Changes to scholarship tax credit bill would divert even more dollars from public education

One of the most contentious education issues this session has been an effort to expand the Oklahoma Equal Opportunity Scholarship Act. As we discussed in an earlier blog post, two bills were introduced to make changes to the program. One of those bills is SB 407 (Sen. Rader and Rep. Echols) and it was recently amended by a House committee substitute which made several worrisome modifications. 

While intended to address concerns with the original version, the latest changes to the scholarship tax credit legislation are even more harmful. The new bill increases the Oklahoma Equal Opportunity Scholarship tax credit limit from $5 million to $30 million, which means an additional $25 million public dollars could be taken out of our revenue base as tax credits for private donations. Every dollar this bill spends on tax credits is a dollar the state can’t spend on public education or other core services. In addition to diverting more tax dollars away from public services, the revisions also dilute the fiscal impact of donations to public school foundations and create unfair advantages for some nonprofits.

Bill to expand the Oklahoma Equal Opportunity Scholarship Act 

The original version of SB 407 sought to amend the Oklahoma Equal Opportunity Education Scholarship Act. This act grants tax credits to individuals or corporations who make a donation to a scholarship granting organization (SGO) or an educational improvement grant organization (EIGO). SGOs award scholarships for students to attend participating K-12 private schools while EIGOs award grants to public school districts with fewer than 4,500 students. Currently, the total tax credit is capped at $5 million. Earlier this session, the Senate committee amended the initial version of SB 407 and increased the total tax credit limit to $20 million. 

[pullquote]If the goal of scholarship tax credits is to help increase private donations to public schools, returning up to 75 percent of this donation from the state’s tax revenue is counterproductive.[/pullquote]

Most recently, House author Rep. Echols introduced a committee substitute for SB 407, which increases the total tax credit limit for scholarship donations to $30 million, a six-fold increase over the current cap. The amended version of the bill would also:

• Remove the restriction placed on EIGO grantees and allow all public schools (regardless of size) to receive education improvement grants;
• Extend tax credits for donations to public school foundations, but limit individual school districts to giving out $100,000 in tax credits per year. Public school foundations are nonprofit organizations that accept private donations to benefit a particular public school district;
• Increase transparency by requiring organizations that receive tax credit donations to submit detailed financial reports to the Oklahoma Tax Commission.

The new version of the bill passed out of the House Appropriations and Budget committee on April 10th. Next it will need to be passed by the full House before going back to the Senate to accept House amendments or send the bill to conference committee. 

Expanding the credit to public school foundations is counterproductive

While the new version of SB 407 appears to be a boon for public schools, these changes actually make private donations to public schools less impactful. Under the Oklahoma Equal Opportunity Scholarship Act, individuals or businesses that donate to SGOs and EIGOs receive a 50 percent tax credit for a one-time donation and a 75 percent tax credit for a two-year donation on top of the standard state and federal charitable tax deduction. Under the new version of the bill, these tax credits would now extend to donations to a public school foundation. Currently, donations to public school foundations are eligible only for a standard charitable deduction.

Public school foundations are designed to solicit private dollars to supplement public funding. Donations to public school foundations are typically used to fund special programs or to award grants for classroom supplies because schools lack sufficient state funding to provide these on their own. However, rather than add funding to public schools, the tax credit dilutes the fiscal impact of these private dollars by paying individuals or businesses back at least half of their donation with public funding. If the goal of scholarship tax credits is to help increase private donations to public schools, paying back up to 75 percent of this donation from the state’s tax revenue is counterproductive.  

In addition, while creating an incentive to donate to public school foundations may increase giving, this benefit creates a competitive disadvantage for other nonprofits that rely on charitable contributions to stay afloat. Donating to a public school foundation would become much more lucrative and attractive than making a donation to, for example, Reading Partners or the Oklahoma Arts Institute, which both provide educational opportunities for children. This change raises questions about fairness and why some nonprofits can offer tax credit benefits for donations and others cannot. 

Increasing the cap on scholarship tax credits drains even more public dollars

By increasing the total cap on the tax credit six-fold, the new version of SB 407 is likely to divert even more public funding to private schools. Despite the fact that the revised bill seeks to extend tax credit benefits to public schools, thus far, donations for private schools scholarships have far outpaced donations made to public schools. From 2013 to 2017, donations to private school SGOs skyrocketed from $570,000 to $5.1 million, compared to roughly $300,000 donated to the public school EIGO last year, according to estimates cited during the Senate committee debate on SB 407. At a time when public schools still haven’t recovered from a decade of budget cuts, this is not the time to strip our state coffers of an additional $25 million that could be invested in the state aid formula. 

Questions remain about benefits to low-income students

The amendments made to SB 407 still leave other major concerns about this bill. While proponents of scholarship tax credits claim that they benefit low-income students the most, lack of oversight and reporting requirements make it difficult to validate this claim. It is encouraging that the new version of the bill would help rectify this problem by requiring SGOs to report scholarship data by income; however, it is short-sighted to expand the program before obtaining this information.

In addition, the new revisions do not modify current student eligibility requirements for private school scholarships. Currently, families that earn up to three times the income limits for free and reduced priced lunch (a family of four earning $139,000 a year) are eligible for scholarships.  Still further, in 2017-2018 the state’s three largest SGO’s awarded an average scholarship of just $1,800, which makes it unclear whether these awards put expensive private school tuition in reach for low-income families.  

Committee substitute for SB 407 doesn’t fix the problems

While the changes made to SB 407 may give the impression that the bill will substantially benefit public schools, this is not the case. Expanding tax credits for donations to public school foundations dilutes the impact of private donations by reimbursing donors with public dollars. Public schools need reliable, consistent and equitable public funding. SB 407 could divert up to $30 million dollars of revenue as tax credits that could instead be appropriated directly to public schools. Investing these dollars through the state aid formula is the only way to ensure that all public school students have access to quality schools.