government gives to support education.

In 1978, state and local governments raised about $90 billion to support the operations of their public schools. The federal government refunded, through tax deductions, $20 billion or more of this cost-almost three times the direct federal education budget of about $7 billion for all programs. Although the direct programmatic budget is modestly skewed to aid lower-income areas, the refund program is much more heavily skewed in the opposite direction. The net effect of federal inter

times as much aid per pupil as it gives New York City (see box, "Pocantico Hills and New York City: How Federal Education Aid Works"). So Pocantico Hills is quite attractive to anyone who can afford to move into the district, and it will attract the wealthiest families from the city.

Tax Disincentives for Using
Private Schools

The tax system, with all its consequent disadvantages for central cities, drives wealthier families from the city

Substantial federal aid comes to local schools districts through the income tax system, but some districts benefit more than others from this form of federal support. Income tax data are not reported for communities, so we are forced to make some assumptions about the tax brackets of the average taxpayers in New York City and Pocantico Hills in order to estimate the comparative value of federal aid to these cities through deductions of local taxes that support their schools.

To determine the effect of federal tax aid on the public schools, we must first determine the portion of per pupil expenditure in the school system raised through taxes at the local and state levels because only this portion of the school bill becomes a deduction from the income tax obligations of the school district's residents. Federal aid to the district is not paid for out of local taxes and, therefore, is not a deduction from federal tax obligation. To calculate the actual federal tax aid to a district, we must subtract the value of federal education aid to the district from its per pupil expenditure.

We must next determine the average tax bracket of the school district's residents, since the value of the deduction of local school taxes is equal to the taxpayer's tax bracket. For example, if a taxpayer is in the 25% bracket, an increase in local school taxes of $1,000 means a reduction of federal taxes by a little more than $250. The taxpayer has to come up with 75% of the new taxes because the federal government, in effect, shares the cost of the taxation by lowering its own tax bill. If the taxpayer falls into the 50% bracket, his or her federal taxes are reduced by a little more than $500.

State and local income taxes follow the federal regulations on these deductions, so the amount of local school taxes paid for through tax deductions is correspondingly greater. For those in the 50% tax bracket who live in New York State and work in New York City, the deduction is worth almost 70% of the local tax obligation. In other words, when a local government increases taxes by $1,000, these high-bracket taxpayers pay only $300 in additional taxes. The other $700 that comes to the local system is,

in effect, a transfer payment from local, state, and federal governments to the taxpayer's school system.

Let us look at the effects of the deduction system on two districts-New York City, whose population is at about the national average tax bracket, and Pocantico Hills, a high-income, high-spending school district in Westchester County. We can calculate the average tax bracket of a resident of the two districts by relating it to median family income as determined by census bureau surveys. If we multiply the median tax bracket by each community's per pupil expenditure, less federal programmatic aid, we have a reasonable estimate of the per pupil federal aid to each district through the operation of the tax system.

⚫ New York City. Median family income in 1975 was $13,459. The corresponding combined federal, state, and local tax bracket, after the standard deduction, is 16%. Per pupil expenditure less federal programmatic aid equals:

($2.9 billion - $0.3 billion) ÷ 1,033,813 students = $2,500. Federal, state, and local tax aid to the school system equals:

$2,500 x 16% = $400 per pupil. However, those taking a standard deduction do not itemize local taxes; thus, the city does not get any additional tax benefit when it increases taxes to support the school system.

to suburbs where residents have high median incomes. One cure for the prob. lem would be, as President Carter suggested in his first tax reform message, to eliminate the deduction for local proper. ty taxes from federal tax returns, thus reducing the tax advantage of the suburbs. Such a reform would make support of suburban schools much more difficult and would encourage families to remain in or move back to the central city. But the move would also be likely to have the net effect of reducing local investment in education, and it would force greater reliance on federal and state governments to fi nance schools, which is not necessarily a desirable change or one likely to benefit cities.

