Future of Schools

Here’s how new federal rules could impact Indiana’s $14M private school tax credit scholarship program

PHOTO: Dylan Peers McCoy
Students at the Oaks Academy in Indianapolis, a private school, play during music practice. The Oaks accepts tax credit scholarships.

Some school choice advocates are uneasy that new federal tax rules could be detrimental to Indiana’s $14 million tax credit scholarship program.

In August, the U.S. Department of the Treasury released rules clarifying new tax law that limited how much state and local taxes an individuals could deduct from their federal taxes. Some fear the changes might discourage donors from contributing to charities like the state’s tax credit scholarship program, in which individuals and businesses can give money to fund students’ private school tuition in exchange for a tax credit from the state.

“Our primary concern is to make sure that the families who are relying on these scholarships, that they can continue to do so,” said Leslie Hiner, vice president of legal affairs for EdChoice, a national school choice advocacy organization based in Indianapolis. “There are a lot of unknowns.” (EdChoice is a funder of Chalkbeat.)

Jerry Stayton, superintendent of Elkhart Christian School, submitted a public comment about the regulations saying the scholarships are vital to helping private schools stay afloat and give opportunities to low-income families. The tax incentives have “encouraged giving to schools on a scale never before seen.”

“For the federal government to impose a tax on a state tax credit represents a strange and dangerous precedent,” Stayton wrote. “While the federal government is supreme in the United States, its strength is derived from strong, growing, supportive states with great local economies and excellent education.”

There’s optimism, though, that the regulations’ impact could be far more limited in Indiana than in other states,  given how established its scholarship program is, how low income taxes are here, and how many donors are individuals making smaller contributions.

“So far, Indiana is in a better position, I’d say, than some of the high-tax states,” Hiner said. “Nonetheless, that uncertainty is the thing … I have a lot of faith that people in Indiana, and I’m hoping, that any impact in Indiana because of its long history of charitable giving will not be great.”

Below, we break down how this news could impact Indiana’s school choice programs, as well as how the program works and got its start.

First, what are tax credit scholarships?

Indiana’s tax credit scholarship program, which lawmakers passed in 2009, lets taxpayers donate money to nonprofit, state-approved “scholarship granting organizations” in exchange for a 50 percent credit on their state taxes.

Those donations are then distributed to the nonprofits and given out to income-eligible Hoosier families as private school tuition scholarships. To participate, a family of four can’t make more than $92,870 per year.

In 2018-19, the program could distribute as much as $14 million in tax credits, though the amount that can be donated has no cap. Indiana’s tax credit cap has steadily increased up from $2.5 million since 2009.

While the use of vouchers far outstrips the tax credit scholarships, the program is still sizable. It serves 348 private schools across the state. In 2017, the program awarded 9,349 scholarships totaling more than $16 million.

The National Conference of State Legislatures reports that as of 2017, 17 states had tax credit scholarship programs. The largest one in the country is in Florida, where many corporations participate and the program collects and doles out hundreds of millions of dollars each year.

Is the program controversial?

Yes, though it gets far less attention than Indiana’s voucher program, where families use state tax dollars to pay for private school tuition. It also predates vouchers, which weren’t allowed in the state until 2011.

Tax credit scholarship supporters say the donations benefit students in need who otherwise could attend the school of their choice. They also argue the programs can results in savings for states, as the cost for the tax credits is lower than the cost to educate students in public schools.

Critics of the program say it’s just another version of state-subsidized private school, not unlike vouchers. They also point out it is unclear whether these programs allow states to save money — partially because data on where students go to school and how they transfer between public and private schools can be hard to track.

In Indiana, students do not need to have attended a public school before receiving a tax credit scholarship, and the scholarships can pay up to the full tuition amount at their desired school.

What’s the IRS rule change that is causing the concerns?

It comes in response to a part of the 2017 federal tax bill that limited how much state and local taxes someone could deduct from their federal taxes — up to $10,000. Hiner said federal officials proposed the change to allow the government to get more revenue. Giving fewer opportunities for deductions means the government collects more in tax dollars.

