A closer look at Marco Rubio’s proposal for federal tax credit scholarships

Eleven states currently offer tax credits to specified taxpayers who make contributions to tax-exempt non-profit organizations that in turn use those contributions to fund scholarships for qualifying, financially-needy, elementary and/or secondary school students attending private schools. This fairly recent development is currently empowering perhaps 150,000 lower-income families, who generally are unable to afford private schools, to make this sort of school choice for their children. To be clear, these plans provide benefits for taxpayers who make contributions that help other people’s children attend private schools.

Sen. Rubio
Sen. Rubio

Sen. Marco Rubio, R-Fla., has just introduced a bill that would expand this tax credit scholarship initiative nationwide. To understand the good (and dubious) features of Senator Rubio’s proposal, it is important to appreciate the state law background against which it is set.

Florida has the financially largest of these 11 state tax credit programs, with about 50,000 children currently participating. It restricts the scholarships to children from truly low-income households; the child must be eligible for a free- or reduced-price school lunch – currently just over $40,000 a year for a family of four. Other states are more generous, with Oklahoma reaching well into the middle class since there a family of four can still qualify with $120,000 in annual income. Senator Rubio’s plan, while not as tightly restricted as Florida’s, focuses the scholarships on families with income no more than 250 percent of the poverty level, which is a bit over $50,000 today. The main thing to emphasize here is the senator clearly seeks by his bill to empower the least well-off Americans who are currently least able to exercise school choice – a choice that more well-to-do families make by either moving to a better public school district or paying for private schools on their own.

Several state plans give tax credits to both individual and corporate donors (and for corporate donors the plans sometimes allow credits against a variety of state taxes).  Senator Rubio’s bill does the same – allowing married couples and single taxpayers both to obtain a federal income tax credit for an annual contribution of up to $4,500, and allowing corporations an annual corporate income tax credit of up to $100,000. Florida by contrast only allows corporate tax credits and Arizona (which was the first state to adopt this program) initially granted only individual tax credits. Senator Rubio’s proposed tax credit limit for couples and individuals is about twice that now allowed in Arizona. Some states have no cap on donations, and indeed in Florida a few very large corporate donors contribute millions each year to the plan.

Senator Rubio’s proposed tax credit is a 100 percent credit, as is true in both Florida and Arizona, for example. This means that for every qualifying dollar contributed, federal income taxes would be reduced by a dollar. This essentially makes contributions costless to the donors. They, in effect, are able to re-direct their tax dollars to this specific cause – helping needy families send their children to private schools. It is worth nothing, however, that some states grant only a partial tax credit, such as the 65 percent credit allowed in Iowa and the 50 percent credit allowed in Indiana. In those latter states, donors must put up some of their own money.

Most states that adopted these plans imposed a maximum overall limit on the amount of tax credits that may be claimed each year in support of the program. These maxima vary enormously and even so are often not reached. Senator Rubio’s plan has no such limit. It probably would be complicated and costly, but clearly not impossible, for the IRS to administer an overall ceiling in a way that allowed would-be donors to know whether their contribution was within the national maximum and hence truly eligible for the credit.

One important difference between many state plans and Senator Rubio’s proposal is there is no limit on the amount of the scholarship that may be awarded. Florida, for example, caps scholarships at $4,335 at present; in Georgia the limit is just over $9,000. Hence, as appears to be the case in states like Iowa and Indiana, it would be legally possible under the senator’s plan for a child to win a full scholarship to a very high cost, elite private school and hence indirectly obtain government financial aid well beyond what is now being spent on public schools. This is perhaps unwise. Note, however, that nothing in Senator Rubio’s bill would require scholarship granting organizations to award full scholarships or high-value scholarships. In many states at present, the average scholarship is less than $2,000 a year. Since it would be rare to find a school with tuition that low, either the families must find some way to come up with the difference, or the schools must use their own financial aid plans to make up some or all of the gap.

The most striking difference between most state plans and Senator Rubio’s is children already enrolled in private schools would be eligible for scholarships.

Although this is not universally true, existing state plans generally restrict initial eligibility to children currently attending public schools plus (often) those just starting school (i.e. in kindergarten). States have adopted this restriction because they are not eager to take on the education costs of children whose families, under the current regime, have opted out of public support by choosing private education. In fact, one of the political selling points of most state plans is they will either save the government money (or at least not result in a net new cost to the government) because public education costs are reduced when a child in public school leaves for private school. Senator Rubio’s plan is quite different.

Indeed, because it is a federal tax credit, it would seem 100 percent of the cost of the plan would amount to new federal spending – in the form of tax expenditures. It might seem surprising that someone as conservative as Senator Rubio is calling for this potentially sharp increase in federal expenditures. Yet, because this spending comes as a tax expenditure, the upshot would be to deprive the federal government of revenue, which is something Senator Rubio appears to favor, and would likely force the federal government to cut spending elsewhere, something else the senator no doubt favors.

Were Senator Rubio’s plan adopted, it would save states and local school districts money to the extent that scholarship winners who would otherwise be in public school are now attending private schools. In this sense, it is somewhat analogous to proposals to have the federal government fully fund Medicaid, rather than share the cost of Medicaid with the states, as happens now. Of course, Republicans like Senator Rubio tend to have the opposite goal of reducing, not increasing, federal spending on Medicaid.

