A Mackinac Center Report

The Universal Tuition

Tax Credit:

A Proposal to Advance Parental

Choice in Education

The Universal Tuition

Tax Credit:

A Proposal to Advance Parental

Choice in Education

Patrick L. Anderson

Richard McLellan, J.D.

Joseph P. Overton, J.D.

Gary Wolfram, Ph.D.

How Educational Freedom Will Help Michigan

Students, Schools, and Taxpayers

November 1997
Mackinac Center for Public Policy 1 of 2 January 1999 

Addendum to the Universal Tuition Tax Credit 

Since the release of the Universal Tuition Tax Credit in November 1997, the Mackinac 

Center for Public Policy continues to strengthen the original proposal by incorporating revisions 

based on input from school choice organizations, legislators, and education experts in Michigan 

and across the country. The following changes represent an effort to create the most viable and 

effective school choice proposal. 

1. Increase the maximum first-year credit from ten percent to fifty percent of the average 

amount public schools receive to educate each child for families with income at or below 150 

percent of the federal poverty level and keep it at the maximum thereafter (If the state 

foundation grant is $6,000, then the credit for low-income families would increase from $600 

to $3,000 dollars in the first year). This both increases the amount of funds immediately 

available compared to the original plan, and also extends this increase to more low-income 

families than the original plan which provided special consideration to families with income 

up to 100 percent of the federal poverty level. 

2. Permit the legislature to increase the maximum credit amount in any year to provide 

additional funds for Special Education students or for any other purpose. 

3. Permit the legislature to provide tax credits for home school parents, textbooks, 

transportation, or other related purposes. 

Revised School Choice Amendment Language 

(See pages 36-37 of Universal Tuition Tax Credit study) 

No public monies or property shall be appropriated or paid or any public credit 

utilized, by the legislature or any other political subdivision or agency of the state directly or 

indirectly to aid or maintain any private, denominational or other nonpublic, pre-elementary, 

elementary, or secondary school. No payment, credit, tax benefit, exemption or deductions,

tuition voucher, subsidy, grant or loan of public monies or property shall be provided, directly 

or indirectly, to support the attendance of any student or the employment of any person at any 

such nonpublic school or at any location or institution where instruction is offered in whole or 

in part to such nonpublic school students. The legislature may provide for the transportation of 

students to and from any school. 

TO IMPROVE PUBLIC EDUCATION BY EMPOWERING PARENTS WITH GREATER 

FREEDOM TO CHOOSE THE BEST AND SAFEST SCHOOLS THAT MEET THE INDIVIDUAL 

NEEDS OF THEIR CHILDREN, IT IS HEREBY ESTABLISHED THAT: 

AS PROVIDED IN THIS SECTION, THERE SHALL BE A CREDIT AGAINST 

AMOUNTS PAYABLE UNDER THE STATE INCOME TAX, THE STATE SINGLE BUSINESS 

TAX, THE STATE EDUCATION TAX, OR ANY SUCCESSOR TAXES, AND OTHER TAXES AS 

PROVIDED BY LAW TO ANY PERSON FOR PAYMENTS MADE BY THE PERSON FOR 

TUITION FOR EDUCATION FOR ANY RESIDENT CHILD ATTENDING A PUBLIC OR 

NONPUBLIC ELEMENTARY OR SECONDARY SCHOOL IN THIS STATE. 

continued ... 
Mackinac Center for Public Policy 2 of 2 January 1999 

Revised School Choice Amendment Language continued... 

A CONTRIBUTION TO A NONPROFIT ORGANIZATION SHALL QUALIFY FOR 

THE CREDIT AT THE TIME THAT 100 PERCENT OF THE CONTRIBUTION IS DISBURSED 

BY THE ORGANIZATION AS TUITION FOR INDIVIDUAL PUPILS PURSUANT TO THE 

LIMITATIONS OF THIS SECTION. 

THE TAX CREDIT PER PUPIL FOR TUITION PAYMENTS FOR A PUPIL WHOSE 

FAMILY INCOME IS AT OR BELOW 150 PERCENT OF THE FEDERAL POVERTY LEVEL 

SHALL BE 50 PERCENT OF THE AVERAGE STATE AND LOCAL PER PUPIL REVENUE FOR 

SCHOOL OPERATING PURPOSES FOR PUBLIC ELEMENTARY AND SECONDARY 

SCHOOLS OR 100 PERCENT OF THE ACTUAL TUITION PAID, WHICHEVER IS LESS. 

THE TAX CREDIT PER PUPIL FOR OTHER PUPILS SHALL BE LIMITED TO THE 

LESSER OF THE MAXIMUM CREDIT ESTABLISHED IN THIS SECTION OR 80 PERCENT OF 

THE ACTUAL TUITION PAID. THE MAXIMUM CREDIT PER PUPIL PERMITTED IN THE 

STATE FISCAL YEAR FOLLOWING THE RATIFICATION OF THIS AMENDMENT SHALL 

BE AN AMOUNT EQUAL TO TEN PERCENT OF THE AVERAGE STATE AND LOCAL PER 

PUPIL REVENUE FOR SCHOOL OPERATING PURPOSES FOR PUBLIC ELEMENTARY AND 

SECONDARY SCHOOLS. FOR EACH FISCAL YEAR THEREAFTER THE MAXIMUM 

CREDIT SHALL INCREASE OVER THE PRIOR YEAR BY AN AMOUNT EQUAL TO AN 

ADDITIONAL FIVE PERCENT OF THE AVERAGE STATE AND LOCAL PER PUPIL 

REVENUES, UNTIL THE MAXIMUM CREDIT AMOUNT PER PUPIL IS EQUAL TO FIFTY 

PERCENT OF THE AVERAGE STATE AND LOCAL PER PUPIL REVENUE. 

THE LEGISLATURE MAY IN ANY YEAR INCREASE THE AMOUNT OF THE 

CREDIT APPLICABLE TO PUPILS WHO REQUIRE SPECIAL EDUCATION SERVICES, OR 

FOR ANY OTHER PUPILS AS THE LEGISLATURE DEEMS APPROPRIATE. 

THE LEGISLATURE SHALL PROVIDE BY LAW FOR THE IMPLEMENTATION OF 

THIS SECTION. 

LIMITATION ON STATE REGULATION OF NONPUBLIC SCHOOLS. 

THE LEGISLATURE SHALL NOT ADOPT ANY LAW IMPOSING REGULATIONS 

ON NONPUBLIC SCHOOLS OR THEIR PUPILS OR TEACHERS IN ADDITION TO THOSE 

IN EFFECT ON NOVEMBER 7, 2000, EXCEPT BY A VOTE OF TWO-THIRDS OF THE 

MEMBERS ELECTED TO AND SERVING IN EACH HOUSE. 
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice

in Education

How Educational Freedom Will Help Michigan Students,

Schools, and Taxpayers

by Patrick L. Anderson, Richard McLellan, J.D.,

Joseph P. Overton, J.D., and Gary Wolfram, Ph.D.

________________________

Copyright © 1997 by the Mackinac Center for Public Policy, Midland, Michigan

Permission to reprint in whole or in part is hereby granted, provided that the

Mackinac Center for Public Policy and the authors are properly cited.

ISBN: 1-890624-03-9

S97-04

Guarantee of Quality Scholarship

The Mackinac Center for Public Policy is committed to delivering the highest quality and

most reliable research on Michigan issues. The Center guarantees that all original

factual data are true and correct and that information attributed to other sources is

accurately represented.

The Center encourages rigorous critique of its research. If the accuracy of any material

fact or reference to an independent source is questioned and brought to the Center’s

attention with supporting evidence, the Center will respond in writing. If an error exists,

it will be noted in an errata sheet that will accompany all subsequent distribution of the

publication, which constitutes the complete and final remedy under this guarantee.

The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 iii

The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education

Table of Contents

EXECUTIVE SUMMARY.................................................................................................................. 1

I. THE PROMISE OF PARENTAL CHOICE IN EDUCATION .................................................. 5

CHOICE IS BREAKING OUT .................................................................................................................. 5

THE ASSIGNMENT SYSTEM ................................................................................................................. 6

Common Schools and Government Assignment ............................................................................ 6

Education Decisions Under an Assignment System ...................................................................... 7

WHY PARENTAL CHOICE WORKS ....................................................................................................... 8

Parents and Students as Consumers.............................................................................................. 8

Parents as the Engine of Choice.................................................................................................... 8

Human Capital .............................................................................................................................. 9

MICHIGAN’S HISTORY OF PARENTAL CHOICE ................................................................................... 10

Private Schools............................................................................................................................ 10

Scholarship Programs ................................................................................................................. 10

Choice in Higher Education........................................................................................................ 11

Intra- and Inter-district Schools of Choice.................................................................................. 12

Charter Schools or Public School Academies ............................................................................. 12

ADDRESSING MISCONCEPTIONS ABOUT CHOICE............................................................................... 13

Parental Choice Especially Helps the Poor ................................................................................ 14

Parental Choice Does Not Reduce Educational Resources ........................................................ 15

Parental Choice Improves the Whole System .............................................................................. 15

Teachers Benefit from Parental Choice....................................................................................... 17

Parental Choice Helps Those Most in Need................................................................................ 17

Urban Leaders Themselves Are Demanding More Choice ......................................................... 18

A “PUBLIC CHOICE” ANALYSIS OF THE CURRENT SYSTEM............................................................... 19

MORE MONEY ALONE WILL NOT IMPROVE PUBLIC EDUCATION...................................................... 21

A CALL FOR REFORM: EMPOWERING PARENTS ................................................................................ 22

II. MICHIGAN CONSTITUTIONAL RESTRAINTS ON PARENTAL CHOICE..................... 23

HISTORY OF ARTICLE VIII, SECTION 2 ............................................................................................. 23

“Parochiaid” and the 1970 Amendment..................................................................................... 23

The Effect of the 1970 Amendment.............................................................................................. 25

SHOULD MICHIGAN HAVE THE MOST REPRESSIVE CONSTITUTION? ................................................. 25

III. EXPANDING PARENTAL CHOICE WITH A UNIVERSAL TUITION TAX CREDIT ... 26

CHOICE AMONG GOVERNMENT SCHOOLS ........................................................................................ 26

CHOICE AMONG PRIVATE SCHOOLS.................................................................................................. 27

WHAT IS THE BEST METHOD OF EXPANDING PARENTAL CHOICE?.................................................... 27

A BETTER CHOICE: THE UNIVERSAL TUITION TAX CREDIT ............................................................. 29

What is the Universal Tuition Tax Credit?.................................................................................. 29

How does the UTTC work?.......................................................................................................... 30

Mechanics of the UTTC Implementation..................................................................................... 31

KEY BENEFITS OF THE UTTC ........................................................................................................... 32

EXAMPLES OF HOW THE UNIVERSAL TUITION TAX CREDIT COULD BE USED .................................... 32

DRAFTING THE UNIVERSAL TUITION TAX CREDIT AMENDMENT ...................................................... 33

Constitution Versus Legislation................................................................................................... 34

General Considerations for Drafting .......................................................................................... 34
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

 iv November 1997

Treatment of Existing Constitutional Language.......................................................................... 34

Establishment of the Universal Tuition Tax Credit ..................................................................... 35

Protection Against Overregulation.............................................................................................. 36

LEGISLATIVE IMPLEMENTATION OF THE UTTC................................................................................. 37

Tracking Tuition Payments and Credits ...................................................................................... 37

Minimizing Recordkeeping by Taxpayers.................................................................................... 40

Tax Forms and Filing Procedures............................................................................................... 40

IV. IMPACT OF THE UTTC ON STATE AND LOCAL FINANCES......................................... 44

A MODEL OF STATE AND LOCAL FINANCE........................................................................................ 44

Current System State Foundation Grant and Local Property Tax Support................................. 44

Per-Pupil Revenues as Indicator of Overall Revenues................................................................ 45

Student Population Assumptions ................................................................................................. 45

UNIVERSAL TUITION TAX CREDIT DYNAMICS .................................................................................. 45

Private, Public, and Alternative Schools..................................................................................... 45

The Education Market ................................................................................................................. 46

Consumer Behavior Under the UTTC ......................................................................................... 46

Net Impact on State and Local Finances..................................................................................... 48

SUMMARY: FINANCIAL IMPACT OF A TUITION TAX CREDIT............................................................. 50

APPENDIX I: A MODEL OF SCHOOL FINANCE..................................................................... 51

PRIVATE AND PUBLIC FINANCING OF SCHOOLS................................................................................. 51

Private School Costs vs. Public School Costs ............................................................................. 51

A MODEL OF STATE AND LOCAL FINANCE: ASSUMPTIONS .............................................................. 53

State Foundation Grant & Local Property Tax Support ............................................................. 53

Student Count Projections........................................................................................................... 53

Private, Public, and Alternative Schools..................................................................................... 54

Universal Tuition Tax Credit Structure....................................................................................... 57

UNIVERSAL TUITION TAX CREDIT DYNAMICS .................................................................................. 57

The Education Market ................................................................................................................. 57

Price Elasticity of Demand.......................................................................................................... 58

Price Elasticity of Demand for Michigan Alternative Schools.................................................... 61

Predicting Consumer Behavior ................................................................................................... 61

Calculating Demand.................................................................................................................... 62

Applying Constraints to the Model.............................................................................................. 62

Likely Migration to Alternative Schools ...................................................................................... 63

Limits on Migration..................................................................................................................... 64

THE FISCAL IMPACT OF THE UNIVERSAL TUITION TAX CREDIT ........................................................ 65

Effects on Revenue and Expenses................................................................................................ 65

Utilization of the Credit............................................................................................................... 66

Fiscal Impact of the UTTC Plan.................................................................................................. 67

Tax Savings from the Tuition Tax Credit..................................................................................... 67

Total Spending on Education ...................................................................................................... 68

A Note on Refundable Versus Non-Refundable Credits .............................................................. 68

Notes on Data Sources ................................................................................................................ 71

APPENDIX II. QUESTIONS AND ANSWERS REGARDING THE UNIVERSAL TUITION

TAX CREDIT..................................................................................................................................... 72

CONTRIBUTORS TO THIS STUDY.............................................................................................. 74
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 1

The Universal Tuition Tax Credit:

A Proposal to Advance

Parental Choice in Education

(Some proposal language was revised in January 1999)

Executive Summary

Parental choice in education—whereby parents have the freedom to choose the

school their children attend—is seeing explosive growth in popularity and implementation.

Instead of sending children to an assigned school based on residence, Michigan parents have

asked for and received the ability to send their children to public schools outside their home

district and to create new charter schools to meet special needs and interests.

This study from the Mackinac Center for Public Policy presents a path-breaking

approach to expanding parental choice in Michigan education. It embodies a proposal to

amend the Michigan Constitution and establish a Universal Tuition Tax Credit (UTTC). In

addition to improving public education, the UTTC will save the state more than $3 billion in

education expenses in the first ten years of implementation and over $500 million each year

thereafter.1

 These savings could be used to support additional educational programs, address

other budget priorities, or reduce taxes on Michigan citizens or businesses.

Section I reviews why parental choice is the most important systemic education

reform and evaluates various ways to expand it. In spite of the fact that parents are entrusted

to make vital decisions in nearly every area of their children’s lives, most Michigan parents

are unable to make true choices about education, one of the most important aspects of their

children’s development. Most children are sent to a government-mandated, governmentassigned school.

Choice is the engine for a market economy in all goods and services. The foundation

of basic economic theory is the ability of individual consumers to choose one good over

another based on their own preferences. Parents prefer good schools over poor schools for

their children. Assigning children to schools, based on where students live, deprives parents

of the freedom to apply their own values and priorities to selecting a school, and it deprives

schools of valuable marketplace incentives that drive continuous quality improvement.

Today, 12 percent of Michigan children—over 220,000—attend alternative schools

which charge tuition. Alternative schools include both private schools and public schools;

the latter may charge tuition when parents choose a public school outside the home district

and the home district superintendent refuses to release funding. The best way to expand

parental choice is to eliminate the penalty for parents who must pay twice for alternative

schools: once through tuition and then through taxes.

 

1

 The original November 1997 report calculated savings of $3.4 billion in the first ten years. Revisions have slightly reduced

the savings to the state, but will still remain over $3 billion after the first ten years.

In spite of the fact

that parents are

entrusted to make

vital decisions in

nearly every area

of their children’s

lives, most

Michigan parents

are unable to make

true choices about

education.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

2 November 1997

Section II examines Michigan’s constitutional prohibition on including nonpublic

schools in an open system of parental choice.

Section III reviews several methods of expanding parental choice. The study

concludes that, although both tuition vouchers and traditional tuition tax credits could be

used to eliminate the problem of double payment, both have disadvantages. Vouchers, for

example, are subject to allegations that they drain funds from public schools, permit state

funds to be used to support religious schools, will spawn a new type of entitlement program,

and invite overregulation of private schools. Traditional tuition tax credits—whereby only

parents are allowed to receive a tax credit—address some of the problems with vouchers, but

fail to help low-income and many middle-income families who lack enough tax liability to

benefit.

Section III sets forth the details of the UTTC plan. Although both vouchers and

traditional tax credits would be an improvement over the current system, the UTTC is

designed to capitalize on the strengths and minimize the weaknesses of each. The UTTC has

the following features and benefits:

• It gradually phases in a tax credit for tuition paid to any Michigan

elementary or secondary school—public or private. It is a direct dollar-fordollar credit against taxes owed, not simply a deduction.

• The tax credit may be claimed by any taxpayer—individual or corporate.

This includes a student’s parents as well as relatives, friends, neighbors or

businesses. A large company, for example, could pay $2,000 tuition for each

of 1,000 low-income children and receive a $2,000,000 tax credit.

• The tax credit applies to three major state taxes: the Individual Income tax,

the Single Business Tax, and the 6-mill state education property tax. These

taxes represent state revenue of approximately $7.5 billion.

• It is a per-child tax credit, allowing the full credit to be applied to each child

in a family.

• For families whose income is AT or BELOW 150% of the federal poverty

level2

 the amount of the credit is limited to the lesser of

• Fifty percent of the amount Michigan public schools receive to

educate each child.3

• One-hundred percent of the actual tuition paid. This makes it easier

for low-income students to benefit.

 2

 Original UTTC established the low-income level at 100% of the federal poverty level.

3

 Original UTTC phased-in the credit amount beginning at 10 percent and increasing 5 percent each year up to 50

percent. Changes to the UTTC language immediately implement the maximum amount in the first year for families at or below

150% of the federal poverty level.

The best way to

expand parental

choice is to

eliminate the

penalty for parents

who must pay twice

for alternative

schools: once

through tuition and

then through taxes.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 3

• For families whose income is ABOVE 150% of the federal poverty level4 the

amount of the credit is limited to the lesser of

• Fifty percent of the amount Michigan public schools receive to

educate each child. This percentage begins at 10 percent and

increases to the 50 percent maximum over 9 years.

• Eighty percent of the actual tuition paid. This produces incentives

for schools to keep tuition rates reasonable, since not all of the

payment will offset tax liability.

• It will permit the legislature to increase the maximum credit amount in any

year to provide additional funds for Special Education students or for any

other purpose.5

• It will permit the legislature to provide tax credits for home school parents,

textbooks, transportation, or other related purposes.6

• It does not affect city, county, or township finances.

The UTTC produces significant savings to the state. Since the UTTC will make

alternative schools more affordable, more parents will transfer their children from traditional

public schools to alternative schools. With the maximum credit limited to 50 percent of perpupil public school revenues, every student who transfers to an alternative school produces a

net savings of at least half of per-pupil revenues. For example, in the 1996-97 school year,

the average per-pupil public school revenue is approximately $5,600. The maximum tax

credit would therefore be $2,800. If a student transfers to an alternative school, the state

must no longer spend the $5,600 and at most loses $2,800 through the tax credit, producing a

minimum net savings of $2,800.

Since the average tuition at private schools—which constitute the vast majority of

alternative schools—is roughly half of public school per-pupil revenue, the amount of the tax

credit provides enough incentive for parents to consider the alternative school option.

Section IV and Appendix I present a comprehensive analysis of the impact of the

UTTC on student enrollment and state finances over a 10-year period.

The report includes detailed guidelines and analysis, including:

• The complete text of a proposed UTTC constitutional amendment (Section III).

• Key elements of the implementing legislation, including sample forms and

procedures (Section III).

• Answers to commonly asked questions regarding the UTTC (Appendix II).

 4

 Original UTTC established the low-income level at 100% of the federal poverty level.

5

 Addition to UTTC amendment language.

6

 Addition to UTTC amendment language.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

4 November 1997
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 5

The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education

I. The Promise of Parental Choice in Education

When the lights go on in bedrooms across Michigan on early school day mornings,

young children are roused from their beds by their parents. During that day, these parents

will be called upon to decide what foods their children will eat and what foods they will

avoid. These parents will decide with whom their children will play, how much television

they will watch, and how much homework they will do. These parents will decide which

physicians will treat their children’s injuries, which dentists will check their teeth, and which

baby-sitters will care for them in the parents’ absence. As their children grow, these parents

will help them decide which clubs and organizations to join and which courses of study to

pursue. As the young people approach high school graduation, these parents will offer

counsel regarding future educational and vocational pursuits.

Yet in spite of the fact that parents are entrusted to make vital decisions in nearly

every area of their children’s lives, most Michigan parents are unable to make true choices

about one of the most important aspects of their children’s development. For 180 days of the

year, most children are sent to a government-mandated, government-assigned educational

institution.7

But slowly, things are beginning to change. Historians who look back on the 1990s

may well view this decade as one of true educational reform—a turning point when

Americans not only talked about reform but individually and collectively made choices about

their schools and the quality of American education.

Choice is Breaking Out

Although it has been decades in coming, educational choice is breaking out all over

America. Milton Friedman, in Capitalism and Freedom, kicked off the modern school

choice debate in the 1960s by proposing educational vouchers.8

 Parental choice in education

involves a broad umbrella of plans, which enable parents to make choices about the

education of their children. A Heritage Foundation review of parental choice programs

 7

 Although our constitution does not require attendance in primary or secondary schools, state

law has long compelled school attendance. State laws regulate almost every aspect of these schools,

including the number of days in the school year. Private schools are also regulated by the Nonpublic

School Act. A law passed in 1995 provides for a gradual increase in the number of school days per

year up to 195 by the year 2011-2012. 8

 Milton Friedman, Capitalism and Freedom. Chicago: University of Chicago Press, 1962. I

term this the “modern” school choice debate, since schools were privately funded for centuries before

governments took over the responsibility. For an acknowledgment of his influence, see The New York

Times editorial notebook article quoted below, in the discussion on addressing common myths.

