Advocating for State Tax Credit Scholarships

Chronology of Events:

1) In August of this year the IRS released a notice indicating it would create rules on state tax credit programs.  In response, ACSI and ACEF sent a letter to Director Mulvaney and Secretary Mnuchin as well as other offices on Capitol Hill Friday, August 17, 2018 raising concerns that the IRS not create regulations so broad that they impact school choice, tax credit scholarships.  An official copy of the letter can be found here.

2) On August 28, 2018 the IRS released its proposed regulations to limit a donor's ability to claim both a federal charitable tax deductiona and a state tax credit on the same charitable gift.  These regulations will harm most school choice, tax credit scholarship programs now operating in 18 states and will have impact on their expansion into other states.  You can read the proposed regulations here.  

3) On October 5, 2018 ACSI and ACEF submitted public comment asking that the IRS more narrowly tailor its rulemaking to not harm school choice. You can read our public comment here

Where to find more information on why the IRS is creating new regulations see this June 10, 2018 article from Politico describing state "workarounds" to the SALT deduction cap.


What is at stake here?
The Tax Cuts and Jobs Act (TCJA) signed into law in  December 2017 was a major overhaul of the tax system.  One provision caps the state and local tax (SALT) deduction at $10,000.  High-tax states are seek to avoid the cap and have created "tax credit programs" to which a taxpayer may funnel his/her tax payment in return for a charitable deduction - on which there is no limit.

Why is that a problem?
The IRS is concerned that states are evading federal taxes by misusing tax credit programs. It has issued a Notice of Proposed Rulemaking (NPRM) - draft regulations - to forbid the practice.  But, instead of targeting the specific abuses, the draft regulations target all tax credit programs, even those which pre-exist the state innovations.  And one type of those programs are the school choice scholarship tax credit programs that already exists in 18 states - and which we hope will expand to the others. 

What's a scholarship tax credit program?
A scholarship tax credit program allows donors to give a charitable contribution to a "scholarship granting organization" (SGO) which, as its name says, gives scholarships to low-income students so they can choose the school their child attends.  To incentivize donors to give, states offer tax credits to donors of up to 100% of the gift.  The percentage varies by state.
State tax credit scholarship programs have not been created in response to the recent tax reform law but have in fact been operational for many years. Twenty-four tax credit scholarship programs exist in eighteen states.  As an average, the year of enactment was 2010.  Collectively they have been in state statutes 171 years before "The Tax Cuts and Jobs Act" (TCJA) became controlling law in 2017.  Of the twenty-four, only two have been passed since 2017. The oldest was created twenty-one years ago in 1997.  Tax credit scholarship programs have long predated the TCJA.

Our hope is that their success will lead to other states giving serious consideration to creating such programs.  That's why it's important for the nationwide Christian school community to weigh in.

The program involves no state/government funds. A donor may give to a scholarship granting organization (SGO) such as the one ACSI has created, the ACSI Children's Education Fund (ACEF) and receive a state tax credit for all or a portion of his/her contribution.  The SGO uses the funds exclusively to provide scholarships for low-income children to attend the school of the parents' choice, often a faith-based school. 

How do the draft IRS regulations affect SGOs?
The draft regulations apply to all tax credit programs, including tax credit scholarship programs.  They limit the value of the gift.  This limit gives donors less incentive to give.  Fewer gifts mean fewer scholarships.  The regulations should not apply to scholarship tax credit programs which were never designed to evade federal taxes.  Scholarship tax credit programs are designed to give low-income families a choice of schools to which they can send their children.

What can we do?
When the federal government issues a new regulation, it must first go through a period of Public Comment.  In this case, the Public Comment period ends October 11.  The public is invited to comment on the proposed regulation.  We are urging that the Christian school community take advantage of the process.  We are urging that the Christian school community also let Members of Congress and the President know of our concern.

What should I say?
If you click the link above, you will find suggested language for public comment and for letters to Congress and the White House.  Our message is simple: please exclude tax credit scholarship programs from the proposed regulations. They are too valuable and are not part of the politics of tax reform.

What are the 18 states with one or more state scholarship tax credit programs?
Alabama, Arizona, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Montana, New Hampshire, Nevada, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota and Virginia.

What do do next?
You can submit public comment by clicking here.

You can send an email to the White House by clicking here.