Educational Credits and The LLEC in Wisconsin

(Original publication: April 30, 2006 at 9:07 am – reprinted here for archival purposes with authorization by the author (me), William Danielson)

I have proposed for some time now that the most logical and effective mechanism to reform both the educational outcomes and the finance system in Wisconsin is through a tax credit system. Alternatively, an intelligent voucher system could be created but I do not currently support vouchers as a first choice. I would like to take the time now to more fully develop what I mean by a tax credit system. Also, I would like to briefly outline a simple example of the initial impact of a local levy credit system (LLEC). It is my sincere hope that candidate Mark Green, Senator Harsdorf and Representative Rhoades take a serious look at this proposal and immediately start the process of detailed analysis of the financial impacts of such a system and to begin crafting legislation that would implement it. I would be more than happy to discuss this matter further with any legislator who is honestly interested in both the state financing of education and the fundamental rights of parents in Wisconsin.

The fundamental purpose of either a tax credit mechanism or a voucher system is a means of introducing two fundamental changes into the education system of Wisconsin. First and foremost, a tax credit system would introduce fundamental economic choice for parents at virtually all income levels across the state. Secondly, the introduction of a credit mechanism would introduce direct competition within the state for the provision of education and summarily eliminate the economic monopoly status that the State of Wisconsin currently has over K-12 education.

Currently, if a parent of a school aged child decides for whatever reason to not send his or her (or their) child(ren) to the local government schools they are still compelled by law to pay the local school district portion of their property tax, as well as their portion of personal and corporate income that is taxed and redistributed around the state. In other words if you decide to educate your child outside of the government system you are being directly financially penalized, dollar for dollar, up to your actual total school taxes paid – to the extent of the cost of the alternative you choose for your child. A simple universal tax credit would eliminate this penalty for those parents who desire to choose an alternative to the state run schools, thus introducing real economic choice.

It is particularly important to note also that currently only those families with substantial disposable incomes can afford to pay either private or parochial school tuition, and pay all of the school taxes imposed. In addition, only those income earners of substantial means can afford the home school option of eliminating one of two wage earners, who would be conducting the home based education. A tax credit system would clearly open the doors of private or parochial schools, as well as make home scholarship more attainable, to many middle and low income families in Wisconsin. This would, by default, create a tremendous diversity of educational options for Wisconsin families and create a competitive environment that many scholars, economists, and studied observers agree is needed.

Currently in Wisconsin, K-12 is financed by a portion of local property taxes and roughly 90% of all income taxes paid into the state. The total of the income tax is then sent back out to the various school districts by virtue of a funding formula. Also, please note that in Wisconsin roughly 65% of the K-12 expenditures are funded via state aid (an amount roughly equal, in dollar terms, to 90% of all income tax paid into the State of Wisconsin). In Hudson, due to the relative value of the property in the district as compared to districts statewide, the state aid portion of the funding is less than 65% (roughly 45%). In other, less property valued areas, the state aid portion is more than 65%.

A simple universal statewide education credit would provide parents with the financial option of sending their children to non-government schools if they so choose. What is critical is that the credit be large enough to offset the simultaneous financial burden of local school levies and 90% of their income taxes to the extent it funds education. A baseline credit of at least $2500 would need to be introduced to adequately eliminate the economic monopoly effects of the current state finance system. A more aggressive credit, designed to specifically incentivize market forces, could be based on a credit up to the current statewide average per pupil expenditure – currently approximately $10,000. As a compromise, 50% of the statewide average expenditure could be selected which would, in effect, create a powerful tool of choice for all parents regardless of income level.

Fundamentally, such an approach is fair and equitable while one has children of school age. If the state is going to compel children to be educated, then it ought not discourage an efficient diversity of market based, as well as state subsidized, options to comply with its education mandate. In other words it is not equitable for the State of Wisconsin to discriminate government only provisioning of education over true parental choice. Before children are of school-age and after they are educated through K-12, taxpayers would be required to continue to contribute into the government school system as they had previously done. The whole idea here is to modify the tax payment system so as to eliminate the double jeopardy that parents of school-aged children face when evaluating where they would like to have their children educated.

