How large-scale subsidy programmes affect private school revenue, enrolment, and prices

Kevin Rinz, Daniel Hungerman

In the last decade, US states have created dozens of large-scale programmes that use public resources to subsidise attendance at private schools, but there is disagreement over who benefits from these subsidies. This column estimates the effects of the programmes on school revenue and enrolment. The programmes increase revenue, but the mechanism depends on the design. In programmes with restricted eligibility the subsidies reach families and increase enrolment, whereas in unrestricted programmes the subsidies flow to schools and increase revenue per student.

In the last decade, US states have created dozens of new, large-scale programmes that use public resources to subsidise attendance at private elementary and secondary schools, much like traditionally conceived school vouchers. Over one million families currently participate in these programmes, on which states spend over $1 billion annually (Friedman Foundation 2015).

However, the recent, rapid proliferation of large private-school subsidy programmes does not indicate that observers agree on how they work. Although school vouchers have been studied in many settings (see Epple et al. 2015 for a recent, comprehensive review), little evidence is available on the financial consequences of these policies. In particular, the economic incidence of the subsidies they provide is unclear. Advocates often suggest that these subsidies flow to families of recipient students. Others have pointed out that these programmes provide financial support for schools themselves (Crothers 2014). Which of these stories is correct depends on how private schools respond to large-scale subsidy programmes.

In a recent paper, we estimate the effects of these subsidies on private school revenue and enrolment using eight state-level programmes created in five US states between the late 1990s and mid-2000s (Hungerman and Rinz 2016). In order to do so, we first address a major shortcoming in the existing data on private schools – a lack of frequent, detailed information about their finances. To obtain such information, we turn to non-profit tax returns, a source of data that had previously been little utilised in this literature. Although they do not pay taxes, non-profit organizations, including many private schools, are often required to file forms annually with the IRS that detailed information about their finances. By matching information from these tax returns to data from a government survey of private schools, we create a unique panel dataset that includes detailed financial and enrolment information for thousands of schools each year, covering about 20% of private school enrolment.

Revenue, enrolment and incidence

We first investigate whether large-scale subsidy programmes increase private school revenue. A look at the raw data suggests that they do – Figure 1 shows a jump of about $30 million to $40 million dollars. Regression estimates are similar in magnitude, suggesting that creating such a subsidy programme increases private school revenue by about $30 million on average. The increase in total private school revenue indicates that spending on public subsidies does more than simply replace private spending families would have done on their children’s educations.

Figure 1 Average private school revenue

Notes: The figure shows average private school revenue, in thousands of 2012 dollars for private schools filing 990 tax returns in states which enacted state-wide school subsidy policies during the period of study (Arizona, Florida, Illinois, Iowa, and Pennsylvania). Average revenue across each state is calculated from four years before a policy change to four years after; the year of the policy change (year “zero”) is omitted from the figure.

The increase in total revenue that we observe could arise from either a change in private school enrolment or a change in revenue per student. We find that responses on both of those margins play important roles in increasing revenue, but also that certain programme details contribute to which margin is more important to a particular programme. Specifically, whether or not a programme restricts subsidy eligibility based on student characteristics like income, disability status, or prior public school enrolment determines whether it will increase private school revenue primarily by increasing enrolment or per-student revenue.

Where student eligibility is restricted, as it is in five of the programmes we consider, the increase in revenue is driven by an increase in enrolment. The average state sees enrolment at schools in our sample increase by about 2,000 students (about 10% of enrolment on average) after the adoption of a subsidy programme with restricted eligibility. The change in per-student revenue after the introduction of this type of programme is much smaller and cannot be statistically distinguished from zero. These estimates suggest that the incidence of restricted-eligibility subsidy programmes falls entirely on the families of private school students.

When subsidies are unrestricted, on the other hand, the increase in revenue is driven primarily by a change in per-student revenue. Unrestricted programmes lead to virtually no change in enrolment, but per-student revenue increases by over $1,000 (about 13%). Here, our estimates indicate that the incidence of the subsidy falls entirely on schools, a starkly different result than when subsidy eligibility is restricted. In dollar-for-dollar terms, though, the increase in private school revenue is comparable across these two types of programmes.

Implications for the private school market

Although our estimates are derived from a sample that differs from the universe of private schools in potentially important ways (e.g. it under-represents Catholic schools, which are generally not required to file the tax form from which we obtain our financial data), our analysis indicates that large-scale private school subsidy programmes likely increase revenue for all private schools. Even if the incidence of the subsidies differs substantially from our baseline estimates, private school revenue increases roughly dollar-for-dollar or more with state spending on subsidy programmes. Our estimates also suggest that the deadweight loss associated with these programmes is modest. A simple, static calculation yields a deadweight loss estimate of about $0.03 per dollar spent. We know of no prior comparable estimate of this figure. Finally, we can also provide a sense of how sensitive demand for private schooling is to price. The elasticity of demand for private schooling implied by our estimates is -0.52. This is larger in magnitude than the Dynarski et al. (2009) baseline estimate of -0.19, but the average student responding to a public subsidy may well be more price-sensitive than the students they consider, who have siblings already attending private schools.

Conclusion

In light of the rapid proliferation of large-scale private school subsidy programmes over the last decade, it is important to understand their financial consequences for schools and students. We find that such programmes increase private school revenue dollar-for-dollar or more with state spending on them, but the way in which they do so depends on programme details. When subsidy eligibility is restricted to limited groups of students, the increase in private school revenue is driven by increased enrolment, and the incidence of the subsidy falls on students’ families. When subsidies are unrestricted, per-student revenue rises while enrolment is virtually unchanged, and the incidence of the subsidy falls on schools. These results suggest that the consequences of large-scale private school subsidy programmes are directly tied to programme design.

Our analysis also raises questions about other aspects of these programmes. The composition of private schools’ students may change in response to subsidies, even if total enrolment is little changed. As the composition of students, number of students, and school resources change, the experience of attending a private school may change as well, as considered in Rinz (2015). The relatively small set of early-adopting states limits our ability to analyse the importance of particular policy parameters. Fortunately, the large increase in the number of subsidy programs and the variation in their details subsequent to our analysis period should allow future researchers to address these and other questions.

References

Crothers, J (2014), “Vouchers, Teaching of Creationism Raise Questions,” The Miami Herald, February 9.

Dynarski, S, J Gruber, and D Li (2009), “Cheaper by the Dozen: Using Sibling Discounts at Catholic Schools to Estimate the Price Elasticity of Private School Attendance,” NBER working paper 15461.

Epple, D, R E Romano, and M Urquiola (2015), “School Vouchers: A Survey of the Economics Literature,” NBER working paper 21523.

Friedman Foundation (2015), “The ABCs of School Choice: the comprehensive guide to every private school choice program in America”.

Hungerman, D and K Rinz (2016), “Where Does Voucher Funding Go? How Large-Scale Subsidy Programs Affect Private-School Revenue, Enrollment, and Prices”, Journal of Public Economics (136): 62-85.

Rinz, K (2015), “Undone by the Market? The Effects of School Vouchers on Educational Inputs”, Unpublished working paper.