Tax-Credits in Theory and Practice [Mackinac Center for Public Policy]

The most basic form of education tax credit is one that allows parents to reduce the amount of state taxes they owe by one dollar for every dollar they spend on their children’s education. This personal use tax credit can be either open to all parents or means tested so that only parents below a certain income threshold are eligible.

Whether means tested or not, personal use tax credits come in two flavors: refundable, and non-refundable. A non-refundable credit simply reduces the amount a taxpayer owes, down to a minimum of zero dollars. Refundable credits, by contrast, can actually produce a negative tax balance, meaning that the taxpayer receives money from the state instead of paying money to it. The term refundable is thus a misnomer, since the taxpayer need not have paid any taxes in order to qualify for the “refund” payment. Refundable credits are equivalent to vouchers in that they constitute an outlay of government funds, while lacking the simplicity of voucher programs. As a result, virtually all modern education tax credit programs and proposals are for non-refundable credits.[43]

A problem with non-refundable personal use credits is that they cannot benefit families who have little or no tax liability. To fill that gap, tax-credit proponents developed the donation tax-credit concept.[44] Under donation credits, tax-paying individuals and/or businesses are credited for contributions they make to non-profit Scholarship Granting Organizations (SGOs). The SGOs, in turn, pay private school tuition for children from low- and middle-income families.

The ultimate tax-credit solution is to combine conventional personal use tax credits with donation credits, creating what the Mackinac Center has dubbed Universal Tuition Tax Credits, or UTTCs. Under a UTTC program, any taxpayer who pays for a child’s education can receive a credit, whether or not the child is his or her own. As yet, no state has implemented a UTTC program, though personal use and donation credits exist independently in a number of states. Because the credits may be applied to educational expenses other than tuition, this paper adopts the term Universal Education Tax Credits, or UETCs.

Scholarship recipients	Between 15,000 and 20,000 (2003)
Cap on scholarship recipients	No preset limit. In practice, enrollment is limited by a function of the amount of money donated and the (variable) size of the scholarships awarded.
Scholarship Granting Organizations	Approximately 150 (abbreviated hereafter as SGOs)
Age of program	2 years
Scholarship Size	Variable. Determined by each SGO
Credit size	- Businesses can write off 75% of any single year donation, receiving a credit of up to $200,000 (i.e. a $266,666 one year donation would qualify for the $200,000 maximum credit) - Businesses that commit to making a donation in two or more consecutive years can deduct 90% of each year’s donation up to a per-year credit of $200,000 (i.e. a commitment to donate $222,222 in two consecutive years would quality for the $200,000 maximum credit in each of those years). - The $200,000 cap supersedes to the original $100,000 cap starting in the 2004-2005 school year.
Cap on total credits	A maximum of $26 million in credits are awarded annually for donations to private scholarship granting organizations, starting in the 2004-2005 school year. The original cap was $20 million.
Source of funding	Private businesses. Credits can be assessed against a wide range of business taxes.
SGO eligibility requirements	- Must be 501c(3) nonprofits - Must contribute 80% of annual receipts to scholarships, and prove this via an independent CPA filing - Must provide a reviewed or audited financial statement prepared by an independent CPA - Must not limit scholarship recipients to choosing a single school
Student eligibility requirements	To be eligible, a family’s total income must be below 60,000 if they have one child, 70,000 if they have two children, and so on.
School eligibility requirements	None other than those pertaining to other private schools
School financial regulations	None other than those pertaining to other private schools
School facilities regulations	None other than those pertaining to other private schools
School admissions regulations	None other than those pertaining to other private schools
School personnel regulations	None other than those pertaining to other private schools
School content regulations	None other than those pertaining to other private schools
School testing regulations	None other than those pertaining to other private schools
School performance regulations	None other than those pertaining to other private schools
Donation regulations	Nothing in the law forbids donor businesses from earmarking their donations for use at specific schools.

Sources: “Educational Improvement Tax Credits,” a fact sheet provided by InventPA.com, the website of the Pennsylvania Department of Community and Economic Development (DCED). Obtained online at: [http://www.inventpa.com/docs/Document/application/pdf/c9310566-4789-4b36-bfbc-b502d5bd1c92/edutaxcreditssummary.pdf].

And: “List of Scholarship Organizations (Effective 07/01/2003 - 06/30/2004),” provided by InventPA.com. Obtained online at: [http://www.inventpa.com/docs/Document/application/octet-stream/a10b7a3a-a52f-4b4b-9ea7-9e14bc573930/scholarshiporg.pdf].

And: The General Assembly Of Pennsylvania, Session of 2001, “House Bill No. 996,” the enabling legislation for the tax credit program. Obtained online at: [http://www2.legis.state.pa.us/WU01/LI/BI/BT/2001/0/HB0996P1878.pdf].
And: Edward J. Vassallo, “Perzel hailed as champion of program that aids Father Judge students,” NewsGleaner.com, February 25, 2004. Obtained online at: [http://www.newsgleaner.com/site/news.cfm?newsid=11024041&BRD=2340&PAG=461&dept_id=488595&rfi=6].

