Monday, July 9, 2012

Education Tax Credits vs. Government Subsidies

My latest post at TOS blog begins:

In criticizing his state’s proposed tax credit-based school voucher program, called the “Opportunity Scholarship Act,” former New Jersey governor James J. Florio writes: “You don’t have to be an economist to understand that [education] tax credits are tax expenditures and, thus, revenues lost to be made up by someone else.”

Read Education Tax credits Are Not Government Subsidies to see why Florio is wrong.

Not all tax credits are created equal, however. My published letter in the NJ Star-Ledger Readers Forum explains why:

Voucher economicsIn “Vouchers loss is a gain for equality” (June 20), an op-ed critical of the Opportunity Scholarship Act, former Gov. James Florio said, “Tax credits are tax expenditures and, thus, revenues lost to be made up by someone else,” labeling those who say otherwise as “intellectually dishonest.”But it is Florio who is intellectually dishonest. Each scholarship voucher removes one child from the public schools, reducing government revenues and expenditures by relieving the government of the expense of educating that child. Since the vouchers are capped at $9,000 — well below the average per-pupil cost of public education — there are no revenues “to be made up by someone else.” If anything, the state is getting a windfall.In contrast, solar tax credits, for example, reduce government revenues without any reduction in expenditures because the government is not in the business of installing solar energy devices. If I get a credit of $100, the government is shorted $100 toward some other function that it does perform, which must then be made up by taxing others $100 more.
It's true that solar credits are not literally a subsidy, since the person claiming the credit is spending his own money, not receiving a direct payment from another taxpayer. But I would call it an indirect subsidy, because of the corresponding drop in his tax liability--a drop that amounts to a taxpayer financed discount for his purchase of the solar installation.

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