Preliminary Analysis of LPMN Education Tax Credits

LPMN Education Policy: LPMN policy implies support for the eventual elimination of all government subsidies for education, but assumes subsidies are needed initially. Parents should have control of and responsibility for all funds expended for their children’s education. As an interim measure, LPMN advocates tax credits for any individual or business sponsoring a person’s education, equal to the amount of that assistance.

Issues/Questions: (1) How would transferring the funding of education to tax credits work? What would be the rules for the tax credits? (2) Would the tax credits raise enough money to finance all current education? How would the tax credits affect other tax collections and deficits? (3) Would the tax credits favor children of the wealthy? Would the voluntarily use of tax credits by and from the wealthy be needed to fund other children? (4) What is the purpose of the interim period? For how long is the interim period? Will the interim period transition into the elimination of all subsidies? What will happen when all subsidies are eliminated? (5) Would the LPMN support vouchers instead?

Current Use of Tax Credits: U.S. taxpayers haven’t even fully utilized the much smaller American Opportunity Tax Credit. A parent can claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of a dependent's college tuition and related expenses. If the credit reduces the tax bill to $0, they can get 40% of the remaining credit refunded, up to a maximum of $1,000.

Current Costs: The annual per student cost of K-12 and higher education are about $12,000 and $20,000, respectively. The annual cost of public education is about $600 billion for K-12 and maybe $300 billion for college, with about $750 billion paid by government.

Current Funding: Most K-12 education is funded by equal amounts of state and local property taxes, while most college is paid by equal amounts from the states and student tuition. The federal government funds only about 10 percent of both K-12 and higher education.

Current Tax Revenues for Tax Credits: Federal, state, and local government tax receipts totaled $5.4 trillion in 2018. Federal, state and local receipts were 64, 21 and 15 percent of the total, respectively.

Current Tax Distribution: The top 10 percent of earners pay 70 percent of all income taxes. The bottom half paid 3 percent of all income taxes (or about $50 billion) on about 11 percent of total income.

Analysis: Depending on the rules, the tax credits could raise enough money to finance all current education. However, the tax credits could incentivize the wealthy to spend more on their own children’s education and not enough for other children. Even if they do, it is unclear which schools the wealthy would send their children to and if they would promote competition between schools. The tax credits could violate the policy of putting the parents in control of all funds expended for their children’s education. Maybe, if the wealthy promoted competition between schools, the interim period could end with the elimination of all government subsidies for education. But only if competition reduced the cost of education to a point where the children of the non-wealthy could receive a competitive education with those of the wealthy.

Conclusion: The LPMN should formulate rules for tax credits that can provide a fair amount of funding following all students, promote competition between schools and lead to a reduction of subsidies, or more simply expand the tax-payer financed voucher system used today.

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