Wednesday, February 5, 2020

State of the Union: Tax Credits and School Choice

DownloadOne almost certainly unintended casualty of the cap on state and local tax (SALT) deductions contained in the 2017 tax reform legislation were the numerous pre-existing state and local tax credit programs designed to favor a number of initiatives, but primarily school choice efforts (as identified in this paper). While Treasury and the IRS have taken certain steps to limit the impact of the cap on these programs, as detailed in the background and explanation of the most recent set of proposed regulations implementing the cap, the relief provided has been far from complete.

Which brings us to last night's State of the Union address. In it, President Trump touted a proposal long-supported by Education Secretary Betsy DeVos: establishing a program to allow states to provide federal tax credits to individuals and businesses that contribute to K-12 scholarship organizations. (See U.S. News coverage.) As proposed in the Education Freedom Scholarships and Opportunity Act, donations to state-identified scholarship-granting section 501(c)(3) organizations that satisfy certain requirements would give the donor a federal tax credit equal to the amount of their donation, up to 10% of their adjusted gross income for individuals and up to 5% of taxable income for corporations. 

While the chance of Congress enacting this proposal during the current session, especially given the Democratic control of the House, is almost certainly negligible, the high profile support of this measure appears to be at least in part an attempt to mollify the school-choice supporters who were blindsided by the effect of the SALT cap. And of course a future Congress could enact a tax credit along these lines.

Lloyd Mayer

Federal – Executive, Federal – Legislative, In the News | Permalink


The issue has not been whether the tax credits work; it has been whether those credits are quid pro quo payments thus reducing the amount of the income tax deduction.

Posted by: Harvey Philip Dale | Feb 6, 2020 8:12:48 AM

Agreed. But by creating a federal tax credit for these particular contributions, the proposal would effectively replace the charitable contribution deduction - presumably no longer available because of the quid pro quo - with a 100% federal tax credit, subject to the caps noted (and also a $5 billion national cap, allocated among the states).

Posted by: Lloyd Mayer | Feb 6, 2020 10:57:43 AM

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