Refundable Education Tax Credits: School Choice Panacea or Recipe for Big Trouble?

The failure of SB 1038 in February, 2023, made it clear that any school choice legislation of the scale envisioned by SB 1038 wouldn’t pass muster. The ask was too big, the costs too high, the unknowns too great. School choice proponents tried again in 2024, with a scaled-down refundable tax credit scheme, and were again defeated. But school choice proponents refused to take the hint that Idahoans don’t want public funding of private education. In fact, school choice special interests invested hundreds of thousands of dollars in Idaho to lobby against candidates critical of school choice during the 2024 primary season. They went to great lengths to get school choice-friendly legislators appointed to key positions for the 2025 session.

The groundwork for an alternative to an ESA-style program was laid at the end of Idaho’s 2024 legislative session. On March 12, 2024, a refundable tax credit bill (HB 447) was introduced in the House Revenue and Taxation Committee. It is worth noting that the language of the bill made it seem that it would only apply to families choosing to send their kids to private schools with certified teachers. It quickly became clear during committee debate that both the bill sponsors and the committee expected that it would include homeschoolers. It was eventually held in committee. For a moment, it seemed as if the tax credit plan was dead, but in a surprise move, just days before the session ended a new tax credit bill was presented in the House Ways and Means Committee. HB 743 expanded upon the previous failed bill and actually increased the total expenditures. The session ended shortly thereafter, leaving the fate of HB 743 up in the air, but it was clear that the tax credit wasn’t going away any time soon.

Over the summer of 2024, as Homeschool Idaho met with various legislators, advocacy groups, and other interested parties, it became painfully clear that a refundable tax credit continues to be the school choice du jour being pushed this legislative year. However, refundable tax credits add unique considerations of their own to the overarching problems that all school choice legislation presents.

Let’s start by addressing the two primary flaws in all school choice legislation: 1) No matter what form it takes, school choice legislation does not provide a single new educational option. It simply answers the question of who should pay for all those educational choices. Idaho has constitutionally affirmed that only one choice, public schools, should be funded by the taxpayer. 2) Everything that the government funds ipso facto requires accountability/regulation. Public schools are replete with accountability measures to ensure that said funding is producing reasonable outcomes, precisely because they are publicly funded. School choice legislation expands taxpayer funding of education to both private and home education, but ironically, promises that it won’t demand the same accountability required for any other publicly funded program (whether it be schools, public parks and roads, welfare, medicare, etc.).

An honest evaluation of tax credits, whether refundable or not, is that they are a policy tool. They grow the government simply because they make tax policy more complex. They breed demand for more subsidies, which in turn increases compliance costs. They also tend to be poorly targeted and ineffective. And the more complex the tax system is, the more difficult it is to implement reforms when needed.

So, what is a refundable tax credit? It is a tax credit that can produce a tax refund to an individual that is larger than the amount of taxes paid throughout the year. For example, the amount of the refundable tax credit proposed in HB 743 was $5,000 per child. If your total Idaho tax liability was $1,325 (average for Idaho families), and you claimed a refundable credit worth $15,000 (for your three homeschooled children), you would receive a tax “refund” of $13,675. If that number doesn’t make you gasp, it should.

This brings us to the first of many issues with refundable tax credits for education. The majority of Idahoans who would be eligible for this tax credit would get more out of the system than they actually paid in. They would not be simply receiving their own money back – they would be receiving money that other taxpayers also paid into the system. For those that argue that this amount is far less than the cost to educate those same three kids in an Idaho public school, it is important to remember that Idaho schools are funded by the number of students enrolled, not the number of eligible school age children. Children claimed for a refundable education tax credit are not already being funded by the state, therefore this would constitute an entirely new cost that would have to be absorbed by taxpayers. For a deeper dive into the argument that privately educated children offer a savings to the state, please see our Substack article here.

Another issue with refundable tax credits is built into the tax system. As is obvious above, a refundable tax credit could potentially cover the entirety of an individual’s tax liability for any given tax year, plus some (or a lot). But it also means that the refundable tax credit could pay for multiple years’ worth of back taxes. In addition, these tax credits could be used to pay for anything that taxes could normally be garnished to cover, to include child support payments, federal tax liability, student loan payments, state or federal liens, etc. It is easy to see how a refundable tax credit could end up paying for a lot of things completely unrelated to education.

The problems don’t stop there. Receiving a refundable tax credit may seem as easy as checking a box on your tax return, but the simple stops there. What sort of records will a recipient need to keep in case of an audit? Receipts? What happens if the receipts don’t add up to the amount of the refund? Do recipients get to keep funds not used for education or use them for other household expenses (Idaho Freedom Foundation actually suggests that tax credit monies not used for educational expenses be used to cover household expenses, see here). And if that tax refund is used for household expenses, do those receipts also need to be kept? What actually qualifies as an educational expense? Text books, extra-curricular activities, tuition, fuel costs to drive a child to a private school? What if a recipient is audited and ends up owing funds back to the state? What constitutes non-compliance? Are they subject to the same collection processes as other back taxes? Does the refund count as income for federal tax purposes (state tax refunds typically do)? These questions, and many more, have not been adequately addressed by proponents of refundable tax credits.