suggest that sufficient money put into New York City's public schools could make them more attractive than suburban schools. That solution does not appear practical principally because (1) the change would take too long to have the desired effect; (2) no one knows how much more money would be necessary (the system's budget has more than doubled since 1970, while its student population has declined by about 14%, with no noticeable improvement in the system's reputation for quality); and (3) the city would not be able to increase education spending without increasing spending for other city services during the fiscal crisis. Certainly the improvement of the city's public schoolsespecially to regain their reputation as superior to the best private schools-should be pursued. But right now private schools attract and retain middle- and upper-income families in the city. Their continued presence in New York will determine the future racial and economic makeup of its population. The city can take steps to enhance the effectiveness of these schools, by working for changes in the federal tax system-changes that could actually increase the city's revenues.

Upper-income New Yorkers are most likely to enroll their children in religiously affiliated or independent private schools, schools that charge high tuitions because they are not supported by a church, foundation, or other outside source. Tuitions range from $2,000 per year to $6,000, with an average charge of about $3,000. In addition, parents must bear the cost of school bus transportation and other fees

180-200

As a rule, state and city taxes average one-third of federal taxes. For the sake of clarity, let us take an extreme example, that of a family with a very high income. The line of argument, however, applies to all tax levels.

A New York City family with a taxable income of $45,000 is in the 50% federal tax bracket. In addition, it is at approximately the 17% state and local bracket. After paying taxes ($14,700 federal and $5,500 state and local) the family has $24,800 remaining to pay nondeductible living expenses, such as food, clothing, rent, and tuition to private schools. Tuition and related education expenses for two children in private schools in the city would average about $8,000 per year, approximately one-third the family's after-tax income, leaving it with $16,800 for other expenses. Clearly, using private schools requires a deep commitment to living in the city, since the public schools in the suburbs, as an alternative, often have a reputation for comparable quality.

If education expenses were deductible, as they would be if they were simply business expenses or religious contributions, the impact on the family would be quite different. An $8,000 deduction from a taxable income of $45,000 would bring the family down two tax brackets. It would pay $10,800 federal and $4,200 state and

local taxes on its $37,000 taxable income. After all taxes and education expenses were paid, the family would be left with $22,000, or $5,200 more than it has today, without the tax deduction, for other expenses. The effect of a tax deduction of education expenses on this family would be to reduce the cost of private education by 65%.

Consider once again, but from a different angle, the present situation in which education expenses cannot be deducted. How much must the upper-income family earn in order to pay $8,000 per year in private education expenses? In its tax bracket, it would have to earn $24,000 in order to cover the $8,000 privateschool expenditure (assuming the $24,000 income is "earned income" and subject to a maximum federal tax of 50% and corresponding maximum state taxes). The federal, state, and local governments

would be taking $2 for every $1 the family spent to educate its children in private school.

Our examples have substantially understated the economic incentive for the family to move from the city. The commitment to a private school is not a one-year commitment, but stretches out over 12 to 15 years of nursery, elementary, and high school. Tax consultants estimate the out-of-pocket expenses of a family using only private schools to be in the range of $40,000 to $60,000 per child, or $120,000 to $180,000 of pretax, earned income -if the education expenses cannot be deducted. If it remained in the city, the family with two children would have to spend $250,000 to $333,000 of its earnings for education in private schools.

At present, the alternatives are remarkably attractive. This same family could move to an exclusive suburban school district, invest in a home-a capital investment-the money it would have spent on private schools in the city. The home investment would produce tax deductions that allow the family to shelter a substantial portion of the $250,000 to $300,000 it has to invest over the 15 years or so its children are in public schools. And the family may find its suburban home appreciates in value in that time.

In the suburb, the family can enroll both children in public schools, paying only the taxes on its property. Property taxes are a function of local tax rates and of the

assessed value of the property and so cannot readily be projected. Let us assume that the family pays $3,000 per year in property taxes. Of this, 60% to 80% would be assignable to the costs of the public schools, or about $2,400 for both children. This amount would be deductible from the family's taxable income, lowering its tax bracket and saving it about $1,600 in taxes. Thus, the real cost to the family of the suburban public school education would be about $800, or $400 per child.

