choice history

The rise of tax credits: How Arizona created an alternative to school vouchers — and why they’re spreading

PHOTO: U.S. Department of Education

With its recent adoption of a tax credit scholarship program, Illinois became the 18th state to adopt an innocuously named — but highly controversial — policy that critics have described as a “backdoor voucher.”

In some sense, the description is apt. But by injecting a middle layer into the government’s support of private school tuition, tax credits help avoid some of the legal and political obstacles that have dogged efforts by advocates, like Education Secretary Betsy DeVos, to promote school choice through vouchers.

Perhaps as a result, more students now use tax incentive programs than vouchers to attend private schools in the U.S. A federal tax credit is also seen as the Trump administration’s favored approach for promoting school choice at the federal level, though its immediate progress looks increasingly unlikely.

The 20-year history of this approach offers insights into why it has taken hold: resistance to legal challenge; limited government oversight, appealing to among free-market advocates of school choice; and a more politically palatable branding than vouchers.

This is far better than vouchers — it is easier to pass and easier to uphold,” Trent Franks, a conservative activist and now a U.S. congressman, said in 1999 after Arizona’s state supreme court upheld its tuition tax credit program. “I think this is the direction the country will go in.”

He proved largely right.

The number of students participating in private school choice programs over time, including tax credits (green) and vouchers (orange). (EdChoice)

Arizona’s pioneering approach

The first tax credit program was passed in Arizona in 1997. Arizona’s constitution, like most other states’, bars public dollars from going to religiously affiliated schools. Proponents knew any plan to promote private school choice would likely end up in court.

So they landed upon an ingenious approach that would make the initiative more likely to survive legal challenge. Instead of issuing vouchers for private school tuition — like Milwaukee had done since 1990 — the state would outsource that role to nonprofits. Those groups would get their money from donations, encouraged by generous tax credits.

It worked like this: An individual could donate up to $500 to a nonprofit, then get a tax cut for the exact amount they donated. The nonprofit would take the donated money and use it to offer tuition stipends — essentially vouchers — to families who met certain conditions. That system allows the state to promote the tuition subsidy, losing $500 in revenue for each maxed out donation, without paying for it directly.

Arizona’s program has since grown, and the state has created a number of other tax credit programs. (This approach is distinct from programs that give individual families tax breaks for educational spending on their own children; Illinois has had such an initiative since 2000, while Minnesota has had one since 1955.)

Arizona’s and Milwaukee’s policies look similar. In both places, students can receive a subsidy to attend a private school, and it comes at the expense of state revenue. But crucially, in Arizona, the government never had the money to begin with.

“The point was in part to ensure that these were not government-run programs,” Lisa Graham Keegan, who was Arizona’s school superintendent when the tax credit program passed, told Chalkbeat. “Those scholarships are completely separate, both for legal reasons and for philosophical reasons.”

Tax credits: the legal survivors

Private school choice across the country have been inundated with legal challenges, but tax credits have proven remarkably resilient.

Although voucher programs have continued to grow and were upheld by the U.S. Supreme Court in 2002, they have also faced legal challenges in state courts. Colorado’s top court, for example, struck down a voucher program in 2015. (The case is currently being reconsidered in light of a recent Supreme Court decision.)

But tax credits have never ultimately lost in state or federal court, prevailing in Arizona, Alabama, Florida, Georgia, New Hampshire, and the U.S. Supreme Court.

Tax credits “grew up as a result of saying we need a different vehicle than vouchers in states that have legal issues,” said Robert Enlow, the president of EdChoice, an Indianapolis-based group that backs both vouchers and tax credits. (EdChoice is a funder of Chalkbeat.)

Often, cases have been thrown out before substantive arguments can be made, amounting to a win for the programs: Some courts have ruled that private organizations or individuals do not have legal standing to challenge tax credits, since they aren’t government expenditures.

That was the decision in the 2010 Supreme Court case Arizona Christian School Tuition Organization v. Winn, in which the majority said equating government spending and tax credits was “incorrect.”

“When Arizona taxpayers choose to contribute to [scholarship organizations], they spend their own money, not money the State has collected,” Justice Anthony Kennedy wrote.

Light regulatory touch proves a blessing and a downside

To Arizona conservatives skeptical of both regulation and the education establishment, the system had an additional benefit.

“The point was in part to ensure that these were not government-run programs,” said Graham Keegan, and additionally that “these don’t become government dollars.”

Nationwide, tax credit scholarship programs appear less regulated than voucher programs, some of which require private school students to take state tests or for schools to undergo financial audits.

Free-market oriented supporters “see ‘neovouchers’ as much less likely to be regulated and have restrictions — the government strings attached — than a traditional voucher law,” said Kevin Welner, a University of Colorado professor who wrote a book on the rise of tax credit programs and is generally critical of them.

A 1998 essay published by the Mackinac Center, a conservative Michigan think tank, made this case explicitly: “Tuition tax credits also create very different effects than vouchers. … Vouchers are more likely to be viewed as a rationale for regulating the entity that receives the subsidy.”