Historians who

look back on the

1990s may well

view this decade as

a turning point

when Americans

not only talked

about reform but

individually and

collectively made

choices about their

schools and the

quality of

American

education.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

6 November 1997

throughout the states indicates that school choice or open enrollment legislation was

introduced or pending in 28 states in 1995.9

The choices parents and their children are making go beyond the selection of another

school within the same district. Throughout the country, families are taking advantage of

charter schools, voucher systems, tuition tax credit plans, and other innovations providing for

public and private school choice alternatives to traditional government schools. Wisconsin

and Ohio have instituted new choice options for some of their urban parents. Vermont, on

the other hand, continues private and public school choice options for many of its rural

citizens under a program started in 1869.10 In 1997 both Arizona and Minnesota approved

educational tax credits. Arizona now allows a credit of up to $500 for donations to

organizations that provide scholarships to private school students. The Minnesota plan

allows families with incomes of $33,500 or less a $1,000 per child ($2,000 maximum per

family) tax credit for tutoring, textbooks, transportation, computers, and instructional

materials. Families with incomes of more than $33,500 receive a tax deduction (up to

$2,500) for private school tuition as well as the expenses covered under the tax credit.

In Michigan, parents now have the option of sending their children to public school

academies, also known as charter schools. In fact, 1996 could easily be designated the year

of the charter school in Michigan. As 34 new charter schools opened their doors in

Michigan in 1996, bringing the total number of public school academies to 78, a small

segment of parents and school-aged children enjoyed increased educational options.

The Assignment System

Common Schools and Government Assignment

 In the post-Civil War period, the concept of a common-school system was advocated

as a “right” and then institutionalized in the early 1900s as a mandate in many states for

children from ages 6 to 17. Since that time, students and parents who have made use of the

public school system have been generally assigned a specific school. The first such

assignments were informal, based on the availability of schools for a particular area. Later,

as American cities became more cosmopolitan and students living in rural areas had better

transportation and access to schools, such assignments were based on where the school-aged

children lived in relation to the schools; in many cases, two children residing on opposite

sides of a street might attend different schools, depending on where the school district lines

were drawn.

 9

 James F. Hirni, “Introduction,” School Choice Programs: What’s Happening in the States.

Washington, D.C.: Heritage Foundation, 1996. 10 In Vermont, local school boards in certain towns will pay tuition at any public or approved

private (“independent”) secondary school, in or out of the state. The school boards are required to pay

an amount equivalent to the average tuition charge of the state’s union high school districts, with the

parent paying the remaining amount. See John McClaughry, “Educational Choice in Vermont.”

Concord, VT: Ethan Allen Institute, n.d.; available at the Ethan Allen Institute’s World Wide Web

site, http://plainfield.bypass.com/~ethallen. McClaughry, the president of the Ethan Allen Institute,

was the vice chair of the state’s Senate Education Committee in 1991-1992.

Students and

parents who have

made use of the

public school

system have been

generally assigned

a specific school.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 7

Indeed, much of American history is reflected in the gradual movement from wholly

private schools to community schools that were similar to private schools today and then to

government-mandated “public” schools that were supported by taxpayer dollars and filled by

government assignment and compulsory education laws. As the United States grew more

urban and professional, so too did its school system. At the same time, the individual and

community autonomy melted away as state governments—and more recently national

governments—assumed increasing authority. As government became more powerful,

political calculations dominated the design of school systems. The exclusion of American

blacks from many public schools is but one unpleasant consequence of this dominance of

government and politics in schools as is the rise of the suburban school districts as “asylums”

from the city.11 While government schools achieved some of the goals of the commonschool movement, they also brought with them many ills.

Education Decisions Under an Assignment System

 

This study uses the terms “alternative school” and “alternative school student” to

refer to any situation where tuition is paid for a student to attend a nonpublic or public

school. Some public schools charge tuition when parents choose a public school outside the

home intermediate school district and the home district superintendent refuses to release

funding. The vast majority of alternative school students, however, are in private schools. In

either case parents pay tuition to the school.

Although parents have always had the option of sending their children to alternative

schools, often wealthier parents were the only ones who could afford to take advantage of

this opportunity with the hope of providing a better education for their children than the

assigned public schools might provide. Parents who elected to make use of the assigned

public schools could make choices about their schools only by choosing where to live; in

fact, home buyers with children have long identified the quality of the local school district as

one of the primary considerations when choosing a home. Yet here, too, parents experienced

financial constraints because the cost of property tends to be higher in the better school

districts. Thus, a system of “assignment” has left parents in a relatively passive role in

relation to school selection. It was only with the advent of school choice programs that

children attending many public schools began to enjoy some of the choices that their more

economically advantaged counterparts enjoyed all along.

Parents can choose to send their children to alternative schools in an assignment

system, but they effectively have to pay twice. They pay tuition out of their pockets, and

they pay property, income, and sales taxes, which go toward the support of the government

education system. In Michigan today, Proposal A and its accompanying legislation did

reduce the property tax burden shouldered by many Michigan citizens and businesses.

However, the proposal did not eliminate the double payment situation since Michigan

citizens must still pay the higher sales tax and the property taxes dedicated to support the

government school system.12

 11 William Allen and Eugenia Toma, A New Framework for Public Education in Michigan.

East Lansing, Michigan: Michigan State University, 1996, pp. i-x. 12 Proposal A added a two-percent sales tax and a six-mill state property tax, both dedicated to

the aid of government schools. Other taxes are also used to support the government school system.

See the section on fiscal analysis for a more complete discussion of the taxpayer cost of government

The past exclusion

of American blacks

from many public

schools is but one

unpleasant

consequence of the

dominance of

government and

politics in schools.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

8 November 1997

Parents can also exercise choice in an assignment system by selecting a residence in

a school district they desire. However, this is still a very limited choice and unavailable to

many families, especially those in lower income brackets who cannot afford homes in

desired school districts.

Why Parental Choice Works

Parents and Students as Consumers

In their daily lives as consumers, people make decisions about the products they

consume. As the markets in these various products have expanded over the years,

manufacturers have given consumers more choices in order to compete with other

companies. Competition causes quality to increase and firms to operate more efficiently.

The growth of the advertising industry on Madison Avenue can be attributed to the increased

number of choices and the need to measure and compare them.13 Choice is the engine for a

market economy in all goods and services. The foundation of basic economic theory is the

ability of individual consumers to choose one good over another based on their own

preferences. Parents prefer good food for their family over poor food. As a result of

economic freedom, they have the right to choose better food, even if it means that better

restaurants and grocery stores thrive while others close. Parents prefer better automobiles

over poorer ones. They have the right to choose the cars they want, even if it means that

some auto-makers expand production and others close plants. Parents prefer good schools

over poor schools for their children. Why shouldn’t they have the right to choose better

schools for their children?

Parents as the Engine of Choice

The empowerment and transformation of parents into active agents is the foundation

of educational choice theory. As a review of any literature on the subject of choice will

indicate, parents are the primary advocates for school choice. A strong correlation has long

been noted between parental involvement and children’s success in school. Parents who

advocate choice have asserted consistently that they consider their children’s education a

significant responsibility. The concept of choice takes full advantage of parents’ valuable

knowledge about their children and their respective talents, abilities, and learning styles.

This information equips parents to make optimal choices about where their children should

attend school and what kind of school might best suit their children’s temperaments. Parents

thus have the opportunity to become active agents in their children’s education. Rather than

be intimidated by this responsibility, parents who are able to make choices about schools

generally feel empowered, which allows them to continue to play a full, active role in their

children’s education.14

 

schools. 13 See the discussion on choice improving the whole system, below, for an interesting example

of advertising by public schools when parents gain choices. 14 Daniel McGroarty (in Break These Chains. Rocklin, CA: Prima Publishing, 1996, p. 193)

reviews researcher John F. Witte’s assessment of parental involvement in the Milwaukee Choice

Program. In that program, parents making choices about their children’s schools had “high parental

involvement coming into the schools and even higher involvement once there.” According to Witte,

Choice is the

engine for a

market economy in

all goods and

services. Why

shouldn’t parents

have the right to

choose better

schools for their

children?
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 9

A second reason parental choice works is that it allows educational programs to be

tailored to the needs of individual students, not simply provided as a one-size-fits-all

package. In what has become one of the seminal works on the educational choice movement,

Politics, Markets, and America’s Schools, John E. Chubb and Terry M. Moe explain that the

system of public education created in the early twentieth century “was bureaucratic and

professional, designed to ensure, so the story goes, that education would be taken out of

politics and placed in the hands of impartial experts devoted to the public interest. It was the

‘one best system.’”15 As they argue against the one-system concept, Chubb and Moe

emphasize the role that a market system could play in education:

A market system is not built to enable the imposition of higher order values on the

schools, nor is it driven by a democratic struggle to exercise public authority.

Instead, the authority to make educational choices is radically decentralized to those

most immediately involved. Schools compete for the support of parents and

students, and parents and students are free to choose among schools. The system is

built around decentralization, competition, and choice.16

The work of Chubb and Moe underscores a basic tenet of choice—the idea that

competition will enhance the diversity and the quality of the entire educational system. As

parents choose schools for their children, the schools they leave behind are forced to improve

in order to compete; engaged in competition, these schools provide the energy for their own

regeneration, thus improving the entire educational system.

The market approach that provides the philosophical underpinnings for the concept

of school choice acknowledges the truth about children as students: that they have different

educational needs and learning styles, and that they have a right to seek out a school that will

best match their needs and aptitudes. The market system can offer diversity in the type of

education offered to students as well as improved quality of the schools.

Human Capital

Gary Becker, the Nobel Laureate in Economics, addressed the “human capital”

aspect of school choice in a presentation in Grand Rapids, Michigan, on October 24, 1996.17

Human capital is the investment in training, education, health, values, and other aspects of

human potential. Human capital investments increase the ability of people to create wealth.

 

parents responding to surveys felt that in their choice schools they found “what they professed they

were looking for when they entered the program—increased learning and discipline.” 15 John E. Chubb and Terry M. Moe, Politics, Markets, and America’s Schools. Washington,

D.C.: The Brookings Institute, 1990, p.4. Chubb and Moe note that David B. Tyack’s book One Best

System: A History of American Urban Education made the term “one best system” popular, although

his work does not hold that one system is best for all. 16 Chubb and Moe, Politics, Markets, and America’s Schools, p. 189. 17 Gary Becker, “Human Capital and the Family,” (available on cassette tape) Grand Rapids,

Michigan: Acton Institute, 1996. Becker’s work, Human Capital (1970) is the seminal work on the

subject. See also his essay “Human Capital” in David Henderson, The Fortune Encyclopedia of

Economics: New York: Warner Books, 1993.

Parental choice

allows educational

programs to be

tailored to the

needs of individual

students, not

simply provided as

a one-size-fits-all

package.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

10 November 1997

Becker called the current century the “age of human capital,” citing the tremendous

growth in investment in human capital in this century, and the resulting huge increase in

wealth. He noted that the widely varying economic growth rates among nations could best

be explained by investments in human capital rather than by raw materials or other measures.

Immigrants in the United States, he noted, have traditionally sacrificed in order to provide a

better education for their children—a vivid example of investment in human capital. Becker

noted, however, that the public school “monopoly” is a significant deterrent to further

investments in human capital in the United States. He noted the “well documented” quality

of private school education, particularly at Catholic schools. In his view, the unavailability

of parental choice harms the poor in particular, since they do not have the same ability to

move to better neighborhoods or purchase private schooling as do middle- or upper-class

parents. He suggested vouchers as a workable solution to this problem, since they would

enable parents to choose where to send their children.18 Finally, he noted that the improved

competition would not only benefit the children who moved to private schools, but also the

children who remained in the public system.

Becker’s remarks support a tuition tax credit plan in the State of Michigan as

presented in this study. While this study argues that tuition tax credits are superior to

vouchers, their ability to empower parents to improve their children’s education is roughly

the same.

Michigan’s History of Parental Choice

Private Schools

Although parental choice emerged as a major public policy issue in the late 1980s,

Michigan parents, like those in most other states, have always had some options in schooling

their children. Parents have always been free to choose private schools for their children in

lieu of sending them to government-funded public schools, although such choices required

extra expenditures. Inner-city religious schools have long been a source of pride for cities

and the religious denominations they represent because of the high-quality education these

schools offer. Likewise, the more “elite” private academies in our state, such as Cranbrook or

Detroit Country Day School, offer students a strong academic education and grant a small

number of students need-based financial aid.

Scholarship Programs

Recent innovations have expanded parents’ options. Many families seeking

alternative forms of education for their children have been aided by private scholarships

provided by such entities as the Vandenburg Foundation, now known as CEO Michigan.

According to Scott Gordon, Executive Director, during the 1997-98 school year, CEO

Michigan awarded 462 scholarships statewide to students in 110 schools and 35 cities.19

 18 Becker notes a small difference of opinion with his colleague Milton Friedman on this issue.

Becker believes a voucher system should be targeted to the poor, because they suffer the most from the

current system. Friedman favors a more open system. This study recognizes both these views and

advocates a tuition tax credit that has the same maximum value for all, but is somewhat more accessible

to low-income parents. 19 Scott Gordon, executive director of CEO Michigan, chronicles the impressive expansion of

Parents have

always been free to

choose private

schools for their

children in lieu of

sending them to

governmentfunded public

schools, although

such choices

required extra

expenditures.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 11

These scholarships are available to parents who choose any school. Scholarship amounts are

$1,000 per year, and the recipients may receive the grant in successive years of schooling.

Although the aid is still less than that needed for tuition at an alternative school, it is enough

to enable many parents to place their children in an alternative school of their choice.

Located in Detroit, Cornerstone Schools were organized by a coalition of church

groups, with support from businesses and community organizations, to offer educational

opportunities to children from low-income families. First proposed by Adam Cardinal Maida

in 1990, the schools have a Christian, though not explicitly Catholic, orientation. The

curriculum is rigorous and is spread across an 11-month school year. The three schools

established by the coalition offer assistance to students with a Partner Program, which

matches each student with a partner who provides a $2,000 grant to help defray the cost of

tuition. The board of the organization, chaired by Michigan School Board member W. Clark

Durant, is supported by monetary grants from 270 individual and corporate partners,

including the Big Three auto-makers, Blue Cross and Blue Shield, and Detroit Edison.

Partners provide more than monetary assistance, however. They also serve as a positive

influence in the students’ lives. Meetings between partners and students are arranged four

times each year. During the 1996-97 school year, 409 students were enrolled in the

Cornerstone Schools.

The success of Cornerstone Schools in creating a quality educational opportunity in

an urban setting has won widespread acclaim. The organization has received awards from

the Clinton Administration’s National Education Commission on Time and Learning, along

with Republican House Majority Leader Dick Armey’s third annual “Freedom Works”

award.20

Choice in Higher Education

Unlike the system of elementary and secondary education, our system of higher

education in Michigan has long been a system of choice. Graduating high school seniors

have always had the opportunity to choose the schools, public or private, to which they apply

for admission. It is important to note the many reasons behind students’ choices of college,

including financial circumstances, the students’ interests, and the students’ high school

achievements. Parents and their graduating seniors survey a full range of options, knowing

that because individuals differ, the institutions they attend cannot and should not all be

homogenous. No government entity could ever weigh properly all these factors for each

individual student and impose its choice. Yet, the government attempts to do exactly that for

primary and secondary school students.

The success of the choice model for higher education is partly based on the relative

freedom in financing options. The 1970 Amendment to the Michigan Constitution represses

virtually all direct or indirect financial support for students attending private schools. No

 

the scholarship program: In the first scholarship year, 1993-94, 3 scholarships were granted, followed

by 10 scholarships in 1994-95. During the 1995-96 school year, 162 scholarships were awarded, a

number that doubled to 330 during the 1996-97 school year. CEO Michigan currently assists 462

students with scholarships. 20 Carol Stevens, “Detroit’s Cornerstone Schools Get Rave Reviews on Capitol Hill,” The

Detroit News, May 15, 1997, p. A-1.

No government

entity could ever

weigh properly all

factors for each

individual college

student and impose

its choice. Yet, the

government

attempts to do

exactly that for

primary and

secondary school

students.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

12 November 1997

such prohibition exists for higher education, and in fact, a wide range of government

financing options are available to students at public and private colleges, even private

religious colleges. These include government-subsidized loans and grants, tuition tax credits,

and direct government aid to colleges and universities.21 While the direct aid for public

colleges generally makes their tuition costs lower than those at private colleges, the existence

of tuition tax credits and taxpayer-subsidized loans and grants has helped students exercise

choice in higher education. One might question why the 1970 Amendment prohibits an 18-

year-old student from getting a tax credit for tuition at a high school but allows it for college

tuition.

Intra- and Inter-district Schools of Choice

In 1991 Michigan passed legislation that encouraged public school districts to

experiment with intra-district school choice options. Intra-district choice allows students to

apply to attend other schools within the same school district. Inter-district school choice,

which allows students to apply to attend schools in other school districts, was rather limited

in Michigan until 1996. In June of 1996, the governor signed Senate Bill 851, the annual

appropriations bill for school aid, which authorized inter-district schools of choice within

intermediate school districts. School districts within the intermediate school district can

make decisions about the extent to which they will participate in the inter-district choice

program. Since the 1996-97 school year is the first year of the program, significant data are

not yet available, but the existence of the program gives at least some parents yet another

option to pursue as they decide on their children’s schooling.22

Some parents have also been able to send their children to traditional public schools

in other intermediate school districts. This, however, requires the permission of the

receiving school district superintendent and, if funding is to be released, the permission of

the home school district superintendent. If funding is not released, the receiving school

district may charge the parents tuition. For example, Rory Pettipas was refused a funding

release by the Meridian School District superintendent when his parents chose to enroll him

in a gifted and talented program at Handley Elementary School in the Saginaw Public School

system. His parents were charged $1,800 tuition.23

Charter Schools or Public School Academies

Perhaps the most promising expansion of parental choice in Michigan occurred in

late 1993 when the Legislature passed charter school legislation as part of a package of bills

reforming educational programs and funding. Enacted in 1994, the current public school

academy statute gives state public universities, community colleges, and intermediate and

 21 A variety of these programs exist at both the state and federal level. (For a discussion of

Michigan’s tuition tax credit for college tuition, see the financial analysis section of this study.)

However, a handful of colleges, led by Michigan’s Hillsdale College, refuse to accept any government

funding because they do not wish to accept the government controls that accompany it. 22 Although the new inter-district options are promising, stronger legislation is necessary.

Because the School Aid Act is examined every year during the appropriations process, the inter-district

choice option could be deleted or altered in future budget years. 23 “Sending Child To New Public School Costs Parents,” Detroit Free Press, November

19,1991, p. 3A.

One might

question why the

Michigan

Constitution

prohibits an 18-

year-old student

from getting a tax

credit for tuition at

a high school but

allows it for college

tuition.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 13

local school districts the authority to contract for the creation of “public school academies”

or charter schools, to provide education to Michigan’s students.24 During the 1996-97 school

year, 76 schools were operating under school charters. Although several universities, most

notably Central Michigan University, have granted charters to establish schools, few school

districts have exercised this option.

Addressing Misconceptions About Choice

The growing number of charter schools and the expanded choice options offered to

Michigan residents are promising developments, but they were not achieved without

struggle, turmoil, and acrimonious debate. Given the long and established history of public

education, it is not surprising that the concept of expanded educational choice is threatening

to some. Though Americans pride themselves on their innovations, advancements, and

entrepreneurial spirit, we are still, as Chubb and Moe point out, a people who cling to our

perceived heritage, our institutional underpinnings, and our founding creeds, even when the

institutions we have inherited are no longer serving us well.

Some of those individuals and organizations that are opposed to the implementation

of choice assert that parental choice will eventually lead to the disintegration of the entire

system of public education. They argue that the system has served America well for years,

and should not be significantly changed. In this century, it is true that a strong public school

system has been one of the bedrocks of American society, serving as a cohesive force in a

heterogeneous society and enabling people with varied backgrounds to live together in

support of common goals and values. This government school system, which grew up from a

network of local community schools, has traditionally been a place that offers not only a

basic education in subjects such as reading and math, but also an education in citizenship and

the workings of American government. However, that legitimate concern has in some cases

given way to an overreaction against parents and others who believe they should pursue

better alternatives.

 Chester Finn, a senior fellow at the Hudson Institute and noted school reformer, has

summarized the overreaction of some protectors of the current system in various states:

• A Queens, New York couple was charged with fraud for enrolling their 12-

year old in a different school system.

• The public schools in Morrisville, Pennsylvania pay a $500 bounty on

nonresident students who are fingered for attending better schools without

permission.

 24 The statute that originally provided for public school academies, P.A. 362 of 1993, was

ruled to be unconstitutional by the Ingham County Circuit Court in November of 1994. The court held

that public school academies were not public schools under state law because they were not under the

exclusive control of the state. As a result of that ruling, another statute, P.A. 416 of 1994, was enacted

to address the constitutional questions and to replace the previous statute.

Some individuals

and organizations

that are opposed to

parental choice

assert that it will

eventually lead to

the disintegration

of the entire system

of public

education.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

14 November 1997

• A Cleveland mother was actually jailed for putting her son in a neighboring

school district “because I wanted him to have a better life and a better

education.”

• Illinois now has a criminal statute for “illegal school registration,” a

misdemeanor punishable by jail and fines.

Finn concludes:

Fortunately for children, school choice is spreading despite the system’s efforts

to stop it. And spread it should. There is no reason to confine children,

against their families’ wishes, in a bad school when there’s a good alternative

on the next block, in the next town, or even in the next state.25

Other overreactions have appeared as well. Today, it is not unusual to see supporters

of school choice, especially voucher supporters, to be labeled as “extremists” and lumped

together with Ku Klux Klan members or termed a member of the “radical right.” The chief

lobbyist for the Michigan Education Association (MEA), the state’s largest public school

employee union, has said that anyone who supports educational vouchers is “basically racist

in nature.”26 The MEA also threatened to blacklist teacher education students at a public

university if that university chartered public school academies contrary to the MEA’s

demands.27 One innocuous-sounding group, the “Coalition for Democracy,” supported

heavily by the two main teachers’ unions in New York, even has a list of “extremist” groups,

which includes such organizations as the Concerned Women of America, the National

Association of Christian Educators, and an all-purpose listing for “Taxpayers’ Association:

(list specific name.)”28

Of course, the majority of those who defend or work in the public school system do

not fall victim to these extreme overreactions. Most are rightly concerned with the quality of

education and want it improved. Even among the more thoughtful opponents of parental

choice, however, there are several misconceptions that can be dispelled by a review of the

experience with parental choice around the nation.

