Many Illinois children are currently trapped in failing public schools.  Most of these children, whose futures are put at risk due simply to geography and bureaucracy, would thrive if given equal choices and greater educational opportunities.

Those opportunities can come in the form of the expansion of a simple tax credit—the Illinois Education Expense Tax Credit—which would give children from poor and working class families a realistic option to escape chronically failing schools while creating competition among education providers that will improve public school performance.  It would also, as we demonstrate here, result in a fiscal windfall for the state.  Our findings show that a $4,000 per child education tax credit will actually save up to $3.48 billion over 10 years.   

Only 32 percent of Illinois public elementary school students are reading at grade level.1 By the end of middle school, that number slips to 30 percent.2 By the time they reach the 12th grade, only 20 percent of public school students possess the requisite skills to succeed in college.3 25 percent of students in Illinois’ public high schools drop out of school altogether. It is little wonder that parents want to escape these chronically failing schools. They want more choices to improve their children’s future.4

In December 2007, the Illinois Policy Institute co-sponsored a poll that asked 1,500 registered Illinois voters the following question: “If it was your decision and you could select any type of school, what type of school would you select in order to obtain the best education for your child?” Four out of five Illinoisans chose schools other than regular public schools. By a 2-to-1 margin, 39 percent to 19 percent, parents said that they would most prefer to send their children to private schools if the option was available.5

Despite these startling responses, the number of Illinois children currently enrolled in public schools outweighs the number of children enrolled in private schools 9-to-1.6 Clearly, tens of thousands of Illinois children are attending a school that their parents consider second-rate. Most of them do so because they don’t have any other choice.

Most Illinois parents cannot afford to pay twice for their children’s education—that is, to pay local property taxes for local public schools and pay private school tuition as well. Most working class families, many of whom rent and/or receive housing subsidies, cannot afford private school tuition under any circumstances. Yet these are the families that are most likely to have children attending substandard public schools and that are the most in need of more choices.

Late last year, the Illinois Policy Institute renewed its call upon lawmakers to give Illinois families equal opportunity in education by expanding Illinois’ education expense tax credit from its current level of $500 per family to $4,000 per child. In order to do so, and in order to allow every family to have equal access to the full amount of the tax credit, lawmakers should immediately:

– Increase the per student tax credit to $4,000, covering up to 100% of tuition costs

– Make the credit refundable, if total tuition expenses exceed a taxpayers’ income tax liability

– Allow the tax credit to apply separately for every dependent child, as is done with college tuition tax credits

If lawmakers take these steps, they will enable thousands of Illinois families to send their children to the schools that they clearly prefer. Tens of thousands and perhaps hundreds of thousands of Illinois schoolchildren will be able to enroll in a school that better suits their needs, and the resulting competition for students, as previous studies have shown, will force public schools to improve.7

With all of this in mind, what is the projected fiscal impact of creating a $4,000 tuition tax credit? The following study takes into account the numerous factors that would affect private school enrollment, public school costs and total government spending. We then calculate the net financial impact of the tax credit program.

Our findings show that a $4,000 per child education tax credit will actually save $3.48 billion over 10 years. This savings could be returned to taxpayers, or it could be allocated to those students remaining in the public schools. These results follow from reasonable assumptions about the demand for school choice and the ability of public schools to adapt to changing enrollments.

As a matter of justice, parents should have a choice over which school is best for their children. As a matter of preference, more Illinois parents would choose to send their children to a private school than a traditional public school. As a matter of educational excellence, it makes sense to create competition among all providers rather than protecting a government monopoly. And as a matter of fiscal and education policy, lawmakers can save billions of taxpayer dollars while creating a system that will make Illinois a national leader in educational opportunity and results.

Tax Credits in Illinois

Illinois public schools are estimated to spend about $11,383 per pupil in 2008. The Illinois Policy Institute has proposed that the General Assembly expand the state’s education tax credit from $500 per family to $4,000 per child. Not only will this empower parents with children in failing schools, it will save money and improve public school performance over time.

