Tax credit scheme ‘more like money laundering’

Secretary of Education Betsy DeVos will reportedly unveil a proposal for federal private-school scholarship tax credits Monday in Indianapolis. That makes a recent report on the topic especially timely.

The report, “Public Loss, Private Gain: How School Voucher Tax Shelters Undermine Public Education,” was released last week by AASA the School Superintendents Association and the Institute on Taxation and Economic Policy. It describes how 17 states, including Indiana, divert $1 billion to tax credits for contributions to private K-12 schools, including religious schools.

Remarkably, nine states provide a 100 percent tax credit for the scholarship donations. Taxpayers who make such donations get back every penny from the state, tax-free. Some can even make a profit on their contribution by claiming an additional deduction on their federal taxes.

Report co-author Carl Davis said that, in those states, donors may not even have a charitable interest in private schools or their students. It’s simply a risk-free scheme to make money while, in some cases, getting around prohibitions on public funding of religious schools.

“I don’t see how you can help but draw the parallel to money laundering,” Davis told Jennifer Berkshire and Jack Schneider in an episode of the “Have You Heard” podcast devoted to the tax credits. “It’s certainly more like money laundering than charitable giving. There’s no charity involved.”

Indiana’s scholarship tax credit is 50 percent; in other words, a taxpayer who donates $1,000 gets back $500, plus any savings from a federal deduction. There is no limit on the size of an individual’s state credit. There is an annual cap on the total tax credits the state will award, but the legislature voted last month to increase it: from $9.5 million this year to $12.5 million next year and $14 million the year after.

Based on model legislation from the American Legislative Exchange Council, the state programs typically provide tax credits for donations to state-authorized scholarship granting organizations, or SGOs, which in turn award tuition scholarships to private-school students from low- and medium-income families.

SGOs in Indiana awarded 9,424 scholarships totaling $15.7 million in 2015-16, according to an Indiana Department of Education report. The scholarship granting organizations may keep up to 10 percent of the donations they receive for administrative expenses.

The impact of the program in Indiana goes far beyond cost to the state of paying the tax credits, however. That’s because a student who receives a scholarship from an SGO qualifies in future years for a state-funded voucher for private school tuition. The state will make tuition payments for as long as the family meets income requirements.

SGO scholarships have become one of the most common pathways to qualify for vouchers.

Indiana’s voucher program, which gives money directly to parents to pay private school tuition, has been getting critical national attention recently. Tuition tax credits, on the other hand, have mostly flown under the radar. But as report co-author Davis explained, both are ways to funnel state funding to private and religious schools that aren’t directly accountable to the public. Every state dollar that goes to private schools means one dollar less for public schools and other public services.

DeVos is expected to introduce the Trump administration’s tax-credit proposal Monday at a national policy summit for the American Federation for Children, a pro-voucher organization that she formerly chaired. Out-of-state campaign contributions from the federation and its affiliates played a key role in pushing Indiana legislators to adopt some of the most radical pro-voucher policies in the nation.

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