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.

portfolio push

The City Fund’s next steps: These 7 cities are the focus of the biggest new education player

PHOTO: Andy Cross/The Denver Post
Buses head out on their routes at the Denver Public Schools Hilltop Terminal November 10, 2017. (Photo by Andy Cross/The Denver Post)

A new group that’s raised millions to promote its brand of school reform has begun spending that money in seven cities — and its staff may be planning to try to influence elections, too.

The City Fund has already given grants to organizations and schools in Atlanta, Indianapolis, Newark, Denver, San Antonio, St. Louis, and Nashville, according to one of the group’s founders, Neerav Kingsland. Those grants amount to $15 million of the $189 million the group has raised, he told Chalkbeat.

City Fund staffers have also founded a 501(c)(4) organization called Public School Allies, according to an email obtained by Chalkbeat, which Kingsland confirmed. That setup will allow the group’s members to have more involvement in politics and lobbying, activities limited for traditional nonprofits.

The details — some first reported by The 74 on Sunday — offer the latest insight into the ambitions of The City Fund, which is looking to push cities across the U.S. to expand charter schools and district schools with charter-like autonomy.

The $15 million that’s already been spent has mostly gone to local groups, Kingsland said.

In Denver, the recipient is RootED, a nonprofit that launched about a year ago. RootED’s head Nate Easley said his organization has issued roughly $3 million in grants, partially based on money from The City Fund. Some of that has gone to community groups that organized parents to speak out about the city’s superintendent search. Other money has gone directly to charter schools and district schools that are part of Denver’s innovation zones, which mean they are overseen by a nonprofit organization and that teachers can vote to waive parts of the labor contract.

Easley’s approach is consistent with The City Fund’s favored policies, sometimes called the “portfolio model.” In their ideal scenario, parents would be able to choose among schools that have autonomy to operate as they see fit, including charter schools. In turn, schools are judged by outcomes (which usually means test scores). The ones deemed successful are allowed to grow, and the less-successful ones are closed or dramatically restructured.

A version of that strategy is already in place in Denver and Indianapolis. Those cities have large charter sectors and enrollment systems that include both district and charter schools In others, like San Antonio, Atlanta, and Camden, struggling district schools have been turned over to charter operators.

The City Fund’s Newark grant is more of a surprise. Although the district has implemented many aspects of the portfolio model, and seen charter schools rapidly grow since a $100 million donation from Facebook founder Mark Zuckerberg, Newark hasn’t been a magnet of national philanthropy recently. That may be because the changes there sparked vehement community protest, and the district recently switched to an elected school board.

Charter advocates in Nashville, meanwhile, have faced setbacks in recent years, losing several bitter school board races a few years ago. A pro-charter group appears to have folded there.

Kingsland said The City Fund has given to The Mind Trust in Indianapolis; RootED in Denver; City Education Partners in San Antonio; the Newark Charter School Fund and the New Jersey Children’s Foundation; The Opportunity Trust in St. Louis; and RedefinED Atlanta. In Nashville, The City Fund gave directly to certain charter schools.

The seven cities The City Fund has given to are unlikely to represent the full scope of the organization’s initial targets. Oakland, for instance, is not included, but The City Fund has received a $10 million grant from the Bill and Melinda Gates Foundation for work there. The presentation The City Fund made for potential funders earlier this year says the organization expects to reach 30 to 40 cities in a decade or less.

“We will make additional grants,” Kingsland said in an email. “But we don’t expect to make grants in that many more cities. Right now we are focused on supporting a smaller group of local leaders to see if we can learn more about what works and what doesn’t at the city level.”

Chalkbeat previously reported that the Hastings Fund, Laura and John Arnold Foundation, the Dell Foundation, and the Bill and Melinda Gates Foundation were funding the effort. The Walton Family Foundation and the Ballmer Group are also funders, Kingsland said. (The Gates Foundation and Walton Family Foundation are also funders of Chalkbeat.)

The organization had told prospective donors that it had raised over $200 million. Kingsland said Sunday that $189 million is the correct figure.

As the group expands its influence, it will have to contend with the fact that the portfolio model approach has proven deeply controversial, especially where it has led to the closure of traditional public schools and the expansion of non-unionized alternatives.

It’s gained particular traction in a number of cities, like Newark, Camden, and New Orleans, while they were under state control. In Denver and Indianapolis, cities where the approach has maintained support with elected school boards, supporters faced setbacks in recent elections. Public School Allies may work to address and avoid such political hurdles.

The academic success of the approach remains up for debate. Supporters point to research showing large gains in New Orleans, as well as evidence that in many cities, charter schools outperform district counterparts. Critics note that gains in New Orleans also came with a huge infusion of resources, and that results elsewhere have been more tepid.

Kingsland told The 74 that other approaches to school reform might also have merit — but he’s prepared to stand by his strategy.

“It’s possible that personalized learning, early childhood education, increased public funding, or a deeper focus on integration could be the best way to make public education better. Or perhaps the best way to increase student learning is to address poverty directly by giving poor families more money,” he said.

“While I don’t think our strategy is at odds with any of these approaches, it is possible that our effort is just not the right focus. I don’t think this is true, but it could be.”

For now

Indianapolis Public Schools picks Aleesia Johnson as interim superintendent

PHOTO: Dylan Peers McCoy
Aleesia Johnson

Deputy superintendent Aleesia Johnson will lead Indianapolis Public Schools as interim superintendent while the board searches for a permanent replacement for Lewis Ferebee, who is leaving the district for D.C. schools.

Johnson will be the first African-American woman to lead the district, according to board member Kelly Bentley.

The board unanimously voted to appoint Johnson as the interim superintendent in a meeting Friday. Johnson started working for the district in 2015 as the innovation officer, leading the new strategy to partner with outside nonprofit or charter operators to run schools under the district’s umbrella. She formerly led KIPP Indianapolis College Preparatory and worked for Teach for America.

School board members said Johnson’s appointment represents a continuation of the work under Ferebee’s leadership. Ferebee, who joined the district in 2013, was selected Monday to be the next chancellor of D.C.’s public school system.

“I think the work and the path that we’re on is the right path,” Johnson said, “but I think obviously I am a different leader.”

She could also potentially be an internal candidate to permanently replace Ferebee, though she said Friday that she is waiting to hear more about what the board is looking for in its search process. The board has not yet decided on details, holding off until early January when three newly elected board members will be sworn in.

“I know that Ms. Johnson will be able to continue the direction and progress begun by Ferebee and this board without missing a beat,” said school board member Mary Ann Sullivan. “IPS has many transformative initiatives underway, and it’s absolutely critical that the person managing the district is able to not only maintain momentum but sees new opportunities consistent with the best hopes and dreams of our students.”

Ferebee said he expects to address raises for teachers this month, before his last day in Indianapolis on Jan. 4. He is slated to start in D.C. by Jan. 31.

His successor will have to deal with the district’s tough financial situation. Despite winning a $272 million influx of tax dollars through referendums this year, the district still faces the potential of budget cuts and school closures.

The next district superintendent also will have to navigate new dynamics on the school board. Of the three new members joining the board in January, two won seats by voicing opposition to Ferebee’s moves to close high schools and partner with charter or outside operators to run innovation schools.

Board president Michael O’Connor said the mandate for a new leader will be: “How do we continue with the progress that we’ve made?”

Read more from Chalkbeat: ‘We are going to follow through.’ In interview, Ferebee says he is leaving Indianapolis in a good place

Who should replace Lewis Ferebee as superintendent of Indianapolis Public Schools?

D.C., meet your next chancellor: 8 things to know about Lewis Ferebee and what he might bring to the district