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.

Frequently asked

New Denver teacher contract: We answer the most common questions about the tentative pact

PHOTO: Joe Amon/The Denver Post
Students in class at Dora Moore ECE-8 during the second day of the Denver Public Schools teachers strike.

One reason many Denver educators didn’t like the district’s old ProComp pay system was that it was too complicated and unpredictable. Both sides agree that the deal reached early Thursday morning creates a much simpler pay system for teachers.

But educators — and the general public — still have a lot of questions about the tentative ProComp agreement, which still needs to be ratified by union members and the Denver school board. Here we’ve answered some of the most common questions we’ve heard since the end of the strike.

How do I place myself on the salary schedule?

The salary schedule is made up of “steps” and “lanes.” The “steps” represent years of service for which a teacher had a positive evaluation. The “lanes” represent levels of education. The new schedule has 20 steps and seven lanes.

Worked in Denver Public Schools for five years and have a master’s degree? Go to step five and then slide your finger over to the master’s degree lane. That’s your base salary.

Did you have a year when your evaluation wasn’t good? Go back one step. Have an additional 18 credits on top of your master’s degree? Go up one more lane.

Teachers can also go up a lane once they hit the 10-year mark because the district wanted to reward longevity. Other milestones that merit a lane change: earning national board certification or an advanced license, or completing six “professional development unit” training courses.

Still not sure? Denver Public Schools plans to put a salary calculator on its website soon.

What if I have more than 20 years of experience?

If you have 20 or more years of experience, you’re placed at the top of the salary schedule, on step 20. After step 20, you’ll get yearly cost-of-living raises. You’re still eligible to change lanes, but you won’t get any more step raises.

Does the district know everything it needs to know about individual educators to pay them the correct salary?

Denver Public Schools plans to send letters or emails this spring to every teacher and special service provider (nurses, counselors, and others) covered by the contract, laying out where the district believes that employee falls on the schedule based on information they have on file. Educators will have a certain amount of time to correct any wrong information and get on the correct step and lane for the 2019-20 school year.

Under the new salary schedule, it looks like I’ll earn less next year than I do now. Am I taking a pay cut?

No. The agreement includes a “hold harmless” clause that ensures everyone will get a raise next year. Those whose salaries are higher now than they would be under the new schedule will get a cost-of-living raise each year until the salary schedule catches up with them.

How are bonuses and incentives different under the new contract?

The bonuses and incentives are different in three ways: There are fewer of them, the dollar amounts are different, and the dollar amounts won’t change year to year.

This year, there are six bonuses and incentives offered by the district: one for educators who work in Title I schools where 60 percent or more of the student population qualifies for subsidized meals; one for educators who work in hard-to-fill positions; one for educators who work in “hard-to-serve” schools; one for educators who work in one of 30 “highest-priority” schools; one for educators who return year over year to those schools; and one for educators who work in schools deemed top-performing or high-growth, as based on school ratings.

Here’s what’s left in the new contract: Teachers in Title 1 schools and those in hard-to-fill positions, such as secondary math, will get $2,000 a year. Teachers who return year over year to 30 highest-priority schools will get $3,000 a year. Teachers in 10 schools deemed “distinguished” will get $750 a year, with the criteria to be determined by the district and the union.

Why aren’t the district and the union tying bonuses to test scores anymore?

Unions have traditionally been skeptical of paying teachers based on student test scores because the scores are so closely correlated with factors like race and household income. In Denver, these bonuses were also less predictable for teachers because the district often changed the criteria it used to rate schools and award “top-performing” bonuses.

The district also came to see these bonuses as canceling out the effects of bonuses for teachers at high-poverty schools. A teacher could get nearly the same kind of monetary reward by moving to a more affluent school or by staying in one where students face more challenges. The new bonus system provides clearer monetary benefits to working in a high-poverty school.

Why did the union agree to keep the incentive for highest-priority schools, when that had been such a sticking point?

In any negotiation, there’s give and take and a lot of moving pieces. 

Here’s what lead negotiator Rob Gould said to district officials during bargaining: “We are open to the incentive because we know it’s important to you. And we’re willing to entertain your ideas if we can get the base salary schedule that our teachers need. Because if we can get the base salaries we need, we can keep our teachers in Denver.”

This was also an issue that divided teachers, with some teachers at schools that received the highest-priority incentive pushing to keep them.

Did teachers get a better deal out of the strike than the district’s last offer before the strike?

Teachers were getting a raise no matter what. The district was offering an average 10 percent raise before the strike (this included a cost-of-living raise that was agreed to back in 2017). Now teachers will get an average 11.7 percent raise, though individual teachers will see a wide range.

The district is putting the same amount of new money — $23.5 million — into teacher compensation as it was offering before the strike. It can give a larger average raise with that same amount of money because the incentives are smaller than under the previous proposal and because of limits on how teachers can use training to get raises. That gives the district more predictability about how many teachers will get raises each year.

Union leaders call the deal a win. They secured more opportunities for teachers to earn raises and move into higher categories on the salary schedule, including through completing training partially during work hours at no additional cost. And teachers can get to $100,000 in 20 years, rather than the 30 years in the last district proposal.

However, individual teachers aren’t necessarily getting more base pay next year than they would have under the district’s last offer. Early-career teachers without advanced degrees would have earned more in base pay under the district’s last offer. The teachers who do better under the deal reached after the strike are veteran educators with more education.

To take two examples: A second-year educator with a bachelor’s degree and no extra credits or training would have earned $47,550 in base pay under the district’s last offer before the strike but will earn $46,869 under the deal reached this week.

But a 20-year educator who has a master’s degree and an advanced license who has been with the district for 10 years will earn $88,907 in base pay under the new agreement, compared with $87,550 under the district’s last proposal before the strike.

