Executive Summary - Fiscal Impact of Proposed Tuition Tax Credits for the State of New Jersey

April 01, 2001
Joseph L. Bast

Quick Links

This study reports the results of an independent examination of the likely fiscal impact of two proposed tuition tax credit plans for New Jersey. The author determines that the plans would reduce the after-tax price of tuition by between 32 percent and 95 percent, depending on family income, grade level, and choice of school. Lower tuition would increase total private school enrollment by 40 percent (from 207,275 currently to 290,958). State tax revenues would decline $585 million. Falling public sector enrollment would generate avoided costs of $1.065 billion, for net annual savings to the state's taxpayers of $480 million.

1. The Proposals Summarized

The Educational Options Act (EOA) would allow individuals, estates, trusts, and companies to receive a credit against state income and corporate income taxes of not more than 75 percent of the amount they contribute to "qualifying entities" that provide educational scholarships to children attending nonpublic schools. For individuals, estates, and trusts, the credit is limited to $10,000; for companies, it is limited to 10 percent of the company's annual corporate income tax liability.

The Parental Control and Involvement Act (PCIA) would allow parents of school-age children to receive a credit against their state income tax liability equal to 50 percent of qualified educational expenses, up to a maximum credit of $500 per dependent child. All parents of school-age children would be eligible to receive a credit against their state income tax equal to 100 percent of the amount spent on computer hardware and software related to curriculum or instruction, up to a maximum credit of $150 per household.

2. Impact on the Price of Tuition

The Educational Options Act (EOA) would most likely raise less funds than needed to pay the tuition of every child who wishes to attend private schools. Realistic estimates of participation levels and average gift size suggest EOA would raise between $340 million to $530 million a year, enough to provide scholarships to between 57 percent and 89 percent of students wishing to attend private schools.

The Parental Control and Involvement Act (PCIA) allows tax credits of up to $500 a year, but many families wouldn't qualify for the entire amount. Families earning less than $40,000 a year, for example, would "zero out" their entire state income tax liabilities before reaching the cap for just one child. A family earning $20,000 a year pays only $210 per year in state income taxes. Because the tax credit for education-related computer hardware and software would be 100 percent of expenses (up to $150), many parents would apply for this credit before or instead of applying for the 50 percent tax credit against tuition and other expenses.

A plausible scenario taking into account both the limited funds available from EOA and the limited tax credits provided under PCIA appears in Table 1. It shows the two plans would reduce the cost of tuition for a typical family by as little as 32 percent (for a nonpoor family sending a child to an independent secondary school) to as much as 95 percent (for a "poor" family sending a child to a parochial elementary school).

Table 1
Impact of PCIA and EOA on Average After-Tax School Tuition Paid in New Jersey
Institution Average Tuition* Likely Tax Credits and Scholarships Likely Price Reduction
Elementary parochial schools
"Poor" families $2,082 $104 $1,874 $1,978 95%
Nonpoor families $2,082 $291 $1,500 $1,791 86%
Elementary independent schools
"Poor" families $5,411 $110 $4,870 $4,980 92%
Nonpoor families $5,411 $500 $3,000 $3,500 65%
Secondary parochial schools
"Poor" families $4,660 $110 $4,194 $4,304 92%
Nonpoor families $4,660 $500 $3,000 $3,500 75%
Secondary independent schools
"Poor" families $10,982 $110 $6,517 $6,627 60%
Nonpoor families $10,982 $500 $3,000 $3,500 32%
* Many private schools adjust their tuition based on a family's ability to pay and offer discounts to families with more than one child attending the school. This table does not reflect such policies.

3. Impact on Public and Private School Enrollments

Economists estimate that a 10 percent increase in the price of private schooling reduces the probability of a family choosing private schooling by 4.8 percent, while a 10 percent reduction in price causes a 4.8 percent increase in the probability of choosing private schools. Table 2 combines this estimate of price elasticity with the previously calculated effects of PCIA and EOA on tuition prices to reveal the tax credit plans' impact on private school enrollment.