Parental Choice Especially Helps the Poor

One of the major fears that critics voice about implementing a widespread parental

choice program is the notion that it will hurt minorities and economically disadvantaged

students and benefit only those who least need it. The evidence demonstrates

overwhelmingly that this is not the case. In his review of the Milwaukee Choice Program,

Daniel McGroarty points out that through the first four years of Parental Choice in

Milwaukee, an average of 92 percent of all children receiving choice vouchers were African-

 25 Chester E. Finn, Jr., “Cheating the Child to Save the ‘System’,” The New York Times, May

17, 1997.26 See “Teacher Unions: Are They Helping or Hurting Education?,” Mackinac Center for

Public Policy, http://www.mackinac.org/mea. 27 http://www.mackinac.org/mea

28 Mike Antonucci, “Who’s an Extremist?” The Wall Street Journal, May 20, 1997.

Antonucci is the managing editor of the California-based Western Journalism Center.

A Cleveland

mother was

actually jailed for

putting her son in a

neighboring school

district “because I

wanted him to have

a better life and a

better education.”
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 15

American or Hispanic.29 Chester Finn reports that in a sample of almost 8,400 charter school

students across the states, 63 percent were members of a minority group.30 Many existing

private schools located within cities have already opened their doors to minorities and the

economically disadvantaged, offering full tuition scholarships to those demonstrating need.

In addition, charter schools in Michigan and across the nation have been created expressly to

serve populations that have traditionally been locked into an assigned government school.

Fears of creating an elitist system are unfounded. Expanded school choice programs

increase rather than decrease the range of students taking advantage of alternative schools.

Parental Choice Does Not Reduce Educational Resources

A second charge made by opponents of expanded school choice is that it will

somehow de-fund the public school system, resulting in its financial bankruptcy or an

inability to pay for essential programs. Of course, it is true that choice will allow dollars to

follow students. In nearly all states participating in inter-district choice programs, the

funding follows each student from the original school district in which he or she resides to

the chosen school and its district. This, necessarily, results in a reduction of the overall grant

to the original school district, and an increase in the resources to the school receiving new

students. For example, due to the opening of two large charter schools in the mid-Michigan

area in the 1996-97 school year, the Lansing School District experienced a “loss” of just

under four million dollars in state aid when approximately 700 students left the district.31 Of

course, these new charter and other public schools “gained” the same amount of money as

was “lost” by this school district. Thus, the government education system as a whole did not

lose money, and parents and their children gained an increase in options.

When choice is extended to private schools, even more resources are deployed for

education. Dollars follow the students, although in a more indirect manner. Other dollars,

from private sources, also flow in. Thus, even when choice options include private schools,

the overall resources devoted to education need not decrease.32

Parental Choice Improves the Whole System

The dynamic of school choice improves the whole system because competition

favors the consumer in every market. The market for education is no different.

Competition has certainly improved the products and services of other industries. In

the 1980s, U.S. automobile manufacturers were faced with increasing competition from

Japanese car makers, who produced safer, more efficient, and more reliable products. In

response to losing significant market share, U.S. automobile manufacturers simultaneously

 29 McGroarty, Break These Chains, p. 188. 30 Chester E. Finn, Jr., Bruno V. Manno, and Louann A. Bierlein, “Executive Summary,”

Charter Schools in Action: What Have We Learned?. Indianapolis, IN: Hudson Institute, 1996, p.1. 31 Public schools receive a basic per pupil foundation grant for each student attending their

schools. The Lansing School District foundation grant for the 1996-97 school year is $5,912. When

the district loses students, it loses the grant for those students. It is important to note, however, that the

amount of the per pupil grant flowing from the state to the school district remained constant. 32 See the discussion on public and private school costs, in Appendix I, which details how

private school tuition is typically supplemented by substantial other private funds.

One of the major

fears that critics

voice about

parental choice is

the notion that it

will hurt minorities

and economically

disadvantaged

students. The

evidence demonstrates overwhelmingly that this is

not the case.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

16 November 1997

formed partnerships with foreign manufacturers and launched extensive efforts to improve

their products.33 Thus, competition brought about improvement in products offered by all

manufacturers—both national and foreign. Today, U.S. manufacturers again lead the world

in many markets.

Now consider the Lansing School District discussed above. In response to “losing”

745 students to other districts and charter schools in the 1996-97 year, the Lansing School

District is creating more options to offer its residents. The school district has added a sixth

grade to one of its existing elementary schools and plans to pilot several more K-6 schools in

the coming year. In addition, the school district is considering offering all-day kindergartens

in some of its elementary schools. Finally, in the ultimate tribute to the power of consumer

choice, the district has launched an advertising campaign to showcase its new and improved

offerings.34 In the case of the Lansing School District, the exercise of choice options by

about 700 students has generated better programs for the over 17,000 who remain in the

traditional schools.35

One of the strengths of parental choice is that—just as a restaurant need not lose all

of its customers before the chef gets the message—even a small number of students choosing

an alternative school can send a powerful message to traditional public school

administrators.

The logic that choice options help even those students who stay in the traditional

public school system is now overwhelming. A recent “Editorial Notebook” column in The

New York Times, subtitled “How Choice Changes Public Schools,” confirms how even

mainstream opinion has been moved by the evidence now at hand:

In Milwaukee, the threat of expanded competition has worked precisely as

Milton Friedman predicted. A system that once treated parents with contempt

has begun to answer their calls and embrace local experiments through a

charter school and other partnerships with community groups. A city that once

rebuffed requests for public Montessori schools now has them. Said John

Gardner of the Milwaukee school board: “A system that has been arrogant and

indifferent for 20 years has suddenly got religion.”36

 33 It is interesting to note the parallels between the actions of those who fought competition in

the auto industry and those who fight it in the education industry. Many auto union leaders supported

protectionist trade barriers to prevent foreign manufacturers from selling in the US market. Similarly,

many teacher union officials want to preserve protectionist barriers preventing private schools from

selling their services in an open market. 34 Mark Mayes, “Lansing Schools to Unleash Marketing Push,” Lansing State Journal, May 5,

1997. The advertising even extends to placemats in local restaurants touting a “parade of schools.” 35 Data from Michigan Department of Education, 1996-97 year, indicate 17,851 students

enrolled during the year. Thus, the movement of about 1 in 24 students was all it took to force

significant change in the Lansing district. 36 Brent Staples, “Showdown in Milwaukee/How Choice Changes Public Schools,” The New

York Times, May 15, 1997.

One of the

strengths of

parental choice is

that—just as a

restaurant need not

lose all of its

customers before

the chef gets the

message—even a

small number of

students choosing

an alternative

school can send a

powerful message

to traditional

public school

administrators.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 17

Teachers Benefit from Parental Choice

Teachers benefit from educational choice because, with a greater number of

independent schools, they have more employment choices. Today, if a teacher feels he or

she is underpaid, overburdened by red tape, not respected as a professional, or otherwise

treated poorly by administrators, the only real option is to leave town and move to another

school district. This is because the same employer, the school district, operates nearly all the

schools in the area, which practically equates to a monopoly purchaser. With more private

and charter schools, however, there will be increasing pressure on school administrators to

treat teachers well or risk losing them to competing schools. Teachers can take advantage of

better opportunities to teach without having to move their residence.

Parental Choice Helps Those Most in Need

Another criticism of expanded choice asserts that government schools will be left

with the poorest performing, most difficult to educate students—the intractable, the

unfocused, the “impossible” individuals. Evidence gathered from school choice programs has

not supported this assertion. In the case of the Milwaukee Choice Program, the “skimming”

of only “good” or “desirable” students has not taken place. John Witte, who completed

several evaluations of the Milwaukee Choice Program, observed that the program seemed to

provide an alternative educational environment for students who were not succeeding in the

traditional public school. Although Witte’s review of the choice program in Milwaukee is

not completely positive, he nevertheless acknowledges that students who were not “making

the grade” could always find a place where they were welcome and free to succeed.37 Most

schools participating in choice programs, whether they are private, public, or charter schools,

seem eager to convey the message long ago inscribed on the Statue of Liberty: “Give me

your tired, your poor, / Your huddled masses yearning to breath free . . .”38

Indeed, even The New York Times now recognizes that choice programs offered to

economically poor students help them achieve more and pressure the public school system to

improve:

Desperate to find a remedy for failing schools, several states are considering voucher

experiments that would offer low-income students private-school scholarships at

public expense. . . . A study of the longest-running experiment in Milwaukee

suggests that vouchers can improve the prospects of the poorest and least prepared

students. . . . More work needs to be done to see if the gains are sustained. But the

Milwaukee data should serve notice on the teachers’ union—and large, urban

districts everywhere—that if the schools do not improve quickly, vouchers could

become irresistible.39

 37 McGroarty, Break These Chains, p. 192. 38 From “The New Colossus,” a sonnet by poet and essayist Emma Lazarus, which is inscribed

on the Statue of Liberty. 39 “A Lesson From Milwaukee,” editorial, The New York Times, April 25, 1997.

Teachers also

benefit from

educational choice.

With more private

and charter

schools, there will

be increasing

pressure on school

administrators to

treat teachers well

or risk losing them

to competing

schools.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

18 November 1997

Urban Leaders Themselves Are Demanding More Choice

If the defenders of the current system are correct in their criticism that choice will

hurt the urban poor, we should see urban leaders resisting choice strongly. In fact, just the

opposite is the case. In Detroit, Milwaukee, Cleveland, and other cities across the country,

urban leaders and parents are at the forefront of demands for choice.

In an essay supporting a modified voucher plan for Cleveland’s public schools, Hugh

Calkins, a member of the Cleveland School Board from 1965 to 1969, examines the claim

that choice will “skim the cream.” Calkins addresses the concern that students who do not

take advantage of choice options and remain in their home school may sustain losses that

equal and perhaps exceed the gains that those who leave the system may achieve.

I respond that it is intolerable to deny better education to inner city children

with the gumption to seek it, in order to help others who are less determined to

escape the ghetto. Moreover, the gains and losses are closely related to the

degree of involvement that parents have in their children’s education, and

providing real choices is the best tool we have to increase the number of

involved parents and the intensity of their involvement.40

Mr. Calkins’s comments underscore the danger of focusing primarily on individuals

who choose not to make a choice about their schools. It may well be true that those students

will, for a time, exist in a school that does not meet their educational needs. But many

students in public schools find themselves in this situation right now. The very existence of

expanded choice options will bring about changes in the educational environments in the

students’ home districts. In Michigan, as charter schools have attracted increasing numbers

of students, the traditional public schools have doubled their efforts to “win back” departing

students.41

Mr. Calkins’s words also serve as a reminder that parents should be the primary

caretakers of their children’s education, rather than allowing the state to assume that role.

Parents deserve the freedom to seek a better education for their children if they think the

current system is failing to provide one. Any objection to allowing parents the right to send

their children to a better school, because doing so somehow undermines a “system,” is

significantly flawed. Parents would not accept such an argument with a child seeking

medical care: (“But Johnny can’t go to a better doctor; what would happen to the staffing

levels at our government-assigned clinic?”) People would not accept it for choosing where

to live: (“No, I’m sorry, Mrs. Smith, you and your husband cannot move out of town; we

need your residency in order to keep up our revenue sharing.”) Similarly, it cannot be

accepted with respect to education.

In Detroit, local ministers have come together to demand choices in education that

extend outside the government school system. A large group of urban leaders, including the

former superintendent of the Detroit School District, Deborah McGriff, have traveled to

Cleveland and Milwaukee to personally review their choice programs. In both cities, pilot

 40 Hugh Calkins, “School Vouchers—A Middle View,” Education Week, Sept. 11, 1996, p.

35. 41 See the example of the Lansing School District, above.

Any objection to

allowing parents

the right to send

their children to a

better school,

because doing so

somehow

undermines a

“system,” is

significantly

flawed.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 19

programs offer vouchers to parents of school-age children, which can be used at private

schools. The ministers emerged impressed and vowed to support choice programs for their

citizens in Detroit. Reverend Edgar L. Vann, President of the Council of Baptist Pastors of

Detroit and Vicinity, stated that there is no reason why every school—public and private—

”should not be a part of the mix of positive choices available to parents.” The Reverend Ned

Adams, Jr., pastor of True Faith Baptist Church and a member of the Baptist Council’s

education committee, believes that without a choice among private schools, there is no

incentive to drive school reform.42 Rabbi E.B. “Bunny” Freedman, former executive director

of Yeshiva Beth Yehudah in Southfield, noted that “Parents who send their children to

private schools are not getting a fair shake, because they are effectively paying twice for the

education of their children.” He favors vouchers or tuition tax credits for parents.43

Public opinion supports the ministers’ efforts. A February 1997 poll by the Lansing

firm of EPIC/MRA for TEACH Michigan, an organization which supports school choice,

found that Michigan residents support state-funded scholarships for poor children to attend

any school of their choice. 44 The survey of 600 Michigan voters found that 54 percent

favored such a plan.45 In Detroit, full choice was favored by an even greater 60 percent.

A “Public Choice” Analysis of the Current System

Economics as a social science explains the behavior of consumers and producers.

Both seek to satisfy their own preferences. Producers try to maximize profits. Consumers

maximize their own utility, which normally includes cash income, creature comforts, and

leisure time. The field of “public choice,” a branch of economics, extends these basic

findings to the world of politicians, voters, and interest groups.46 A brief public choice

analysis explains many of the problems of the current system and points to parental choice as

the solution.

Public choice analysis assumes that politicians, although they have a variety of

desires, try to maximize their ability to get re-elected. They therefore pay more attention to

organized interest groups, the media, and segments of the population which actively

participate in politics than to the public at large. This is not to say that politicians are

immoral or operate against the wills of the voters. Rather, just as retailers court those

customers who have the most to spend in their stores, politicians listen to those who have the

 42 Bill Johnson, “Powerful Baptist Council Leans Toward Favoring School Vouchers,” The

Detroit News, April 20, 1997, p .5B 43 Johnson, “Powerful Baptist Council Leans Toward Favoring School Vouchers,” p. 6B.

44 “Michiganders choose vouchers to help kids in failing schools,” Lansing, Michigan: Teach

Michigan Education Fund, February 24, 1997; Johnson, “Favoring School Vouchers,” p. 5B. The poll

also asked a separate question for the Detroit Free Press about a proposal that the state take over

failing public school districts. The public opposed the plan by a 53% majority. 45 The pollsters indicate a margin of error of four percentage points.

46 The founding works of the public choice school are those by Gordon Tullock and James

Buchanan, who co-authored The Calculus of Consent in 1962. Buchanan was awarded the 1986 Nobel

Prize in Economics for his work. The Society of Public Choice was started in 1965 by these two men,

and is loosely affiliated with a journal devoted to the field. The Society has a Web site at

http://sunsite.unc.edu/public-choice.

A 1997 poll of 600

Michigan voters

found that 54

percent favored

state-funded

scholarships for

poor children to

attend any school

of their choice. In

Detroit, full choice

was favored by an

even greater 60

percent..
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

20 November 1997

most impact on their re-election. In politics, it is the squeaky wheel and, more particularly,

the well-funded, influential wheel, that gets the grease.

When this insight is applied to the current public school system, it is easy to see why

“the system” as a whole has developed a resistance to competition. There is no organized

lobby for parents concerned about their children’s performance.47 There are, on the other

hand, a number of very organized, politically active interest groups that support the current

system.48 While these organizations—public school employee unions, school board and

administrator associations, intermediate school districts, urban and rural school districts—do

not agree on all points, they all tend to oppose parental choice and support more money for

the current system. Although it is clear that the vast majority of the individual members of

these organizations also support better education for children, the vocal lobbying groups

representing these individuals are concerned primarily with protecting institutional interests.

Even though it is not in the best interests of parents and students, the typical politician

responds to the powerful calls for more money for a system that is protected from outside

competition.49 

Dr. William Allen, Dean of Michigan State University’s James Madison College,

analyzed Michigan’s current education system and highlighted the structural deficiencies that

prevent citizens from demanding and receiving quality, cost-effective educational services.

He notes that “due to the lack of market-like mechanisms,” consumers must use the political

process. For ordinary citizens in the political process, the costs are high and their ability to

influence is limited, when compared to the highly-organized employees of the current

system.50

Thus, it is not surprising that, as the general populace has increasingly noticed the

decline in overall performance, the defenders of the system do not wish to embrace the very

change that would best address the problem. That change—market competition for

students—provides every student a better chance to succeed, but also reduces the power,

prestige, and money that accrue to the traditional public school system.

 47 Nineteen centuries before the emergence of “public choice” as a school of economics, the

Roman lawyer Pliny the Younger made a direct observation on this point. He noted that he was less

likely to send children to a school maintained by public funds than to those supported by private

tuition, because the teachers at the taxpayer-funded school paid more attention to the concerns of

politics than to the desires of the parents who placed their children in their care. Letters and

Panegyricus, “Letters,” Book IV, XIII (Louden, William Heineman, 1969). Quoted in Andrew

Coulson, “Markets versus Monopolies in Education: The Historical Evidence,” Education Policy

Analysis Archives, vol. 4 number 9. (June 1996) College of Education; Arizona State University.

Available at http://olam.ed.asu.epaa/v4n9.html. 48 The fiscal analysis section, in Appendix I, cites a study showing the likely voting behavior

of teachers and parents in a Michigan school millage election. Their behavior was entirely consistent

with the “public choice” theory discussed here. 49 Chubb and Moe present a thorough discussion of public choice and politics in their chapter

entitled “An Institutional Perspective on Schools,” in Politics, Markets and America’s Schools, pp.26-

68. 50 Allen and Toma, A New Framework, pp. 129-131.

There is no

organized lobby for

parents concerned

about their

children’s

performance.

There are, on the

other hand, a

number of very

organized,

politically active

interest groups that

support the current

system.
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A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 21

More Money Alone Will Not Improve Public Education

Before concluding that parental choice in education is the best improvement to the

system, we should at least consider one alternative: that simply devoting more resources to

traditional public schools will dramatically improve their performance. That question has

been conclusively answered. Indeed, now even mainstream economists accept that simply

spending more money on traditional government schools will not significantly improve

education. Edward Gramlich, the Dean of the Public Policy School at the University of

Michigan, and a former Acting Director of the Congressional Budget Office, has long been

concerned about lagging national investment in human and physical capital. He notes in his

1992 Brookings Distinguished Lecture on National Priorities:

Two types of public consumption seem especially in need of attention—

education and health care. In both cases, aggregate measures of performance

are lagging badly. In both cases, this lag is in the face of big increases devoted

to the problem.

Take first education. There John Chubb and Eric Hanushek make a powerful

argument that further resources devoted to the problem without structural

reform will simply make the nation’s schools more expensive, not better.

Their macro argument is that over the last 30 years real expenditures per pupil

have tripled but most measures of test performance have dropped sharply.

Their micro argument is that most careful research studies have simply not

found any relationship between resource inputs and output measures such as

achievement test scores. Presumably the missing ingredient here is some form

of performance incentive, but even this is not very clear.51

Gramlich confirms what free-market advocates have been saying for some time:

simply putting money into the current system has not worked in the past and will not in the

future.52 More recent work, including a comprehensive analysis of Michigan schools by Dr.

Allen, again finds a weak relationship between increased expenditures and improved school

performance.53

 51 Edward M. Gramlich, Distinguished Lecture on Economics in Government, “Setting

National Priorities: 1992,” in Journal of Economic Perspectives, vol 6 No. 2 (Spring 1992), p. 7-8;

John Chubb and Eric Hanushek, “Reforming Educational Reform,” in Henry J. Aaron, ed., Setting

National Priorities: Policies for the Nineties. Washington, D.C: Brookings Institution, 1990, pp. 213-

47. 52 See, for example, in Michigan, Patrick L. Anderson, Proposal A: An analysis of the June 2,

1993 Statewide Ballot Question. Midland, Michigan: Mackinac Center for Public Policy, 1993.

Anderson summarizes analyses, including earlier work by Hanushek, showing no connection between

government school spending and performance. 53 Allen and Toma, A New Framework pp. 102-103. Allen and Toma use regression analysis

to isolate the contributions of various factors to better performance, measured by graduation rate and

dropout rates in various Michigan public school districts. Public expenditures per student was not

statistically significant (at the .05 level) in explaining either graduation or dropout rates, and was

significant at the .10 level for dropout rate alone. In layman’s terms, this evidence indicates there is

less than a one-in-twenty chance that public expenditures per student on their own cause a change in

graduation or dropout rates.

Even though it is

not in the best

interests of parents

and students, the

typical politician

responds to the

powerful calls for

more money for a

system that is

protected from

outside

competition.

Mainstream

economists now

accept that simply

spending more

money on

traditional

government

schools will not

significantly

improve education.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

22 November 1997

Gramlich, writing in 1992, was not yet convinced performance incentives were the

answer. Today, the case for performance incentives is clear and compelling. Indeed, more

aggressive reformers go well beyond the parental choice plan proposed herein. They argue

that the government school system has completely outlived its usefulness and should be

totally replaced. Lewis J. Perelman, in School’s Out, argues that choice is essential, but does

not go far enough:

However, the need not merely for “choice” but for commercialization of

education has been overlooked by most would-be reformers. We need

commercial choice and competition in schools first to goad technological

innovation—the profit motive is essential to reward the creation and provision

of productive technologies.54

While Perelman argues for outright commercialization, Dr. Allen argues for a new

framework of public ownership of schools, in which competition on price and quality would

drive the system:

We advocate provisions by which all K through 12 education will be nongovernmentally operated. We propose to eliminate all jurisdictional barriers to

school selection. No single structure of educational governance would be

imposed by the State, even as the State preserves its commitment to equitable

funding for Michigan students. Schools will be owned by individual

shareholders, who will operate each school acting through their respective

boards of directors.55

Thus, we need to change the incentives if we hope to change the outcome.

A Call for Reform: Empowering Parents

We need to return power, authority, and responsibility to parents, rather than leaving

it vested in politicians and administrators. Parents have the responsibility for the welfare of

their children. As choice options have become more widespread, it is apparent that parents

are eager to accept the responsibility for their children’s schooling. The problems of our

existing public education system—the increase of violence in the schools, the breakdown of

communication between students’ homes and the school, the inconsistent level of graduating

students’ basic skills—all point to an enervated, overburdened system that needs more than

increased funding, administrative tinkering, or pedagogical experimentation. It needs

wholesale change in which students and their parents can become an integral part of a new

system—a dynamo of improvement.

 54 Lewis J. Perelman, School’s Out. New York: William Morrow, 1992, p. 184. 55 Allen and Toma, A New Framework, p. 1.

We need to return

power, authority,

and responsibility

to parents, rather

than leaving it

vested in

politicians and

administrators.
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A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 23

II. Michigan Constitutional Restraints on Parental Choice

History of Article VIII, Section 2

The Michigan Constitution of 1963, Article VIII, Section 1, states the following:

“Religion, morality and knowledge being necessary to good government and the happiness of

mankind, schools and the means of education shall forever be encouraged.”56 In adopting

this language–which sprang from the 1787 Northwest Ordinance–the people asserted that

education is vital to our society and that knowledge, morality, and religion are necessary

elements of that education.

