How a Proposed Tax Rule Could End Up Hurting School Vouchers

By Arianna Prothero — September 11, 2018 4 min read
  • Save to favorites
  • Print

A tax rule proposed by the Trump administration as part of a crackdown on blue states trying to circumvent parts of the new GOP tax law could hurt school vouchers popular in many red states.

Tax-credit scholarships are voucher-like programs funded through tax breaks and private donations that have grown in popularity as a workaround to state constitutions that strictly prohibit public dollars flowing directly into private, religious schools, as they do in traditional voucher programs.

Private school choice advocates are up in arms that tax-credit scholarships are getting swept into another standoff between the Trump administration and Democratic-led states.

Under the Tax Cuts and Jobs Act passed in 2017, wealthy residents in states such as New York and California face sizable increases in their federal tax bills because of a $10,000 cap on state and local tax deductions they can make on their federal returns. Democratic lawmakers allege the so-called SALT-cap unfairly targets left-leaning states.

In response, a few states came up with ways to circumvent the cap, modeled off of tax-credit scholarship programs, said Carl Davis, the research director at the left-leaning Institute on Taxation and Economic Policy.

State and local governments in Connecticut, New Jersey, and New York created charities where people could donate money to help fund public services such as education or health care and receive generous tax credits in return. Donors could turn around and claim 100 percent of the money they gave to those government-run charities as a charitable donation on their federal income tax return.

Other states are considering similar programs to help their high-earning residents.

But now the Treasury Department and the IRS have put the kibosh on the scheme with a new rule that says that people can no longer receive the federal charitable deduction on donations that they have also received a state tax-credit for—basically, no more double dipping.

And that includes tax-credit scholarship programs enacted well before the 2017 tax overhaul that use tax credits to incentivize donations to groups that provide scholarships to students to attend private schools.

Generous Programs

“These taxpayers want to look like philanthropists when they’re not,” said Davis. “The IRS is saying, we don’t care who you are donating to, if you get your money back, you get your money back, and you can’t count it as a charitable donation.”

Many tax-credit scholarship programs are so generous—sometimes offering a dollar-for-dollar tax-credit—that donors could actually make money off of their donation, if they claimed the federal deduction on top of the tax credit.

Davis said this is the case in 12 of the 18 states that have created tax-credit scholarships. Some states such as Florida and Illinois already prevent donors from claiming both state tax credits and federal charitable deductions on the same donations, he said.

Tax-credit scholarship programs that relied on offering big benefits to reel in donors interested in the tax breaks more than school choice stand to lose the most, said Leslie Hiner, the vice president of legal affairs at EdChoice, an advocacy, lobbying, and research organization.

School choice advocates were already worried that uncertainty over the new tax law was going to lead to a decline in donations to tax-credit scholarship programs—a concern that’s now compounded by the fact that the new IRS rule means there’s markedly less benefit to participating in many state programs.

“At this point, we’re dealing with a lot of unknowns,” said Hiner. “It’s not fair to taxpayers and it’s certainly not fair to these kids who are relying on these scholarships.”

Advocates Split

EdChoice estimates the new rule could impact 250,000 mostly low-income students. The proposed rule does not apply to corporate donations to tax-credit scholarship programs.

Voucher proponents have criticized the Treasury Department and the IRS, saying that the proposed rule could have been tailored to only target the new government-run charities that have popped up in response to the tax law.

While technically, yes, that would have been possible, it would have been a very political move, said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

“Just because you can draft a rule to hit one group but not another, doesn’t mean that it’s the correct rule from a policy standpoint,” said Rosenthal. “I don’t think it would be hard to give the red states, the school choice people, what they wanted ... but as a policy matter I think it would be completely inconsistent and foolish.”

But not all school choice advocates oppose closing the loophole. Excellence in Education, an influential education reform lobbying and advocacy group founded by former Florida Gov. Jeb Bush, called the proposed rule “sound tax policy.”

“Just like no school choice supporter would advocate for a 130 percent state tax credit, neither should we push to preserve a loophole in the federal tax code that allows donors to turn a $1,000 donation into $1,300 in lower taxes,” Adam Pesheck, the managing director of opportunity policy at ExcelInEd, wrote in a recent policy brief. He proposed delaying the implementation of the rule in order to allow states to adjust.

This scuffle over the SALT-cap and school choice may not be over. There may be lawsuits and the Treasury Department and the IRS could reverse course, said Rosenthal.