This has played out in practice. One analysis compared several voucher programs to a number of tax credit programs and found that, in almost all cases, vouchers were more regulated. Most tax credit systems had few, if any, financial reporting or disclosure requirements. (Notably, Florida’s program, the largest in the country, was the most regulated tax credit initiative.)

Many tax credit programs do not require participating students to take state exams, and if they do, the tests are rarely comparable to the assessments taken in public school. This means that while voucher programs have been widely studied, there is little research on the effect of receiving a tax credit scholarship.

Supporters of this approach argue that such requirements discourage private schools from participating.

Limited oversight, however, has proven something of a political liability, insofar as it has allowed for financial malfeasance. National media have drawn attention to how one prominent politician and advocate for Arizona’s program was also able to profit personally from it, for example.

“I think [limited regulation] is a feature that has some bugs,” said Enlow of EdChoice. “We need to have transparency. The programs, like Florida, which are very transparent and very open to data collection, I think are very important.” He declined to name any tax credit programs that, in his view, lacked sufficient transparency.

The use of the tax code has also raised another concern: Under some tax credit systems, “donors” can actually earn a profit by taking advantage of both state and federal tax breaks.

Selling tax credits

How exactly to brand tax credit programs has been the subject of fierce debates. Opponents have called them “neovouchers” and “voucher schemes,” while supporters sometimes portray them as entirely distinct from vouchers.

Tax credits tend to poll better than vouchers, and Welner thinks that may be because it’s less clear to most people what they are.

“People’s eyes get bleary and they tune out when people start talking about tax credits,” he said. “That helps to avoid a situation where they respond to it the same way they respond to a voucher proposal.”

Tax credits are essentially a tax cut, which can be a selling point for some, especially conservatives. Advocates sometimes also downplay the costs of tax credits to the government.

“Is it foregone revenue? Sure, but it doesn’t mean it’s the state’s revenue,” said Enlow.

The distinctions between vouchers and tax credits, though, may ultimately matter less to lawmakers in states where they are being debated. In Illinois, critics connected tax credits to vouchers, and Democrats were largely opposed to the tax credit initiative that ultimately passed.

“In my experience the arguments have been the same whether it’s a tax credit bill or a voucher bill when you’re talking with legislators,” Enlow said. “There’s some nuances, but it’s still the same.”

Correction: An earlier version of this piece misstated the name of a free-market Michigan think tank, which is the Mackinac Center.

Future of Schools

Four school leaders hope to bring innovative ideas to Indianapolis education

PHOTO: Dylan Peers McCoy
Brandon Brown introduces four new innovation school fellows.

Hoping to jumpstart innovation in Indianapolis education, four experienced educators will spend a year or more developing new models for schools.

The educators were chosen from among 39 applicants for fellowships from the Mind Trust, a nonprofit that supports district-charter partnerships. This is the fifth round of innovation fellowships, which give leaders one to two years to prepare to launch or takeover schools in Indianapolis Public Schools.

The fellowship includes an annual salary of about $100,000, benefits, and support for creating new schools, such as visits to other schools, training, and legal assistance. The package for each fellow is worth approximately $200,000 per year.

The city has 16 innovation schools, and they enroll about 20 percent of the students in Indianapolis Public Schools. They are under the umbrella of the district, but they are managed by outside charter operators or nonprofits, and most of the teachers are not employed by the district nor do they belong to the teachers union. The Mind Trust has been instrumental in the creation of innovation schools, and the vast majority of the schools were founded with support from the nonprofit.

The innovation fellowship winners include two people from Indianapolis and two recruits from other cities. But in a sign that the nonprofit’s leaders have become more cautious in their choices, all four have years of experience in education.

Brandon Brown, CEO of the Mind Trust, said that’s by design. About four early innovation fellows never ended up opening innovation schools. But all of the recent winners have either opened schools or are on track to open them, he said.

Candidates are much more likely to be successful, he said, if they have the entrepreneurial spirit to create their own nonprofits and win community support — and have experience in education.

“There’s this notion that if you’re a great entrepreneur, you don’t have to have the unique skill set to know education and [yet] you can go operate a school,” Brown said. “We’ve learned that that’s a very rare thing to see.”

While the winners have all worked in established schools, however, Brown said they are trying new models.

Tihesha Henderson, principal of School 99, won a fellowship to develop a school designed to meet the social and emotional needs of students. She will take a yearlong leave from her current job and hopes to return and transform School 99 into an innovation school.

Henderson envisions a school that adjusts to meet student needs, whether through therapy, small classes, or classroom redesign. School 99 already has significant flexibility, but as an innovation school, Henderson would be able to change the school calendar and set teacher pay, she said.

“We don’t have to be the status quo,” she said. “We can branch out and do some things differently, but it all comes back to — are we meeting out kids needs?”

The other fellows are Alicia Hervey, dean of student development for Christel House Academies; Kim Neal, managing director of secondary education for the charter school network KIPP DC; and Brandy Williams, an expert in special education from New Orleans.

