The Sales Tax and Catholic Schools
The Missouri Catholic Conference (MCC) has come out in opposition to the proposal to implement a statewide sales tax that would replace all corporate and individual income taxes. One of their major concerns is the effect that such a change would have on Catholic schools. By taxing Catholic school tuition, they argue, fewer families would be able to afford it, thus decreasing enrollment and forcing those children into public schools. This is a legitimate concern, but the MCC fails to take into account that with the repeal of the income tax, families would have more money to spend on discretionary expenses in the first place. This money could be devoted to educational expenses, thereby increasing the demand for Catholic school education.
In the chart to the right, the y axis represents the price of parochial education, and the x axis represents its quantity (P and Q represent the status quo price and quantity). The line labeled S1 shows one likely effect if the state income tax were replaced with a sales tax: An increased cost for parochial education would lead to a shift in the supply curve, wherein quantity demanded and supply provided would settle at a lower equilibrium. But the line labeled D1 shows another effect of the replacement of the income tax with a sales tax: Because families would have more money to spend that would have previously gone toward paying taxes, the demand curve for parochial education would shift, as well, leading to a higher equilibrium point for both supply and demand. We can’t predict which one of these effects will dominate, but the point is that replacing the income tax with a sales tax would not necessarily lead to a reduction in the amount of parochial school enrollment demanded by education consumers.
Another concern raised by the MCC is that because poor families already do not pay income tax, they would only be harmed by the implementation of a sales tax and would not benefit from greater income levels. However, as this blog post by Abhi Sivasailam notes, lower corporate and personal income taxes help fuel growth by attracting people and investment funds to the state. This results in higher employment levels and higher incomes, which benefit everyone. Furthermore, the bill as proposed in the Missouri Senate also includes a sales tax rebate for low-income families that may otherwise struggle to pay the sales tax.
The concerns brought forth by the Missouri Catholic Conference are not unfounded, but as my colleague Abhi Sivasailam reminds us, tax changes do not happen in a vacuum. The switch to a sales tax has the potential to greatly benefit Catholic schools in Missouri.
My nine brothers and sisters and I were all educated in catholic schools.
My father always believed when the government gave you money, it told you how to spend it.
This sales tax issue is a regressive tax.
Comment by Jim Lee — February 18, 2010 @ 4:49 p.m.
Sales taxes in general are regressive, Jim, that’s true. This particular sales tax legislation is designed to avoid regressivity by providing sales tax rebates to low-income families.
Comment by Eric D. Dixon — February 18, 2010 @ 5:57 p.m.
I agree that most citizens would have the money not paid in income taxes to compensate for the extra sales tax. If the assumption that the change in tax structure is revenue nuetral then the change should be fairly negligible to most people. The question is how would it affect the Catholic Church in particular regarding the schools. While the parents of school children would be facing the same net bill (sales tax replacing the income tax) the choice between the two different options (parochial vs public) would become more stark. The price differential between the two would widen making the public option more enticing as a relative value. In the case of the sales tax there is a choice to pay the tax (a parent can decide to take the public option). In the case of the income tax there is no choice. Doesn’t the change work against the private schools?
I am all in favor of the switch to a sales tax but I think that the private/parochial schools have a good argument and a unique problem. There competitor in the market is exempt from a major cost.
John Crowe
Comment by John Crowe — February 24, 2010 @ 10:55 a.m.
While parents of school children do have a choice about whether to pay the sales tax, they also have a choice about their other spending habits. Beyond necessary household items, there is presumably some flexibility in how much a family spends for extra things, like movie tickets or sporting events. Furthermore, the demand for Catholic school education is relatively inelastic; a working paper by the National Bureau of Economic Research shows that the coefficient is -0.19. This means that relative to changes in the price of tuition, the demand for Catholic school education decreases very little. This makes sense just thinking about it: most parents who send their children to Catholic school believe that providing such an education to their kids is extremely important, and so are thus less sensitive to price changes. We also have to remember that tuition for additional children within a family is usually decreased, so the sales tax burden for those additional tuition payments will be reduced. For these reasons, Catholic schools are not likely to suffer a huge decrease in attendance as a result of this 5.11% sales tax.
To expand on a point in the initial blog post, the repeal of the income tax would allow wealthy families who send their children to Catholic school to contribute more in scholarship money, reducing the burden on low-income families.
Comment by Charis Fischer — February 24, 2010 @ 2:50 p.m.
The argument that the demand for Catholic/private schools is relatively inelastic is most likely true but there is still some connection between price and demand for the service. The multiplier may be small but it still will have an affect.
Another competitive concern that I would have (please correct me if I am wrong) is that the parochial non-profit schools will now have to pay a sales tax on the goods and services that they buy in order to oprerate the schools (as non-profits they are currently tax exempt from sales tax). Thier competition, the public schools, would not have that cost. The non-profit schools would get hit with both a higher charge to their costumers as well as a higher operating cost. It seems that they lose on both fronts. In a time of failing public schools it is hard to see the wisdom of hobbling the performing competition.
As an aside, every child that attends a private school saves the various government entities thousands of dollars. Bringing those kids back into the public system is going to be expensive for the system.
Comment by John Crowe — March 2, 2010 @ 9:36 p.m.
You are right that there may be a small decrease in attendance as a result of the increase in the price of the tuition- using the elasticity coefficient of -0.19, the decrease will be approximately 1% as a result of the 5.11% sales tax. But this does not take into account the demand shift that will likely occur as a result of the higher income levels that will be realized due to the repeal of the state income tax. We can’t precisely predict how much enrollment will increase as a result, but it will almost certainly offset at least a portion of the losses that result from the implementation of the sales tax. On the whole, this tax change actually has the potential to increase enrollment in private schools if the effect of greater income levels outweighs the impact of the addition of a sales tax on tuition.
As far as I can tell from looking at the bill, there is nothing that removes the tax-exempt status for non-profits when it comes to paying the sales tax for goods and services. So parochial schools will not be at a disadvantage on this front.
Comment by Charis Fischer — March 3, 2010 @ 2:27 p.m.
It looks like our disagreement over this issue has been rendered obsolete: the new version of the proposal in the Missouri Senate to replace the state income tax with a sales tax contains an exemption for private school tuition. See this article in the Columbia Tribune: http://www.columbiatribune.com/news/2010/mar/04/senator-rolls-out-revised-tax-proposal/
Comment by Charis Fischer — March 4, 2010 @ 2:51 p.m.