EDUCATION NOTEBOOK: 
School Choice Spreads with State Tax Credits

July 7, 2006

In 2001, Pennsylvania Governor Tom Ridge battled with Democratic state legislators to create a corporate scholarship tax credit program to bring the state's families school choice. Five years later, Ridge's tax credit has strong bipartisan support and is a model for other states. And just this week, Gov. Ed Rendell, a Democrat, signed legislation expanding the program.

The 2001 school choice law offers corporations tax incentives to fund private school scholarships and "school improvement" projects at public schools. Under the law, corporations can claim a tax credit of up to 75 cents per dollar for a one-year contribution and 90 cents for a two-year contribution.

Initially, the tax credit was capped at $20 million for private school scholarship donations and $10 million for public school donations. Since 2001, it has been has expanded, reaching an annual cap of $44 million in 2005.

Businesses have been eager to participate. Last year, contributions hit the cap for private school scholarships just days after tax credits became available, raising $44 million to help 27,000 students attend private schools.

But many more children could receive scholarships if more tax credits were available. In 2005, more than 500 companies were unable to participate because of the cap. Responding to this strong demand, this week Gov. Rendell agreed to support legislation that expands the tax credit program-with a new annual cap of $54 million, the expanded tax credit will pay for thousands of additional scholarships.

Gov. Rendell's support demonstrates growing bipartisan support for tax credit-based scholarships. Last month, Republican gubernatorial candidate Lynn Swann proposed doubling the cap for corporate contributions to Pennsylvania's scholarship program. Gov. Rendell's office responded by pointing to the governor's record of raising the cap in 2003 and 2005.

Across the country, corporate scholarship tax credits have become a popular way to expand school choice. The pioneer for this model was of Florida, which in 2001 was the first state to create a corporate tax credit for private school scholarship donations. Last year, the program helped 13,000 low-income students attend private schools. Following the success of Florida's and Pennsylvania's programs, states across the country are rushing to enact corporate scholarship tax credits.

This year, Arizona became the third state to create a corporate tax credit for scholarship donations. The Arizona law will allow $10 million in corporate scholarship tax credits this year and $21 million by 2010. And just last week, Rhode Island enacted a corporate scholarship tax credit, which, capped at $1 million annually, will offer businesses the same partial tax credits that are available in Pennsylvania. The Rhode Island legislation passed with overwhelming bipartisan support.

In the guise of tax credits, school choice is now gaining support among Democratic legislators, despite their party's resistance to most school choice measures. In New Jersey, Assemblywoman Nilsa Cruz-Perez, a Democrat from Camden, joined four other Democrat legislators to sponsor a corporate scholarship tax credit that would create private school scholarships for 4,000 low-income children in Camden, Newark, Orange, and Trenton. In Maryland, Sen. James E. DeGrange, a Democrat, joined with 19 bipartisan cosponsors to propose a corporate tax credit modeled after Pennsylvania's.

Next year, corporate scholarship tax credits will give nearly 60,000 children school choice scholarships. But millions more American children could benefit from the chance to attend better schools. In Philadelphia alone, an estimated 63,000 students attend persistently failing public schools.

When Gov. Ridge first proposed school choice for Pennsylvania, he envisioned school vouchers to help lower-income students attend private schools. While corporate tax credits have proven to be a successful path for expanding school choice, additional reforms-including vouchers, tuition tax credits, and education savings accounts-are needed to give all families the freedom to choose the best schools for their children. And as bipartisan support for corporate tax credits grows, these more ambitious school choice proposals may become possible. After all, all children deserve the opportunity to attend a high quality school that best meets their needs.

Dan Lips is an Education Analyst and Evan Feinberg is a Research Assistant at the Heritage Foundation, www.Heritage.org.