Several factors will affect the net fiscal impact upon state and local governments once lawmakers implement a $4,000 tax credit program. Those factors include:

– The average tax credit claimed by parents who send their children to private school

– The change in the relative enrollments in public and private schools

– The level at which lawmakers are willing to fund public schools once enrollments are affected by the tax credit program

– The amount of money saved by decreasing public school enrollments

Average Tax Credit Amount

We estimate average private school tuition at $6,017 (see below). In some areas of the state – and particularly in Catholic elementary schools – tuition may be lower than that amount. However, for the purposes of this study we assume that tuition at every private school is at or exceeds $4,000.

There are some parents – though not many – who will not file for the tax credit. When projecting the fiscal impact of a $4,000 tuition tax credit, however, we assume that 100 percent of students enrolled in Illinois’ private schools will apply for and receive the full $4,000 tax credit.

Estimating Private Average School Tuition

No state-level data exist that would allow us to directly calculate current private school tuition rates in Illinois. The most reliable data on private school tuition come from 2000, when the National Center for Education Statistics reported that average private school tuition in America was $4,689.8 Since that time, private school tuition has surely increased. In order to calculate current tuition levels in Illinois, we assume that private school tuition has held constant as a percentage of average income, both over time and from state to state.

In 2000, the national per capita income was $29,843,9 while average private school tuition equaled15.71 percent of national per capita income. In 2006, the most recent year for which data is available from the Bureau of Economic Analysis, per capita income in Illinois was $38,297.10 Thus, assuming private school tuition has grown in direct proportion to per capita income, the current average private school tuition in Illinois can be estimated at approximately $6,017.

Estimating Private School Demand

When polled, 39 percent of Illinoisans said they would send their children to private school in order to receive the best education possible.11 Yet only 11 percent of Illinois schoolchildren are enrolled in private schools.12 The disparity between these two figures owes primarily to the tuition costs of private schooling, which become prohibitive for most working parents.

A $4,000 tuition tax credit program changes this equation. Rather than taxpayer dollars going directly to a school district, they are put into the hands of parents who then decide where to enroll their children. Since the program greatly reduces the financial burden of sending one’s child to private school, we can expect the number of Illinois students enrolled in private school to increase once the program is initiated.

In order to predict the number of students who would take up the opportunity to attend private school and thus receive the tax credit, we need to know how the demand for private school will be affected by a change in the price of private school tuition. With most goods, economists rely on a concept known as “price elasticity of demand” to predict the affects of price changes. Over the past 10 years, many tax credit and voucher programs have developed around the country. Data are still being developed on the price elasticity of demand for private schools when costs decline. While no formal studies have yet to be completed, we can calculate the fiscal impact at three different levels of demand based on past studies, current methods employed in comparable fiscal impact studies, and indicators of potential private school demand in the state.

A 1996 study by Barry Chiswick and Stella Koutroumanes looked at marginal changes in private school tuition. The study was conducted twelve years ago, before most of the nation’s largest school choice programs were underway. The authors concluded that the price elasticity of demand for private education was 0.48 – that is to say, if the price of private school tuition is decreased by one percent ($60), then private school enrollment will increase by 0.48 percent.13 This figure is very low, and almost certainly underestimates the effect that a $4,000 tax credit (i.e. a 66 percent reduction in average tuition costs) would have on the demand for private schools.

Other fiscal impact studies, including a recent report by the Show-Me Institute in Missouri, have assumed that the elasticity of demand for private schools is at least 1.0. At 1.0 and above, prices are considered elastic, while below 1.0 prices are said to be inelastic.14

After reviewing the information above, after evaluating poll results which show that private schools are preferred by more Illinoisans than any other schooling option, and given the fact that robust choice programs such as the voucher program in Milwaukee have experienced high enrollment rates, it is safe to assume that the elasticity of demand for private education in Illinois is at least 1.25. While the 1.25 metric will be used as the basis for our conclusions, in the interest of fully examining the potential fiscal impact of this proposal, we will also analyze fiscal impact assuming a price elasticity of demand of .48 and 1.0.