In summary, under the present tax system, the family must spend $24,000 of its gross income to remain in the city and use private schools, or $800 of gross income (which is the additional tax obligation the family must meet in the suburbs, after federal deductions are accounted) in the suburban public system.

Thus, the tax system has two notable damaging effects. It makes it almost certain that a family would choose suburban public schools over the city's private ones. If the family does opt for the suburbs, that choice also removes from circulation in the city's economy about two times the amount of money a resident family would pay to support private education for its children.

The Tuition Tax Credit Debate

Any change in the federal tax treatment of education expenses will rouse the same objections that surfaced in last summer's congressional debate over tuition tax credits. Any tax reform that removes some disadvantages private schools suffer under the revenue codes touches an ideological nerve in many Americans. Aside from First Amendment arguments (see box, "Tax

One block to careful consideration of reform of the tax rules on education expenses is the assumption that such a reform tries to skirt the First Amendment's prohibition of establishment of religion. During the tuition tax credit debate last summer, this objection drew so much publicity that the actual impact of the proposed tax credits never really received careful attention. Opponents' use of a First Amendment argument stems from their confusing a taxation bill-which the tax credit proposal was with a programmatic aid bill. The two are substantially dif ferent things.

It is the settled practice of Congress to exempt religious organizations from federal taxation, to permit states to exempt them from state taxes, and to allow individuals to deduct religious and other charitable contributions in calculating their taxable income. Until the early 1960s, the IRS allowed parents to deduct "tuitions" to religious schools. Up to that time, 80% of all private schools were tuition-free, that is, they were denominational schools supported by contributions to the church or synagogue. The deductability of these con

Reform and the First Amendment"), the principal objections voiced during the debate on tax credits centered on opponents' concern that private schools are elitist and segregationist and succeed at the expense of public schools.

After reviewing the debate and the prin

tributions was an accepted practice and did not raise First Amendment problems.

But in the 1960s-ironically, to become eligible for federal funds-most religiously supported schools began to open their doors to students who were not, and whose families were not, church members. In a sense, these schools became more secular. And since they were accepting students whose parents were not church members, and, thus, not contributing to the parish, they began to charge tuitions. The IRS then ruled that these tuitions (as payments for services rendered) are not tax deductible.

As a practical matter, the federal government let parents deduct "tuitions" to religiously affiliated schools until the mid-1960s, when the churches began to limit their contributions to the schools and the schools began to charge tuition. Only then did the IRS prohibit the deductions. Any reform of the tax treatment of education expenses that includes religiously affili ated schools-as the tuition tax credits did-simply restores the situation that existed prior to about 1963.

cipal arguments of the tax credit opponents, we will examine the present role of private schools-throughout the nation and in New York City-to see if the schools bear out the fears expressed by the tax credit opposition.

The tuition tax credit debate, part of the consideration of the Tax Reform Act of 1978, centered on granting "tax credits" to anyone paying tuition. The proposed credit was to equal 50% of tuition, up to a total of $500, and the credit was to be refunded to tuition-paying families whose incomes were too low to incur any federal tax obligation.

The tax credit approach was a progressive form of tax deduction for education expenses (see Table 1). The approach avoids the regressive effects of a pure tax deduction, which gives greater benefits to taxpayers with higher incomes. For example, if a 50%-bracket taxpayer and

a 25%-bracket taxpayer both deduct the same amount of tuition, the former gets

back 50 cents for every dollar deducted, the latter only 25 cents. The pure deduction system is worst for the poorest families because it would not give them any additional benefits.

Tax credit debaters on both sides of the question-perhaps because most of them came from the education profession-did not seem to understand the significance of the tax credit approach. Opponents generally took the position that tax credits were just a ruse to aid private schools by the back door.

The Opposition's Arguments

Education leaders in New York City played particularly important roles in defeating the tuition tax credit bill in the 1978 Congress. The Board of Education instructed its Washington office to work for the bill's defeat; the office sent mailgrams at public expense to the superinten. dents and community school board members of the city's 32 districts urging them to convey their opposition to tax credits to key members of Congress. The Board of Higher Education also took a position opposed to tuition tax credits.