The very same Constitution, however, and also the U. S. Constitution, place limits on

the extent to which the government can support religious activities and organizations. This

situation has created a tension between various visions of church and state separation and has

shaped the current Michigan Constitutional provision regarding educational options for

parents and students, especially with respect to nonpublic schools.

“Parochiaid” and the 1970 Amendment

The delicate balance between church and state has been debated and litigated across

the country for four decades.57 While it is settled law that the government may not directly

support religious instruction, it is also well established that the state can adopt policies which

indirectly aid religious institutions, particularly through some form of tax preference.58 The

debate over taxpayer financing and private schools in Michigan reached a high point in 1970

and is again headed into the mainstream of Michigan politics. A brief history is instructive.

Since at least 1939, the state had provided indirect support for private schools, for

auxiliary functions such as transportation, testing, health, and special services for

handicapped children.59 Even prior to that, at least beginning in 1921, some “shared time”

classes were held involving both private and public school students, which continued until at

 56 Constitution of the State of Michigan of 1963, Article VIII, Section 1.

57 This is dated from the court decisions outlawing school prayer which occurred in the late

1950s and early 1960s, but there has been constant tension over the balance between government and

religion since the founding of the nation. Cases on schools and religion have reached the U. S. Supreme

Court on several occasions, and these cases mostly determine the outlines of allowable activities. The

seminal supreme court cases in the last few decades have been Everson v Board of Education (1947),

Lemon v Kurtzman (1971), Committee on Public Education v Nyquist (1973), Mueller v Allen (1982),

and Rosenberger v Rector (1995). 58 Rosenberger v Rector and Visitors of Univ. of Va. 515 US ____ , 132 L Ed 2d 700, 115 Sct

2510 (1995), (slip op. at 18). The court’s discussion here even encompasses direct aid, as long as the

aid is for activities that are neutral toward religion. On the tax preference issue in particular, Justice

Thomas in his concurrence in Rosenberger v Rector, p. 9, gives an extensive history of government tax

exemptions for religious institutions. 59 See “State Ballot Issue C: Prohibit Use of Public Money for Support of Non-Public

Schools,” Council Comment, No. 833, Detroit, Michigan: Citizens Research Council of Michigan,

October 14, 1970.

The Michigan

Constitution states

the following:

“Religion, morality

and knowledge

being necessary to

good government

and the happiness

of mankind,

schools and the

means of education

shall forever be

encouraged.”
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The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

24 November 1997

least 1970.60 Starting in 1929, however, the state maintained a statutory prohibition on direct

support for sectarian schools.61

Thirty years ago in Michigan, many parents who supported the expenses of their

children at private schools and who also supported government schools, urged taxpayerfunded support for private schools. The increasing costs of operating the public school

system and paying for private schools created significant support for partial taxpayer funding

of private education. The legislature then passed Public Act 100 of 1970, the school aid bill

for the year, which provided direct support to eligible private schools, which could be used

only for instruction in nonreligious subjects.62 Michigan’s law was similar in concept to

those passed in a handful of other states, including Pennsylvania and Rhode Island.63

The Michigan Supreme Court quickly upheld the law, ruling in an advisory opinion

that “the Constitution of the State of Michigan did not prohibit the purchase with public

funds of secular educational services from a nonpublic school.”64

The passage of the law then provided impetus for a campaign to amend the 1963

Constitution to prohibit state funds from being used to support education at private schools.

A petition drive was mounted by the “Council Against Parochiaid” to place an amendment

on the ballot. The petitions were thrown out after a finding by the attorney general, and later

the board of canvassers, that the petitions did not let the signers know whether the

amendment would abrogate the education section of the Constitution. A split panel of the

Court of Appeals, and then a 5-2 majority in the Michigan Supreme Court, ordered the issue

onto the ballot.65

However, a concern for maintaining institutional separation between church and

state and avoiding “excessive entanglement” by preventing tax dollars from flowing to

religious schools was probably not the only force which drove the ballot initiative. There

was a heightened awareness of religious differences at that time in the state of Michigan, and

with it came the concomitant concern that state dollars might be used to promote not just

private education in general, but a specific religion. Thus the specter of “parochiaid” was

born.

The campaign itself was confused and bitter, with the effect of the proposal unclear

to the voters as well as to public officials.66 However, the amendment (Proposal C on the

 60 Traverse City School District v Attorney General, 384 Mich 390 at 407 (1971), note 2; and

411, note 3. “Shared time” generally means the education of children primarily attending nonpublic

schools at public school or other taxpayer-funded facilities, where secular subjects are taught. 61 Compiled Law 7379 of 1929; Council Comment, October 1970. 62 The law allowed up to 50 percent of the salaries of certified lay teachers to be reimbursed

by the state. Council Comments, October 1970. 63 Traverse City School District v Attorney General, 384 Mich 390 at 406 (1971), note 1. 64 Advisory Opinion re Constitutionality of 1970 PA 100, 384 Mich 82 (1970); as cited by the

same court in Traverse City School District v Attorney General, 384 Mich 390 at 406 (1971). 65 Council Comments, October 1970. 66 The Supreme Court later noted the “voter was barraged by contradictory statements,”

including those made by prominent supporters and public officials. Traverse City School District v

Attorney General, 384 Mich 390 at 407-409 (1971), note 2. See also Council Comment, October 1970.

The problems of

our existing public

education system

all point to an

enervated,

overburdened

system that needs

more than

increased funding,

administrative

tinkering, or

pedagogical

experimentation. It

needs wholesale

change.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 25

November 1970 ballot), was approved by a margin of 338,098 votes: 1,416,838 to 1,078,740.

The new language added to Article VIII, Section 2 provided the following:

No public monies or property shall be appropriated or paid or any public credit

utilized, by the legislature or any other political subdivision or agency of the

state directly or indirectly to aid or maintain any private, denominational or

other nonpublic, pre-elementary, elementary, or secondary school. No

payment, credit, tax benefit, exemption or deductions, tuition voucher, subsidy,

grant or loan of public monies or property shall be provided, directly or

indirectly, to support the attendance of any student or the employment of any

person at any such nonpublic school or at any location or institution where

instruction is offered in whole or in part to such nonpublic school students. 67

The Effect of the 1970 Amendment

The amendment was so restrictive that the Michigan Supreme Court had to

determine not only whether it prohibited direct aid, but also whether or not it prohibited the

wide variety of indirect services that were shared, supported, or financed by private agencies

and the state and federal government. In the Traverse City School District case, the court

interpreted the amendment to outlaw direct aid, but to continue to allow indirect and

auxiliary services to be performed with taxpayer funding. However, the Court also ruled that

a portion of the amendment which prohibits the use of public money to support the

attendance of any student or the employment of any person at any such nonpublic school or

at any location or institution where instruction is offered “in whole or in part” to nonpublic

students was unconstitutional, void, and unenforceable because it contravened free exercise

of religion.68 The free exercise of religion is an important guarantee provided by the United

States Constitution, and the Court ruled that Michigan voters could not overrule the U. S.

Constitution.

Should Michigan Have the Most Repressive Constitution?

With the 1970 amendment, Michigan’s Constitution became one of the most

repressive in the country with respect to parental choice involving nonpublic schools. In an

attempt to limit state support to religious schools, advocates of the amendment foreclosed the

opportunity for nonpublic school educational choice programs that were religion-neutral and

consistent with state and federal constitutional requirements. Michigan residents have lived

with the result for over a quarter of a century.

The passing of more than two decades has brought about change in Michigan.

Nonpublic schools are attracting more students, support for parental choice in education is

growing rapidly, and it is not clear that 1970s Proposal C would pass in our present day. It is

time to reevaluate the language that is openly hostile and punitive to parents who would like

to send their children to a nonpublic school without having to pay twice.

 67 Constitution of the State of Michigan of 1963, Article VIII, Section 2; added by amendment

in 1970. 68 Traverse City School District v Attorney General, 384 Mich. 390, 185 NW 2d 9 (1971).

With the 1970

amendment,

Michigan’s

Constitution

became one of the

most repressive in

the country with

respect to parental

choice involving

nonpublic schools.

It is time to

reevaluate the

language that is

openly hostile and

punitive to parents

who would like to

send their children

to a nonpublic

school without

having to pay

twice.
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26 November 1997

III. Expanding Parental Choice with a Universal Tuition Tax

Credit

As demonstrated in the preceding sections, the Michigan Constitution clearly

establishes the principle that education must be a top priority of Michigan citizens. Only

with a well-educated populace can we achieve the peace, prosperity, and freedom that a

constitutional democracy promises.

Since parental choice in education is such an effective method of improving the

availability, quality, and efficiency of educational programs, it is vital that Michigan citizens

work to provide more educational options for more students. There are essentially four ways

to accomplish this: 1) allow parents and students to choose freely between existing public

schools, even schools outside the home school district or the home intermediate school

district; 2) remove the existing cap on the number of charter schools that may be created and

reduce regulations that hinder such schools from starting; 3) implement a tuition voucher

program; and 4) implement a tuition tax credit program.

After analyzing the various means of expanding parental choice in education, this

section proposes a Michigan Constitutional amendment for a Universal Tuition Tax Credit.

This tax credit is “universal” because, unlike traditional tuition tax credits, it applies to

• Any Michigan student

• Any Michigan elementary or secondary school, public or private

• Any taxpayer—individual or corporate; and

• Any of three major state taxes: the Individual Income tax, the Single Business

Tax, and the State Education Tax (the statewide 6-mill property tax).

Choice Among Government Schools

As mentioned previously, Michigan law currently permits very limited choice

between traditional public schools. Under legislation adopted in 1996, parents may send

their children to any school within an intermediate school district, provided that the school

district which contains the desired school has elected to accept such students. State funding

will follow the child to the school of choice, thereby creating incentive for schools to satisfy

parents and students.

However, parents who choose to send their children to a public school outside their

intermediate school district may be required to pay tuition to the receiving school if the home

school superintendent refuses to release to the school the state funding that would normally

follow the student. This creates a financial disincentive for choice that not all parents are

able to overcome.

This problem may be solved in one of two ways. A simple solution would be to

allow the state foundation grant to follow the student to whichever public school he or she

attends, without requiring permission of the home school district superintendent. A second

Only with a welleducated populace

can we achieve the

peace, prosperity,

and freedom that a

constitutional

democracy

promises.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 27

solution would be to provide a tuition voucher or a tax credit to parents who find themselves

having to pay tuition to an alternative public school.

Choice among alternative government schools could also be enhanced by lifting the

cap on the number of charter schools and by reducing the regulations that make it difficult to

start and operate a new school.

Choice Among Private Schools

Although increasing choice between traditional public schools and increasing the

number of charter schools will increase parental choice, both approaches fail to take

advantage of the existing nonpublic school infrastructure. Currently 12 percent of Michigan

elementary and secondary students are enrolled in Michigan nonpublic schools, institutions

that are noted for their efficiency and results, and, in urban areas, are often oases of

educational excellence in an environment of under-performing public schools. As with

public schools, the quality of private schools varies widely, and of course not all private

schools are superior to all public schools. But where the best educational opportunity is a

private school, parents should be empowered to choose it for their children.

To engage these schools more fully in the quest for educational excellence, the most

effective choice programs must reduce the bias against private schools that is currently

enshrined in the Michigan Constitution and state law. The barriers that exist to private

school choice have been described in detail in preceding sections.

What is the Best Method of Expanding Parental Choice?

Where parents choose an alternative school and are required to pay tuition—whether

it be to a public school or a private school—the two methods of expanding choice most

frequently advocated are the tuition voucher and the tuition tax credit, each of which has its

own strengths and weaknesses.

Vouchers

The main strength of a voucher program is that it simply and straightforwardly

empowers students who wish to attend an alternative school to do so. Under a voucher

program, the state would provide a tuition voucher for a specified amount to any Michigan

student who chooses to attend an alternative school. The alternative school at which the

student enrolled would submit the voucher to the state for payment. In this way, depending

on the amount of the voucher, the student’s parents’ tuition bill would be either reduced or

paid in full. Such a system would reduce the injustice of parents of alternative school

students paying twice for education, and provide financial means for more parents to choose

alternative education that better meets the needs of their children.

However, tuition vouchers present several concerns. First, opponents argue that

vouchers transfer public funds to private schools and thereby drain funds from public

schools. Related to this is the argument that vouchers transfer public funds, albeit indirectly,

The two methods of

expanding choice

most frequently

advocated are the

tuition voucher and

the tuition tax

credit, each of

which has its own

strengths and

weaknesses.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

28 November 1997

to religious schools, raising a question of separation of church and state which concerns

many people. These arguments touch upon a critical distinction between credits and

vouchers. Under a voucher system, the State of Michigan would end up making payments to

particular schools, including religious schools. Under the UTTC system, the State would not

make any such payments whatsoever. Individual citizens and businesses would support the

schools and students of their choice, and simply pay less taxes to the state as a result. There

is no direct transfer of public funds involved.

Voucher opponents also argue that vouchers are more likely than tax credits to create

a justification for government regulation of schools. Many people feel that if the state is

transferring public funds to a person or organization, the state should have control over how

that money is used. This leads to increased regulation of the receiving party. Tax credits and

deductions, on the other hand, generate less incentive to regulate the receiving institution.

Federal housing subsidies, for example, carry with them many more regulations than the

home mortgage deduction. This is because the taxpayer is the one choosing to make a

payment of his or her own funds, with only incidental tax consequences. This is not to say

that there is no incentive to regulate tax credit or tax deduction programs, but rather that

there is less incentive than when direct subsidies are involved. The last thing Michigan

educators and students need is for nonpublic schools to be hamstrung with the same

burdensome regulations that public school administrators and teachers complain about

regarding their schools.

Voucher opponents also claim that vouchers will spawn a new type of middle-class

entitlement program, with its concomitant trade associations and lobbying organizations

seeking increased government funding. Vouchers present the classic public choice problem

of concentrated benefits and distributed costs, providing great incentive for people to spend

and little incentive to economize. A tax credit, on the other hand, requires that a taxpayer

actually spend his or her own money first, and later pay reduced taxes as a result. There is

still political incentive to increase credit amounts, but it is less than when a program involves

“free money” sent by the government, such as is the case with many welfare programs.

Some have argued that permitting vouchers for only nonreligious schools would

obviate the church and state objections, but that alternative is met with its own shortcomings.

First, it would directly contradict the sentiments of Art. VIII, Sec. 1, which state that

“Religion, morality, and knowledge being necessary to good government and the happiness

of mankind, schools and the means of education shall forever be encouraged.”

Furthermore, such a provision may be unconstitutional on U. S Constitution First

Amendment Free Exercise grounds. The Council Against Parochiaid was careful in

constructing Section 2 as a religion-neutral provision, and even so, part of it was held to

violate the Free Exercise clause69. In addition to constitutional concerns, such a provision

would probably alienate many in the religious community, and it would enshrine in the

Constitution disparate treatment of nonpublic sectarian and nonpublic nonsectarian schools.

This is poor precedent, even if constitutional.

 69 Traverse City School District v Attorney General.

Voucher opponents

argue that

vouchers transfer

public funds to

private schools and

thereby drain funds

from public

schools, and also

that vouchers will

spawn a new type

of middle-class

entitlement

program.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 29

Traditional Tax Credits

The traditional tuition tax credit—whereby only a parent can claim a credit against

his or her personal income tax for school tuition—requires no expenditure of public funds

and therefore avoids or minimizes many of the problems with vouchers. Since the parent is

paying the tuition directly, there is no transfer of public funds to religious schools, less

incentive to create a new entitlement program, and less justification to regulate the nonpublic

schools beyond current law.

The main weakness of the traditional tuition tax credit is that it fails to provide

effective choice for low-income, and even many middle-income, families. These families

simply do not have enough income tax liability to take advantage of a tuition credit.

A Better Choice: The Universal Tuition Tax Credit

The Mackinac Center for Public Policy has monitored the national educational

choice movement for a decade and has developed an approach informed by the successes and

failures of choice programs in other states as well as an understanding of Michigan politics

and the economics of public choice.

 To overcome the weaknesses of both vouchers and traditional tax credits, the

Mackinac Center for Public Policy has developed an amendment to the Michigan

Constitution which would establish the Universal Tuition Tax Credit (UTTC). When

adopted, the UTTC will greatly expand quality educational opportunities for all Michigan

students while reducing government expenditures for education. As discussed below, the

UTTC is superior to vouchers, traditional tax credits, and other methods of expanding

parental choice in education.

What is the Universal Tuition Tax Credit?

The Universal Tuition Tax Credit is based on the simple principle that Michigan

citizens and businesses should make education a priority, and that those citizens and

businesses that are already making education a priority should not be penalized or taxed

unfairly. This occurs today when parents and others are forced to pay twice when they

support nonpublic schools and when they pay additional tuition to send their child to a public

school outside their home school district without a release of funds. The UTTC establishes

basic fairness by allowing parents and others who choose an alternative school—public or

private—to do so without being penalized. The UTTC will expand the effective options for

parents and students so they may choose an educational opportunity that best meets their

needs. As described here, the UTTC will benefit both public and nonpublic schools.

Unlike a traditional tuition tax credit that may be used only by parents to offset only

their personal income tax, the UTTC is “universal” in character. It may be used by any

Michigan elementary or secondary school student. It may be used for tuition paid to a public

or private school. It is applicable against three separate state taxes and may be applied

universally by any state taxpayer—individual or corporation—that pays tuition for a

To overcome the

weaknesses of both

vouchers and

traditional tax

credits, the

Mackinac Center

for Public Policy

has developed the

Universal Tuition

Tax Credit

(UTTC).
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

30 November 1997

Michigan student to attend an alternative Michigan elementary or secondary school. The

credit may be applied to the state individual income tax,70 the Single Business Tax,71 or the

State Education Tax.72 It is important to recognize that the UTTC is a tax credit, not a tax

deduction. This means that it can be subtracted directly from the taxpayer’s tax liability, not

simply used to reduce the basis of the tax. Therefore, if a taxpayer has a pre-credit tax

liability of $3,000 and a tuition tax credit of $2,000, the taxpayer would pay tax of only

$1,000.

The UTTC plan can be accomplished using the existing tax system and, with slight

modifications, the existing mechanisms for tax payment, refunds for overpayment,

enforcement mechanisms, and credits. Significantly, the Michigan Individual Income tax

already allows tuition tax credits for tuition paid to certain colleges and universities. The

UTTC modifies and extends this tax credit to elementary and secondary schools. The

income tax already allows credits for property taxes (the “Homestead” or “circuit breaker”)

and home heating costs. The property tax credit alone accounted for $435 million in tax

credits in 1993. Other credits are allowed for artwork, certain community foundations and

homeless shelter donations, contributions to colleges and universities, and medical savings

accounts.73 Similarly, the Single Business Tax provides for a variety of deductions and

credits.

How does the UTTC work?

The UTTC is very simple and straightforward. When a taxpayer pays tuition for a

Michigan child to attend an alternative school, that taxpayer may claim a portion of the

tuition paid as a credit against the tax liabilities mentioned above. The credit is nonrefundable; that is, only taxpayers who owe taxes can claim the credit. Taxpayers who do

not owe taxes cannot receive a “refund” from the state. The amount of the credit is limited

under the plan in two ways.

First, the maximum allowable credit per child is phased in over a period of nine

years, starting at 10 percent of the average amount received by state and local government

per child in the Michigan public school system and eventually equaling 50 percent of the

average per-child revenue. Thus, the tax credit will never be more than half of the amount

received per child in the public school system.

 70 The state Individual Income tax is a tax levied on the adjusted income of all Michigan

residents, currently at a rate of 4.4 percent. 71 The Single Business Tax is value-added tax levied on Michigan businesses with gross sales

in excess of $250,000. It is calculated using a formula that considers gross sales, payroll expenses, and

the value of capital. 72 The state education property tax is the six-mill property tax levied on all owners of real

property in Michigan. It is important to note that revenues from this tax accrue to the state of Michigan

school aid fund, not local units of government. However, the tax is collected by local units of

government. 73 Executive Budget Tax Expenditure Appendix, Fiscal Year 1996-1997, Lansing, Michigan

Department of Treasury.

Unlike a

traditional tuition

tax credit, the

UTTC is

“universal.” It

may be used by any

Michigan

elementary or

secondary school

student for public

or private school

tuition. It may be

applied universally

by any state

taxpayer—

individual or

corporation—that

pays tuition for a

Michigan student.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 31

To demonstrate with a simplified example, Table 1 shows the amount of the credit

over a period of 9 years based on a constant annual per-child public school spending of

$6,000 (this amount would actually increase each year). The purpose of the phase-in period,

as described later in this report, is to minimize impact on the state budget.

Table 1. Example of Nine-Year Phase In of Universal Tuition Tax Credit

Year Average Per-Pupil

Public School

Revenue

Maximum Credit as a

Percentage of Per-Pupil

Revenue

Maximum

Credit

1 $6,000 10% $600

2 $6,000 15% $900

3 $6,000 20% $1,200

4 $6,000 25% $1,500

5 $6,000 30% $1,800

6 $6,000 35% $2,100

7 $6,000 40% $2,400

8 $6,000 45% $2,700

9 $6,000 50% $3,000

10 $6,000 50% $3,000

Secondly, the credit is limited to 80 percent of the tuition paid, unless the student is

from a family whose income falls below the federal poverty level, in which case the credit is

100 percent of the tuition paid, up to the maximum allowable credit. Requiring a noncreditable payment of 20 percent of the tuition for non-poverty-level families provides

downward pressure on the cost of tuition, helping keep education efficient and affordable.

The credit for students whose family income is below the federal poverty level is limited

only to the maximum credit amount, making it easier for taxpayers to assist such students.

Mechanics of the UTTC Implementation

The state Legislature and the Michigan Department of Treasury would develop the

administrative procedures for implementing the UTTC. Such procedures should include the

following provisions, described in detail in the section “Legislative Implementation of the

UTTC” below:

• Allow individuals and corporations the option to make one annual payment to a

nonprofit scholarship organization or charitable foundation which acts as a conduit

to make direct tuition payments and handle recordkeeping. This will remove from

businesses and individuals the administrative burden of supporting multiple students

at multiple schools.

• Modify the state Individual Income tax form to provide a convenient way for

individuals to claim credit against their Individual Income taxes and state education

property taxes.