“These are only proposed regulations,” he said.

Coverage of how parents work with educators, community leaders and policymakers to make informed decisions about their children’s education is supported by a grant from the Walton Family Foundation, at www.waltonk12.org. Education Week retains sole editorial control over the content of this coverage.
A version of this article appeared in the September 12, 2018 edition of Education Week as How a Proposed Tax Rule Could End Up Hurting School Vouchers


Jobs October 2021 Virtual Career Fair for Teachers and K-12 Staff
Find teaching jobs and other jobs in K-12 education at the EdWeek Top School Jobs virtual career fair.
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Data Webinar
Using Integrated Analytics To Uncover Student Needs
Overwhelmed by data? Learn how an integrated approach to data analytics can help.

Content provided by Instructure
Classroom Technology Webinar How Pandemic Tech Is (and Is Not) Transforming K-12 Schools
The COVID-19 pandemic—and the resulting rise in virtual learning and big investments in digital learning tools— helped educators propel their technology skills to the next level. Teachers have become more adept at using learning management

EdWeek Top School Jobs

Teacher Jobs
Search over ten thousand teaching jobs nationwide — elementary, middle, high school and more.
View Jobs
Principal Jobs
Find hundreds of jobs for principals, assistant principals, and other school leadership roles.
View Jobs
Administrator Jobs
Over a thousand district-level jobs: superintendents, directors, more.
View Jobs
Support Staff Jobs
Search thousands of jobs, from paraprofessionals to counselors and more.
View Jobs

Read Next

Federal National School Board Group's Apology for 'Domestic Terrorism' Letter May Not Quell Uproar
The National School Boards Association voices "regret" for how it sought federal aid to address threats and harassment of school officials.
4 min read
Seminole County, Fla., deputies remove parent Chris Mink of Apopka from an emergency meeting of the Seminole County School Board in Sanford, Fla., Thursday, Sept. 2, 2021. Mink, the parent of a Bear Lake Elementary School student, opposes a call for mask mandates for Seminole schools and was escorted out for shouting during the standing-room only meeting.
Deputies remove a parent from an emergency meeting of the Seminole County School Board in Sanford, Fla., after the parent, who opposes a call for mask mandates for Seminole schools, shouts during the standing-room only meeting.
Joe Burbank/Orlando Sentinel via AP
Federal 'A Snitch Line on Parents.' GOP Reps Grill AG Over Response to Threats on School Officials
Attorney General Merrick Garland said his effort is meant to address violent threats against school boards, not to stifle parents' dissent.
5 min read
LEFT: Attorney General Merrick Garland speaks during a House Judiciary Committee oversight hearing of the Department of Justice on Capitol Hill in Washington, Thursday, Oct. 21, 2021. RIGHT: Rep. Jim Jordan, R-Ohio, questions Attorney General Merrick Garland.
Attorney General Merrick Garland, left, speaks during a House Judiciary Committee oversight hearing of the U.S. Department of Justice on Capitol Hill on Thursday, questioned by Rep. Jim Jordan, R-Ohio, right, among others.
Greg Nash via AP, Andrew Harnik/AP
Federal School Boards, 'Domestic Terrorism,' and Free Speech: Inside the Debate
From critical race theory to COVID policy, the heat on schools has raised issues involving free speech and the safety of public officials.
13 min read
Brenda Stephens, a school board member with Orange County Public Schools in Hillsborough, N.C. has purchased a weapon and taken a concealed carry class over concerns for her personal safety.
Brenda Stephens, a school board member in Hillsborough, N.C., says board members face threats and bullying, an atmosphere far different from what she's encountered in years of board service.
Kate Medley for Education Week
Federal Senate Confirms Catherine Lhamon to Civil Rights Post; Kamala Harris Casts Decisive Vote
Joe Biden's controversial pick to lead the Education Department's office for civil rights held that job in the Obama administration.
2 min read
Catherine Lhamon, nominee to be assistant secretary for civil rights at the Department of Education, testifies during a Senate Health, Education Labor and Pensions Committee confirmation hearing in Dirksen Building on Tuesday, July 13, 2021.
Catherine Lhamon, then-nominee to be assistant secretary for civil rights at the U.S. Department of Education, testifies during a Senate Health, Education Labor and Pensions Committee confirmation hearing in July.
Tom Williams/CQ Roll Call via AP Images