The union fought for this kind of salary schedule in part to address a longstanding complaint that teachers have little reason to stay in a district where base pay levels off.

You can see the salary schedule from the district’s last offer here and the schedule from the tentative agreement here.

Is this deal financially sustainable for the district?

Denver Public Schools Chief Financial Officer Mark Ferrandino says that is the “million-dollar question,” perhaps closer to the “half-billion-dollar question,” since that is roughly how much the district spends on educator compensation.

Ferrandino believes the answer is yes, with the standard caveat that all projections are just that.

What will be cut to pay for this?

The district plans to cut $20 million from administrative costs over the next two years. That includes cutting 150 jobs in the central office and ending all executive bonuses. The bulk of it — $13 million — will go to fund the ProComp agreement.

District officials have not yet said which central office jobs will be cut, though Superintendent Susana Cordova has said cuts will be to “discretionary” departments. Departments that will not be cut include special education, English language acquisition, and transportation, she said.

Teachers will get a raise. What about paraprofessionals, bus drivers, custodians, and cafeteria workers?

These other district employees, much lower paid than teachers, are not covered by the contract that was the subject of the strike. Cordova has said these workers also deserve raises and a portion of administrative cuts will go to pay for them.

But how much of a raise will they get? That will all be worked out over the next few months and include discussions with the unions that represent these employees.

Will striking teachers get back pay?

Not according to district officials. After this story was published Friday, we asked for further clarification on this. We received this statement Saturday morning:

Superintendent Cordova understands that when teachers make the choice to strike, they are doing so to make a statement and bring attention to the importance of the issue at hand. Foregoing pay during the time that a teacher is not working is a challenging decision that no one makes lightly, and consequently, brings with it an impact that is intended to push for change.

DPS did not feel that it would be fair or appropriate to provide back pay to striking teachers when many others — including more than 40 percent of classroom teachers — chose to remain at work this week. However, DPS is working with the DCTA to offer all teachers the opportunity to attend a Saturday session to replace the professional development day that was cancelled in the days leading up to the strike. Any teacher who attends will be paid a day’s salary.

When will the new agreement go into effect? How long will it last?

Assuming both sides ratify it, the new agreement technically (and retroactively) went into effect Jan. 19, the day after the old one expired. But educators won’t start receiving the new salaries, incentives, and bonuses negotiated under it until Aug. 1. The agreement expires Aug. 31, 2022.

Teens Talk Back

‘Mr. Mayor, we cannot afford to wait.’ Teen group says New York City diversity plan doesn’t move fast enough.

PHOTO: Courtesy/Teens Take Charge
Teens Take Charge members at a "virtual" press conference in New York City on Thursday

A teen group representing students from more than 30 New York City high schools sharply criticized a recent report from Mayor Bill de Blasio’s School Diversity Advisory Group as offering no real solutions for increasing integration in the city’s starkly segregated high schools.

At a virtual press conference on Thursday, broadcast live on Facebook by Teens Take Charge, students expressed support for the report’s broad policy aim of achieving greater integration but also disappointment that the findings offered few specifics for how to reach this goal. The mayor’s Diversity Advisory Group has said a follow-up report will provide more details later this year.

“We have been told to wait, to be patient, that change is coming soon,” said Tiffani Torres, a junior at Pace High School in Manhattan. “Mr. Mayor, we cannot afford to wait any longer.”

Teens Take Charge has long advocated for greater efforts to end segregated enrollment patterns in the city’s high schools. Sokhnadiarra Ndiaye, a junior at Brooklyn College Academy High School, said that students’ expectations of the mayor included his announcing “a comprehensive plan” — even if it took years to realize — “to racially, socioeconomically, and academically integrate high schools before the end of this school year,” she said.

Among Teens Take Charge’s specific recommendations are doing away with academic screens for admission to the city’s high schools, a more transparent process for applying to them, and more resources for low-income schools. Early last year, the group produced an Enrollment Equity Plan for increasing educational opportunities for low-income black and Hispanic students.

And because concrete plans for increasing integration would take time, Ndiaye said the teen organization supports several interim measures as well to address inequities in the school system. These include providing more college and career counseling for junior and seniors at low-income, under-resourced high schools. The teen group would also like to see the city provide vouchers to low-income families to access extra-curricular activities and programs offered by private companies or the ability to participate in such programs at other public schools if theirs don’t offer them. (Some city teens joined a class-action lawsuit against the education department and Public School Athletic League for allegedly denying black and Hispanic students equal opportunity to play on school sports teams, in violation of local human rights law.)

Torres described how Teens Take Charge has had “several meetings and phone conversations with Department of Education officials over the past year,” and schools chancellor Richard Carranza has stated that students have his ear. “We’re listening,” he tweeted in response to a Chalkbeat story with excerpts of the students’ views.

In December, the city’s education department posted a new job listing for a “Student Voice Manager” who would gather students’ thoughts on education policies. But while acknowledging this seat at the table, several students expressed frustration at the slow pace of change.

Bill de Blasio’s office declined to comment about Teens Take Charge’s concerns or their specific recommendations, beyond referencing remarks the mayor already made about the School Diversity Advisory Group report.

Doug Cohen, an education department spokesman, said in a statement, “We’ve taken real steps toward school integration,” pointing to initiatives such as a $2 million diversity grant program for school districts and communities citywide to develop their own local diversity plans, and a program that enables middle-schoolers to visit college campuses. “We know there is more work to do, and we thank Teens Take Charge for its continued advocacy on these issues,” he added.

Students at the group’s event urged swift change. “They know our plan; they have our information,” said Sophie Mode, a sophomore at Brooklyn Millennium. “They need to take action now.”