The UTTC is

limited to 80

percent of the

tuition paid, unless

the student is from

a family whose

income falls below

the federal poverty

level, in which case

the credit may be

up to 100 percent

of the tuition paid.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

32 November 1997

• Modify the Single Business Tax form to provide a convenient way for businesses to

claim credit against their Single Business Tax.

• Create a method whereby businesses and individuals can claim credit against the

state education property tax.

• Provide for a standard receipt to be issued by alternative schools that will track

tuition payments to each identified student and the maximum credit allowed for that

student. This will assure that credits are accurately tracked and guarantee that the

tuition payer can claim the proper credit.

Key Benefits of the UTTC

The UTTC has several distinct benefits:

1. The UTTC will vastly expand parental choice in education in Michigan, bringing with it

the dynamics of consumer choice and a competitive educational marketplace. It will

result in marked increases in educational quality, educational opportunity, and parental

involvement.

2. The UTTC overcomes the shortcomings of traditional tuition tax credits by allowing

both parents and non-parents to obtain tax relief when they support a student at an

alternative school. By allowing the credit to be applied to three state taxes by any

taxpayer, the additional money that could be dedicated to alternative school education

would be significant. For Fiscal Year 1996-97, for example, the amount would be over

$7.5 billion.74 Friends and relatives of a student could pay all or part of the student’s

tuition at an alternative school and receive credit against their Individual Income tax,

state education property tax, or Single Business Tax. A corporation could also pay

tuition and receive a tax credit against its Single Business Tax or state education

property tax. The only cost to such taxpayers of assisting parents and students will be

the minimal time required to complete the paperwork associated with claiming the credit.

3. The UTTC will have no effect on the revenues of municipal governments such as cities,

counties, townships, and villages. Because revenues from the Individual Income tax,

state education property tax, and Single Business Tax all accrue to the state of Michigan,

the credits will not reduce local revenue.

Examples of How the Universal Tuition Tax Credit Could Be Used

The following are several examples of how the UTTC would work. These examples

are based on an average per-pupil public school revenue of $6,000, yielding a maximum

 74 This includes revenues of $4.33 billion from the Individual Income tax, $2 billion from the

Single Business Tax, and $1.14 billion from the state education property tax. FY 1996-97

Appropriations Report, Senate Fiscal Agency, July 1996, p. 140.

The UTTC will

vastly expand

parental choice in

education in

Michigan, will

overcome the

shortcomings of

traditional tuition

tax credits, and will

have no effect on

the revenues of

municipal

governments.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 33

credit amount of $3,000. These examples also assume that the maximum credit is fully

implemented, which would only occur nine years after the UTTC was adopted. Until that

time the actual maximum tax credit would be much smaller.

1. Mary Smith, a single mother of two with family income below the federal poverty level,

lives in inner-city Detroit. She wants to take her children out of the public schools

because of the lack of achievement her children are experiencing. She would like to

send them to a local Catholic school known for emphasizing discipline and academic

achievement. Luckily, ACME Motor Company, a large automobile manufacturer, has

established a scholarship program for such families. ACME Motor’s “Educational Hope

Program” pays the entire tuition for both children ($2,000 per child) and the company

takes a $4,000 credit against its Single Business Tax liability. ACME Motors advertises

this program, which earns it much national and community goodwill. The program has

cost ACME Motors nothing but the promotional expenses it chooses to incur.

2. James and Patty Williams like the “Gifted and Talented” program offered by Our Town

Elementary, a public school located in a school district other than the one in which they

live. They feel their son, a very bright and energetic learner, is not sufficiently

challenged by the local school program. However, they are required to pay an additional

$2,000 to send their child to the public school outside their district because the local

school superintendent will not release the funds. James and Patty—whose family

income is above the poverty level and whose Michigan Individual Income tax liability is

$3,000—can take a $1,600 credit (80 percent of $2,000) against their tax bill, paying

only $1,400 in income tax. (Based on an actual Michigan case.)

3. Robert Doe, a wealthy real estate developer living in Oakland County, pays $15,000 each

year to send his only child to the Cranbrook Academy, a private school. He takes a tax

credit of $3,000 against his state Individual Income tax liability ($15,000 x 80 percent =

$12,000, which exceeds the $3,000 cap). This is the maximum credit amount any

taxpayer—or combination of taxpayers—may claim per student. Therefore, it costs Mr.

Doe $12,000 per year instead of $15,000 to send his child to the alternative school.

4. Robert Middleclass, a middle-income auto worker living in Kent County, pays $4,000

each year to send his only child to the Gifted Science Academy, a private school. He

takes a tax credit of $3,000 against his state Individual Income tax liability ($4,000 x 80

percent = $3,200, which exceeds the $3,000 cap). Therefore, it costs Mr. Middleclass

$1,000 per year instead of $4,000 to send his child to the alternative school.

Drafting the Universal Tuition Tax Credit Amendment

As mentioned previously, any expansion of educational choice that includes nonpublic schools will require a change in the Michigan Constitution. This section presents

detailed language for an amendment that would establish the Universal Tuition Tax Credit,

and discusses the policy considerations surrounding the specific language.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

34 November 1997

Constitution Versus Legislation

One question that should be addressed first is how much of the UTTC plan should be

established in the Constitution as opposed to statutory law. It would be possible to amend

the Michigan Constitution to simply permit tax credits, and then leave it up to the Legislature

to implement such a system. There are, however, several problems with such an approach.

First, opponents of parental choice in education, the most vociferous of which are the public

school employee labor unions, have attacked such proposals by obfuscation. The more that

is left to doubt regarding the specific details of a choice plan, the more opportunity its

opponents have to paint a picture of bizarre and harmful situations that may occur under

whatever plan does arise. Secondly, Michigan parents have little ability to influence the

Legislature in matters of education reform when compared to the considerable power of the

public education establishment (which includes administrators and teacher unions), which

views parental choice as a threat to its operations.

General Considerations for Drafting

There are two primary considerations that govern the drafting of this proposal. First,

the language must be as simple, clear, and concise as possible while still accomplishing the

desired objective. The proposed language below consists of removing just 11 words from

the existing Article VIII, Section 2, and adding four paragraphs. Second, the amendments

should, as much as possible, leave existing statutory and case law undisturbed while still

accomplishing the objectives. The debate over parental choice should focus on the merits of

the Universal Tuition Tax Credit, not on issues resulting from changes that are unnecessary

to implementing the UTTC.

Treatment of Existing Constitutional Language

(Note: Existing language is shown in normal type. Language to be eliminated is shown

striked out. Language to be added is shown in UPPER CASE.)

The policy objective with respect to amending the existing language of Article VII,

Section 2, is to eliminate the prohibition on tax credits for nonpublic schools while

maintaining the prohibition on vouchers.

Suggested revisions to the existing Article VIII, Section 2:

Section 2. The legislature shall maintain and support a system of free public

elementary and secondary schools as defined by law. Every school district

shall provide for the education of its pupils without discrimination as to

religion, creed, race, color or national origin.

No public monies or property shall be appropriated or paid or any

public credit utilized, by the legislature or any other political subdivision or

agency of the state directly or indirectly to aid or maintain any private,

denominational or other nonpublic, pre-elementary, elementary, or

secondary school. No payment, credit, tax benefit, exemption or deductions,

tuition voucher, subsidy, grant or loan of public monies or property shall be

It would be

possible to amend

the Michigan

Constitution to

simply permit tax

credits, and then

leave it up to the

Legislature to

implement such a

system. But there

are several

problems with such

an approach.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 35

provided, directly or indirectly, to support the attendance of any student or

the employment of any person at any such nonpublic school or at any

location or institution where instruction is offered in whole or in part to such

nonpublic school students. The legislature may provide for the

transportation of students to and from any school.

These modifications eliminate all barriers to tax credits and maintains the prohibition

on vouchers. A prohibition on vouchers is important due to the fact that survey results show

that public support for tax credits is much stronger than support for vouchers. As discussed

previously, although vouchers would accomplish the objectives of parental choice and would

improve the existing assignment system, they are less preferable to tax credits.

Establishment of the Universal Tuition Tax Credit

The policy objective of the UTTC is to establish a per-child tax credit against the

state Individual Income tax, Single Business Tax, and State Education Tax for ANY taxpayer

who pays tuition for a Michigan student to attend ANY Michigan public or non-public

elementary or secondary school. The amendment is completely nondiscriminatory; it applies

equally to nonreligious and religious schools, to private schools and to public schools.

To maintain incentive for tuition payers to be prudent purchasers of nonpublic

educational services, the credit should equal only 80 percent of the tuition paid. The only

exception to this restriction is that persons paying tuition for children from families whose

income is below the federal poverty level should receive a tax credit equal to 100 percent of

the tuition paid. However, in either case, the credit may not exceed a certain maximum

amount. This maximum amount shall be 10 percent of the average state and local per pupil

revenue for school district operating purposes for the first year following ratification and

shall increase evenly over a nine-year period to 50 percent of the average state and local per

pupil revenue for school district operating purposes.

Suggested language defining the UTTC:

TO IMPROVE PUBLIC EDUCATION BY EMPOWERING PARENTS WITH GREATER

FREEDOM TO CHOOSE THE BEST AND SAFEST SCHOOLS THAT MEET THE

INDIVIDUAL NEEDS OF THEIR CHILDREN, IT IS HEREBY ESTABLISHED THAT:

AS PROVIDED IN THIS SECTION, THERE SHALL BE A CREDIT AGAINST

AMOUNTS PAYABLE UNDER THE STATE INCOME TAX, THE STATE SINGLE

BUSINESS TAX, THE STATE EDUCATION TAX, OR ANY SUCCESSOR TAXES,

AND OTHER TAXES AS PROVIDED BY LAW TO ANY PERSON FOR PAYMENTS

MADE BY THE PERSON FOR TUITION FOR EDUCATION FOR ANY RESIDENT

CHILD ATTENDING A PUBLIC OR NONPUBLIC ELEMENTARY OR SECONDARY

SCHOOL IN THIS STATE.

A CONTRIBUTION TO A NONPROFIT ORGANIZATION SHALL QUALIFY FOR THE

CREDIT AT THE TIME THAT 100 PERCENT OF THE CONTRIBUTION IS

DISBURSED BY THE ORGANIZATION AS TUITION FOR INDIVIDUAL PUPILS

PURSUANT TO THE LIMITATIONS OF THIS SECTION.

A prohibition on

vouchers is

important due to

the fact that survey

results show that

public support for

tax credits is much

stronger than

support for

vouchers.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

36 November 1997

THE TAX CREDIT PER PUPIL FOR TUITION PAYMENTS FOR A PUPIL WHOSE

FAMILY INCOME IS AT OR BELOW 150 PERCENT OF THE FEDERAL POVERTY

LEVEL SHALL BE 50 PERCENT OF THE AVERAGE STATE AND LOCAL PER PUPIL

REVENUE FOR SCHOOL OPERATING PURPOSES FOR PUBLIC ELEMENTARY AND

SECONDARY SCHOOLS OR 100 PERCENT OF THE ACTUAL TUITION PAID,

WHICHEVER IS LESS.

THE TAX CREDIT PER PUPIL FOR OTHER PUPILS SHALL BE LIMITED TO THE

LESSER OF THE MAXIMUM CREDIT ESTABLISHED IN THIS SECTION OR 80

PERCENT OF THE ACTUAL TUITION PAID. THE MAXIMUM CREDIT PER PUPIL

PERMITTED IN THE STATE FISCAL YEAR FOLLOWING THE RATIFICATION OF

THIS AMENDMENT SHALL BE AN AMOUNT EQUAL TO TEN PERCENT OF THE

AVERAGE STATE AND LOCAL PER PUPIL REVENUE FOR SCHOOL OPERATING

PURPOSES FOR PUBLIC ELEMENTARY AND SECONDARY SCHOOLS. FOR EACH

FISCAL YEAR THEREAFTER THE MAXIMUM CREDIT SHALL INCREASE OVER

THE PRIOR YEAR BY AN AMOUNT EQUAL TO AN ADDITIONAL FIVE PERCENT

OF THE AVERAGE STATE AND LOCAL PER PUPIL REVENUES, UNTIL THE

MAXIMUM CREDIT AMOUNT PER PUPIL IS EQUAL TO FIFTY PERCENT OF THE

AVERAGE STATE AND LOCAL PER PUPIL REVENUE.

THE LEGISLATURE MAY IN ANY YEAR INCREASE THE AMOUNT OF THE

CREDIT APPLICABLE TO PUPILS WHO REQUIRE SPECIAL EDUCATION

SERVICES, OR FOR ANY OTHER PUPILS AS THE LEGISLATURE DEEMS

APPROPRIATE.

THE LEGISLATURE SHALL PROVIDE BY LAW FOR THE IMPLEMENTATION OF

THIS SECTION.

The primary purpose of the credit is to end the penalty on parents and others who

both pay taxes to support public schools and pay tuition at alternative schools. The purpose

of extending a 100 percent credit to children of families below the poverty level is to provide

educational opportunity to students whose parents may not be able to pay even the 20 percent

of the tuition charged.

The phase-in of the maximum credit amount will create a positive fiscal impact on

state finances by allowing time for students in traditional public schools to switch to lowercost alternative schools, thereby reducing the amount of state funds needed for traditional

public schools.

Protection Against Overregulation

The policy objective of this provision is to prevent nonpublic schools from being

subject to regulations that hinder learning, discourage and frustrate professional educators,

increase operating costs, and have no bearing on the health, safety, or education of students.

Suggested language to protect against overregulation:

THE LEGISLATURE SHALL NOT ADOPT ANY LAW IMPOSING REGULATIONS ON

NONPUBLIC SCHOOLS OR THEIR PUPILS OR TEACHERS IN ADDITION TO THOSE

The primary

purpose of the

credit is to end the

penalty on parents

and others who

both pay taxes to

support public

schools and pay

tuition at

alternative schools.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 37

IN EFFECT ON THE DATE THIS SECTION IS RATIFIED EXCEPT BY A VOTE OF

TWO-THIRDS OF THE MEMBERS ELECTED TO AND SERVING IN EACH HOUSE.

Public school teachers and administrators agree that current Michigan regulations

impose excessive mandated procedures, recordkeeping, and reporting requirements that

hinder the education process and drive up costs. It is important that nonpublic schools are

protected from this same overregulation while maintaining a safe and healthy environment in

which children can learn.

This language establishes a supermajority voting requirement as used in other

portions of the Michigan Constitution. It is probably not feasible to specify particular areas

to exempt from state or local regulation due to the difficulty of identifying and defining all

such areas. Broad language prohibiting “burdensome” or “onerous” regulations is vague,

would leave the definitions to the courts, and would invite charges that such language would

spawn a flood of litigation. The best alternative is to limit regulation to the contours of the

current Nonpublic Schools Act and require that future regulatory proposals are sufficiently

compelling that a supermajority of the Legislature supports their enactment. One reason that

nonpublic schools are efficient and effective is that they escape many of the debilitating

restrictions and regulations that public school teachers and administrators complain about.

The Nonpublic Schools Act has provided a sufficient regulatory framework to date and will

continue to do so.

Legislative Implementation of the UTTC

The UTTC amendment requires the Legislature to enact an implementing statute to

provide the means by which Michigan individual and business taxpayers may claim the

tuition credit against the state Individual Income tax, the Single Business Tax, and the state

education property tax. The implementation will involve three key areas: 1) accurately

tracking the application of credits to specific students, 2) establishing a method by which

taxpayers may financially support a number of students without having to engage in

extensive detailed recordkeeping, and 3) developing the tax forms and filing procedures for

claiming credits.

Tracking Tuition Payments and Credits

The first step to developing an effective implementation strategy is tracking tuition

payments and applying the appropriate credit. A model of how this may be accomplished is

the existing procedure for claiming a Michigan Individual Income tax credit for payment of

college tuition and fees. As shown on the following page, form MI-1040, Schedule CT,

requires taxpayers to identify each student’s name, Social Security number, college or

university attended, college or university code number, amount of tuition and fees paid, and

the amount of the credit. The form also requires the taxpayer to state whether someone else is

contributing to the students’ tuition and fees.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

38 November 1997

Insert MI-1040 Schedule CT page 1 here.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 39

Insert MI-1040 Schedule CT page 2 here.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

40 November 1997

The Michigan Department of Treasury should design a similar form and procedure

for the UTTC. In addition to identifying the same items listed above, the form should

identify whether or not the student’s family income is below the federal poverty level. Each

year, the form will be modified to reflect the increasing maximum credit amount. Other

modifications may be made as the Department of Treasury deems necessary.

To eliminate the possibility that several taxpayers will claim total credit for a single

student in excess of that allowed by law, the Legislature may require alternative schools to

issue receipts showing tuition payments made for each student, the date of each payment, and

the maximum credit.

A key element of this process will be verifying claims of eligibility for a 100 percent

credit based on having family income below the federal poverty level. When a parent

fraudulently claims poverty level status, and such a claim results in an excessive tax credit to

be claimed by any taxpayer, the parent should be liable to the state for the amount of excess

credit claimed. The implementation legislation must provide for this and specifically exempt

from liability those taxpayers who pay tuition and claim a credit for such students in good

faith after having received confirmation from the parents of the families’ poverty level status.

Minimizing Recordkeeping by Taxpayers

Taxpayers with substantial tax liability may be able to pay tuition for many

alternative school students. For such cases, the Legislature should provide a means by which

these taxpayers can make payments to nonprofit charitable organizations which act as a

conduit to make direct tuition payments and handle recordkeeping. Such organizations may

be either existing nonprofit charities or special scholarship organizations that are dedicated

exclusively to paying tuition to students who attend alternative schools. As long as these

organizations document that 100 percent of each payment is used to fund tuition for students

at Michigan alternative schools, the payments should qualify for the tax credit. These

organizations may solicit other funding to cover administrative costs.

Such a provision will remove from businesses and individuals the administrative

burden of supporting multiple students at multiple schools, thereby improving the

accessibility of the UTTC.

Tax Forms and Filing Procedures

The Michigan Individual Income tax and Single Business Tax both currently provide

for a number of tax credits and deductions. Adding a tax credit for alternative school tuition

will be relatively straightforward from the taxpayers’ perspective.

As mentioned above, the state Individual Income tax form, MI-1040, should be

modified to permit an alternative school tuition credit similar to that currently permitted for

college and university tuition using Schedule CT. The new or modified schedule should also

allow a taxpayer to elect to claim some or all of credit against the state education property in

addition to the Individual Income tax. Although the state education tax is collected locally,

the most convenient way to permit a credit is through form MI-1040. Since this tax and the

Taxpayers with

substantial tax

liability may be

able to pay tuition

for many

alternative school

students.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 41

Individual Income tax are both state taxes, reconciling the appropriate credits is a matter of

accounting. In addition, a method should be created whereby the State Education Tax may

be claimed without filing an Individual Income tax return.

The Single Business Tax annual return C-8000 also includes a schedule, C-8000C,

that is used to claim a number of tax credits for contributions to community foundations,

homeless shelters, and other public contributions. Form C-8000C, shown on the following

pages, should be modified to include the tuition credit. A list of students who receive tuition

support, similar to the Individual Income tax Schedule CT, should also be included. The most

efficient method would be to use a similar schedule for both the Individual Income tax form

MI-1040 and the SBT form C-8000.

The Single Business Tax annual return should also be modified to permit businesses

to claim a credit against their state education property tax. The state will be required to

develop a separate form to claim credit against the State Education Tax for those businesses

that do not file a Single Business Tax return.

The Legislature may wish to allow imputed state education property tax payments

for renters (both residential and commercial) similar to what is provided now under the

“homestead” income tax credit. In that case, 17 percent of rent is imputed to be property

taxes. Such an imputed property tax under the UTTC should equal the actual prorated

amount of state education property tax paid by the renter.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

42 November 1997

Insert SBT Schedule C8000C page 1 here
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 43

Insert SBT Schedule C8000C page 2 here
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

44 November 1997

IV. Impact of the UTTC on State and Local Finances

In addition to improving the quality of education in Michigan through consumer

choice, the UTTC will have a strikingly positive impact on state finances and no direct

impact on local finances. The end result will be a system with the incentives for schools to

become increasingly efficient while at the same time providing greater educational

opportunities for Michigan parents and students.

A Model of State and Local Finance

To assess the impact of the UTTC on state and local finances, a model of state and

local finance of public schools in the state of Michigan was developed. This model is used

to project future financial changes under both the current system of public finance of public

schools and the proposed UTTC plan. The model captures the most significant dynamics in

the complicated financial structure for public schools and explicitly incorporates incentives

that apply to parents as they choose whether to send their children to the assigned public

schools or alternative schools.

Appendix I contains a complete discussion of the model, including a comprehensive

set of tables showing how the model projects student enrollment costs and other variables.

This appendix also includes extensive discussion of the sources of the information used as

well as a discussion of key techniques.

Current System State Foundation Grant and Local Property Tax Support

Under the current system, the state guarantees every pupil in the government school

system, including charter school students, a minimum amount of revenue. Should local

property tax revenue to the school district fall below this figure, the state appropriates money

to the districts to make up the difference. The guaranteed amount, often called the

“foundation allowance,” will be approximately $5,400 in fiscal year (FY) 1998. The model

assumes that the state per-pupil guarantee increases by about 3 percent per annum from this

base for the next ten years.

Some school districts are currently receiving less than the “formula” guarantee, and

many are receiving much more. The average revenue is about 6 percent higher than the

guarantee amount.75 The variation among school districts in per-pupil revenue is declining

under the constitutional amendment known as “Proposal A,” which reformed school finance

in 1994. In general, Proposal A “averaged up” the spending of the large majority of school

districts in order to bring them into closer parity with the highest-spending districts.76 This

 75 For fiscal year 1996-97, the benchmarks are basic foundation allowance, $5,308; average of

school districts, $5,646; average of pupils, $5,876. See Senate Fiscal Agency, 1996 Statistical

Yearbook, p. 61.

76 The Executive Budget 1998, p. C2, calls for 79 percent of all students to be at or above the

foundation allowance in fiscal year 1998.

The UTTC will

have a strikingly

positive impact on

state finances and

no direct impact on

local finances.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 45

“averaging up” has significantly increased overall taxpayer support of the public school

system.

Per-Pupil Revenues as Indicator of Overall Revenues

Per-pupil revenues do not include all revenues of the public school system.

“Categorical” program revenues and intermediate school district revenues add roughly $1.3

billion annually; also not included are some federal funds and other local taxpayer sources.

However, the rate of per-pupil revenues reasonably predicts the overall revenues of the

school system. Since the analysis is concerned mainly with the financial impact that occurs

when pupils shift from one system to another, we rely on this “per pupil” revenue pattern to

indicate the overall change in revenue and spending that would occur. This makes the

analysis conservative, since some of these revenues would probably shift to alternative

schools under the UTTC plan.