From a statewide funding perspective, tax credits make incredible sense. Currently, it costs, all things considered, roughly 50% less to educate a child outside of the government school system. The private sector provides educational options at a far lower cost than does the government. Consequently, for every child whose parents freely choose to move from the taxpayer subsidized system into the free market provisioning system the taxpayers of Wisconsin save 50% of the average statewide expenditure. This savings develops partially in the short run but fully in the long run as fewer taxpayer funded buildings are constructed and far fewer teachers and staff are hired into the state system. This is a win for parents, a win for their children, a win for teachers who truly do love their profession, and a win for taxpayers. Teachers, especially, should take a close look at this proposal as it bodes well for them financially. The current state system does not reward great teachers adequately, and rewards mediocre (or worse) teachers disproportionate to their ability.

Short of a statewide, universal education tax credit system a series of local levy tax credits could be established by local school districts, with essentially a very similar effect as the statewide plan. With a local levy educational credit, taxpayers would be able to get a credit from the local school district portion of their property tax provided they are educating a child outside of the local school district. Since they are not using the services or facilities of the district, expending their own money to educate a child as required by the state, then they ought to not have to pay a second time. It is profoundly unfair for such taxpayers when their neighbor, who may choose the local government school, is not similarly penalized. The local levy credit would be dollar for dollar up to the actual educational expenses – limited to the lesser of the actual expenses or the local levy. A more aggressive credit within districts, up to the local levy per pupil average, could also be considered and would provide a more powerful incentive. As a compromise, the greater of 50% of the total local levy per pupil or ones actual local levy could be considered. Under the straight local levy credit, parents with children who pay little or no tax would not be at a financial disadvantage to others since they are not paying school taxes (other than, perhaps income) anyway, and therefore nothing upon which to base a credit. They are neither advantaged nor disadvantaged – this is one area that a statewide credit would be superior due the inclusion of income tax as part of the credit basis, or the compromise plan noted above. But in the vast majority of cases, the system would accomplish the primary goal of removing the penalties for making educational choice. The idea here is not to create a tax subsidy for private schools, but rather remove the onerous and obvious tax penalty currently in place.

One notable example of the per-pupil funding effects of a local levy credit is as follows and is somewhat counter-intuitive. In Hudson, Wisconsin, the current operating budget is approximately $43,000,000. If the average local levy credit was $2,500 and 1000 students used the credit that would mean that the school district would receive $2.5 million less in local revenue and would be providing services to 1000 fewer students. The state aid portion that is associated with these 1000 students would not go to the district which, in the case of Hudson, would amount to another $5 million dollars less revenue. With an initial total of approximately 5,000 students, the current per pupil operating revenue is $8,600. Under the local levy credit, the total operating budget would fall by $7.5 million to $35.5 million, but there would only be 4000 students. The counter intuitive result of this shows that the per-pupil amount of operating budget actually rises to almost $8,900. The effect of a tax credit actually increases the average amount of per pupil revenue in the operating budget.

Take home message:
1. Savings to the taxpayers of the state would be maximized by a statewide universal education tax credit system. Such tax saving, impressive as those might be, is not the primary reason for implementing such a system. Clearly, it is a moral reason insofar as freeing up parents to be able to exercise true economic educational choice in the education of their own children – and not be penalized for such choice. Furthermore, a statewide credit would be more pervasive in that it would include more students and affect taxpayers on both the property tax side and the income tax side.

2. The local levy credit accomplishes much of the same as a statewide credit, but works only within a given school district and only deals with the property tax paid by local taxpayers. Specifically the local school tax portion of the property tax. While moderately less pervasive in its effects, it would provide an initial step in local districts that elected representatives in Madison could not ignore. The implementation and success of such a plan on a single district could be the catalyst for a statewide universal credit mechanism.

3. This proposal is also intended to address a variety of issues that create intense divisiveness between friends, families and community members who are currently at odds with each other over education matters. When true choice is implemented, all sides of the education debate will be left with one overriding concern – the education of kids. This is, after all, what a true “public education” should be all about. It is critically important to understand that the current government monopoly over education is the most costly and divisive means of accomplishing that noble and critically important end.

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