To organize opposition to the bill, a number of public education lobbying groups formed the Coalition to Save Public Education. Spearheaded by Albert Shanker's American Federation of Teachers (AFT), the coalition members included the National Education Association, the national PTA, and various state and local associations of school administrators. By the time the House committee voted on the bill, the coalition had 700 lobby. ists from almost every state working in Washington to defeat the measure.

One major opposition group, the Council of Great City Schools, developed the position of the central cities against this tax reform. The council, which lobbies for the country's 28 largest school systems, has New York City's as its largest and leading member. Unfortunately for the large cities, the council based its opposition on an AFT analysis of the bill's national impact. The council performed no independent analysis of the bill's impact on central cities. Nor did New York City's Board of Education, in taking its stand, assess the impact locally.

This was unfortunate because the interests of the 28 largest cities are not identical with those of the teacher unions or

even with the other 16,000 school districts in the nation (more than half of which have fewer than 1,000 students) that dominate by sheer numbers the national education lobbying groups.

Both the coalition and the council opposed tax credits to private schools in principle on the grounds that private schools (1) are elitist institutions, catering to wealthy clients who do not need aid; (2) are segregationist in their attraction to parents; (3) select the best students, leaving public schools with the most difficult educational problems; and (4) weaken support for the public school systems.

The council itself argued that tax credits would result in private school children receiving more federal aid than public school children. The council claimed the present distribution was $60 for private school students, $128 for public school students.10 It believed that tax credits would tip the federal aid scale too heav ily in favor of private school students. The council was also concerned that the bill would exacerbate the severe problem of declining enrollments in urban public school systems.

Other opponents echoed fears that tax credits would, in practice, mean fewer dollars for public schools and would encourage parents (presumably wealthy ones) to transfer their children to private schools. Some argued that the measure would help only the wealthy because the total potential aid (up to $500 in early versions of the plan) was too small to help lower-income families.

Finally, the broadest opposition argument held that the strength of American public education rested on its being a monopoly and that the slightest encouragement of the competitive private sector would permit parents to indulge their most antidemocratic sentiments and turn against public schools.

We cannot discuss tax credits, then, without considering the reasonableness of these fears. Do the characteristics of the private schools give grounds for them? Would federal appropriations for public education decline as a result of tax credits, and how would such a decline affect public schools? What democratizing aspects of public schools are threatened by encouragement given private schools? Would the wealthy benefit the most from tax credits?

Fears about Private Schools

The fears expressed by opponents of tax credits reflect serious concerns. We can judge the degree to which these fears are warranted only by examining them in the light of enrollment in private schools nationally. What proportion of all students do they enroll? What proportion of the wealthiest? Of the poorest?

Are private schools elitist? In its 1976 Survey of Income and Education, the census bureau found that private schools enrolled 10% of all elementary and secondary students (or 4.8 million children), 17% of all students from families whose income was above $25,000, and 6% of all whose family income was below $1,000 (in 1975 dollars).11 Certainly, private schools enroll a higher proportion of upper-income than lower-income students. Nationally, 58% came from families with above-median incomes, 42% from families with below-median incomes. 12 But the differences are hardly large enough to establish private schools as elitist.

Looked at from the public school side, the 1976 census data show that 83% of all students from the wealthiest families in the country take advantage of free public education. This would indicate great support for American democratic values, if these students were in economically integrated schools. Certainly there is no great social advantage in providing free, exclusive educations to the wealthiest families in the country.

Unfortunately, the wealthiest students are disproportionately enrolled in public schools in places like Shaker Heights, Scarsdale, Marin County, Beverly Hills, Palo Alto, and Chevy Chase-exclusive districts with exclusive schools. A student can attend these schools only by living in the district, and to live in the district the family must be able to afford housing that is among the most expensive in the country. Residence in such a school district requires that a family make a capital investment in a home, an investment typically equal to 25%-40% of the cost of a luxury home.