Student Population Assumptions

The model assumes that, under the current system, the number of students in the

government school system—now approximately 1.6 million—will grow slowly. The charter

school portion of this number grows more rapidly, but starting at a small base of roughly

15,000 students, it does not represent a substantial portion of the overall enrollment. The

model projects that alternative school students will number approximately 220,000 in 1998.

Under the current system, the model assumes that alternative school enrollment grows

somewhat faster than traditional public school enrollment.

Universal Tuition Tax Credit Dynamics

Private, Public, and Alternative Schools

Expanded school choice, as discussed in Section I, benefits children who move to

private schools as well as those who stay in the traditional public school system. To fully

encourage these benefits, the constitutional amendment described in Section III establishes a

credit “for tuition for education for any resident child attending a public or nonpublic

elementary or secondary school in this state.”

Thus, a credit would be available to a parent sending their child to a private school,

or a public school that charges them tuition. We have defined such schools in this study as

“alternative schools.” Currently, as detailed in Appendix I, there are between 400 and 500

students attending public schools and paying tuition, normally because their resident districts

have not chosen to participate in inter-district school choice programs. This compares with

about 220,000 private school students and 1.65 million students in traditional public schools.

Data on these tuition-paid students is not precise, and we expect the number to decline as

more districts adopt agreements allowing public school choice without financial penalties for

parents, and as state law changes. The average tuition is also small compared with public

school costs; our survey data indicates average tuition of about $470 per year, with the most

common tuition amount being $1.

The UTTC would

be available to a

parent sending

their child to a

private school, or a

public school that

charges them

tuition. We have

defined such

schools in this

study as

“alternative

schools.”
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

46 November 1997

We have not adjusted the figures for tax credits calculated for private school

attendees to include these tuition amounts, for three reasons. First, the number of students in

this category is so small—less than 1/10 of 1 percent of the public school attendance.

Second, the fiscal impact is negligible, as the measurement error in modeling a $9.3 billion

direct-cost system exceeds the total tuition paid by students in this category. Third, we

expect the numbers in this group to decline.

Thus, figures listed under “alternative school” costs and attendance, unless noted

otherwise, are those projected by the model for private schools alone. However, the data and

other information on this category of alternative school students are described in Appendix I.

The Education Market

To predict the effect of the UTTC on state and local finances, one must predict the

behavior of individual parents. These parents are currently acting as consumers of

educational services and thus exhibit behavior much like consumers of any other service.

Such behavior includes preferring high quality services over low quality services, taking into

account factors such as location and convenience, and of course, preferring to pay less for

educational services when a lower-priced service is available with comparable quality. A

market reflecting such activity operates fairly freely in preschools, in trade schools, and, to a

certain extent, in higher education.

In the K-12 education market in Michigan, the “price” that a consumer pays to send

his or her child to an assigned public school is close to zero. The cost is not zero—we have

already discussed how private taxpayers finance the system—but the price to the parent of

sending one more child to the traditional public school is roughly zero. The “price” of

sending a child to an alternative school can be substantially higher. These costs include the

tuition as well as other costs that the parents must pay, such as books, transportation, and

fees.

Consumer Behavior Under the UTTC

The model predicts consumer behavior using well-defined techniques that take into

account the incentives for parents to place their child in a traditional public school because

of the significantly lower effective price. As the UTTC becomes available, the incentive to

choose a traditional public school over an alternative school will be reduced. Therefore,

more parents are likely to put their children in alternative schools. Appendix I discusses in

detail the economic analysis used to project the response of consumers (students and parents)

to changes in the price structure (alternative school tuition, tax credits, and “free” traditional

public schools) in this market.

The model takes into account the increasing value of the UTTC relative to the

average alternative school tuition. As shown in Figure 1, the UTTC starts at a relatively

small share of the average alternative school tuition. Over the nine years in which the system

As the UTTC

becomes available,

the incentive to

choose a

traditional public

school over an

alternative school

will be reduced.

Therefore, more

parents are likely

to put their

children in

alternative

schools.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 47

is phased in, the maximum tuition tax credit increases to an amount somewhat less than the

average alternative school tuition.77 

Figure 1. Maximum Tax Credit and Average Alternative 

School Tuition

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Cost 

Average

alternative

school

tuition

Maximum

tax credit

Given this increasing incentive to place children in alternative schools, the model

predicts that alternative school enrollment grows significantly. Figure 2 compares

alternative school enrollment under the current system with the UTTC plan. It shows that

with the UTTC, alternative school enrollment increases from approximately 220,000 to over

550,000 over the next ten years. This rapid growth in enrollment levels off once the UTTC

is fully implemented.

Figure 2. Alternative School Enrollment 

With and Without UTTC

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Students

Current

System

UTTC

Plan

 77 As discussed above, the alternative school tuition figures used by the model are those

projected for private schools. If the high-end data for tuition-paid public schools were included, the

overall weighted average alternative school tuition would change by $5, or 2/10 of 1%, in the first year.

Our estimates of private school tuition are not that precise, and a change of that magnitude would not

affect the dynamics of the system.

With the UTTC,

alternative school

enrollment

increases from

approximately

220,000 to over

550,000 over the

next ten years.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

48 November 1997

However, even under this scenario, alternative schools take only a small share of the

overall market for education. Figure 3 shows that under the UTTC plan, the traditional

public school system continues to have over 1.4 million students even after the UTTC is fully

phased in. Thus, even with the UTTC system, it is likely that the traditional public school

system will remain two to three times the size of the alternative school system.

Figure 3. Public and Alternative School Enrollment 

With UTTC

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Students

Alternative

School

Enrollment

Public

School

Enrollment

Net Impact on State and Local Finances

The UTTC both reduces state government expenses and reduces state government

revenues. Parents who pay alternative school tuition, and other taxpayers who assist parents

with such tuition will receive a tax credit. These tax credits result in less state government

revenue.

At the same time, parents who choose to move their children from a traditional

public school to an alternative school are moving from a system that costs the state roughly

$5,500 per student to a system that costs the state fifty to ninety percent less (depending on

the point of time in the UTTC phase-in period). Even when fully phased in, a tax credit of

fifty percent of the average public school per-pupil revenue will save the state of Michigan

(and therefore Michigan taxpayers) thousands of dollars for each student that migrates to an

alternative school.

When the reduced state revenue and reduced state expenses are combined, the model

shows that the UTTC plan would have a significant positive effect on state finances. Figure

4 (next page) shows the overall net effect. Under the current system, per-pupil state

expenditures grow from under $10 billion to almost $14 billion. Under the UTTC plan, state

expenditures still increase, but at a significantly slower rate. When these expenditures are

added to the revenue loss, the total impact is still substantially less in each year than under

the current system. By the time the UTTC is fully implemented, the taxpayers would be

spending about a half-billion dollars less each year: $13.1 billion versus $13.7 billion in

2008. This would amount to a total savings to Michigan taxpayers of over $3.4 billion in the

first ten years alone and over $550 million each year thereafter.

Even with the

UTTC system, it is

likely that the

traditional public

school system will

remain two to three

times the size of the

alternative school

system.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 49

Figure 4. State Spending Under UTTC and Current System

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Cost

 (billions)

UTTC Plan: State Revenue Loss from Tax Credits

UTTC Plan: Total State & Local Per-Pupil Expenditures

Current System: Total State & Local Per-Pupil Expenditures

The UTTC avoids undermining the tax base of local units of government and would

not distort the financing of individual school districts whose residents decided to support

students in other districts. Since the UTTC is integrated into the existing state finance

system for local schools, each district would still be guaranteed the same foundation

allowance as it would under current laws. The large majority of tax credits would be claimed

against the state income tax and state Single Business Tax, which would not affect local tax

collections. To the extent residents of a district took tax credits against the 6-mill State

Education Tax, which is a state property tax collected by the local school districts, the state

would simply increase—dollar for dollar—the amount it provided the school district for its

foundation allowance. Each school district would retain the same amount of per-pupil

funding it has under current state laws, regardless of how many or how few of their residents

claimed tax credits, or where the students sponsored by the residents attended school.

For other local units of government, there would be no direct effect on their tax base.

The tax credit can be claimed only against state taxes.

Indirectly, the UTTC would strengthen the economic and tax base of all units of

government. First, by encouraging better education for the majority of children who would

remain in traditional public schools and allowing all parents to choose the very best school

options for their children, the UTTC would help the economy grow through a better-educated

citizenry. Second, although less important, the overall positive effect on the state budget

would mean hundreds of millions of dollars in net savings. These savings could be used to

lower taxes on businesses and individuals, address other budget priorities, or provide

additional educational resources.

The UTTC plan

would have a

significant positive

effect on state

finances. Parents

who choose to

move their children

from a traditional

public school to an

alternative school

are moving from a

system that costs

the state roughly

$5,500 per student

to a system that

costs the state fifty

to ninety percent

less.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

50 November 1997

Summary: Financial Impact of a Tuition Tax Credit

A careful analysis of Michigan’s state and local financing structure for public

schools, using a model that includes both the incentives for alternative school enrollment

faced by parents and the effect on the taxpayers of those choices, presents several reasonable

conclusions.

First, the UTTC will be popular. If the state provides a tuition tax credit to parents

who choose to send their children to alternative schools, many will take that credit. We can

anticipate that, as the tuition tax credit increases, more parents will choose to send their

children to alternative schools, even if that tax credit does not fully cover their tuition.

Second, even with the UTTC, a majority of parents will keep their children in public

schools, which will increase in quality. Even if the tuition tax credit ends up supporting 80

percent of the costs of sending a child to an alternative school, sending that child to an

alternative school will still cost parents more than a public school. For this reason alone,

many parents will send their children to traditional public schools. As discussed elsewhere

in the report, the increase in competition will also force traditional public schools to

improve. Thus, after the tuition tax credit has been phased in, public school education will

also provide a much more attractive option.

Third, the public school system will remain intact. One common objection to tuition

tax credits and other forms of school choice is that they would cause the destruction of the

traditional public school system. A sober analysis shows that is simply not the case. Even

taking into account the full tuition tax credit proposed in this study, the traditional public

school system continues to spend roughly $14 billion in direct per-pupil expenditures and

enroll 1.4 million students when the credit is fully phased in. Clearly, it will be forced to

become more efficient, but the traditional public school system will continue.

Fourth, taxpayers will save money with the UTTC. Under reasonable assumptions

about the number of parents who would choose to send their children to alternative schools,

the cost savings from some children moving from 100-percent-taxpayer-financed schools into

alternative schools more than outweighs the reduction in state revenue. This analysis

projects that, counting the costs of the tuition tax credit, Michigan taxpayers would save over

$550 million each year when the program is fully implemented.

Fifth, local municipalities are unaffected by the UTTC. Because the UTTC applies

to only the state Individual Income tax, state Single Business Tax, and State Education Tax,

local municipalities will experience no loss of revenue due to the tax credit.

Even with the

UTTC, a majority

of parents will keep

their children in

public schools,

which will increase

in quality.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 51

Appendix I: A Model of School Finance

Private and Public Financing of Schools

Most analyses of school finance take into account the funding of only government

schools, focusing on the taxpayer sources for such funding. For example, the convulsive

debate that resulted in the passage of Proposal A in 1994 was entirely about taxpayer

financing of public schools. This analysis brings in, at least partially, the forgotten sector:

citizen financing of alternative schools, which include nonpublic schools and tuition-paid

public schools. The UTTC will reduce the current disincentive to attend alternative schools;

thus, the costs to an individual parent for his or her child to attend traditional public schools

and alternative schools must be explicitly addressed.

Private School Costs vs. Public School Costs

A close analysis of public and private school costs shows that commonly-used

measures do not accurately reflect the true costs of educating children in the two systems.

Neither the prevailing “tuition” costs nor the commonly discussed “per pupil expenditures”

fully take into account all costs.

In the government school system, Michigan anticipates a per-pupil “guarantee” or

“foundation allowance” of about $5,445 per pupil in fiscal year 1998.78 Some school

districts will spend less, and others much more, so that the average revenue is about 6

percent higher than that.79 An approximation of 1.6 million students multiplied by the

formula guarantee yields an estimate of over $9 billion in direct per-pupil expenditures

annually spent on public education. Adjusting for per-pupil expenditures above the guarantee

brings the total to over $9.5 billion.

Even that amount does not include categorical and intermediate school district

expenditures of roughly $1.3 billion annually, nor some federal funds, nor other local

taxpayer sources. Adding these yields current expenditures for Michigan’s government

school system that exceed $11 billion annually.80

 78 State of Michigan Department of Management and Budget, Executive Budget 1998,

February 1997. The FY 1998 Budget provides funding for the 1997-98 school year. 79 Under the new school finance system, all school districts will have at least the foundation

guarantee allowance to spend per pupil. As of the passage of Proposal A, the foundation allowance

was set significantly above the average expenditure, so that the new system creates an increasing

expenditure for the majority of districts. However, special rules limit the annual increases, so that a

fraction of the districts by 1998 will not receive the full allowance. At the same time, a number of very

high spending school districts were “held harmless” and guaranteed their current expenditure plus

additional increases. These additional increases will be smaller in magnitude than for the majority of

districts, so the variation in spending is declining. As of 1997, DMB estimates showed the “average”

per pupil expenditure to be about 6 percent above the “formula guarantee.” 80 “Categorical” expenditures include special education, special education transportation, atrisk programs, vocational education, and early childhood programs. See Senate Fiscal Agency, 1996

Statistical Yearbook, p. 57; or annual school aid appropriation bills.
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52 November 1997

The taxpayers also provide additional direct and indirect support of public schools.

For example, taxpayer dollars help provide land and facilities for the school system, along

with government services, without those facilities contributing to the local tax base.81

Government agencies in Michigan pay no property tax, no sales tax, and no income or single

business tax; further, they borrow money at tax-exempt rates.82 All these costs are indirectly

paid for by the taxpayers, and many do not appear in the accounting for expenditures. Thus,

the actual burden of the government school system on the taxpayers is significantly higher

than the foundation allowance might imply.

Private school tuition is about half that of the average per pupil revenue of public

schools. Private school tuition in Michigan averages about $2,500, with significant variation

among schools.83 This amount is much less than half of the expenditures of the public school

system, which is consistent with the national pattern.84 However, just as the per-pupil

expenditure for public schools is a significant underestimate of the government school costs,

private school tuition also underestimates private school costs. Most religious schools

receive significant contributions from their sponsoring organizations to support their

operations. Many also receive volunteer time and services from parents. Furthermore, those

same parents often face fees for their children’s participation in extra-curricular activities

such as sports, music, and various student clubs.85 Thus, while private school tuition is often

half or less than the commonly discussed per-pupil expenditure figure for public schools,

actual costs are a larger share. Once all private and taxpayer-funded costs are included for

both systems, the ratio of total public school costs to total private school costs is less clear,

but is probably about 2:1.

It should be noted, however, that the prime motivation behind the movement to

parental choice in education is not efficiency or the need to save money, but the desire to

improve the education of children.

 81 Much of the acquisition and construction of school facilities is financed through debt

millage, which is levied in addition to operating millage. Public employees themselves do pay state

income tax, and local income taxes in those Michigan cities that levy them. 82 Religious schools receive tax exemptions as well. It is interesting to note that schools and

other local units of government sometimes must pay special IRS taxes for “arbitrage,” when they

borrow at tax-exempt rates and then invest the proceeds in taxable securities. 83 There is no consistent data source for all alternative schools. This estimate emerged from

discussions with private school representatives. Typically, elementary school tuition runs around

$1,000 to $2,000 per year, and high-school tuition runs between $3,000 to $4,000 per year. Tuition at

religious schools is usually less than that at nonreligious private schools. Tuition at elite private

academies often exceeds $10,000, which is near the per-pupil expenditures of the local public school

districts. 84 According to a 1996 Cato Institute study, the average tuition for all private schools,

elementary and secondary, is $3,116; less than half of the average cost per pupil in the public school,

$6,857. In 1994, 67 percent of all private schools charged $2,500 or less for tuition; and more than

5,000 private schools charged under $1,000. David Boaz and R. Morris Barrett, What Would a School

Voucher Buy? The Real Cost of Private Schools. Washington, D.C.: Cato Institute, March 26, 1996. 85 Public schools also receive some of these services, but the requirement in the Constitution

for a “free” education prevents government schools from charging for any basic service.

The prime

motivation behind

the movement to

parental choice in

education is not

efficiency or the

need to save

money, but the

desire to improve

the education of

children.
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November 1997 53

A Model of State and Local Finance: Assumptions

To analyze the effect of tuition tax credits on taxpayer finances, a model of state and

local financing of public schools in the state of Michigan was developed. The model

incorporates both the current system, and the proposed Universal Tuition Tax Credit.

Although the model does not take into account all the complicated and intricate financial

conditions involved in a public school system, it captures the most significant dynamics. It

can be used to predict reliably what will happen should the people of Michigan adopt the

UTTC.

State Foundation Grant & Local Property Tax Support

The model assumes continuation of the current system, in which the state guarantees

every school district a minimum per-pupil revenue. The state is proposing $5,445 as the perpupil guarantee for FY 1998.86 Under the statutes which accompanied Proposal A, some

school districts are spending less than this formula guarantee, and many are spending more.

As a consequence of the Proposal A reforms, the variation between the lowest and highest

spending school districts is being substantially reduced while the average revenue is rising

sharply.87 The model assumes that this per-pupil foundation grant can be used to reasonably

predict the overall revenues of the school system. As noted above, multiplying the state

foundation grant by the number of students in the government system will actually

substantially underestimate the total state expenditures to support the system. However, this

underestimate would be roughly proportional to the same underestimate in a tuition tax credit

scenario.

Using the 1998 budget recommendation as a starting point, we assume that the state

per pupil grant guarantee will increase at 3 percent per year for the following ten years.

Therefore, for the school year starting in the fall of 1998 (FY 1999), the basic foundation

allowance is calculated to be $5,608, which represents a 3-percent increase from the FY

1998 figure of $5,445.88

Student Count Projections

Department of Education figures indicate that there are slightly more than 1.6

million students in the traditional government school system. Allowing for some growth and

incorporating approximately 15,000 charter school students in 1998, we arrive at a base

projection of 1,650,000 students in the “public” system, which includes the traditional

standard government system and newer charter schools. Multiplying this number by the state

per-pupil grant guarantee, we arrive at a current system state and local per-pupil expenditure

 86 This number is the “basic foundation allowance” established in the Executive Budget 1998,

which was published by the Department of Management and Budget in February 1997. 87 In the context of school finance reform, in which one of the goals was to reduce the

disparity among school districts’ spending, this is known as “averaging up.” 88 Confusion sometimes arises when the budget for school aid is discussed because the school

calendar is different from the state’s fiscal year. The state’s FY 1998 basic foundation allowance grant

covers the 1997-98 school year; the 1998-1999 school year will be provided for in the FY 1999 budget.

To make matters more confusing, the state sometimes front-loads or back-loads the expenditures, and

occasionally provides advance payments to assist school districts with their cash flow.
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The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

54 November 1997

of $9.3 billion in 1998. As noted above, this direct per-pupil expenditure is a substantial

underestimate of the total expenditures, but changes in this measure should be a reliable

predictor of the change in total expenditures. The projections of student enrollment and

expenditures are shown on page 58 in Table 3 and Table 4, respectively.

Private, Public, and Alternative Schools

The constitutional amendment described in Section III establishes a credit “for

tuition for education for any resident child attending a public or nonpublic elementary or

secondary school in this state.” Thus, a credit would be available to a parent sending their

child to a private school, or a public school that charges them tuition. We have defined such

schools in this study as “alternative schools.”

There are no reliable data from State sources on the number of tuition-paid public

school students. To fully explore this category of students, the Mackinac Center conducted a

survey of ten public school districts in various areas of the state, in the fall of 1997. The

survey revealed the following:

• State law currently does not require school districts, in which reside parents who

choose to send a child to another intermediate school district, to “release” the tuition

amount. If the student is “unreleased,” the student may be forced to pay tuition.

• Tuition charged by receiving districts varies from $1 to $8000. The average appears

to be about $470, as most districts charge only nominal fees. The existence of one

district in the sample—Ann Arbor—charging an exorbitant amount clearly skewed

the average upward. Two other measures of central tendency, which tend to be more

robust, were much lower. The median figure—the middle figure—was just $1, as

was the mode (the most common figure).

• The decision to refuse to “release” a student appears to be often based on political

opposition to school choice by teacher unions in the district, rather than fiscal or

management considerations. A district which refuses to release a student, who

nonetheless attends school in another district, cannot include that student in their

overall pupil count. This means they do not receive the per-pupil funding for that

pupil.

• More districts are joining in compacts or agreements that allow free, or nearly free,

movement of students among districts.

• In cases where the district refuses to release a student, adverse publicity often

results. The case of the Meridian school district not releasing a student to attend the

Handley Elementary School in the Saginaw school district is an example.89

 89 Conversation between Joseph P. Overton of the Mackinac Center for Public Policy and Mr.

Powell of the Saginaw Public Schools, October 8, 1997.

The decision to

refuse to “release”

a student to

another public

school appears to

be often based on

political opposition

to school choice by

teacher unions in

the district, rather

than fiscal or

management

considerations.
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November 1997 55

Data from the survey are presented in Table 2, below.

Table 2. Public School Tuition Students

School District Total

Students

Tuition

Students

Tuition

Saginaw 13,216 0 $2,500

Midland 9,618 6 $1,466

Flint 25,207 38 $1

Ann Arbor 15,590 1 $8,000

Detroit 174,573 10 $1,450

Traverse City 7,107 1 $1

Hancock 1,091 0 n/a

Ludington 2,776 11 $25

Dewitt 2,530 0 n/a

Hillsdale 2,215 0 n/a

Total 253,923 67

n/a = not applicable

Summary Statistics

Tuition students as a percentage of

students in districts sampled 0.026%

Weighted Average Tuition $472

Median Tuition $1

Mode Tuition $1

Using these districts as an indicator of “refusal to release” statewide, we can infer

that between 400 and 500 students statewide are currently paying tuition at public schools, at

an average tuition of about $470.90 These numbers are tiny compared to approximately

220,000 private school students and 1.65 million students in traditional public schools. If we

use the median as a measure of tuition, the tuition amounts are even smaller—$1 per student

multiplied by 400 or 500 students.

Thus, figures listed under “alternative school” costs and attendance, unless noted

otherwise, are those projected by the model for private schools alone, for three reasons.