The scholarship granting organizations that would come into being under Senator Rubio’s bill are very much like those now operating under state plans. They must be tax-exempt organizations that specialize in awarding these sorts of scholarships. And they may keep no more than 10 percent of what they receive for administrative costs (which is the typical state rule, although in Florida the scholarship granting organization – that would be Step Up For Students, which co-hosts this blog – must give away 97 percent of what it receives in donations as scholarships). Were Senator Rubio’s bill to pass, perhaps the existing state scholarship granting organizations (or newly formed sister organizations) would be the first to take on this role with the new federal tax credit.

Senator Rubio’s bill makes clear that someone who gets a tax credit for contributing to a scholarship granting organization under his program may not also get a tax deduction under federal law – no double benefit. But it does not specify what is to happen under state law. Unless state laws were changed, it might well be that under current rules, donors could not only get the federal tax credit but also a state tax deduction. This might allow donors to make money from such contributions – a probably undesirable result.

Senator Rubio’s plan, like most state plans, requires that the scholarship granting organizations give scholarships to children attending more than one school, and the schools for which the scholarships are granted may not illegally discriminate (although Senator Rubio’s bill refers only to state laws on discrimination whereas some state plans refer to federal civil rights laws). Otherwise, apart from one matter discussed next, Senator Rubio would impose no further requirements on participating private schools.  This, of course, gives schools maximum freedom, but it does not give maximum choice to families, which some think is the basic ideology underlying these plans. Charter schools, another important element in the “school choice” movement, better conform to this outlook since they typically must accept all who apply (and admit by lottery if there is excess demand).  But in barely restricting the admissions policies of private schools in his bill, Senator Rubio is largely paralleling state tax credit scholarship plans.

One key deviation from the “hands off” approach that otherwise pervades Senator Rubio’s bill is an elaborate evaluation scheme. Simply put, it requires participating schools to give students standardized tests, then report the results to parents and others. Many Republicans especially favor this sort of accountability strategy – believing required disclosure of test results will make parents better choosers of what is best for their children. Some state plans have similar sorts of requirements. Notice, however, that there are no curriculum or teacher quality or qualifications requirements in the Senator’s bill, apart, of course, from any existing state law requirements for private schools (which vary significantly from state to state).

It is altogether unclear whether Senator Rubio wishes for his plan to fully replace the state plans (a somewhat anti-federalism outcome). This could happen if all of the demand for scholarships were met with federal tax credit donations. But that would probably be quite a way off, and so the most sensible interaction between the federal and state plans could perhaps be better dealt with after more experience with both of them.

Clearly, both Senator Rubio’s plan and all state plans allow scholarships to be used at private religious schools – not only Catholic and Protestant schools, but of course, Jewish and Muslim and other religious schools as well. And, in fact, most scholarship recipients under the state plans are using their scholarships at religious schools. This seems to be constitutional, although those favoring a high wall of separation between church and state would probably seek to challenge the senator’s plan anyway.

Here is a likely scenario under the senator’s plan that is somewhat disturbing to me.  I imagine existing religious schools would be quick to get a scholarship granting organization in place and, so long as at least two schools are paired together, the organization could focus its scholarships only on children attending such schools. Then I foresee that financially better-off parents with children in those schools would make maximum contributions allowed under the law, at least to the extent that the two (or more paired) schools have qualifying students to whom the scholarships could be awarded.  This might well replace any contributions these families currently make to the school that is for financial aid. While this might increase the number of children from lower-income families attending the school, it might not; it might instead just increase school revenues in ways that would benefit donor families and/or their children – a result that is inconsistent with the underlying philosophy of these plans, which is to help other people’s children.

There is at least some reason to be concerned that gaming of this sort has taken place to some extent under Arizona’s individual income tax credit plan. One way to counter this tendency would be to require the scholarship granting organizations to fund scholarships of students attending a large number of schools. That would more clearly break any connection between the schools where donor children attend and children who receive the scholarships – even if, in the end, a number of scholarship students attend with children of parents who donate. Another way to break this connection is to restrict donors to corporations, as Florida has done.

Of course, Senator Rubio’s bill is in its early stage and could easily be amended. Indeed, for now, it is highly unlikely to be adopted by the current Congress. Hence, while this comment has focused on the details, perhaps the main take away is Senator Rubio has put before the nation a bold idea that supporters of more school choice for lower-income families should generally support.


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BY Stephen D. Sugarman

Professor of law, University of California at Berkeley, author with John E. Coons of Private Wealth and Public Education and Education by Choice

One Comment

John Kirtley

Mr. Sugarman is concerned that a group of schools will create a scholarship organization that will restrict its donations to their own schools. However, language in the bill makes this impossible. Here is the exact language:

“[A scholarship granting organization must] provide grants to..more than 1 student, and..different students attending more than one 1 school…[and] such organization does not earmark or set aside contributions for scholarships on behalf of any particular student or to any specific school or group of schools.”

This provision ensures the intent of the bill, which is to empower low income parents to choose from multiple schools.

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