We have estimated that average private school tuition in Illinois is $6,017. The $4,000 tuition tax credit proposed by the Illinois Policy Institute would lower the average price of private school tuition by 66.5 percent. Given this change in tuition costs, the different levels of price elasticity of demand discussed above would produce the following effects on the enrollments in public and private schools:

– At a price elasticity of demand of 0.48, the percentage of Illinois students enrolled in private school would increase by .48 percent for every 1 percent reduction in the average tuition cost of private school. A $4,000 tax credit would reduce the per pupil tuition costs of private school in Illinois by 66.5 percent – therefore, private school enrollment would increase by 31.9 percent (from 244,188 to 322,103). The migration rate – the percentage of students leaving public school for private school – would be 4 percent.

– At a price elasticity of demand of 1.0, the percentage of Illinois students enrolled in private school would increase by 1.0 percent for every 1 percent reduction in the average tuition costs of private school. A $4,000 tax credit would reduce the per pupil tuition costs of private school in Illinois by 66.5 percent – therefore, private school enrollment would increase by 66.5 percent (from 244,188 to 406,512). The migration rate of students leaving public school for private school would be 8.4 percent.

– At a price elasticity of demand of 1.25 – the elasticity of demand that we believe is most realistic – the percentage of Illinois students enrolled in private school would increase by 1.25 percent for every 1 percent reduction in the average tuition cost of private school. A $4,000 tax credit would reduce per pupil tuition costs of private school in Illinois by 66.5 percent – therefore, private school enrollment would increase by 83.1 percent (from 244,188 to 447,093). The migration rate of students leaving public school for private school would be 10.5 percent.

Holding Per Pupil Spending in Public Schools at or above Current Levels

During the 2007 fiscal year, the most recent fiscal year on record, combined public spending on elementary and secondary education in Illinois was $22.64 billion. During the 2007 legislative session the General Assembly authorized a $560 million increase in state government spending on state schools. Assuming that local revenues and federal revenues continue to grow at a rate similar to each of the last five years, total public spending on Illinois’ public schools will exceed $24.11 billion. Current public school enrollment is reported to be 2,118,692 students.15 Therefore, projected spending per pupil in Illinois’ public schools will be $11,383 during the 2008 fiscal year.

We assume that, even in the face of declining enrollments:

– Lawmakers will hold per pupil spending in Illinois’ public schools at or above its current estimated level of $11,383.

Estimating the Savings of Decreased Enrollment

Beyond the projected changes in public school and private school enrollments, we must also estimate cost savings resulting from decreased public school enrollments. Public schools in Illinois spend $11,383 per student, and the proposed tax credit costs $4,000 per student. At first glance, it would appear that taxpayers would save $7,383 for every student to opt out of a public school and into a private school – a move made possible by the $4,000 tax credit.

However, many argue that there are certain fixed costs that do not disappear when a student leaves a particular public school. They contend that the marginal costs of gaining a student, or the marginal savings of losing a student, are far below the school system’s average per pupil costs of $11,383.

Some researchers have been dismissive of any differences in marginal costs and average per pupil costs when predicting the fiscal impact of school choice programs which enable students to exit the public school system. This is a mistake. There are overhead costs that districts cannot eliminate instantaneously after facing a sharp decline in public school enrollment.