In order to get around the $10,000 cap, some high-tax states, such as New York, California, and New Jersey, took advantage of tax credit programs. As a result, the IRS proposed new rules that prohibit the tax credit workaround, and that’s what has school choice supporters up in arms.

“The IRS had a good reason for taking action, but unfortunately in taking action against those bad actors, they swept in thousands of nonprofits across the country,” Hiner said.

How will the rule change affect Indiana?

Advocates hope is that Indiana won’t take as big a hit as other states with higher taxes.

In a press release, the treasury department said most taxpayers will not be affected by the change, with about 1 percent of taxpayers seeing “an effect on tax benefits for donations to school choice tax credit programs.”

It’s really not clear yet if that will come to pass, Hiner said, because taxes won’t be filed until next year. No one can really say now how donors might change their behavior.

The state-approved nonprofit “scholarship granting organizations” that manage private tuition scholarship funds are already fielding questions from donors. Indiana has seven such organizations, six of which are currently granting scholarships.

“The one thing we’re stressing with everyone is to always contact your accountant, financial advisor, or tax preparer to walk through what the impacts could be,” said Betsy Wiley, executive director of the Institute for Quality Education, one of the state’s scholarship granting organizations.

But in Indiana, according to an analysis from CNBC, taxpayers on average don’t claim deductions over $10,000. While the rule change could impact corporations or very large individual donors, most Hoosiers don’t fall in those categories. The vast majority of donors are individuals, and 43 percent of those donations are for less than $1,000, Wiley said.

Wiley hopes the federal government decides to pause implementing these new rules until after taxes for 2018 are filed. This would give donors and nonprofits more time to understand what the effect might be so they can adjust at the state level.

Federal officials are collecting feedback through November, when there will be another hearing on the rules.

Immigration fears

Chicago on Trump administration changes: ‘A sicker, poorer and less secure community’

PHOTO: Scott Olson/Getty Images
A scene from an August immigration rally in downtown Chicago. Mayor Rahm Emanuel submitted a public comment on the proposed public charge rule changes on Monday.

The possibility of tougher rules on immigration and citizenship has provoked “tremendous fear” and plummeting participation in publicly funded daycare programs and afterschool care, according to a federal memorandum the City of Chicago submitted Monday.

The Trump administration has proposed changes that would weigh participation in programs such as Medicaid, food stamps, or housing assistance when granting residency and citizenship.

The changes could be devastating, the Chicago memorandum warns.

They could affect 110,000 Chicago residents, according to the filing. One in three Chicago residents receives Medicaid benefits, which the proposed changes would affect.

Chicago and New York led a coalition of 30 cities that filed comments to the Department of Homeland Security over changes to the so-called “public charge” rule, which is used by immigration officials to decide who is allowed entry and permanent residency in the United States.

“History teaches that, given this choice, many immigrants will choose to forgo public aid, which will make them a sicker, poorer, and less secure community,” according to the City of Chicago’s comments. You can read the entire document below.

Already, the city said, a group called Gads Hill that operates child care centers in Pilsen and North Lawndale has struggled to enroll children because of families’ worries about the impending rules.

Another operator, Shining Star Youth and Community Services in South Chicago, saw families start to keep children home since the proposed changes were announced.

The Boys & Girls Clubs of Chicago told the city that participation in its after-school programming also has taken a hit, the filing said.

The changes to the proposed rule do not specifically mention Head Start or any of the publicly funded child care programs. But many families are fearful that participation in anything offered by the government — from child care to health care to even food programs — would bring them to the attention of immigration authorities.

Early childhood advocates shared similar concerns at a November meeting of the Early Learning Council, an influential group of policymakers who help set the state agenda for children ages birth to 5.

“Families are very confused about the changes,” Rocio Velazquez-Kato, an immigration policy analyst with the Latino Policy Forum, told the group. “They think that by enrolling in Head start or free and reduced-price lunch at school — that it will factor against them.”

Public comment on the proposed rule change was due Monday. The 60-day public comment period is required by law before the federal government delivers a final recommendation. 

