All the programs basically work this way: Individuals and businesses make cash or stock donations to scholarship granting organizations. The organizations award scholarships to qualifying families with K-12 students, primarily children in failing public schools or whose families’ income meets the state’s poverty threshold. Students can then attend a private or religious school of their choice. What makes these programs unique is that donors get a full or partial credit toward their state taxes, which they are not allowed when donating to most other charities, and this allows them to realize a sizable tax advantage when combined with a federal deduction on the same gift. Plus, in some states, donors also get a state deduction.
“What these scholarship tax credits do is they super charge that incentive up to 100 percent of the amount donated,” Carl Davis, senior tax expert with the Institute on Taxation and Economic Policy, said. “And in the right set of circumstances, they’re receiving more back in tax breaks than they ever donated in the first place. … They’re able to claim a state tax credit and a federal deduction on a single donation and this is often profitable for them to do so.”
Davis’ organization released a report last month in conjunction with the American Association of School Superintendents that highlights nine states — Alabama, Arizona, Georgia, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina and Virginia — where donors can make a profit from their donation.
In Alabama, according to Davis, if a donor in a 28 percent tax bracket contributed $50,000 to a scholarship tax credit program, the donor would get a $50,000 tax credit to offset state taxes owed. Combine that tax credit with a federal deduction — calculated at the same tax rate — plus an additional state deduction for federal taxes paid, and the donor could receive up to $63,300 in tax cuts, which is a $13,300 profit.
Davis argues these programs divert much needed tax revenue away from state resources.
“Any other public service you can imagine can potentially suffer because of these scholarship tax credits,” he said. “There will be less funding for public schools, less funding for roads and bridges, health care, public safety.”