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.”
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.