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.

“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.”

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.

The opinions stated above are not necessarily those of OK Policy, its staff, or its board. This blog is a venue to help promote the discussion of ideas from various points of view and we invite your comments and contributions. To see our guidelines for blog submissions, click here.