However, it is reasonable to expect that school districts will respond over time to a decreased demand for their services and will adjust spending accordingly. Economist Michael Podgursky and Show-Me Institute researchers noted this fact in a January 2008 fiscal impact study of a proposed school choice program in Missouri: “school districts have substantial fixed costs in the short run. But in the long run, districts can consolidate fixed costs (like buildings and classrooms) and marginal costs will approach average costs, eliminating short-run economies of scale. In other words, it is possible to run a district with 5,000 students just as efficiently as one with 30,000 students.”16

One can observe this happening in Illinois. Enrollment in Chicago Public Schools has fallen by more than 41,000 students since 2001. In response to declining enrollments, CPS has taken a large step in adjusting to decreased demand by announcing plans to close 50 to 75 elementary schools. The district has stated that this could result in savings of more than $100 million per year.17

Closing schools is the final step a district takes when attempting to adjust its capital expenses tomeet its capital needs. Leading up to that point, districts are able to decrease the number of administrative personnel, support personnel and material costs to suit the size of their decreasing student population. In order to simulate this effect, when projecting the fiscal impact of a $4,000 tax credit – and the concomitant decline in public school enrollment – we assume that total amount of absolute fixed costs during the first year of the program will be equivalent to the total amount of absolute fixed costs in the current system. However, given the experience in Chicago and the predictions of Podgursky et al., we predict that fixed costs will fall in absolute terms, reaching the same proportions as 2008 by the sixth year of the tax credit program.

The single best study calculating fixed costs in public school systems comes from South Carolina. In 2006 economists Cotton M. Lindsay and Alex Grecu estimated that the temporary fixed costs in South Carolina’s public schools were 20 to 25 percent of per pupil costs.18 There are few, if any, reasons to believe that South Carolina’s public schools are considerably more or less efficient than schools in Illinois. In fact, the Chicago Public Schools’ own data indicate that fixed costs are in the range of 22-24 percent.

As noted above, CPS estimates that closing from 50 to 75 schools will ultimately result in savings of $100 million annually. We can determine the fixed costs associated with these schools as follows: [see page 9 of pdf for chart]

We make two final assumptions before calculating the fiscal impact of a $4,000 tuition tax credit:

– The combined fixed costs in Illinois’ public schools are equivalent to 25 percent of total spending.

– While fixed costs will remain fixed in the short run in absolute terms, they will gradually return to 25 percent of total public school spending within five years of the creation of the tuition tax credit.

The Impact

The following is a projection of the fiscal impact of the proposed tax credit program over ten years’ time. In order to calculate the fiscal impact of a $4,000 tuition tax credit, one must make a number of informed assumptions. The assumptions made here are:

– 100 percent of students enrolled in Illinois’ private schools will apply for and receive the full $4,000 tax credit

– Lawmakers will hold per pupil spending in Illinois’ public schools at or above its current estimated level of $11,034.

– The combined fixed costs in Illinois’ public schools are equivalent to 25 percent of total spending.

– While fixed costs will remain fixed in the short run in absolute terms, they will gradually return to 25 percent of total public school spending within five years of the creation of the tuition tax credit.

As discussed above, we project the total program costs (or savings) at three different levels of demand. In each case, we make different assumptions about how Illinois families will respond to a $4,000 change in the net cost of private school tuition. In the first case, we assume a tepid public response. In the second, we assume a more reasonable reaction to the increased accessibility of private school. And in the third case, we assume what we believe would be the most realistic response to the creation of a $4,000 tuition tax credit.

The total combined enrollment in Illinois public and private schools is 2,362,880 students. Ten percent (244,188) of those students currently attend private schools. Ninety percent (2,118,692) are enrolled in public schools.19 Total public spending on elementary and secondary education during the 2008 fiscal year is estimated to be $24.11 billion. With fixed costs assumed to be 25 percent of total spending ($6.03 billion), variable costs would then be $18.08 billion – which allows us to conclude that marginal per pupil costs in Illinois’ public schools are approximately $8,537.In order to calculate the total fiscal impact of a $4,000 tuition tax credit, we combine total predicted expenditures on tax credit allocations with predicted spending in the public schools. We then compare that figure to estimated current spending in Illinois’ public schools.

