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Released: 4/22/2009

Author(s): David Stuit

Indiana legislators are currently debating the merits of a proposal to adopt a statewide tuition scholarship tax credit program. The proposed program would make available $5 million in tax credits that businesses and individuals could claim by making donations to non-profit Scholarship Granting Organizations (SGOs). SGO donations would be matched at 50 percent, meaning that the state would provide a 50 cent tax credit for each dollar donated to a SGO. SGOs would in turn distribute scholarships for families to use towards private schooling costs. Eligibility for the program is restricted to students who were not enrolled in private schools in the previous school year and whose household income is at or below 200 percent of the federal free and reduced-price lunch program. Students who received a scholarship in the previous school year from a qualifying non-profit are also eligible.

The purpose of this study is to project the impact of this program on the state’s public education costs. It forecasts the immediate costs of the program in foregone state tax revenue and the potential cost savings that result if public school students use the scholarships to migrate to private schools. These estimations will allow policymakers and taxpayers to evaluate the merits of the policy in the context of its financial implications for the state.

Key findings of this study include:

• The program shows savings in the first year even with the state’s current five year rolling enrollment adjustment provision (which protects school districts with declining enrollments). At an average scholarship of $1,500 and below the state would realize between $300,000 and $4.7 million worth of savings in the first year. In the second year, scholarships worth $4,000 and below would show savings worth up to $8.8 million. From the third year on, even if demand from public school families is low, we estimate that the program will result in savings regardless of scholarship size and demand.
• Without Indiana’s declining enrollment adjustment provision (also known as the deghoster), the savings to the state increase substantially. The deghoster uses a fi ve year average of student counts to create a current year enrollment for funding purposes, which often includes funding for students that aren’t there. However, when public schools base funding on accurate and up-to-date counts, the fiscal benefit of the proposed choice program spikes dramatically - savings in the first year would range between $5.3 and $29.5 million based on scholarship value. In fact, the state would save money in all years and at all average scholarship sizes.
• Regardless of demand, the tax credit scholarship program will result in savings to the state. Depending on the level of demand and average scholarship size, savings in the fifth year of the program are estimated to range from $6.4 million to $17.6 million even if you include the rolling five year enrollment adjustment. Even in the worst case scenario – low demand and little capacity – the program will result in savings to the state of 1.6 million in the third year.
• Based on the experiences of other states, we predict all $5 million tax credits will be claimed in the first year of the program. If this is the case, SGOs would receive a total of $10 million in donations and distribute at least $9.5 million as scholarships. Depending on the average size of the scholarships, this will make scholarships available to anywhere from 1,900 to 19,000 students.
• Demand for the program rises dramatically as the value of the scholarship increases. If scholarships of $500 are offered, we predict between 1,382 and 3,799 public school students will seek scholarships. In contrast, if scholarships of $5,000 are offered demand will range from 13,815 to 37,992 public school students.
• Assuming there is a moderate level of demand from public school families, savings in the fifth year of the program are estimated to range from $6.4 million to $17.6 million depending on the average scholarship dollar amount.
• The maximum savings to the state are estimated to be found when average scholarship amounts fall between $1,250 and $1,750, in which case savings could reach $24 million in the fifth year of the program if demand for scholarships from public school families is high.
• Cost savings decline sharply if average scholarship amounts drop below $1,000 because demand for the program from public school families will be low.
• The program is estimated to produce cost savings at any scholarship amount between $500 and $5,000. This suggests that SGOs have substantial flexibility in deciding the average scholarship amount that should be distributed. Scholarship granting organizations could choose to distribute scholarships of larger dollar amounts, which would induce the greatest amount of demand from Indiana’s low-income students, without overdue concern that the program would lead to additional costs to the state.

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