First, the number of students in this category is so small—less than 1/10 of 1 percent of the

public school attendance. The real dynamic in the model, in terms of both fiscal impact and

migration of students, is between public and private schools. Second, the fiscal impact is

negligible, as the measurement error in modeling a $9.3 billion direct-cost system exceeds

the total tuition paid by students in this category. Third, we expect the numbers in this group

to decline, though not to reach zero.91

 90 This inference is drawn by using the percentage of students paying tuition in these districts

and applying it to the statewide number of public school students. The tuition is calculated as a

weighted average of tuition paid by students in the sample. 91 There are a number of reasons to expect these “unreleased” students to decline, although to

never reach zero. First, once school choice is opened up by constitutional amendment, there would

appear to be little to be gained by punishing parents who exercise it within the public school system.

Second, more and more school districts are awakening—however reluctantly—to school choice. The

example of Lansing, discussed in Section I, is instructive. Many of these districts are adopting

Between 400 and

500 students

statewide are

currently paying

tuition at public

schools, a tiny

number compared

to approximately

220,000 private

school students and

1.65 million

students in

traditional public

schools.
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56 November 1997

Table 3. Enrollment Projections Under Current System

Year Total

Students

Traditional

Public School

Students

Total Alternative,

Charter, and

Home School

Students

Charter

School

Students

Alternative

School

Students

Home

School

Students

1998 1,905,125 1,650,000 255,125 15,125 220,000 20,000

1999 1,924,176 1,662,739 261,438 16,638 224,400 20,400

2000 1,943,418 1,675,421 267,997 18,301 228,888 20,808

2001 1,962,852 1,688,031 274,821 20,131 233,466 21,224

2002 1,982,481 1,700,552 281,928 22,145 238,135 21,649

2003 2,002,306 1,712,967 289,338 24,359 242,898 22,082

2004 2,022,329 1,725,255 297,074 26,795 247,756 22,523

2005 2,042,552 1,737,393 305,159 29,474 252,711 22,974

2006 2,062,977 1,749,357 313,620 32,422 257,765 23,433

2007 2,083,607 1,761,121 322,486 35,664 262,920 23,902

2008 2,104,443 1,772,654 331,789 39,230 268,179 24,380

Base Growth: 1.01 1.1 1.02 1.02

Table 4. Projected Public School Expenditures Under Current System

Year State Per-Pupil

Grant Guarantee

Traditional Public

School Students

Charter School

Students

State & Local Per-Pupil

Expenditures, Traditional &

Charter Public Schools

1998 $5,608 1,650,000 15,125 $9,338,021,000

1999 $5,776 1,662,739 16,638 $9,700,480,270

2000 $5,950 1,675,421 18,301 $10,076,845,183

2001 $6,128 1,688,031 20,131 $10,467,640,640

2002 $6,312 1,700,552 22,145 $10,873,410,903

2003 $6,501 1,712,967 24,359 $11,294,720,280

2004 $6,696 1,725,255 26,795 $11,732,153,838

2005 $6,897 1,737,393 29,474 $12,186,318,137

2006 $7,104 1,749,357 32,422 $12,657,841,999

2007 $7,317 1,761,121 35,664 $13,147,377,283

2008 $7,537 1,772,654 39,230 $13,655,599,706

Base Growth: 1.03 1.1

 

cooperative agreements with surrounding districts. Third, there will always be some students who, for

a variety of reasons, fall outside the boundaries of expected circumstances. Our survey discovered at

least one student from out of the country, and another who missed a deadline for enrollment in a

schools of choice program. This means the number of students in this category will probably never be

zero. Fourth, as part of legislative implementation of a tuition tax credit program, such practices as

charging tuition in public schools will probably become more restricted. Finally, under the current and

proposed Article VIII section 2 of our Constitution, the state promises “free public elementary and

secondary schools.” Thus, this practice, which is already suspect, could never get too widespread.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 57

Figures for alternative and home school students are not as readily available. Based

on discussions with private school representatives and other educators, we have started with

a projection of 220,000 alternative school students and 20,000 home school students in the

year 1998. As mentioned earlier, “alternative school” students include all students for whom

tuition is paid, whether it be to a public school or a private school. The vast majority of

these students attend private schools.

Universal Tuition Tax Credit Structure

The UTTC begins at 10 percent of the average state and local per-pupil revenue and

grows to 50 percent of this amount.92 The maximum credit of 50 percent of the average perpupil public school revenue establishes a credit which, when fully implemented, will

approximate the average alternative school tuition.

The amount of the credit is also limited to 80 percent of the actual tuition paid. This

provision provides incentive, similar to a co-payment with a medical insurance policy, for the

purchaser to exercise care. It provides downward pressure on the price of tuition, even if the

tuition tax credit is enough to cover their children’s tuition.

There is an exception to the 80 percent limit, however. A credit of 100 percent of

actual tuition paid may be claimed for children in families whose income is below the federal

poverty level, subject to the same overall limit of 50 percent of the average per-pupil public

school revenue. The proportion of students in this category is small and does not affect

substantially the cost of the proposal. The rationale for the inclusion of this provision is to

give additional support to parents whose children are in the poorest areas and are in most

need of aid.

Universal Tuition Tax Credit Dynamics

The Education Market

To predict the effect of the proposed universal tuition tax credit on state and local

taxpayers, we must predict the behavior of individual parents. In the K-12 education market

in Michigan, the “price” that a consumer pays to send his or her child to a traditional public

school is close to zero. That is not to say that the cost is zero—we have already discussed

how private taxpayers finance the system—but the price of sending one more child to a

traditional public school is roughly zero. The “price” of sending a child to an alternative

school will be substantially higher. It will include the tuition as well as other costs that the

parents must face in the alternative school that the traditional public schools cannot impose.

 92 The constitutional amendment specifies the amount by referring to the average state and

local per-pupil expenditure for operating purposes. This will not be exactly the same as the guarantee

amount. The analysis uses the guarantee amount to predict both the government system costs and the

private credit costs so any difference between the “average” and “guarantee” amount would affect both

systems similarly. This keeps the comparison of costs consistent, although it somewhat underestimates

the cost savings when students migrate from traditional public schools to alternative schools.

The UTTC begins

at 10 percent of the

average state and

local per-pupil

revenue and grows

to 50 percent of

this amount. The

credit is also

limited to 80

percent of the

actual tuition paid,

which provides

incentive, similar

to a co-payment

with a medical

insurance policy,

for the purchaser

to exercise care.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

58 November 1997

Price Elasticity of Demand

The “law of demand,” namely that the higher the price of a good, the less consumers

will purchase, has been termed the “most famous law in economics, and the one that

economists are most sure of.”93 To predict consumer behavior, economists use well-defined

techniques evaluating the sensitivity of consumers to changes in price. Such techniques,

pioneered by the great British economist Alfred Marshall (1842-1924) in the early part of

this century, are the foundations of microeconomics.94 The most commonly used measure of

consumers’ sensitivity to price is known as “price elasticity of demand.” It is simply the

proportionate change in demand given a change in price.95 If a one-percent drop in the price

of a product produces a one-percent increase in demand for the product, the price elasticity

of demand is said to be one.96 Hundreds of studies have been done over the years calculating

long-run and short-run price elasticity of demand.97 For most consumer goods and services,

price elasticity tends to be between .5 and 1.5. As the price elasticity for most products

clusters around 1.0, it is a commonly used rule of thumb.98 A good with a price elasticity

 93 David Henderson, “Demand,” in David Henderson, ed., The Fortune Encyclopedia of

Economics. New York: Warner Books, 1993. 94 Marshall also pioneered the ubiquitous price-and-quantity charts, with their demand and

supply curves, which are part and parcel of any economics course. His seminal work is Principles of

Economics, 8th Edition. London: Macmillan, 1920.

95 In mathematical terms, price elasticity of demand = − ×

P

Q

Q

P

∆

∆ ;

where P and Q denote price and quantity, and the delta symbol denotes a change in the

variable. This measure is equivalent to −  



 ∆ ∆ Q

Q

P

P ; which is more intuitively the

“percentage change in quantity given a percentage change in price.” 96 Technically, a one-to-one relationship such as that indicated in the example produces a price

elasticity of negative 1.0, because the increase in demand is associated with a decrease in price. Since

almost all goods have a negative price elasticity (meaning that a lower price encourages a higher

demand for the good), many discussions simply drop the sign and talk only about the magnitude of the

elasticity. The rare cases of goods with a price elasticity of demand that is positive (meaning that

people buy more when the price goes up) are termed “Giffen goods,” after Sir Richard Giffen, who

noted that this occurs with staple foods among the very poor. See, for example, Intriligator,

Econometric Models, Applications, and Methods. Englewood Cliffs, NJ: Prentice Hall, 1978; p. 216,

citing Marshall’s Principles of Economics. 97 For example, Intriligator cites: Goldberger and Gamaletsos, “A Cross-Country Comparison

of Consumer Expenditure Patterns,” European Economic Review, 1: 357-400, 1970, who studied

consumer behavior in the US, Canada, the UK and other developed countries; Houthaker, “New

Evidence on Demand Elasticities,” Econometrics 33: 797-801, who estimated income and price

elasticities for food, rent, clothing, and consumer durables in Western Europe and North America; and

many others. See also the discussion following. 98 See, for example, Pindyck and Rubenfeld, Econometric Models and Economic Forecasts,

2d ed.. New York: McGraw Hill, 1981, chapter 13. Pindyck and Rubenfeld discuss the estimation of

elasticities, particularly the difficulty in using time-series data to estimate elasticities at a point in time.

They include examples, including a seminal work on automobile price elasticities done by Saul

Hymans of the University of Michigan, who estimated the short-term price elasticity of demand for

automobiles at –1.07 and a long-run elasticity of –0.36. Saul Hymans, “Consumer Durable Spending:

Explanation and Prediction,” Brookings Papers on Economic Activity, No. 2. pp. 173-199, 1970.

Intriligator, in Econometric Models, contains an extensive discussion of the various estimation methods

The “law of

demand,” namely

that the higher the

price of a good, the

less consumers will

purchase, has been

termed the “most

famous law in

economics, and the

one that

economists are

most sure of.”
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 59

stronger than negative one is said to be “elastic;” goods with price elasticities smaller (closer

to zero) than negative one are said to be “inelastic.” Goods that are more essential to

everyday living, and that have fewer substitutes, typically have lower elasticities; staple

foods are a good example. Goods with many substitutes, or that are not essential, have

higher elasticities. Goods that are considered luxuries, or whose purchase can be easily

postponed, often have elastic demand. Table 5 on the next page shows estimated price

elasticities of demand for a variety of consumer goods and services, taken from a standard

economics textbook.99

For example, the demand for automobiles would, in the short term, be somewhat

elastic, as the purchase of a new vehicle can often be delayed. The demand for a specific

model automobile would likely be highly elastic, because there are so many substitutes.

Table 5 shows estimated price elasticities of demand for a variety of consumer goods and

services. Over the long run, the demand for automobiles in rural areas would probably be

inelastic, since there are few alternative modes of transportation.

Table 5 includes an estimate for the price elasticity of demand of 1.1 for alternative

schools. Schooling itself is considered an essential service by most parents, and better

schools are so desirable to many parents that they undertake considerable sacrifices to send

their children to alternative schools. This would tend to produce a highly inelastic demand.

However, there is also a widely available substitute for alternative schools, namely the

traditional public schools. For most goods and services, the availability of substitutes

produces a highly elastic demand. Given this combination of widely available substitutes

and high importance to many parents, it is not surprising that the existing research places the

demand elasticity for alternative schools near 1.

 

for elasticities, and numerous citations. 99 James Gwartney and Richard Stroup, Economics: Private and Public Choice, 8th edition.

New York: Dryden, 1997. Used with permission.
 The Universal Tuition Tax Credit:

The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

60 November 1997

Table 5. Estimated Price Elasticities of Demand for Various

Goods and Services

Goods Estimated

Elasticity of

Demand

Inelastic

Salt 0.1

Matches 0.1

Toothpicks 0.1

Airline travel, short-run 0.1

Gasoline, short-run 0.2

Gasoline, long-run 0.7

Residential natural gas, short-run 0.1

Residential natural gas, long-run 0.5

Coffee 0.25

Fish (cod) consumed at home 0.5

Tobacco products, short-run 0.45

Legal services, short-run 0.4

Physician services 0.6

Taxi, short-run 0.6

Automobiles, long-run 0.2

Approximately Unitary Elasticity

Movies 0.9

Housing, owner occupied, long-run 1.2

Shellfish, consumed at home 0.9

Oysters, consumed at home 1.1

Private education 1.1

Tires, short-run 0.9

Tires, long-run 1.2

Radio and television receivers 1.2

Elastic

Restaurant meals 2.3

Foreign travel, long-run 4.0

Airline travel, long-run 2.4

Fresh green peas 2.8

Automobiles, short-run 1.2 - 1.5

Chevrolet automobiles 4.0

Fresh tomatoes 4.6

Source: Economics: Private and Public Choice, James D. Gwartney and Richard L. Stroup, eighth edition

1997, seventh edition 1995; primary sources: Hendrick S. Houthakker and Lester D. Taylor, Consumer

Demand in the United States, 1929-1970 (Cambridge: Harvard University Press, 1966,1970); Douglas R.

Bohi, Analyzing Demand Behavior (Baltimore: Johns Hopkins University Press, 1981); Hsaing-tai Cheng

and Oral Capps, Jr., “Demand for Fish” American Journal of Agricultural Economics, August 1988; and

U.S. Department of Agriculture.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 61

Price Elasticity of Demand for Michigan Alternative Schools

Parents are today choosing to send, or not to send, their child to alternative schools

based partially on the price of doing so. The model incorporates a price elasticity of demand

parameter to project the likely behavior of parents sending their children to alternative

schools, as the price changes. Based on this wide body of research on related quantities, and

some limited data on demand for alternative and traditional public school services, we have

used a price elasticity of demand of 1.0 in this model.100

While it is impossible to know the actual price elasticity of demand, there is a small

amount of data showing that a financial incentive of approximately $1,000 will, in presentday Michigan, induce parents to send their child to alternative schools.101 Economic theory

also holds firmly that parents have a strong desire to send their children to better schools,

since it increases their “human capital” and thus their earning power for the future. Since we

know that a significant number of parents already send their children to an alternative

school—all the while paying twice—we cannot avoid the fact that many consumers in this

market perceive the value of an alternative school education very highly.

Predicting Consumer Behavior

If we apply this analysis to the price of alternative schools given the existence of a

tuition tax credit, we can predict consumer behavior. Table 6 on the next page shows how

the UTTC changes the incentive for a parent to send his or her child to an alternative school.

It reflects how the decrease in the effective price of alternative school tuition due to the

tuition tax credit would change the demand for the services of alternative schools.

 100 In addition to the general theory and citations above, Pindyck and Rubenfeld summarize an

analysis done in Troy, Michigan, on the voting behavior of 425 individuals in a school millage election.

They report a price elasticity of demand of –1.21 for public school services.

 Interestingly, the researcher included a variable in the equation for attendance at private

schools, expecting to find that having children in a private school would be associated strongly with

voting “no” on public school millage. However, the estimation did not show a statistically significant

difference in behavior for parents currently sending their children to public and private schools. School

employees, however, were much more likely to vote “yes” on millages, as were the parents of multiple

children in the public school system. Daniel Rubenfeld, “Voting in a School Election: A Micro

Analysis,” Review of Economics and Statistics, vol. 59, no. 1. pp. 30-42, February 1977. For a

discussion of “public choice” economics and political support for public school spending, see A Public

Choice Analysis of the Current System in section I, February 1977, pp. 30-42. 101 The two best examples are Cornerstone Schools in Detroit, and Children’s Educational

Opportunity (CEO) in Grand Rapids. Both offer scholarships to parents who want to send their

children to private schools, or in the case of CEO, to a private school or out-of-district public school.

Both have scrambled to raise funds to support the scholarship program, which has met with significant

demand. Since many parents in these programs have below-average income, their willingness to

support the additional expenses not covered by the scholarship underlines the strong desire of families

to place their children in better schools, even at financial sacrifice.

The decrease in the

effective price of

alternative school

tuition due to the

tuition tax credit

would change the

demand for

alternative schools.
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62 November 1997

Table 6. Incentives to Migrate from Traditional Public Schools

 to Alternative Schools

Year Average

Alternative

School

Tuition

80% of Avg.

Alternative

School

Tuition

Maximum

Tax Credit

Per Student

Maximum

Tax Credit

As Share of

Tuition

Change in

Relative

Price of

Tuition

Raw

Desired

Migration

Smoothed

Desired

Migration

1998 $2,600 $2,080 - - 0.00 0.00 -

1999 $2,717 $2,174 $578 0.21 -0.21 0.21 0.17

2000 $2,839 $2,271 $892 0.31 -0.10 0.10 0.14

2001 $2,967 $2,374 $1,226 0.41 -0.10 0.10 0.10

2002 $3,101 $2,480 $1,578 0.51 -0.10 0.10 0.10

2003 $3,240 $2,592 $1,950 0.60 -0.09 0.09 0.09

2004 $3,386 $2,709 $2,344 0.69 -0.09 0.09 0.09

2005 $3,538 $2,831 $2,759 0.78 -0.09 0.09 0.09

2006 $3,697 $2,958 $3,197 0.86 -0.08 0.08 0.08

2007 $3,864 $3,091 $3,659 0.95 -0.08 0.08 0.08

2008 $4,038 $3,230 $3,768 0.93 0.01 -0.01 -

Annual Tuition Growth Factor: 1.045 Price Elasticity of Demand: -1.0

Table 6 presents basic data for the school year 1998-99, in which no tuition tax

credits are granted. We assume an average alternative school tuition of $2,600 in 1998.102

Because the tax credit is not yet implemented, Table 6 shows that the maximum tax credit is

zero. In this base year, a parent pays 100 percent of the cost of alternative school tuition.

Calculating Demand

If we assume that the UTTC plan takes effect in 1999 (the 1999-2000 school year), a

maximum tuition tax credit of only 10 percent of the average public school per-pupil revenue

($5,776 for 1999) provides a maximum tax credit that year of $578. The dollar amount of

$578 is 21 percent of the average alternative school tuition in that year ($2,174). Thus, the

parent receiving a tuition tax credit for that student experiences a 21-percent decrease in the

relative cost of alternative schools versus traditional public schools. Using a price elasticity

demand of -1.0, we would expect a 21 percent increase in demand for alternative schools.

Applying Constraints to the Model

A number of factors have been included in this model to try to make it more realistic.

First, the increase in the relative affordability of private schools will also likely boost the rate

of increase of private school tuition. As noted above, private school tuition—just like public

school “per pupil expenditures”—does not include the full cost. It is easy to anticipate that,

should a tuition tax credit program go into effect, some of those costs currently being

subsidized by churches, religious institutions, or parents’ volunteer work would no longer be

 102 See the discussion on Private School Costs and Public School Costs, above.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 63

subsidized.103 Thus, we have assumed that the average private school tuition grows at 4.5

percent per year, 50 percent faster than the 3.0 percent growth assumed for the public school

per-pupil guarantee to account for this effect.

Secondly, we have also noted that behavior does not change overnight. Parents with

children in traditional public schools are not likely to pull them all out or move them around

in the first year the tuition tax credit is available. Thus, we have smoothed the migration

behavior slightly by including in the model an adjusted desired migration factor, which

indicates the likely migration that would occur with the implementation of the tuition tax

credit plan. That smoothed migration factor starts at 17 percent in 1999, tapering to 14

percent, 10 percent, 9 percent, and then 8 percent, before finally moving to zero after the

UTTC has been fully implemented. This is somewhat slower migration than a straight

application of price elasticity would indicate.

Likely Migration to Alternative Schools

Table 7 on the next page shows the predicted number of students who would migrate

from traditional public schools to alternative schools. Table 7 begins with the base-case

assumption of total students, government school students, and alternative school students.

Since the main dynamic in consumer choice in the education market is between the

traditional public schools and private schools, the model is constrained to allow movement

between these two sectors only, with the smaller charter school and home school sectors left

alone. While this assumption is artificial, the relative size of these sectors suggests that a

relaxation of the assumption will matter little in terms of the overall cost.104 From the

current system alternative school student enrollment of 220,000, we apply a smoothed

desired migration factor. Table 7 indicates that the migration in the first year, before the

UTTC is implemented, is zero. This indicates that there is no migration between the two

sectors. In the second year, the largest desired migration comes into effect: a 17-percent

increase in demand for alternative schools.

 103 This would occur because charitable and religious organizations, which are chronically

short of resources, would find it possible to fulfill their educational mission with less of an internal

subsidy to an affiliated school. 104 With charter schools starting at 15,000 students compared with the traditional public

school total of over 1.6 million, including that sector in this fiscal analysis would make almost no

change. Home-schoolers, whose numbers are hard to estimate in any case, are likely to be even more

resistant to moving and have an even smaller overall fiscal impact. This is not to underestimate the role

they play, only to observe that the fiscal effect of including them would be small. See the discussion

beginning on page 56, “Public, Private, and Alternative Schools,” regarding public school tuition

students.

Behavior does not

change overnight.

Parents with

children in

traditional public

schools are not

likely to pull them

all out or move

them around in the

first year the

tuition tax credit is

available.
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64 November 1997

Table 7. Calculation of Migration Under UTTC Plan

Current System UTTC Plan

Year Traditional

Public

School

Students

Alternative

School

Students

Smoothed

Desired

Migration

Rate

Smoothed

Desired

Migration

Migration

Limit

Projected

Migration

Cumulative

Migration

Total

Alternative

School

Students

1998 1,650,000 220,000 - - 33,000 - - 220,000

1999 1,662,739 224,400 0.17 37,400 33,000 33,000 33,000 257,400

2000 1,675,421 228,888 0.14 36,036 38,610 36,036 69,036 297,924

2001 1,688,031 233,466 0.10 29,792 44,689 29,792 98,828 332,294

2002 1,700,552 238,135 0.10 33,229 49,844 33,229 132,058 370,193

2003 1,712,967 242,898 0.09 33,317 55,529 33,317 165,375 408,273

2004 1,725,255 247,756 0.09 36,745 61,241 36,745 202,120 449,876

2005 1,737,393 252,711 0.09 40,489 67,481 40,489 242,609 495,320

2006 1,749,357 257,765 0.08 39,626 74,298 39,626 282,234 539,999

2007 1,761,121 262,920 0.08 43,200 81,000 43,200 325,434 588,354

2008 1,772,654 268,179 - - 88,253 - 325,434 593,613

Migration Limit Factor = 15% (applied to previous year’s alternative school enrollment)

Limits on Migration

The model also includes some self-regulating behavior. It is unlikely that any sector

of the economy can grow at 10-20 percent per year indefinitely. Certainly, a 20-percent

increase in alternative school enrollment would be difficult to handle, although with some

excess capacity and the ability to lease space in other buildings, it may be possible. To

account for this supply constraint, the model places a limit of 15 percent per year on

migration to alternative schools. Thus, in the first year migration is to be constrained to only

15 percent. In subsequent years, as the desired migration drops to 10, 9, and then 8 percent

per year, the migration limit becomes less of a factor.

