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Carl Davis is Research Director at the Institute on Taxation and Economic Policy (ITEP), a non-profit, non-partisan research organization that works on federal, state, and local tax policy issues.
When is a charitable contribution not a “donation” at all? If a taxpayer manages to turn a profit on the deal, has anything altruistic actually occurred? The clear answer is no. But a new report from my organization, the Institute on Taxation and Economic Policy, reveals that the Internal Revenue Service (IRS) does not always see it that way, at least with regard to certain state-subsidized “gifts” that Oklahomans are making to private K-12 scholarship funds.
Tax incentives for charitable giving are common in the United States. More than 30 states, including Oklahoma, allow a write-off for charitable donations. For an Oklahoma taxpayer who claims itemized deductions, this state incentive can reduce the cost of giving by up to 5 percent.
One particular type of giving, however, enjoys a much more generous government subsidy. In 2011, Oklahoma decided to supercharge its charitable donation incentive for contributions to private K-12 scholarship funds. Donors who pledge to contribute for two consecutive years now receive a tax credit equal to 75 percent of the amount donated. When combined with the state’s ordinary charitable deduction (a practice prohibited in most states with these types of credits, but allowed in Oklahoma), the end result is a program that reimburses donors for up to 80 percent of their contribution. That incentive is 16 times more generous than the 5 percent match the state offers on gifts to churches, food pantries, and other charities.
As if this subsidy were not enough, the full benefit to private school donors is even larger once federal income tax consequences are considered. In fact, as our report explains, certain high-income taxpayers can actually turn a profit by claiming a federal charitable deduction for so-called “donations” that were already largely reimbursed by the state. In other words, the IRS allows private school donors to enjoy a charitable deduction even when there was no charitable intent or effect behind their actions. We calculate that under the right set of circumstances, an Oklahoma business could generate up to $20,000 in profits each year — at taxpayer expense — by collecting three tax benefits (a state credit, state deduction, and federal deduction) on a single donation.
[pullquote]“When businesses and high-income taxpayers are able to generate a profit by making a so-called ‘donation,’ the entire concept of charity is thrown on the window.”[/pullquote]
This tax scheme was not designed with average Oklahomans in mind. First, the limit placed on tax credits claimed by individuals ($2,000 per year) is much lower than the limit faced by business owners ($100,000). And second, because of a quirk in federal tax law, only taxpayers subject to the federal Alternative Minimum Tax (AMT) can use this method to turn a profit. As IRS data show, AMT payers are overwhelmingly comprised of households earning over $200,000 per year. In Oklahoma, 82 percent of filers with AMT liability earn over this amount.
When businesses and high-income taxpayers are able to generate a profit by making a so-called “donation,” the entire concept of charity is thrown out the window. In effect, an incentive of this magnitude shifts most or all of the ultimate cost of subsidized private school scholarships onto the public, as opposed to the taxpayers who allegedly “donated” those funds. While it may sound extreme, the truth is that this arrangement has more in common with money-laundering than it does with actual philanthropy.
Read ITEP’s report for more information on how high-income taxpayers are using neo-vouchers to turn a profit in ten states, including Oklahoma, and on the dubious educational benefits and general lack of accountability inherent in such programs.
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Why do you recycle old news? Anyone who is on top of their policy knows that there is a new tax law in place. In that new tax law, it is impossible for a donor to “profit” or “make money” on a state tax credit to a charitable organization. First, the state only provides a tax credit on a part of the donated amount (in Oklahoma that is 50% or 75% depending on whether the donor makes a two-year commitment). The donor is not “making money” on the state incentive. States create incentives through tax credits to achieve a public good. Empowering parents to educate their children in the place that best meets their learning needs is good for all Oklahomans.
Under the new federal tax law, not all taxpayers are able to itemize their deductions due to the higher standard deductions. However, if the donor is able to itemize their deductions, the amount of the charitable contribution deduction under the new tax law is reduced by the amount of the state tax credit received. For example, if the donor gives $100 and receives a 75% tax credit for that gift, their charitable contribution deduction on that $100 contribution is only $25 ($100 gift – $75 tax credit received). Even at a 24% tax bracket, that $25 is only good for a $6 federal tax benefit, and a $1 state tax benefit from the charitable contribution deduction. I don’t believe that large or small donors will benefit by “laundering their money” through this program.
Regardless as to how the donor is able to use their money to donate (after all, it is THEIR money until they file their tax return), there are a lot of lower-income families that would not be able to afford an education for their children, which they are grateful to have. This program can level the playing field for lower-income families to have the same educational opportunities that more affluent families have currently. And this is with private dollars – not public funds (which there is no evidence that such funding has not been reduced by programs like this).
Please find better material to spew in the future. You are starting to lose your credibility (what little that there is).
[Editor’s Note: Rob Sellers is Executive Director of the Opportunity Scholarship Fund. By reimbursing a portion of private donations to the Opportunity Scholarship Fund with state dollars, this program directly reduces the public funds available to support public education and other services.]
The regulation you’re referring to is merely a proposal. It is not yet official IRS policy. And indeed, many private schools and SGOs from around the country have lobbied fiercely for a carveout that would exempt Oklahoma’s program and ones like it from the scope of the regulation. I sincerely hope that those groups’ efforts do not succeed. But we will not know for sure until the IRS unveils a final regulation and until that we see whether that final regulation withstands a likely legal challenge from New Jersey and other states where leaders have expressed displeasure with the IRS’s proposal. Until that happens, it is impossible for Oklahoma legislators to know how the IRS will treat donations under this program, which makes this a very inopportune time to consider an expansion.
Carl, merely a proposal that, once finalized, will revert back to the date of issue in August 2018. The regulation will be finalized and it will be to the detriment of programs that help lower-income families to provide the best education available for their child, solely because high tax states like NY, CT, NJ and CA created quid-pro-quo “charitable” entities to create a tax loophole (like all the rich people like) around a federal tax law. This will preclude donors from “making money” on a donation to help a kid.
In addition, the state is only providing a portion of a tax credit – 50%, or 75% if the donor is willing to make a two-year commitment – that benefits Oklahoma families and the local economies around these accredited private schools. The tax credit scholarships have exceeded their $5 million cap for the last two years. That means that they have had to raise over $6.7 million for it to cost the state $5 million. If I were a state government and I could get $1.7 million more money, plus reduce my operating costs from the savings of the program, I would do that every day and twice on Sundays.
And to answer the “Editor’s note”, it is a portion of the private donation – not an amount greater than what was given – to help a family to get the educational help they want for their child. All kids learn differently and unfortunately our public schools can’t help all kids – even if they had all the money they want. Common education in Oklahoma currently gets $2.9 billion of the state taxpayers’ dollars. They get another $3.0+ billion in local taxes, plus federal funds. They would like to have another $400 million appropriated with no expectation of better academic outcomes. Having the state provide an incentive for private money to assist families in getting their children educated is a great investment in our kids…and that is what our focus is on – the kids. We have a lot of thank you notes from grateful parents.