Scholarship recipients	Approximately 19,000
Cap on scholarship recipients	No preset limit. In practice, enrollment is limited by a function of the amount of money donated and the (variable) size of the scholarships awarded.
Scholarship Granting Organizations	Approximately 47
Age of program	6 years
Scholarship Size	Variable. Determined by each SGO
Credit size	- Individuals can write off 100% of their donations to scholarship granting organizations up to a maximum of $500. - For married couples, the maximum donation is $650.
Cap on total credits	No preset cap
Source of funding	Individual donations that qualify for credits against the state income tax
SGO eligibility requirements	- Must be 501c(3) nonprofits - Must contribute 90% of annual receipts to scholarships (and prove this via an annual financial filing) - Must make scholarships available to more than one school
Student eligibility requirements	none
School eligibility requirements	None other than those pertaining to other private schools
School financial regulations	None other than those pertaining to other private schools
School facilities regulations	None other than those pertaining to other private schools
School admissions regulations	None other than those pertaining to other private schools
School personnel regulations	None other than those pertaining to other private schools
School content regulations	None other than those pertaining to other private schools
School testing regulations	None other than those pertaining to other private schools
School performance regulations	None other than those pertaining to other private schools
Donation regulations	Nothing in the law forbids donors from earmarking their donations for specific schools or even specific children, so long as the children in question are not their own.

Sources: Carrie Lips Lukas, "The Arizona Scholarship Tax Credit: Providing Choice for Arizona Taxpayers and Students," Arizona Issue Analysis #186, Goldwater Institute, December 11, 2003.
And: Arizona Statutes 43-1089, "Credit for contributions to school tuition organizations." Obtained online at: [http://www.azleg.state.az.us/ars/43/01089.htm].

Taxpayers claiming credits	Number unknown
Cap on scholarship recipients	No limit
Scholarship Granting Organizations	N/A
Age of program	6
Credit size	- Individuals can write off 25% of their eligible education expenses for their own children, up to a maximum credit of $500. - Eligible expenses include tuition, book fees, and lab fees in excess of $250.
Cap on total credits	None
Source of funding	Credit against parents’/guardians’ personal income taxes
SGO eligibility requirements	N/A
Student eligibility requirements	Under 21, attending an eligible school (see below)
School eligibility requirements	Public schools or private schools that satisfy Title VI (non-discrimination provision) of the Civil Rights Act of 1964 and that satisfy the compulsory attendance provision of section 26-1 of the Illinois School Code.
School financial regulations	None other than those pertaining to other private schools
School facilities regulations	None other than those pertaining to other private schools
School admissions regulations	None other than those pertaining to other private schools
School personnel regulations	None other than those pertaining to other private schools
School content regulations	None other than those pertaining to other private schools
School testing regulations	None other than those pertaining to other private schools
School performance regulations	None other than those pertaining to other private schools
Other	Private schools in Illinois need not register with the state, nor belong to a state-approved accrediting body

Sources: Illinois Compiled Statutes, Chapter 35, Article 5, Section 201, Subsection m (35 (ILCS) 5/201). Obtained online at: [http://www.legis.state.il.us/legislation/ilcs/ilcs4.asp?DocName=003500050HArt%2E+2&ActID=577 &ChapAct=35%A0ILCS%A05%2F &ChapterID=8&ChapterName=REVENUE& SectionID=39344&SeqStart=2300&SeqEnd=4300 &ActName=Illinois+Income+Tax+Act%2E

Scholarship recipients	15,000 (2002-2003) (55,000 children applied)
Cap on scholarship recipients	All children who qualify for free/reduced price lunch (1,098,140 as of the fall of 2002). In practice, enrollment is limited by the amount of money donated and the size of the individual scholarships awarded.
Scholarship Granting Organizations	7 (November 2003)
Age of program	2
Credit Size	There is no limit on the total amount of creditable donations a given business can make other than the overall cap on the entire program (see below), and the fact that the business’s donations to a single SGO may not exceed $5 million per year.
Scholarship size	- Variable, up to the lesser of $3,500 or the school’s tuition - No child may receive more than $3,500 whether from a single scholarship organization or cumulatively from multiple such organizations
Cap on total credits	$88 million (2003)
Source of funding	Corporate donations eligible for credit against state taxes
SGO eligibility requirements	- Must be 501c(3) nonprofits - Must make scholarships available to multiple schools - Must give priority to students who received a scholarship in the previous year - Can only accept donations for specific children already identified as eligible and for which private school places have been identified - Must spend 100% of scholarship donations on scholarships in the year in which the donations are made. Interest from donations must be spent on scholarships Annual financial filing by an independent CPA is required - Must confirm that scholarship is restrictively endorsed to the school of choice (to prevent kickbacks?)
Student eligibility requirements	- Must qualify for free or reduced price lunches - Student must be just starting school or, in the previous year, student must have either been enrolled as a full-time Florida public school student or have already been participating in the scholarship program. - As a corollary, students already enrolled in private schools are not eligible
School eligibility requirements	None other than those pertaining to other private schools
School financial regulations	Must have been in operation for at least a year, or submit CPA filing stating it is/will be solvent, or file a letter of credit to the state in the amount of the scholarship
School facilities regulations	Meet state and local health and safety laws and codes
School admissions regulations	Comply with the anti-discrimination provisions of 42 U.S.C. s. 2000d
School personnel regulations	Comply with the anti-discrimination provisions of 42 U.S.C. s. 2000d
School content regulations	None other than those pertaining to other private schools
School testing regulations	None other than those pertaining to other private schools
School performance regulations	None other than those pertaining to other private schools
Donation regulations	Donation may not be earmarked for a specific child
Other	Parents must inform their public school district within fifteen days of having accepted a scholarship to a private school

Sources: 2003 Florida Statutes, Title XIV, Chapter 220.187, Sections 2 and 3. Obtained online at: [http://www.flsenate.gov/Statutes/ index.cfm?App_mode=Display_Statute &Search_String=&URL=CH0220/ SEC187.HTM &Title=-%3e2001-%3eCH0220-%3eSection%20187].
And: The Manhattan Institute website corporate scholarships page. Obtained online at: [http://www.miedresearchoffice.org/corporatetaxscholarships.htm].