‘Texas Two-Step’ is a budgetary sleight of hand

Yet again, proponents of legislation creatively dubbed the “tax credit scholarship” (SB 4/HB 1043) continue the fancy footwork in attempts to persuade colleagues and taxpayers this proposal is not a school voucher. Given that the Texas Legislature has repeatedly and resoundingly rejected school vouchers, this gambit is not surprising.

A “school voucher” is any scheme by which the state, directly or indirectly, diverts money from its coffers, or that it would otherwise collect in taxes, to subsidize private schools.

The version under consideration by the Legislature is simply a variant on this theme I refer to as the Texas Two-Step voucher. Here’s how it works.

A corporation owing taxes to the state of Texas can divert up to 50 percent of taxes it owes to a nonprofit organization that distributes those funds as private school tuition subsidies. In return, the corporation receives a dollar-for-dollar tax credit in the amount of its contribution at a cost to the state in foregone tax collections of up to $100 million annually, with a built-in annual escalator clause (of either 5 percent or 10 percent, depending on the specific proposal.)

Assessing similar proposals, Robert VerBruggen of the conservative publication National Review wrote in 2011:

“Let’s be absolutely clear about what happens when someone makes a ‘donation’ under a tax-credit regime: If the donation amount is $1,000, the donor knocks $1,000 off his tax bill. This isn’t a deduction; he doesn’t merely pay taxes on $1,000 less of his income. This isn’t a partial credit; his taxes are reduced by the full $1,000. This is a dollar-for-dollar reimbursement by the government. There is absolutely no difference between this situation, and a situation in which the government simply gives $1,000 to fund vouchers directly.” (Emphasis added)

VerBruggen concludes no practical economic difference exists between a tax credit voucher and a direct subsidy to private schools. He also illuminates that, while the name “tax credit scholarship” evokes charitable beneficence, it is significantly different from a simple charitable contribution.

This point is not widely understood, as illustrated when the bill’s Senate author, Senate Education Chairman Larry Taylor, asked another senator during floor debate whether he received a federal tax deduction for personal charitable contributions, and indicated this was no different. It is different, of course, in one very important respect: It is a dollar-for-dollar credit, so the corporate taxpayer is out no money. It is a corporate tax break and a school voucher rolled into one.

While marketed as advancing social justice, note that households with incomes of 250 percent of the national income guidelines for the free or reduced school lunch program would be eligible to participate. Based on bill language, it appears a family of four earning up to $78,510 annually would be eligible to receive the full voucher amount, and a family of four earning up to $112,157 annually would be eligible to receive a lesser subsidy for private school tuition.

Proponents not only creatively packaged the Texas Two-Step voucher, but also tried to cover their tracks with budgetary sleight of hand.

While the Senate bill would result in a state revenue loss of $80 million for the 2016-2017 biennium, and $184.8 million for the 2018-2019 biennium, any loss must be made up with an equal amount of general revenue to fund the Foundation School Program. Translation: The bill would rob Peter to pay Paul so proponents can claim no less money would be available for public schools. This budgetary maneuvering would either divert resources from other vital needs or require the Legislature to reshuffle funds within the budget when times are tight.

Local districts and campuses across Texas would also feel the pinch. A Legislative Budget Board analysis notes that “savings” touted by the bill’s proponents come from reduced state aid to local districts associated with the exit of students to attend private schools using these taxpayer-funded subsidies. The impact on a given district or campus would be unevenly distributed, and many districts would receive less revenue while having to fund the same number of classrooms, teachers and other resources for remaining students.

Don’t let the fancy footwork fool you. When it’s all said and done, a school voucher is still a school voucher, no matter what they call it.