Although innovation schools are considered part of Indianapolis Public Schools, they also often have charters through the office of Mayor Joe Hogsett. The collaborative nature of the schools was on display at the announcement Thursday, where Hogsett, Superintendent Lewis Ferebee, and Brown all spoke.

The innovation schools, said Ferebee, are part of a broader district strategy to give principals more flexibility to run their schools.

“We hire great leaders, get out of their way and give them the space and agility to make decisions about academics [and] operations to better serve our students and our families,” he said.

The city’s reputation in the education community is helping it attract educators from across the country, said Hogsett.

“They know our city is one where they can make a difference,” he said. “Indianapolis welcomes their passion with open arms.”

Compare and Contrast

Comparing the Upper West Side and Harlem integration plans: Here’s how schools, admissions offers could change

PHOTO: Christina Veiga
Parents gathered at a recent Community Education Council meeting in District 3 to learn about the city's plan to integrate Upper West Side and Harlem middle schools.

Following an uproar over a plan to integrate Manhattan’s District 3, the Department of Education introduced three more proposals to change the makeup of middle schools on the Upper West Side and in Harlem.

The initial plan for integrating the 16 middle schools — which drew the ire of some parents concerned their children would be elbowed out of sought-after schools — was pulled by the education department. While the new plans also set aside 25 percent for low-performing students, they differ from the original option in an important way: they don’t rely solely on student test scores to guide admissions decisions.

We’ve placed each plan side-by-side to help you get up to speed. The district hopes to put its new admissions system into place in early June, in time for the middle school admissions process.

What would the plans do?

Each plan would give needy students priority for a quarter of admissions offers at 16 middle schools. Within those seats, 10 percent of offers would go to students who struggle the most, and 15 percent would go to students with the next-highest level of need.

However, the plans look at different factors to determine who gets priority:

Plan A would consider test scores and whether a student attended an elementary school where many students are economically needy.

Plan B would take test scores and report cards into account.

Plan C, presented by city officials Tuesday, would weigh test scores, report card grades, and whether a student qualifies for free- or reduced-price lunch — a commonly used measure of poverty. The plan considers whether an individual student is considered poor — rather than the demographics of his or her entire elementary school, which would be the case with Plan A.

How would the schools change?

Supporters of the plans hope they will extend academic opportunity to more students in District 3. And since race and class are often linked to academic performance, the proposal could integrate schools in numerous ways. But despite the controversy, the city’s projections actually show the impact of the changes are likely to be small because of how families are ranking schools. Some struggling students are already applying to the district’s more sought-after schools. But higher-performing students — who tend to be middle class — are not ranking schools where many students are poor or struggling.

These projections are based on how families applied to schools last year.

Under Plan A, the schools that would change the most are:

  • West End Secondary School would offer 21 percent of seats to students who have low test scores and come from high-needs elementary schools. That’s an increase of 19 percentage points.
  • The Computer School would offer 26 percent of seats to students in the priority group, up 15 percentage points.
  • West Side Collaborative Middle School would offer 49 percent of seats to students in the priority group — a decrease of 14 percentage points.

Under Plan B, the schools that would change the most are:

  • West End Secondary School would offer 25 percent of seats to students with low report card grades and test scores, an increase of 13 percentage points.
  • Dual Language Middle School would offer 64 percent of seats to the priority group. That is a 12-point decrease.
  • Both the Computer School and Booker T. Washington would see an 11 point increase in offers to the priority group. At the Computer School, 32 percent of offers would go to those students. At Booker T. Washington, the priority group would comprise 19 percent of offers.

Under Plan C, the schools that would change the most are:

  • West Side Collaborative would offer 47 percent of seats to students who have low test scores and report card grades, and qualify for free- or reduced-price lunch. That is a decrease of 16 percentage points.
  • The Computer School would offer 28 percent of seats to students in the priority group, an increase of 16 percentage points.
  • West End Secondary School would offer 17 percent of seats to the priority group — up 13 percentage points.

But under each plan, schools would still be largely divided between those that serve mostly top-performers and those who serve students who struggle.

How many families would be impacted?

Contrary to what the backlash to the plan suggests, they would actually only impact a small number of the almost 2,000 families applying to the district’s middle schools.

The city’s projections show more students benefiting from the changes because they would be offered a spot in a higher-ranked school, or get a match rather than be shut out. That is likely to be an important factor in the district’s decision making, since the city has proven uneasy about the impression that student would be forced into schools they don’t want to go to.

Under Plan A, 109 families would get a seat in a school that they ranked lower on their application. The city estimates that 96 families would not receive an offer to a school on their list — 18 more families than without the plan. But 169 students would be offered a seat at a school they ranked higher.

Under Plan B, 135 students would get a seat in a school that was lower on their application. It’s estimated that 100 families would not get accepted to any school on their list, 22 more than without the plan. On the other hand, 194 students would benefit. 

Under Plan C, 137 families would get a seat in a school that they ranked lower. The city’s projections show that 113 families wouldn’t be matched to a school they picked — 35 more families than before. That’s compared to 185 students who would be offered a seat at a school they ranked higher.