Americans United has advised the Internal Revenue Service to move forward with a plan to close a loophole in federal tax law that allows individuals who donate to state-based voucher programs to make money off their donations.
Several states have adopted voucher programs called tuition tax credits. Under these plans, individuals or corporations donate money to an intermediary organization, and this entity, in turn, writes a check for tuition to a private school. The state then fully reimburses the donor through a dollar-for-dollar tax credit. These are not donations in the legal sense, since the government fully repays the money. But that hasn’t stopped some people from claiming them as such on their federal tax returns.
In six states, after the “donor” receives a full state tax reimbursement, the taxpayer can also take a federal tax deduction for the same “donation.” This allows the donor to actually make money by donating to the voucher program.
Writing about the issue on AU’s “Wall of Separation” blog, Maggie Garrett, AU’s legislative director, observed, “Imagine that a wealthy South Carolinian who is in the top tax bracket gives $1 million to a ‘scholarship organization’ that funds the state’s private school voucher program. South Carolina will reimburse that donor $1 million – this means the donor hasn’t spent anything. Nonetheless, the federal government considers that $1 million a charitable donation and therefore not taxable. At the top federal income tax bracket of 37 percent, the donor saves $370,000 on their federal taxes. But because the donor was reimbursed by the state for every dollar of their $1 million donation, that extra $370,000 savings is pure profit. It’s outrageous.”
Garrett noted that public schools are the biggest loser in this scheme because, in the example above, all $1.37 million in state and federal tax breaks could have been used to fund public schools; instead, it is used to fund private, mostly religious schools and wealthy individuals.
Noted Garrett, “We applaud the IRS for recognizing that this scheme is fleecing America and for proposing to close the loophole. But, in an effort likely led by the Association of Christian Schools International, the IRS is now being targeted with criticism.”
Americans United has formally asked the IRS to close the loophole. The organization continues to monitor the situation. AU also made a short video to explain the issue: