Choosing to Save

The Fiscal Impact of Education Tax Credits on the State of Nevada

By Andrew J. Coulson
  • Monday, January 12, 2009

Executive Summary 

This study analyzes the net fiscal impact that a large-scale education tax credit program would have on the state of Nevada. It does so by estimating the number of students who would migrate from public to independent schools as a result of lower effective tuition costs, and then calculating the impact that such migration would have on both districts and the state treasury. The impact of tax credits claimed on behalf of students already enrolled in private schools is also taken into account.

The particular education tax credit program evaluated here combines credits for donations to nonprofit scholarship organizations serving low‐income families with credits for parents who directly assume the cost of their own children's education (both of which already exist, separately, in several states). In other words, the program will cut taxes on any individual or business that pays for the independent schooling of an eligible child. This program, developed by the Washington, D.C.-based Cato Institute, is known as the Public Education Tax Credit Program.

In order to calculate the district‐level impact of the program, it is necessary to know the marginal cost of a public school student. The marginal cost is the additional spending required to serve one additional student, and also the savings from having to serve one fewer student. Nevada's marginal cost of public schooling was not previously available in the literature and so it has been calculated for the present study by analyzing public school data for the nine most recent years available.

Total per‐pupil spending in Nevada public schools is roughly $10,019, and the marginal cost is estimated here at $8,576. This figure, roughly 85 percent of average spending per pupil, is comparable to the 80 percent figure arrived at in a 2006 analysis of South Carolina.

Assuming that students already enrolled in private schools become eligible gradually over the first seven years of the program, the Public Education Tax Credit is estimated to save nearly $1 billion in its first 10 years. Because the marginal cost on which that savings calculation is based is itself only an estimate, it is preferable to consider the total program savings as a spectrum rather than a point. Taking the lower and upper bounds of the 95 percent confidence interval around the estimated marginal cost, total tax credit program savings are expected to be between $590 million and $1.3 billion over the first 10 years. This study's conclusion that the PETC would generate substantial savings is shown to be robust to a variety of alternative assumptions in the model.

While the PETC program is confidently estimated to yield substantial long‐term savings, its impact during the first few years after implementation is more sensitive to the particular parameters of the legislation and to the assumptions made in the model. To ensure savings during these first few years, eligibility for students already enrolled in private schools can be phased in gradually over time, and the rate of that phase‐in monitored and adjusted by the legislature, if necessary, based on real‐world conditions.

 

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Download file Nevada PETC calculator spreadsheet


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