calculate the “break-even” rate of transfer, or the number of public school students who would have to transfer to private schools in response to the scholarship program, in order to make the tax-credit scholarship program (both the scholarship and innovative education program for public schools portions) fiscally neutral from the perspective of Maryland state government. We compare the revenue and expenditure impacts of the scholarship and contributions for innovative educational programs on school districts to determine the net impact of the tax-credit program on school district finances and the resources available to educate each child in Maryland’s public schools.

In addition to expanding educational opportunities to Maryland families of limited means (improving the equity of its education system) and providing funding for innovative educational programs in the public schools, the Building Opportunities for all Students and Teachers (BOAST) tax-credit program will generate fiscal benefits for local school districts, increasing the available resources for students who remain in public schools. Because much of their revenue does not vary with enrollment, school districts will retain much of the funding associated with students who use scholarships to transfer from public to private schools. The overall impact on public schools would be to increase the financial resources available per student. Depending on a few key program variables and design elements, the BOAST proposal can also result in large fiscal savings to the state budget.

Key findings include:

The total fiscal impact of the BOAST proposal depends primarily on the number and percentage of public school students who receive scholarships. This in turn depends on a number of program design factors, including income eligibility levels, the size of the scholarships, and the total amount of available scholarship funding. The study uses data from the U.S. Census Bureau and other sources to estimate how public school families might respond to a tax-credit scholarship program with various design features.
The State of Maryland receives a net fiscal benefit, in the form of reduced per-pupil state education aid expenditures, for each public school student who receives a BOAST scholarship, as long as the value of the scholarship is lower than the cost of the tax credit awarded to fund it.
Under almost all scenarios, the scholarship portion of the BOAST proposal generates large net fiscal benefits for the State of Maryland. Under many, but not all, scenarios, the net fiscal benefits of the scholarship portion of BOAST are large enough to offset or “pay for” the innovative education program for public schools’ portion of the BOAST proposal.
In the first year of the program, 10,546 public school students will have to receive a scholarship for a $50 million tax-credit program to “break even” or to result in no additional expenses for the state. The break-even number of public school students declines in each year of the program.
The scholarship portion of the BOAST proposal will produce enough savings in per-pupil state education aid to pay for the tax-credit cost of contributions for scholarships and contributions for innovative public school programs. BOAST will generate state savings of more than $133 million over 10 years, if at least two-thirds of the scholarships awarded go to public school students and their average value is between $1,500 and $2,500.
If 80 percent of scholarships are awarded to public school students, then net state benefits can be as high as $267 million over 10 years, depending on the average value of scholarships. If all scholarships are awarded to public school students, then savings can be as high as $472 million over 10 years.
In no scenarios does the BOAST proposal adversely affect the fiscal situation of local school districts or the per-student resources available to them. Because only a portion of revenue (state education aid) is reduced when a student receives a scholarship and leaves a local district, while a majority of revenue remains and a portion of the expenses associated with educating that student reduced, the resources available to students who remain in public schools increase. These results are robust even under unrealistic, high assumptions about the percentage of local school district costs that are fixed.