Program Costs With Demand Below Expected Levels

At a low level of demand – when the price elasticity of demand for private school rests at a paltry 0.48 – private school enrollment would climb to 322,103 students from the present 244,188. Once a $4,000 tax credit is awarded to every student in private school, the total annual allocation for tax credits would be $1.28 billion. At this level of demand, the net costs of the creation of a $4,000 tuition tax credit would be approximately $623 million in year one, $579 million in year two, $535 million in year three, $490 million in year four, $446 million in year five and then $401 million each year thereafter through year ten. Over the first ten years of the tax credit program, the total fiscal impact of the program would be $4.68 billion, which is just a fraction of the projected increases in education spending. Since the 2000-01 school year, education spending has been increasing at 4.3% per year in Illinois. Assuming that same rate of increase over the next 10 years, the tuition tax credit program would absorb only $4.68 billion—a mere 7.2%—of the projected $64.96 billion in increased education spending.

Program Costs If Demand Is ‘Elastic’

At a more reasonable level of demand – where the demand for private schools meets the minimum definition of “elasticity,” at 1.0 – private school enrollment would climb to 406,512 students from the present 244,188. Once a $4,000 tax credit was awarded to every student in private school, the total annual allocation for tax credits would be $1.62 billion. In the first year of the program, before local schools will have had the opportunity to adjust to decreased enrollments, total public education spending – the combined spending on public schools and tuition tax credits – would be $24.35 billion, an increase of $240 million. In year two the net costs will be $148 million, and $55 million in year three. In year four, however, the program will begin to generate an annual net savings. In that year, the program will produce a net savings of $37 million. The program will save $129 million in year five, and $222 million each year thereafter through year 10. Over the first ten years of the tax credit program, taxpayers will save $832 million. This money could be returned to taxpayers or it could be allocated to students remaining in public schools.

Program Costs at Projected Levels of Demand

Parents in Illinois want choices, and more of them would prefer to enroll their children in private school than in regular public schools. The cost projections above presume a low and a modest level of demand for private school. But recent polling suggests that if choices are made available, the level of demand for private education will be very high.

We estimate that the demand for private education is higher than either of the figures above, and consider the most reasonable level of price elasticity of demand to be 1.25.

At that level, private school enrollment would climb to 447,093 students from the present 244,188. Once a $4,000 tax credit was awarded to every student in private school, the total annual allocation for tax credits would be $1.79 billion. In the first year of the program, before local schools will have had the opportunity to adjust to decreased enrollments, total public education spending would total $24.17 billion, a net cost of $56 million. By the second year of the program, however, while public schools are still adjusting their fixed costs for decreased enrollments, total combined spending on tuition tax credits and public school expenses will be $24.06 billion – a resultant savings of $59.4 million. In year three, state and local governments will realize a net savings of $174.9 million. Annual savings from the tuition tax credit program will be $290 million in year four, $ 406 million in year five and $521 million during years six through ten. The total 10 year savings will be $3.48 billion.

Program Costs at All Three Levels of Potential Demand

As we have stated, we believe that the most likely outcome is a price elasticity of 1.25, which will result in a migration rate of 10.5 percent from public schools to private schools. The table below provides a summary of this level of demand alongside the less likely migration levels.

In the worst case (.48 elasticity) this program can be implemented at a cost to taxpayers that is just 7.2% of the projected annual increases in education spending.

In the second case (1.0 elasticity) the program will save taxpayers $831 million over 10 years. In the case we think most likely (1.25 elasticity), the tuition tax credit program will save taxpayers $3.48 billion. In either case this savings can be returned to taxpayers or reallocated to the public schools to increase the spending per student. (see page 10 of the pdf)

Conclusion

The data show that the Illinois legislature should consider and pass legislation for a $4,000 Illinois Education Expense Tax Credit program. This program will increase educational opportunity and improve educational results while saving taxpayer dollars. It saves the overburdened taxpayers’ money, it provides parents and students with greater opportunities and the choices that they desire, and, over time, it will make Illinois a true national leader in education. With a system of choice and competition, both private and public schools will have incentives to innovate and improve—and Illinois students will have a more opportunities for a brighter educational future.