Just Taxes Blog by ITEP

Illinois Voucher Tax Credits Don’t ‘Invest in Kids,’ They Invest in Inequality

June 12, 2023

Public education is under threat to a degree that would have been hard to imagine even just a decade ago. The playbook being used by its opponents is a simple one.

First, discredit public schools by amplifying an endless string of disinformation and lobbying to reduce the tax revenue needed to improve those schools. Then, use the resulting public distrust as an opening to privatize a growing share of our educational system.

Illinois lawmakers have a rare opportunity to buck this trend by allowing their misleadingly named school privatization tax credit, the “Invest in Kids” program, to roll off the books on December 31. The result would be a meaningful step toward better tax and education policy, and a clear show of support for our nation’s public education system.

Illinois’s voucher tax credit looks a lot like ones in other states because it’s a copycat version of policies started in Florida and Arizona that have been pushed out across the country by groups like the American Legislative Exchange Council (ALEC).

In Illinois, the credit reimburses so-called “donors” for 75 percent of the amount they contribute to a fund that bundles vouchers for free or reduced tuition at private, usually religious, K-12 schools. In other words, for every dollar that an individual or business gives to pay for a student’s private school education, only 25 cents ultimately come out of their pocket and the other 75 cents are covered by the state. While the Wall Street Journal editorial board, among others, likes to call these “privately funded scholarships,” the reality is that three times as much money is coming from public coffers as opposed to private ones. These lost public dollars are unavailable to “invest in kids” who attend Illinois public schools.

Voucher tax credits are peculiar tax policy, to put it mildly. For one thing, the size of the tax cut involved is astronomical compared to what people typically receive from states on their gifts to charitable organizations.

Some states offer a tax cut of 5 or 10 cents on the dollar for gifts made to charitable causes. Other states, including Illinois, offer no tax cut at all on most gifts. Unless, of course, the gift happens to be to support private school vouchers. In Illinois, donors giving to these voucher-bundling organizations get a 75 percent state tax cut while those who choose to support veterans’ organizations, survivors of domestic violence, environmental causes or any other issue receive precisely nothing from the state.

While Illinois does not publish data showing who is pocketing these tax credits, data from other states show that high-income families are most likely to jump at the chance to send their money to private schools and pay significantly lower taxes to support public education as a result.

A study published by ITEP just a few months ago revealed that in all three states providing data, most voucher tax credits are claimed by families with income over $200,000. In Arizona, 60 percent of tax credits are claimed by this group. In Virginia, that figure stands at 87 percent. And in Louisiana, an astounding 99 percent of tax credits go to these top earners.

Making matters worse, Illinois is among the states that have chosen to open the door to a highly problematic—and legally dubious—loophole that some high-income families are using to avoid state and federal tax on their capital gains income. These families send their stock holdings, rather than cash, to voucher-bunding groups and claim that their gifts do not give rise to capital gains income, even though they received a payout from the state worth most of their stock’s value. Fenwick High School, just outside of Chicago, has encouraged families to exploit this convoluted scheme, calling it “double tax savings.” When capital gains tax avoidance is stacked on top of the tax credit itself, the combined revenue loss to Illinois can go beyond 75 percent of the amount contributed.

The tax credits being paid out through the “Invest in Kids” program are almost certainly widening tax inequality in the state. And while the trickle-down theory behind these tax cuts suggests that families of more modest means will eventually benefit as well, the reality is that school vouchers do not meaningfully improve student achievement. Nevertheless, Gov. J.B. Pritzker has expressed interest in extending the state’s voucher tax credit while also reshuffling a larger share of its cost onto the federal government. The details of that proposal have yet to be released, but it is clear that the end result would look very similar, in the broad strokes, to the current policy. Most of the funding for private school vouchers would come out of public coffers (federal and state) with only a small sliver coming from the so-called “donors” themselves. Ultimately, the biggest problem with Illinois’s voucher tax credit is the core idea behind the program, not the details of how it is administered.

If “Invest in Kids” is allowed to lapse at the end of this year, donors to private and religious K-12 voucher programs will receive the same tax treatment as donors to other nonprofit organizations. This would be an immense improvement over the current arrangement, which indefensibly puts private K-12 schools at the front of the line with exceptionally generous tax subsidies. Better tax and education policy is right around the corner in Illinois. All lawmakers have to do is wait.


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