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Released: 6/15/2011

Author(s): Brian J. Gottlob

This study seeks to provide outcomes-based information on Oklahoma’s proposal to give tax credits for contributing to organizations that provide scholarships to K-12 private schools. The study constructs a model to determine the fiscal impact of tax-credit scholarships on the state and on local school districts.

We estimate the impact that tax-credit funded tuition scholarships will have on the distribution of students between Oklahoma’s public and private schools by estimating the number of students transferring from public to private schools in response to different scholarship values. We use these estimates to construct a model to determine the impact that scholarship tax credits will have on state education aid to school districts and to calculate the “break-even” rate of program participation. The program’s break-even rate is the number of public school students that would have to transfer from public to private schools in response to the scholarship program in order to make the tax credits fiscally neutral from the perspective of Oklahoma state government. We use district-level expenditure and enrollment data to estimate the percentage of expenditures that vary with changes in enrollment levels across school districts in Oklahoma. We then compare the revenue and expenditure impacts of scholarship tax credits on school districts to determine their net impact on school district finances.

In addition to allowing Oklahoma to expand educational opportunities to a broader segment of families and improving the equity of its education system, a tax-credit scholarship program would generate fiscal benefits for local school districts, thus increasing the available resources for students who remain in public schools. Because much of their revenue does not vary with enrollment, school districts would 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 design elements, a taxcredit scholarship program can achieve any desired level of fiscal benefits for the state of Oklahoma.

Key findings include:

• When students leave Oklahoma public schools in significant numbers, local school districts experience reductions in expenses greater than the reduction in state aid. In addition, school district revenues from local sources do not decline when enrollments decline. Because expenses decline more than revenues when students leave public schools, there is a net gain of resources available in public schools equal to $2,136 per public school student using a scholarship.
• The total fiscal impact of a tax-credit scholarship program depends on the number and percentage of public school students who receive scholarships in relation to the number of private school students receiving scholarships. This in turn depends on a number of programmatic 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.
• Contributions to scholarship granting organizations are estimated to cost the state of Oklahoma $26.2 million dollars in tax credits in the first year of the program, resulting from about $32 million in contributions to scholarship granting organizations by businesses and individuals.
• A scholarship program for current public school students that costs the state of Oklahoma $26.2 million in tax credits, including $10 million from businesses at 65 percent of the value of contributions to scholarship granting organizations, and the remainder from individuals receiving tax credits equal to 100 percent of their contributions, will make $31.8 million in funds available to scholarship granting organizations.
• In the first year of the program, 6,480 public school students will have to participate in the program for it to “break even” or have no cost to the state.
• If scholarship eligibility is set at 300 percent or below of the federal free or reduced-price lunch eligibility guidelines, and at least 80 percent of scholarships are awarded to public school students, the program will yield net fiscal benefits to the state of Oklahoma over 10 years of between $8.9 million and $125.6 million if scholarship values average less than $4,000.
• If 80 percent of scholarships are awarded to public school students, peak fiscal benefits of $125.6 million over 10 years occur at scholarship values of $2,750. At scholarship values averaging $4,250 to $5,000, the program would cost the state between $8 million and $49 million over 10 years.
• Raising the income eligibility for scholarships always increases the fiscal benefit of the program, because more public school students would be eligible for scholarships and eligibility is increased most among income groups that have the highest propensity to transfer from public to private schools.
• A tax-credit scholarship program is a more efficient way to direct dollars to education than increasing state aid. Oklahoma data show that every dollar of increased state aid to schools only produces an additional 32 cents of additional school spending, because local governments respond to state spending increases by reducing local spending on education. By contrast, for every dollar spent on a tax-credit scholarship program,90 cents goes directly to a child’s scholarship and education. Every dollar of tax-credit scholarships would cost the state of Oklahoma less than one dollar.