Education savings accounts: a vehicle for parental choice

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Executive editor’s note: This is the first in a short series of articles documenting the origins of Arizona’s Empowerment Scholarship Account program. AZESA was the first education savings account (ESA) program, and it seemed like a good idea to tell this story before any of us involved got hit by a passenger bus or suffered some other sort of calamity. ESAs started in Arizona, and Florida, Mississippi, North Carolina and Tennessee have followed suit, while bills are being filed in dozens of other states. In this post, Dan Lips, a visiting fellow with the Foundation for Research on Equal Opportunity and the originator of the concept which eventually became the AZESA program, recounts the genesis of the idea.

American children are heading back to school. For more than 19,000 students, going “back to school” now has a very different meaning, thanks to state-funded education savings account (ESA) programs operating in five states. 

Children using state-funded ESAs can benefit from a customized and personalized learning experience. Their parents are given direct control of their child’s share of education funding using state-managed accounts. They can combine multiple education service providers and tools to provide the ideal learning program for their child. 

Twenty years ago, state-funded ESAs were not among the policy options that lawmakers were actively considering when designing school choice policies.

How state-funded ESAs became a new and, in many cases, preferred policy mechanism for improving learning opportunities, highlights the value of friendly debates among policy wonks, as well as the need for ongoing policy development. In 2019, this should inspire us to design and advance new mechanisms to improve learning options, particularly to help disadvantaged children and other students poorly served by traditional public education. 

When my friend and redefinED executive editor Matthew Ladner asked me to write the first in a series of essays about the history of ESAs as a school choice policy, my mind quickly turned to the school choice policy debates of the early 2000s and the late Andrew Coulson

In 2001, school choice supporters were recovering from several disappointments. Yet there were reasons to hope that widespread choice would soon be possible. But state-funded ESAs were not yet part of the discussion.

School voucher initiatives had lost at the ballot box in California and Michigan in 2000. President George W. Bush had campaigned in favor of the principle that parents should be able to choose their children’s school. But his administration traded away a modest school voucher proposal as a bargaining chip early in the No Child Left Behind negotiations with Massachusetts Sen. Ted Kennedy.  

At the same time, statewide education tax credit programs for scholarship donations were becoming law, offering a new model for expanding choice. In 1997, Arizona passed an education tax credit program to encourage people to donate to private school scholarship funds. Florida and Pennsylvania followed in 2001, passing education tax credit programs for similar corporate donations.

Education tax credits appeared to be a popular, effective, and politically-possible way to expand parental choice and to do so without raising federal or state legal challenges. At the time, the looming Zelman v. Simmons-Harris Supreme Court case offered hope that federal Establishment Clause questions about school vouchers soon would be resolved. Nevertheless, the map of state Blaine Amendments and other legal restrictions across the country continued to force policymakers to consider different proposals’ legal prospects and potential challenges when designing legislation.

The diverse movement of school choice supporters often debated whether school vouchers or education tax credits were a more effective policy mechanism. While urban school voucher programs had proved popular in Milwaukee and Cleveland, as well as the many cities that had private scholarship funds, education tax credits appeared to be a promising alternative. 

Andrew Coulson was the author of the book Market Education: The Unknown History and one of the thought leaders arguing for education tax credits at the time. He reasoned that a system of universal state tax credits would be the ideal policy mechanism to expand choice in education. He envisioned combining parental tuition tax credits with generous tax credits for businesses and individuals to encourage scholarship contributions.

Others, including key school choice leaders in Milwaukee, warned that education tax credits were unlikely to sufficiently help disadvantaged children. They believed that school vouchers were the best policy mechanism to ensure equity.

Developing state-funded ESAs as an alternative to vouchers and education tax credits

As a think tank researcher and school choice advocate at the time, I had the opportunity to study and learn about the relative advantages of these policies. While working at the Cato Institute, we supported vouchers, but also embraced the universal education tax credit approach.

I also worked on a project for the non-profit Children First America in Arizona from 2002 to 2004, trying to expand widespread school choice in the Grand Canyon state. One of our goals was to encourage Arizona taxpayers to use the state’s tax credit for donations to raise scholarships for disadvantaged children.

We learned that was very hard to do, particularly given small average state income tax liabilities. While Arizona’s scholarship tax credit program succeeded in sustaining the private school sector (at a time when some communities saw declines in private school enrollment), I concluded that it was unlikely to deliver widespread choice to low-income families.

If the system of universal education tax credits that Coulson and others were championing wasn’t the answer to deliver widespread school choice, what was a better approach, particularly considering the ongoing state legal challenges facing school vouchers?

I began developing the case for an alternative approach: state-funded ESAs, which combined key advantages of vouchers and tax credits. Like vouchers, state-funded ESAs could be designed to give families, particularly kids from low-income families or those with disabilities, real purchasing power. Like tax credits, however, the ESA funding mechanism was indirect and less likely to cause tuition inflation or excessive regulation.  