Tax credits for private education have been presented as a way to disperse public funds without regulation or accountability. Proponents argue that the tax commission really doesn’t have an incentive to regulate refundable tax credits other than to confirm that a recipient isn’t enrolled in the public school. But it is naive to think that both legislators and taxpayers won’t want some sort of accountability for the millions of dollars that refundable tax credits would put into the pockets of private and homeschool families.

The first few years of a program like this would likely seem pretty low-key – just check the box and sign on the dotted line. It must be noted that simply checking a box on a tax return to indicate that your children are being homeschooled is an alarming precedent: it creates a state-level registry of homeschoolers (even if it is just the funded ones) that has never existed in Idaho before. Frankly, a registry of homeschoolers makes all future regulation easier to enforce because the government knows who is homeschooling. Keeping educational receipts in case of an audit becomes a practical necessity, even if it just starts out just as an abundance of caution. These may seem of little consequence, but in light of Idaho’s unprecedented educational freedom, these little concessions to regulatory oversight are the first steps in the wrong direction. If refundable tax credits follow the trend of other school choice programs, accountability will be built over time, with the legislature either creating or adjusting existing accountability measures each year, changing to meet the concerns and demands of the program, taxpayers, and legislative whim. It isn’t unreasonable to expect that those measures could easily include required testing for those who claim an educational tax credit or require minimum credentials for teachers. Idaho already requires testing for families who receive public funding through Idaho Home Learning Academy, so it isn’t a stretch to think similar requirements would be placed on tax credits.

School choice proponents like to wring their hands because Idaho is “behind” other red states in passing and implementing school choice legislation. The advantage of not being at the front of a movement is that it gives legislators and voters alike the opportunity to get a bearing on where these programs are headed. For example, Arizona continues to struggle with their bloated and fraudulently used ESA program (which SB 1038 was modeled after). While Arizona is the most obvious example of the flaws inherent in school choice legislation, it is certainly not the only example. Idaho’s proposed education tax credit program is being modeled after Oklahoma’s and there is data we can look at to predict where a similar program in Idaho would likely end up.

Like Idaho homeschoolers, Oklahoma homeschoolers are remarkably free – they are not required to register or notify state officials of their intent to homeschool, and they are not required to test. Oklahoma’s $300 million Parent Choice Tax Credit passed in 2023. The legislation provides $5,000-$7,500/child for parents sending their children to private school and up to $1,000 for parents homeschooling their children.

Homeschoolers claiming Oklahoma’s refundable tax credit must provide the tax commission receipts for approved educational expenses along with their tax return (see here). The approved items are organized in broad categories, but are generally related to educational expenses. The refund is issued with the standard state tax return. Parents of students attending private schools have access to more money, but the process is a bit more complicated. First, private schools must register with the Oklahoma State Tax Commission, then parents must receive an EVN (enrollment verification number) from the school for each child participating in the program. Parents then apply online using each child’s unique EVN. Once the child is approved, the tax credit checks are mailed directly to the private school the child is enrolled in. The parent must sign the check over to the school (see here). In both cases, participation in the Oklahoma Parental Choice Tax Credit Program has the same effect as a parental revocation of consent, which means that the child’s public school district is no longer required to provide special education services (see here). Changes to a child’s enrollment status during the year claimed affects the amount of the refundable tax credit; the tax credit is essentially prorated. The Oklahoma tax commission recommends that all participants keep receipts for up to seven years in case of an audit. Further, they affirm that the tax commission has the right to “recapture” funds incorrectly claimed by a family. The program originally allowed for delinquent state tax, penalties, or interest that the taxpayer owed to be deducted from the tax credit (see here) and in fact paid for back taxes, student loans and other debts (see here). In 2024, the program was updated in an effort to minimize some of these unintended tax ramifications for the 2025 school year (see here), but the state retained the right to recapture incorrectly claimed funds.

While the application process is hardly difficult for individuals, the issues created by the whole program are plentiful and complex. One of these issues is the enormous cost associated with running the program itself. The tax commission contracted with a private CA company to administer the program to the tune of $4 million, an amount that is four times what the tax commission told legislators it would cost. Legislators only appropriated the $1 million originally estimated by the tax commission, leaving the additional $3 million to be absorbed elsewhere in the tax commission’s budget. There continues to be transparency concerns around the approval process used by the 3rd party vendor administering the program as well as accountability measures for the vendors themselves. These details have not been ironed out, even as the state tax commission continues to issue the refundable tax credits.

Oklahoma’s program budgeted $150 million for its first year, but 36,000 applicants used it all up within 90 minutes of applications going live online. The application process is first-come, first-served, but once the applications are received, the program is tiered. The maximum credit of $7,500 is given to applicants whose income is less than $75,000, but all applicants are given a minimum of $5,000. There is no income cap on eligibility, which some Oklahoma lawmakers assert subsidizes wealthy families already sending their kids to private schools. In 2024, the program had to deny 5,600 applicants because the program hit capacity. The budget for the 2025 school year was increased to $200 million and $250 million for 2026.