Table 2
Impact of PCIA and EOA on
Private School Enrollment in New Jersey
Institution % Tuition Reduction % Enrollment Increase Current Enrollment Projected Increase Total Enrollment
Elementary parochial schools
"Poor" families 95 46 45,456 20,728 66,185
Nonpoor families 86 41 92,290 38,097 130,388
Elementary independent schools
"Poor" families 92 44 7,896 3,487 11,383
Nonpoor families 65 31 16,032 5,002 21,034
Secondary parochial schools
"Poor" families 92 44 12,821 5,662 18,483
Nonpoor families 75 36 26,031 9,371 35,402
Secondary independent schools
"Poor" families 60 29 2,227 641 2,869
Nonpoor families 32 15 4,522 695 5,216
Totals --- 40 207,275 83,683 290,958
"Poor" families --- 45 68,401 30,518 98,919
Nonpoor families --- 38 138,874 53,165 192,039


Total private school enrollment would increase 40 percent, and enrollment by children from "poor" families would increase 45 percent. Most of the increase would occur at the elementary school level (largely because elementary-school enrollment, spanning nine years, is much larger than secondary-school enrollment, spanning only four years). Some 37 percent of the new students (30,518 out of 83,683) would be from "poor" families. Public school enrollment would decline by 6.97 percent as students transfer from public to private schools.

4. Impact on Taxpayers

The impact of the two programs on the state's taxpayers is calculated by subtracting the total loss of revenue caused by tax credits from the avoided costs due to declining public school enrollment. Table 3, on the next page, shows the EOA and PCIA would save New Jersey taxpayers approximately $480 million a year. This estimate is most likely to represent savings several years after the programs' start, assuming the availability of tax credits is well known and that they are easy to apply for and that no new developments or trends arise that significantly influence the price or supply of private schooling.

Table 3
Fiscal Impact of Tuition Tax Credits
Totals Subtotals PCIA
  $92,000,000 50% tax credits for parents of children attending private schools
  $56,000,000 100% computer hardware and software tax credits
  $48,000,000 50% tax credits to parents of children attending public schools
  $4,400,000 50% tax credits to homeschoolers
$200,400,000   Revenues lost due to PCIA
  $272,800,000 75% tax credits to persons contributing gifts averaging $1,000
  $58,500,000 75% tax credits to corporations giving to scholarship-granting entities
  $53,000,000 75% tax credits to donors contributing gifts averaging $10,000
$384,300,000   Revenues lost due to EOA
$584,700,000   Total revenues lost
    Avoided costs due to falling public school enrollment
  $652,813,035 Non-urban students transferring from public schools
  $412,115,072 Urban students transferring from public schools
$1,064,928,107    Total avoided costs
$480,228,107    Net savings to taxpayers


5. Conclusion

PCIA and EOA would enable an additional 83,600 students, including 30,000 students from low-income families, to enroll in the private schools of their parents' choosing. The programs would also produce a considerable net savings, $480 million, for the state's taxpayers. However, the limits of the tax-credit approach are clear when one observes the very small impact of the individual tax credits contained in PCIA. A 50 percent tax credit capped at $500 would provide too little tax relief to have any effect on private school enrollment.

This analysis confirms, though cautiously, what the supporters of one of the bills, EOA, assert in its preamble: "It is possible for low income children to attend privately managed schools while simultaneously saving State taxpayers many hundreds of millions of dollars annually."

Based on Heartland Policy Study #96, "Fiscal Impact of Proposed Tuition Tax Credits for the State of New Jersey," by Joseph L. Bast. Copies of the 38-page report are available from The Heartland Institute for $10.00 each. You can also download the full text, free of charge, in Adobe's PDF format; click here.

Copyright 2001 The Heartland Institute. Nothing in this Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of any legislation. Permission is hereby given to reprint or quote from this Executive Summary; please send tearsheets to The Heartland Institute, 19 South LaSalle Street #903, Chicago, Illinois 60603.

Questions? Call us at 312/377-4000; fax 312/377-5000; email think@heartland.org; Web www.heartland.org.