The implications are startling: The most exclusive schools in America are suburban public schools. Enrollment in them is determined strictly by stringent economic criteria, that is, by the family's having enough capital to buy a house in a highincome school district. This economic

requirement is surprisingly more severe than those set for admission to private schools serving families with comparably high incomes.

Private schools charge only tuition. In budgetary terms, this is an operating expense. It is far easier to cover this expense than it is to accumulate the capital needed to enter the best suburban systems. Private schools purposely select a certain proportion of students from lower-income families to achieve some degree of socioeconomic mix in their student bodies, and they have scholarship funds for those whose families cannot pay tuition. Fifteen percent of the students in schools belonging to the National Association of Independent Schools (NAIS) receive scholarship aid, and most of these schools charge the highest tuitions in the country.

Wealthy public schools, despite their financial resources, do not offer scholarships to low-income students from outside the district to achieve an economic mix in the student population. Instead, they treat residence in the district as an absolute requirement for admission to the school. Urban, selective, independent, high-tuition private schools provide a far more integrated education experience than their suburban public school rivals. Urban private schools, by removing one of the most powerful factors impelling middle- and upper-income white families to move to suburban districts, help keep the city economically and racially balanced.

Are private schools segregationist? Private schools are not scattered evenly over the country; they are concentrated in cities in the Northeast and the Midwest and are scarcest in Appalachia and the Deep South, regions with the highest concentrations of low-income and minority families. Consequently, national statistics will show a lower percentage of students from these families in private schools than will the figures for some specific regions. In some regions, private schools enroll even greater proportions of low-income and minority students than public schools do in these areas. In 1977, the National Center for Education Statistics found that in the 13 western states (including Alaska and Hawaii) blacks were more likely to use private schools than were whites; 7.4% of all elementary school-age blacks were in private schools compared with only 6.6%

of all school-age whites, 13 In more than half the western states, private schools enrolled greater proportions of minorities than did public schools. 14

Few states have collected reliable data on the racial makeup of private school enrollments. Most information must be drawn from federal surveys. California, however, has now collected data that break down minority enrollments in private schools in the state. The figures show that the largest private school systems in California enroll an equivalent or greater proportion of minority group students than the public system does (Table 2). The Catholic school system in California is 41.3% minority; the public system, 36.5%.

The minority enrollment in the independent schools may appear to be significantly lower than in California's other private schools and much lower than in the public schools. But, given their necessarily high tuitions, these independents have remarkably high percentages of minority students, who are supported principally by scholarships, not by outside aid. The 11% minority enrollment should most properly be compared with the minority enrollments in the public schools in Marin County, Belair, Newport Beach, La Jolla and similar districts serving high-income residents. These districts have only a trace of minority students.

Except for Catholic schools, comparable national data on minority enrollment in private schools are difficult to obtain. Private schools-even those in the same system, such as the Baptist day schoolstend not to collect racial and economic information on their students' families. The Lutheran Church (Missouri Synod)

has done so, however, and reports that, nationally, 14% of its elementary and 18% of its high school students are black. The system enrolls a higher proportion of black students than the public schools.

In many communities, the Catholic schools also report high percentages of minority enrollments. In the District of Columbia, 77% of the Catholic elemen. tary school enrollments in 1974-75 were minority students, and the proportion was increasing. In 1973-74, Catholic schools in Mobile, Alabama, reported a 37% black enrollment; Montgomery reported 43%. Minority enrollments were increasing in both districts.

Much of the concern that private schools are racially segregated comes from the experience with southern "segregation academies," which are often pointed to as examples of private schools' tendencies in this direction. These academies, however, are not traditional private schools. They are only a small, recent component of private education in the South, created by public authorities trying to shield public schools from the Supreme Court's desegregation order of 1954.

In the South, the "real" private schools have traditionally been far more integrationist than public schools in the region. Most southern private schools were segre. gated only after the Berea College case of 1907, in which the Supreme Court said the state could force private schools to segregate. When the Supreme Court turned the tables again in the 1950s, many private school systems in the South integrated before the public schools in their communities. (These include the Lutheran and Catholic systems of New Orleans and La