In the last three columns of Table 7, we see that the projected migration between the

traditional public schools and alternative schools ranges between 0 and 43,000 students per

year. This equates to a migration of approximately 2 percent of traditional public school

students each year, a relatively small amount, and leaves the government school sector at 1.4

million students in the year 2005. Alternative schools experience an annual increase in their

enrollment of approximately 15 percent each year due to the tax credit, producing a total

enrollment of nearly 600,000 in 2005. These figures are shown on the next page in Table 8,

which compares the enrollment trends under the current system and the UTTC plan.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 65

Table 8. Summary of Enrollment, Current System vs. UTTC Plan

Current System UTTC Plan

Year Traditional

Public School

Students

Alternative

School

Students

Migration Traditional

Public School

Students

Alternative

School

Students

1998 1,650,000 220,000 - 1,650,000 220,000

1999 1,662,739 224,400 33,000 1,629,739 257,400

2000 1,675,421 228,888 69,036 1,606,385 297,924

2001 1,688,031 233,466 98,828 1,589,202 332,294

2002 1,700,552 238,135 132,058 1,568,495 370,193

2003 1,712,967 242,898 165,375 1,547,592 408,273

2004 1,725,255 247,756 202,120 1,523,135 449,875

2005 1,737,393 252,711 242,609 1,494,784 495,319

2006 1,749,357 257,765 282,234 1,467,123 539,999

2007 1,761,121 262,920 325,434 1,435,687 588,354

2008 1,772,654 268,179 325,434 1,447,220 593,613

The Fiscal Impact of the Universal Tuition Tax Credit

Effects on Revenue and Expenses

To model the effect of the UTTC on state and local finances, the model calculates

revenue and expenses under both the current system and the UTTC plan. Under the current

law, state per-pupil expenditures equal the per-pupil guarantee multiplied by the number of

students in traditional public and charter schools. Under the UTTC plan, the model

calculates this amount as well as the state revenue loss due to the tax credits extended to

individual and corporate taxpayers who pay alternative school tuition.

There are some additional expenditures, approximately $1.3 billion per year, that the

taxpayers are now paying for the public school system. Since it is unlikely that this amount

would go away or change substantially under the UTTC system, these costs are not included

in either scenario.105

Table 9 on the next page shows the loss of tax revenue due to tax credits under the

UTTC plan. The first column shows the number of alternative school students, which grows

from 220,000 to almost 600,000 during the ten-year period. This table then shows the

maximum tuition tax credit as a share of per-pupil revenue and the maximum tuition tax

credit per student.

 105 If there were any change in this amount, which includes intermediate school district

funding, certain categorical programs, some federal aid, and other local factors, it would likely favor

the UTTC plan. If private schools start to take over some of these functions, and they are somewhat

more efficient than the public sector, then this would add to the savings that taxpayers would see in the

UTTC plan.
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66 November 1997

Table 9. Loss of State Revenue Under UTTC Plan

Year UTTC Plan:

Alternative

School

Students

State PerPupil Grant

Guarantee

Maximum

Tax Credit

As Share

Of Per

Pupil

Guarantee

Maximum

Tax Credit

Per

Student

Utilization

Ratio

Weighted

Avg. Tax

Credit Per

Alternative

Student

UTTC Plan:

Loss of State

Revenue Due

to Tax Credits

1998 220,000 $5,608 0% - 0.95 - -

1999 257,400 $5,776 10% $578 0.95 $549 $141,246,397

2000 297,924 $5,949 15% $892 0.95 $848 $252,582,239

2001 332,294 $6,128 20% $1,226 0.95 $1,164 $386,897,558

2002 370,193 $6,311 25% $1,578 0.95 $1,499 $554,943,275

2003 408,273 $6,501 30% $1,950 0.95 $1,853 $756,466,323

2004 449,875 $6,696 35% $2,344 0.95 $2,227 $1,001,648,443

2005 495,319 $6,897 40% $2,759 0.90 $2,483 $1,229,862,050

2006 539,999 $7,104 45% $3,197 0.87 $2,781 $1,501,864,128

2007 588,354 $7,317 50% $3,659 0.85 $3,110 $1,829,662,343

2008 593,613 $7,536 50% $3,768 0.85 $3,203 $1,901,395,367

Utilization of the Credit

The model includes a utilization ratio to adjust for consumer behavior in using the

credit and for the 80-percent-of-tuition limit on creditable tuition for most taxpayers. The

ratio is the share of the theoretical maximum amount of credits available that are actually

claimed. The utilization ratio starts off fairly high at 95 percent; this percentage is selected

because, with a maximum tuition tax credit of between $500 and $600, tuition almost

everywhere will exceed the maximum tax credit. Almost all those who apply will receive the

maximum tax credit. The difference between 0.95 and 1.0 is due to tuition payers who for

some reason do not apply for a tax credit.

Over time, the utilization ratio drops to 85 percent. The ratio declines largely

because the maximum tax credit grows to a level that will exceed 80 percent of the tuition

paid by some parents on behalf of their children. (The increase in the relative size of the tax

credit—from 21 percent of average alternative school tuition in the first year to 86 percent in

the eighth year—is shown in Table 6 on page 64.)

The model then calculates a weighted average tax credit per student, which, when

multiplied by the number of alternative school students, produces a tax credit total. Table 9

shows that this figure starts at about $140 million in 1999 and increases to almost $2 billion

over the ten-year period.
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A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 67

Fiscal Impact of the UTTC Plan

To view the net effect on state finances, we must combine the reduction in tax

revenue with the direct expenditures for public schools. This results in a comparable figure

to the total expenditures under the current system.

Table 10 outlines the reduced state public school expenditures that would occur if

the UTTC plan were implemented. The first few columns show the per-pupil guarantee, the

number of traditional public school and charter school students, and the state and local perpupil revenue under the UTTC plan. The figure representing expenditures is still a large and

growing number, but the growth is less than that which would occur if the current system

were allowed to continue unchanged.

Table 10. Fiscal Impact of UTTC Plan

Year State

Per-Pupil

Grant

Guarantee

UTTC

Plan:

Traditional Public

& Charter

School

Students

UTTC

Scenario:

State &

Local

Per-Pupil

Expenditures

(millions)

Weighted

Average

Tax

Credit

Per

Alternative

Student

UTTC

Scenario:

Tax

Credits for

Alternative

School

Students

(millions)

UTTC Plan:

Combined

Impact of

Revenue

Loss and

Direct

State &

Local

Per-Pupil

Expenditures

(millions)

Public

School

Expenditures Under

Current

System

(millions)

Savings

Under

UTTC

(millions)

1998 $5,608 1,665,125 $9,338 - - $9,338 $9,338 $0

1999 $5,776 1,646,376 $9,510 $549 $141 $9,651 $9,700 $49

2000 $5,950 1,624,686 $9,666 $848 $253 $9,919 $10,077 $158

2001 $6,128 1,609,334 $9,862 $1,164 $387 $10,249 $10,468 $219

2002 $6,312 1,590,639 $10,040 $1,499 $555 $10,595 $10,873 $279

2003 $6,501 1,571,951 $10,220 $1,853 $756 $10,976 $11,295 $319

2004 $6,696 1,549,930 $10,379 $2,227 $1,002 $11,380 $11,732 $352

2005 $6,897 1,524,259 $10,513 $2,483 $1,230 $11,743 $12,186 $443

2006 $7,104 1,499,545 $10,653 $2,781 $1,502 $12,155 $12,658 $503

2007 $7,317 1,471,351 $10,766 $3,110 $1,830 $12,596 $13,147 $552

2008 $7,537 1,486,451 $11,203 $3,203 $1,901 $13,104 $13,656 $551

Adding the direct public school expenditures to the amount of tuition tax credits

produces the total combined costs under the UTTC plan. The total costs grows from $9.3

billion in 1998 to $13.1 billion in 2008.

Tax Savings from the Tuition Tax Credit

Table 11 on the next page summarizes the fiscal costs under the two systems. Both

begin at about $9.3 billion in the year 1998 and grow to over $13 billion ten years later.
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The Mackinac Center for Public Policy A Proposal to Advance Parental Choice in Education

68 November 1997

However, under the UTTC plan, the savings from the reduced number of students in the

government school system more than outweigh the reduced tax revenue due to the UTTC.

Thus, on net, taxpayers will save between $50 million and $550 million a year under the

UTTC plan. This represents a total of over $3.4 billion in the first 10 years alone and over

$550 million each year thereafter. These savings may be used to lower individual and

business taxes, to fund additional educational programs, or to address other state budget

priorities.

Table 11. Summary of Fiscal Impact of UTTC Plan

Year Current System:

Total State and Local

Per-Pupil Public

School Expenditures

UTTC Plan: Combined

State Expenditures

and Revenue Loss

Difference in Costs

(Savings)

1998 $9,338,021,000 $9,338,021,000 -

1999 $9,700,480,270 $9,651,110,747 ($49,369,523)

2000 $10,076,845,183 $9,918,695,862 ($158,149,321)

2001 $10,467,640,640 $10,248,916,477 ($218,724,163)

2002 $10,873,410,903 $10,594,824,602 ($278,586,301)

2003 $11,294,720,280 $10,976,048,018 ($318,672,262)

2004 $11,732,153,838 $11,380,358,913 ($351,794,925)

2005 $12,186,318,137 $11,742,876,945 ($443,441,192)

2006 $12,657,841,999 $12,154,702,029 ($503,139,970)

2007 $13,147,377,283 $12,595,784,245 ($551,593,038)

2008 $13,655,599,706 $13,104,302,031 ($551,297,675)

Total Spending on Education

We have already seen that total state and local per-pupil expenditures on schools

increase substantially under the UTTC plan, although at a slower rate than under the current

system. This does not mean, however, that overall education resources are less than under

the current system.

Although total state per-pupil expenditures would decline under the UTTC plan, that

does not necessarily mean that total expenditures on education would decline. Even when

the credit is fully phased in, every dollar of tax credits would be supplemented by private

expenditures for private schools. Thus, total private and public expenditures could be higher

or lower. More importantly, the expenditures would be more closely aligned with those who

receive the benefits and have the opportunity and incentive to demand results. Thus, while

taxpayers would save money, they would, more importantly, receive better value for the

dollars they do spend.

A Note on Refundable Versus Non-Refundable Credits

The original analysis of the impact of the UTTC assumed that the credit was

“refundable,” i.e., that a parent who filed an Individual Income tax return could receive

money back from the state even though his or her tax liability was less than the amount of

Under the UTTC

plan, the savings

from the reduced

number of students

in the government

school system more

than outweigh the

reduced tax

revenue due to the

UTTC.
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 69

tuition paid. A refundable tuition tax credit is actually a combination subsidy and credit; a

credit for those who have sufficient tax liability to be offset, and a subsidy for those who, in

some years, do not have sufficient tax liability.106 This is one method commonly used to

permit low income families to benefit from a tax credit.

Since a refundable tuition tax credit is basically a combination subsidy and credit, it

suffers from problems similar to those of vouchers as discussed in Section III. Fortunately,

however, the final structure of the UTTC provided such powerful incentives and mechanisms

for individual and business taxpayers to make tuition payments available for students from

low-income and middle-income families, there was no need to make the credit refundable.

Gary Wolfram, Ph.D., George Munson Professor of Political Economy at Hillsdale

college and former deputy state treasurer for taxation and economic policy, analyzed the

dynamics of the proposal and summarized the refundability issue as follows:

In examining the effect of the Universal Tuition Tax Credit, the model has

assumed parents are the decision-making unit and that they will respond to a change

in the relative price of education at an alternative school. It is assumed that despite

the fact that the credit is non-refundable, even those parents who lack a tax liability

against which to claim the credit also face the change in relative prices associated

with the credit. One might wonder how this assumption and the universality of the

credit, that is, its availability to business and taxpayers who do not have children in

school, affect the analysis. It turns out that the universality of the credit results in the

ability to assume that all parents, even those without a tax liability, will have the full

allowable reduction in the relative price of private education. Thus, the estimates of

the model are applicable to the Universal Tuition Tax Credit as described.

A brief explanation will show why this is so. Since the tax credit is not

available to taxpayers without a tax liability, low-income parents might appear to

have no incentive to move their children to private schools, and thus the model

would overestimate the amount of student migration. However, there is a strong

incentive for businesses in Michigan to provide scholarships for the children in these

families in the amount of the tax credit that would have been available to the parents

directly. This is because businesses will receive a dollar-for-dollar tax credit for the

tuition they pay for such children. It is quite likely that the financial officer of a

corporation, when faced with the question of whether the corporation should send a

dollar to Lansing to be spent according to the priorities of the legislature, or whether

it should spend that dollar for scholarships for low-income children, will recommend

the money be used for scholarships.

There are at least three reasons why this will happen. First, the corporation

has little control over how the dollar of Single Business Tax it pays will be spent,

whereas it will have direct control over how the dollar is spent if it is a scholarship.

Second, the dollar spent on a scholarship may reduce the training costs of the

 106 Michigan citizens pay numerous taxes whose revenues are dedicated partially to the School

Aid Fund, including sales, tobacco products, cigarettes, industrial facilities, liquor excise, real estate

transfer, state education, and use taxes. Annual Report of the State Treasurer, 1995-96, Lansing,

Michigan: Michigan Department of Treasury, table 14.

The UTTC

provides such

powerful incentives

and mechanisms

for individual and

business taxpayers

to make tuition

payments available

for students from

low-income and

middle-income

families, there is

no need to make

the tax credit

refundable.
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70 November 1997

business in the long run and will reduce training costs for businesses as a group.

Third, there is a lot of company goodwill that can be obtained through a scholarship

program for disadvantaged youth, and there is little goodwill that is gained from

simply filing the company’s taxes with the Department of Treasury.

It is likely that there will be an excess demand for students to which to

provide scholarships. Nearly any business would put as much of its tax liability into

a scholarship program as it can. But the number of students who can receive these

scholarships will be limited. Since the tax credit per student is limited, only those

students whose parents do not use their tax credit fully can receive a scholarship that

can be used as a tax credit by businesses. The number of tax credits available will

likely be far fewer than the tax credits that business would like to claim.

As a result of this two things should be noticed. First, because there is a

demand by business for students to whom to give scholarships, clearing-house type

organizations will develop to match the needy students with corporations. These

will probably be nonprofit organizations, but one might find even profit-making

companies that offer the service.107 Alternative schools themselves will have a

strong incentive to identify and match taxpayers with students. In any event, there

will be a system to match low-income students with corporate donors. Second, the

low-income parents will receive the same net price reduction for private schools as

do the parents who have a tax liability. The only difference is that rather than

receiving a tax credit for tuition paid, the low-income parents will receive a

scholarship in the amount of the credit. Thus it is appropriate to ignore the tax

refundability issue when modeling student migration and assume all parents will

receive the net price change as if they had received a tax credit.

 107 Clearinghouse organizations would have to keep separate accounts for administrative

expenses to avoid mixing creditable tuition payments with deductible administrative expenses. Such

separate accounting is already necessary for charities that engage in certain profit-making enterprises.

Separate accounts are also kept by numerous nonprofit, for-profit, government, and voluntary

organizations to meet numerous accounting, disclosure, legal, regulatory, and prudential requirements.

It is likely that

there will be an

excess demand for

students to which

to provide

scholarships.

Nearly any

business would put

as much of its tax

liability into a

scholarship

program as it can.
The Universal Tuition Tax Credit:

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November 1997 71

Notes on Data Sources

Table 12. Notes on Data Sources

Term Source Notes Value in

1998

Change

Factor

Value in

2008

Current

System

Traditional

Public School

Students

Based on a blended measure of early-year

and late-year attendance.

1,650,000 n/a 1,772,654

Charter

School

Students

Exec. Budget 1998, p. C2, estimates 77

charter schools and 12,500 students in

FY1997. Adjusted at 10% growth and for

school year following state fiscal year. Likely

growth is higher in early years and lower in

later years.

15,125 1.1 39,230

Private School

Students:

Estimates of private school associations and

other educators; includes Catholic, Lutheran,

and private school association members.

220,000 1.02 268,179

Home School

Students

Actual number unknown, since many home schoolers distrust government

agencies and do not report attendance to them. Number based on averaged

estimates of home school parents, associations, and education officials.

Total State

and Local PerPupil

Expenditures

This amount does not include two items: ISD and Categoricals. ISD Local

operating money is about $600 million, and Categoricals will be about $700

million, Thus, total spending will be higher than this “membership” spending.

Federal spending not in these two categories is also excluded.

Per-Pupil

Guarantee

Exec. Budget 1998 rec: $5,445; up 2.6%.

Adjusted for school year following state fiscal

year. Does not include all funds. Actual

weighted average of expenditures is about

6% higher, since many school districts

spend more than the foundation grant.

$5,608 1.03 $7,537

Tax Credit

Scenario Max

Share of PerPupil

Guarantee

Share adjusts from 10% to 50%, according

to proposal.

0% n/a 50%

Tuition Growth

Factor

Assumed to be higher than state funding growth, due to

added demand and reduced disincentives for alternative

schools.

1.045

n/a = not applicable
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72 November 1997

Appendix II. Questions and Answers Regarding the Universal

Tuition Tax Credit

During the development of the Universal Tuition Tax Credit, the proposal was

presented to numerous education, business, and government leaders and organizations.

Below are answers to specific questions commonly asked about the UTTC.

How will the UTTC impact non-educational expenditures in the state budget?

The UTTC will reduce state revenues in two areas. Some of the loss will be of

revenues dedicated for the state School Aid Fund, including revenues from 6-mill

education property tax and the state Individual Income tax. The remaining revenue

loss will be of unrestricted revenues which are used to pay for non-educational

programs. The UTTC, however, provides significant savings to the School Aid

Fund. This savings means that less unrestricted funding will be required to

supplement the School Aid Fund, therefore providing more overall resources that

may be applied to non-educational expenditures or used to lower taxes for citizens

and businesses.

How will the UTTC impact local property tax revenue?

The UTTC will not affect local property tax revenue in any way. Since the passage

of Proposal A in 1994, not all property taxes are local taxes. In addition to local

property taxes that are levied by cities, counties, townships, villages, and school

districts, there is also a 6-mill education property tax levied by the state (which is

collected as part of the local property tax bill). The UTTC affects only this state

property tax. It does not affect the local property tax revenue of cities, counties,

townships, and villages. Also, since the state is required to provide public schools a

minimum per-pupil foundation allowance, the UTTC will not affect the per-pupil

revenue of public school districts.

The UTTC sounds too good to be true. How can we expand parental choice in education and

save significant money at the same time?

The UTTC is a carefully crafted plan that is both simple and effective, yet it will,

without a doubt, draw opposition from many in the education establishment who are

fearful of giving parents the ability to choose alternative schools. This is the main

reason why expanded parental choice has been such a long time in coming and why

even common-sense proposals like the UTTC have been outside our reach.

However, with nearly every state in the nation now considering expanding parental

choice, the climate of public opinion will support further innovation. With barriers

to reform removed, the UTTC simply takes advantage of lower-cost alternatives to

the traditional public school system. Since alternative schools charge roughly half of

what public schools receive to educate a student, and since the tax credit is limited to

50 percent of public school per-pupil revenues, each student who transfers to an

alternative school saves the state money. As long as enough students transfer to

alternative schools during the UTTC phase-in period, the program will result in
The Universal Tuition Tax Credit:

A Proposal to Advance Parental Choice in Education The Mackinac Center for Public Policy

November 1997 73

significantly lower state educational expenditures. The estimates in this study are

very conservative and indicate that sufficient transfers will indeed occur to produce

net savings to the state.

How do you know how many students will migrate from traditional public schools to

alternative schools?

There are two ways. First, the model used to project enrollment trends incorporates

a widely accepted method of calculating consumer demand for services and uses a

conservative estimate of this demand. The model also takes into account the

availability of alternative school capacity. Secondly, we have experience with the

demand for parental choice. CEO Michigan, the private foundation that gives $1,000

scholarships to low-income children to attend an alternative school, currently has

3,000 students on their waiting list. This reflects considerable demand even for this

modest amount. Also, in two years of experience with Michigan’s charter school

law, and with only 50 schools operating, parents of more than 14,000 students chose

the new schools. When Michigan’s first charter school opened in Detroit, over 5,000

students applied for the 300 openings. Given the fact that there are over 1,090

private schools alone, the estimates provided in this study are very reasonable.

The above may be true, but during the first part of the phase-in period the maximum credit is

quite small. Is it sufficient to allow and motivate parents to choose alternative schools?

Yes. There is ample evidence to show that even a slight reduction on the penalty of

paying twice for education allows parents to choose alternative schools. For

example, a Mackinac Center for Public Policy study of nonpublic schools in innercity Detroit showed that even very low income parents sacrifice to pay $1,000 tuition

to send their children to these alternative schools. Many parents care deeply about

their children’s education and want them to have the best opportunity to learn; they

are willing to sacrifice.
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74 November 1997

Contributors to this Study

The following people contributed to this study:

Sections I, II, IV (except for the analysis by Dr. Gary Wolfram), and Appendix I were

authored by Patrick L. Anderson, president of the Anderson Economic Group. Mr. Anderson

also assisted with the design of the constitutional amendment. Mr. Anderson served as chief

of staff for the Michigan Department of State and as deputy budget director for the state of

Michigan. Mr. Anderson also served as an economist for Manufacturers National Bank of

Detroit and Alexander Hamilton Life Insurance Company of America.

Richard McLellan, J.D., senior member of the law firm of Dykema Gossett, drafted the

constitutional language for the UTTC amendment. Mr. McLellan is the principal author of

Michigan’s charter school legislation, and a member of the board of directors of the

Mackinac Center for Public Policy.

Joseph P. Overton, J.D., senior vice president of the Mackinac Center for Public Policy,

originated the basic UTTC concept, assisted with the design of the constitutional

amendment, and authored section III and Appendix II.

Gary Wolfram, Ph.D., reviewed and approved the analysis of the final plan and its impact on

state and local finances and on school enrollment. Dr. Wolfram is a member of the state

board of education and former deputy treasurer for the State of Michigan. Dr. Wolfram

serves as president of the Hillsdale Policy Group, senior policy analyst for the Mackinac

Center for Public Policy, and George Munson Professor of Political Economy at Hillsdale

College.

Other assistance was provided by Dawn Newton of the Anderson Economic Group, who

helped research and write the first section of this work outlining the case for school choice,

and individuals who provided helpful comments and criticisms on earlier drafts of the

document, including: Paul DeWeese, Kelly Beeman, Howard Ryan, and Bryan Taylor.