Even as the program rolled into the 2024-2025 year, Oklahoma lawmakers on both sides of the aisle continued to raise concerns, driven by the gap between what they were told the program would look like and cost and how it is actually functioning. Among those frustrations is the fact that the tax commission contracted out the work rather than handling it inhouse (see here), thereby increasing the cost of the program at the outset. Further complicating the matter is the fact that the tax credit is being sent directly to private schools, making the whole program function more like a voucher program (money going directly to private schools) than the tax credit lawmakers voted for (money going directly to parents). Many Oklahoma lawmakers feel like they were sold a bill of goods and that the legislation was being pushed so “rapidly” that there were bound to be problems on the back end (see here).

Another component of Oklahoma’s tax credit that is drawing attention is that private school eligibility in the program requires “accreditation,” but the program doesn’t define what accreditation means. Private schools need only to provide the name of their accrediting organization. An example of the problem this creates is seen with the preschool program run by the Oklahoma City Zoo, whose accrediting organization is the Association for Zoos and Aquariums. One private school had been shuttered for two years, but maintained their accreditation, conveniently reopening with just five students when the tax credit passed.

As accreditation qualification is scrutinized after the fact, questions of accountability at all levels of the program are bubbling to the surface. Oklahoma legislators are working on a bill that would provide more rules for private schools receiving tax credits, arguing that if a private school is taking public funds, it should be subject to the same oversight and expectations as the public schools (see here). The calls for increased oversight aren’t isolated just to private schools. HB 3585, proposed in January 2024, would have required state testing for everyone receiving a tax credit, including homeschoolers. It died in committee, but there are indications it will be back for the 2025 legislative session. It is worth noting that Idaho legislators who support a similar tax credit in Idaho have argued that by leaving implementation of the program to the tax commission, the Idaho Department of Education would be blocked from stepping in and attaching education-related regulations to the funding. This Oklahoma bill, if passed, will have the Department of Education and the Tax Commission working hand-in-hand to implement oversight. A second proposed bill, riding the wave of calls for additional oversight courtesy of public funding of homeschools, was HB 4130, which would have essentially turned all homeschools into mini-public schools, with all the same reporting requirements, background checks, and criteria.

Another common consequence of school choice legislation is the very predictable increase in private tuition rates in states with school choice funding. The Oklahoma tax credit program has resulted in the same problem. Some schools have already increased tuition by 75%. The tax credit amounts to a private school subsidy that private schools want to capture by raising tuition. A recent analysis of tuition rates in Oklahoma indicates that at least 20% of private schools have raised their tuition by 6-100%, with the tuition in many schools matching the maximum allowed under the tax credit program (see here). Unfortunately, increases in tuition continue to price lower income families out of private schools, even if they are eligible for tax credits.

The take-away from this analysis of refundable tax credits is that they are not uniquely impervious to all the failings of other school choice legislation and, in fact, create additional challenges. In 2023, the Oklahoma Policy Institute outlined 10 questions for their legislators when they were considering the Parental Choice Tax Credit program. As we close out this article, we invite Idahoans to ask their own legislators these same important questions. Here are are a few:

1. What will this program be expected to cost three to five years from now?

2. Tax credits will likely cost the state millions of dollars. How will losing this revenue affect other key state services (education, public services, law enforcement, etc.)?

3. Are there enough high-quality private schools in Idaho – especially in rural areas – to meet an increased demand for private K-12 schools?

4. How will the state ensure the quality of the private schools receiving tax dollars?

5. How would a decrease in public school enrollment impact the ability for any given school to offer specialty classes or extracurricular activities?

6. How does a tax credit actually make private school accessible for low-income families? What controls will the program have to ensure private schools don’t just increase tuition by the same amount as the tax credit?

7. If my child’s rural public school district is small, would losing even just a handful of students to private schools or homeschooling cause my school district to consolidate or close?

It is clear that Oklahoma legislators failed to address these concerns before passing their school choice legislation and they are now scrambling to put Pandora back in her box. The inherent nature of public funding for private education requires regulatory oversight, full stop. No amount of tweaking will make a refundable tax credit anything but an open door to the regulation of private and homeschools – it will just be a matter of time. And if Idaho follows in Oklahoma’s footsteps, the oversight begins with checking a box on a tax return. Within a few years it will lead to calls for increased oversight, the likes of which private and homeschools in Idaho haven’t seen. Ultimately, public funding of private and homeschools always leads to government bloat, increased oversight, reduced educational freedom, and ultimately will forever change the homeschool landscape in Idaho, and not for the better.

To take a deeper dive into all the fundamental flaws of the school choice movement, please visit homeschoolidaho.org/schoolchoice.

Author: Audra Talley, Homeschool Idaho Board Member