Public Good Through Charter Schools?

• Jurisdiction: United States,Federal
• Citation: Vol. 39 No. 3
• Publication year: 2023

PUBLIC GOOD THROUGH CHARTER SCHOOLS?

Philip Hackney^*

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ABSTRACT

Should nonprofit charter schools be considered "charitable" under § 501(c)(3) of the Internal Revenue Code and be entitled to the benefits that go with that designation (income tax exemption, charitable contribution deduction, etc.)? Current tax law treats them as such; the question is whether there is a good rationale for this treatment. In addition to efficiency and equity, I consider political justice as a value in evaluating tax policy. By political justice, I mean a democratic system that prioritizes the opportunity for more people to have a voice in collective decisions (political voice equality or PVE). Thus, a tax policy that decreases PVE violates the value of political justice. Efficiency theory and equity provide modest help in evaluating the charter question, but the tool of political justice provides important value. When viewed in its entirety, granting tax exemption to charter organizations violates the norm of political justice. The charter movement takes decision-making regarding

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community education away from a community and gives it to private parties. Instead of the community controlling major educational decisions, charter management organizations control those decisions. Still, valid democratic authorities across the country have chosen to provide some education through charter vehicles. Given the strong interest in keeping tax policy in harmony with democratically chosen policies, the most ideal solution to this conflict would be to maintain tax exemption. However, to be charitable, a charter school and its management organization ought to be democratically operated in some broad sense. The Article thus suggests some ways to increase the democratic accountability of charters.

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CONTENTS

I. Introduction............................................................................698

II. Education in the U.S. & Charter Schools.........................707

A. Short Introduction..............................................................707
B. Charter School Structure...................................................711

III. Political Justice and Education........................................717

A. Why Political Justice as Democracy in Tax Policy?.........717
B. Arguments from Choice.....................................................722
C. Democracy and Education................................................725

IV. Tax Exemption, Education, Benefits, Theory..................733

A. Education as a Charitable Purpose...................................734
B. Benefits of Classification as Charitable............................740
C. Theories for Subsidizing Charitable Activity Through Tax Policy.................................................................................745

i. Tax Exemption .............................................................. 745
ii. Charitable Contribution Theories...............................751

V. Analysis...................................................................................758

A. Tax Exemption ................................................................... 758
B. Charitable Contribution Deduction................................... 769
C. Possible Solutions to the Harm to PVE.............................772

VI. Conclusion............................................................................775

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I. Introduction

Should Congress grant charitable federal income tax-exempt status and the benefits of the charitable contribution deduction¹ to nonprofit charter schools? In line with a burgeoning movement to consider the value of democracy in tax policy,² I evaluate this question by considering the value of political justice as democracy in addition to the traditional tax policy factors of equity and efficiency. Where tax policy harms political voice equality (PVE)—that is, equality in the opportunity to shape collective choices—we should question that policy.³ on its face, charter schools appear to lower PVE. Prior to a charter school opening, typically a democratically elected local community school board oversees the operation of the school.⁴ After being granted charter status, most decisions are carried out by the charter school's board and management.⁵ Charter proponents celebrate bringing "choice" to parents and children who previously had to accept what the public school system offered. However, from a PVE perspective, educational decisions are taken from the community and

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given to the small group granted a charter. The Article concludes that while troublesome from a political justice perspective because so many jurisdictions have democratically chosen to pursue schooling through charters, ending these benefits provided to similar tax-exempt groups does not make sense. However, given the unique role of primary and secondary public education in shaping a democratic nation, this Article recommends Congress require charter schools to adopt provisions that would make their operation more democratic in nature to maintain their charitable tax subsidies.

Because charters are nonprofits operating public schools and society has long considered education a charitable activity,⁶ this choice to examine the charitable tax subsidies for charter schools may seem far from intuitive and maybe even odd. However, the examination through a political justice lens highlights a significant tension that arises when government uses charities to carry out government functions.⁷ The move may be one by a state to avoid the very democratic process that legitimates the state's authority. It shows that Congress ought to take political justice into consideration when determining whether to grant charitable tax subsidies to such arrangements. Congress should consider whether a democratic process is central to the shaping and delivery of the service the nonprofit is delivering. In the case of primary and secondary education, I argue democracy is central to the furtherance of the charitable purpose. That may not be the case with other government services provided by nonprofits.

Traditional tax efficiency and equity theories provide only modest help in resolving this tax policy matter. Tax-exemption efficiency theorists ask whether the nonprofit form helps to solve market failures.⁸ Charter schools solve no market failure. They are primarily financed through taxes, so there is much less of a free rider problem to

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solve.⁹ The efficiency claim may be that charters are better than traditional public schools at delivering education than the government, but there is little evidence that charter schools are providing superior student outcomes as compared to public schools. Charitable contribution efficiency theorists ask whether the charitable contribution deduction generates more dollars for public goods than would taxing alone.¹⁰ There is no clear efficiency to be gained here either. Charters primarily rely on tax dollars, not charitable contributions, and public schools also have the ability to seek charitable contributions.¹¹ Perhaps charters as an institutional structure can attract more dollars for education through the charitable contribution than the public school system. Some anecdotal evidence supports this as a possible efficiency.¹² Equity asks whether tax policy treats one taxpayer fairly as compared to other taxpayers. Some equity theorists also argue that equity means the tax system should redistribute money from high-income to low-income individuals.¹³ Equity theories are not well defined, but we can say a couple things. Because both public and private schools are generally provided tax exemption, providing exemption to charters would treat these

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institutions the same way. Additionally, charters tend to serve a lower income group,¹⁴ so bearing a 0% tax rate is perhaps more appropriate than a top tax rate. However, because charters rely primarily on tax dollars, they likely redistribute no more wealth than the traditional public school they replace. As for the charitable contribution, this deduction is not designed with equity in mind. Only a small group, about 9% of taxpayers, mostly high-income, are able to deduct such contributions.¹⁵ As discussed in Part IV, most accept that the charitable contribution deduction amounts to a subsidy from the government equal to the marginal tax rate times the amount of the deduction. Thus, the government provides significant incentives for the charitable activity of a very small group of citizens in our country and little for everyone else. Although this critique does not apply only to charters, these charitable contribution incentives provided only to a small wealthy class do not meet the first notion of equity. That said, generating donations from high-income individuals to charters would generally result in some redistribution, but this redistribution is likely no more than if they made the donation to a public school. In other words, neither charitable tax theories of efficiency nor equity provide substantial support for the provision of these subsidies.

A political justice analysis suggests there are problems with the state subsidizing charter schools through the Internal Revenue Code (Code)¹⁶ because the system is not supportive of a rational deliberative democracy. By granting tax benefits to a charter school, federal tax

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policy provides support to an endeavor that lowers PVE both in the shaping of the education that takes place in the school and in a long-term sense. The non-democratic education provided to the children likely impacts the ability of those individuals to participate in a democratic endeavor in the future.¹⁷ A key piece of the PVE case, developed more in Part III, is that we should prioritize a democratic form of education at the primary and secondary levels. I mean that in at least two senses: (1) primary and secondary education should be designed...