Read Chicago’s full response below.



on the move

Lack of transportation, conflicting deadlines put school choice out of reach for some, study finds

PHOTO: Denver Post file
Fourth-graders Kintan Surghani, left, and Rachel Anderson laugh out the school bus window at Mitchell Elementary School in Golden.

More Colorado students use school choice to opt into traditional district-run schools than use it to attend charter schools. Those who do so are more likely to be white and middle- or upper-class than their peers. And transportation continues to be a barrier for students who want to go somewhere other than their neighborhood school.

Those are the findings of a report on choice and open enrollment in the traditional public school sector put out by Ready Colorado, a conservative education reform advocacy group that supports greater access to school choice.

The report, “Open Doors, Open Districts,” looked at the roughly 49,800 Colorado students who attended school in a district other than the one in which they resided during the 2016-17 school year and another 95,600 who used school choice within the 12 largest districts in the state. Together, these 145,400 students make up roughly 16 percent of all Colorado students. Another 13 percent of state students attend charter schools.

Since 1990, the School Choice Act has allowed students to enroll in any public school they want, without paying tuition, provided there is room — and that the school provides the services that student needs, a sticking point for many students who require special education services.

The number of students using this system to attend school in another district increased 58 percent over 10 years to 49,800 in 2016. Roughly 6,000 of those students attend multi-district online schools.

The students taking advantage of inter-district open enrollment are more likely to be white than Colorado students as a whole — 58 percent are white compared with 54 percent of all students. They’re also less likely to come from low-income families (36 percent, compared with 42 percent of all students), to speak a language other than English at home (8 percent compared with 14 percent statewide), or to have a disability (8 percent compared with 11 percent).

“It is important to understand these differences so that policy leaders and educators can work to ensure that open enrollment opportunities are more accessible for all Colorado families,” the report said. “The underrepresentation of Hispanic/Latino students and English learners suggests there may be some unmet needs in Spanish-speaking communities around inter-district choice — either in information, accessibility, or appropriate services for students.”

The report highlights two major barriers to more students using school choice.

Most districts don’t have the kind of common enrollment system that Denver pioneered or that Jeffco is rolling out each year. Most districts require parents to turn in paperwork at a particular school. Not only do districts not share the same deadlines as each other, often different schools in the same district have different deadlines.

The other is transportation. 

“Time spent driving students to school can conflict with work schedules for parents, and public transit options can be scarce in many areas, making open enrollment functionally impossible for families without a transportation solution,” the report said. In one rural district, a group of parents banded together and hired their own school bus to take students to another district.

A bill sponsored last year by state Sen. Owen Hill, a Colorado Springs Republican, would have addressed both issues, encouraging the creation of more consistent deadlines across the state and allowing districts to cross boundaries to provide transportation. That bill was defeated in the Democratic-controlled House after some school districts said it would set the stage for larger, wealthier districts to poach students.

The transportation provision was later added to an unrelated bill in the final days of the session, a move that led to a lawsuit in which a judicial decision is pending.

Democrats now control both chambers of the Colorado General Assembly, and it’s not clear how any attempts to expand school choice would fare. Both school choice and charter schools have enjoyed bipartisan but not universal support in Colorado.

By highlighting the prominence of traditional public schools in how Colorado students use the choice system, advocates hope to separate choice and the popular idea that parents should be able to find the school that best meets their child’s needs from the more divisive debate about charter schools, which critics see as siphoning scarce dollars from other schools while not serving all students.

The report recommends developing more consistency between and within districts, providing more information to parents, and removing barriers to transportation.

Districts with higher ratings, which are determined primarily by results on standardized tests, tend to get more students than those with lower ratings, but some districts, particularly in the Denver metro area, send and receive large numbers of students, reflecting that parents and students are making decisions at the school rather than at the district level.

Metro area districts that have struggled to raise student achievement are losing large numbers of students to other districts. A quarter of students who live in Adams 14, whose low test scores prompted a state order for external management, attended school in neighboring districts in 2016. In Westminster, which just came off a state watchlist for low-performing schools this year, that number was 29 percent.

Ready Colorado found no clear relationship between districts that spent more per student and districts that attracted more students — but districts with higher enrollment get more money from the state for each student, creating incentives to compete for students.

Read the full report here.