Six years ago, Arizona policymakers created a revolutionary school choice program by allowing a $500 dollar-for-dollar income tax credit for contributions to organizations that give students scholarships to attend private elementary and secondary schools. In 2001, the Cato Institute published a study evaluating the first years of the program and analyzing its potential impact. This paper is a follow-up to that study, assessing the recent trends in the program, its impact on Arizona's educational system, and identifying potential reforms.
Since the program's inception, taxpayers have donated $83.5 million to 47 nonprofit organizations that helped send thousands of students to schools of their choice. Most scholarships were distributed based on financial need to students previously enrolled in private schools. Although the exact portion of the more than 19,000 students currently using scholarships who otherwise would have attended public school is unknown, it is likely that between 2,000 and 4,000 students would return to public school without the scholarship tax credit.
Although the state loses money when taxpayers use the credit, localities and the state save money when students who would have otherwise been educated at public expense switch to private school. The state lost $26.3 million in revenue through use of the credit in 2002. Yet the savings incurred by transferring students offset much of that loss, leaving the total revenue loss between $7.5 and $13.4 million.
As donations increase, it is likely that a greater portion of scholarships will be used by students newly transferring into private school from public school. Therefore, it is probable that future savings will fully offset the revenue loss, eventually saving taxpayers money.
Policymakers could consider several modifications to the tax credit program. The potential benefits and drawbacks of those reforms are outlined in this paper. In general, policymakers should consider ways to improve and expand the program to help more families send their children to private schools of their choice.