Importantly, ESAs offered several benefits over both policies, including giving families ownership of the funding, economizing how funds were spent, choosing multiple providers, and saving funds for future use such as to pay for college or job training.

I turned to Coulson’s Market Education to test the policy design against his arguments for universal education tax credits and began to share my proposal with school choice experts. 

Education reformers had championed federal ESAs to save for higher education for decades. For example, President Ronald Reagan called for ESAs in his statement following the release of the A Nation at Risk report. In the 1990s, Congress created ESAs for higher education, or what were then called Education IRAs. And in 2001, the Bush tax reform bill transformed Education IRAs, including by creating the Coverdell education savings accounts, which allowed tax-free savings for college and K-12 expenses.

However, state-funding of ESAs was a different approach. I presented the case for this new vehicle for expanding school choice in a white paper for the Goldwater Institute in 2005 at the encouragement of the institute’s CEO, Darcy Olsen. The paper explained how Arizona could create a state-funded ESA program. It also explored how federal policymakers could give families greater ownership of federal education spending through ESAs.

As I was publishing the paper, I learned that other experts had proposed related reforms, such as combining vouchers with a reserve ESA to allow unspent funds to be saved for later use. I later learned that Milton Friedman had proposed a similar concept for paying multiple providers (or “partial vouchers”) and that Professors Coons and Sugarman had envisioned combing multiple education service providers in a similar way back in the 1970s.

It was very encouraging to learn that others—including some of the best scholars in the field—had seen promise in similar proposals to customize education. Perhaps we were on to something? 

During the latter half of the 2000s, school choice supporters continued to focus on vouchers and tax credits when designing programs. Yet evidence began to build that ESAs would be a future model to finance flexible education delivery. In 2005, House Republicans proposed student-centered funding, using “education smart cards” or debit cards, to pay education costs for the many children displaced by the devastating hurricanes. In the following years, growing interest in the proliferation of digital learning options encouraged new thinking about how to expand choice in education beyond deciding between different schools. 

Some of us began developing additional reform proposals to expand ESAs or to increase the use of existing ESA vehicles. At Heritage, we began thinking about how Congress should expand federal ESAs, including by expanding the allowable uses of so-called 529 accounts (which allowed tax-free saving for college costs) to include K-12 expenses or by increasing Coverdell ESA contribution limits.

At Goldwater, we wrote an (unpublished) white paper to explain why state-tax deductions that encourage contributions into 529 accounts should also be available for contributions into Coverdell ESAs (which also allowed savings for K-12 expenses). Matt Ladner and I designed a sweeping federal ESA proposal as volunteer advisors to former Sen. Fred Thompson’s campaign for the 2008 Republican presidential nomination, though the campaign ended before the plan was officially rolled out.

Of course, this was all prelude to the actual design and launch of Arizona’s ESA program in 2010 and 2011. Matt Ladner, Clint Bolick, Nick Dranias and Tim Keller and others would work with visionary Arizona lawmakers to design the first state-funded ESA program, in response to court decisions that ruled the state’s school voucher program unconstitutional.

Without their innovative thinking and strategic policy and legal analysis, the education reform movement might still be debating whether tax credits and vouchers offered the better approach. Today, the Arizona ESA program is helping thousands of kids and has inspired similar programs across the country.

For readers of redefinEd and everyone interested in expanding choice in education, I would suggest two lessons from the early 2000s school choice debates and the development of ESAs:

The first lesson is that education reformers should continue to invest time considering and designing new policy mechanisms to improve the financing and delivery of education, including building upon other recent incremental reforms. For example, the 2001 expansion of Coverdell accounts and the “supplemental education services” (or tutoring) provision of NCLB influenced my thinking about the opportunity and need for state-funded ESAs in 2005.

Today, education reformers could be considering ways to build upon the 2017 tax reform bill which expanded the allowable uses of 529 accounts to include K-12 expenses, such as by developing new policies to invest funds in disadvantaged students’ 529 accounts and others who can’t afford to save on their own.  Such reforms could help narrow the education enrichment and savings gaps between poor and nonpoor students to promote equal opportunity.

The second lesson is about the need for friendly debates about education policy development.  The constructive debates of the early 2000s between the tax credit and voucher “camps” of policy wonks created an environment where we were actively thinking about the advantages and disadvantages of competing policy mechanisms. That debate provided valuable context for new thinking about ESAs.

The last time I saw Andrew Coulson was at the Oklahoma City airport in the summer of 2011. I had left my position at the Heritage Foundation a year earlier and was then working in government. But I was invited to an Oklahoma Council of Public Affairs event on education earlier in the day to talk about digital learning and ESAs.

I recall Andrew and I revisiting our debate about the merits of universal education tax credits and state-funded ESAs while waiting for our flights. Of course, I did not convince Andrew that afternoon. But I recall his joy, good-nature, and friendship in disagreement. I know that I would not have made my modest contribution to school choice policy development without reading Market Education and working to improve upon his ideas for how best to help kids learn.