A surprise cap on charitable giving

NICK EICHER, HOST: It’s Thursday, the 27th of September, 2018.

Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Nick Eicher.

MARY REICHARD, HOST: And I’m Mary Reichard.

First up on The World and Everything in It: a battle over tax fraud catches school choice programs in the crossfire.

EICHER: The Republican tax code overhaul adopted last year included a cap on the state and local tax deduction. That triggered a volley of state laws and federal policymaking with unintended consequences for a popular form of school choice.

REICHARD: Eighteen states have tax-credit scholarship programs that fund private school tuition for a quarter-million children. But those programs now face an uncertain future. WORLD Radio’s Leigh Jones explains why.

LEIGH JONES, REPORTER: Alleane West knew her four sons had potential. But growing up in Mobile, Alabama, they had few educational options and plenty of opportunity to get off track. When she and her oldest son Nick discovered the state’s tax credit scholarship program, it felt like a lifeline.

Here’s Alleane talking about the experience in a video produced by the Alabama Opportunity Scholarship Fund.

ALLEANE: It was a relief that nobody would understand unless you know you’re a single mom with boys, trying to not make them a statistic.

Through one of the fund’s scholarships, Nick attended McGill-Toolen Catholic High School, where his classmates unanimously voted him most likely to succeed.

NICK: It embodies my idea that I want to push forward, and I always want to try to go past the limit. No matter what that limit is, I always want to pass that limit.

Today Nick continues to push his academic limits at the University of Alabama-Huntsville, where has has a full ride scholarship. But his younger brothers have to worry about another limit on state and local tax deductions.

Under the Tax Cuts and Jobs Act, federal deductions for state and local taxes are capped at $10,000. That limit closed a loophole in the federal tax code. Residents in high tax states had used it to reduce their overall tax bill.

In response, lawmakers in New York, New Jersey, and Connecticut created a new loophole: state-run charities that pay for government services. Residents who donate to those charities get tax credits to offset their local tax bills. They can then write off those so-called “donations” on their federal tax returns.

HINER: It’s basically a tax scheme to try to get out of paying federal taxes.

Leslie Hiner is vice president of legal affairs for EdChoice, a national organization that advocates for school choice programs. She notes the new scheme is unique because it’s led by state officials.

HINER: Not the kind of thing that you see every day. Normally people get thrown in jail for trying to dodge taxes.

To shut down that new loophole, the Treasury Department issued a rule limiting state tax credits in exchange for charitable donations. That meant it applied to tax credit scholarships programs as well.

Leslie Hiner described it as taking a sledge hammer to a nail.

HINER: They had a very specific problem, but in correcting the very specific problem, they issued a very broad rule that swept in a whole lot of other nonprofits that were no part of any of the schemes being created by those states.

Which takes us back to Alabama. Lesley Searcy heads the Alabama Opportunity Scholarship Fund.

SEARCY: We’re very concerned that this will negatively impact our future contributions. We have over 600 individual donors that support our program. And there is great concern that the program will suffer if the contributions are not sustained.

Searcy’s group funds scholarships for 1,600 students, with 20,000 more on a waiting list. All the families are low-income, with the average family of four making just $26,000. Without their scholarships, the students would be forced back into the local schools they so desperately wanted to leave.

SEARCY: Right now all of our students are funded for this current school year, but we just, we’ve got to have clarity, and we desperately need that carve-out so that we can provide assurance that they’ll still have scholarships.

The Treasury Department is taking public comments on the new rule until October 11. So it could still come up with a solution.

But school choice programs aren’t the only ones affected. States also give tax credits for donations to community hospitals, certain development projects, and land conservation programs. They’re all worried about how the new rules will affect donations.

HINER: The first step is to evaluate the impact. Now it seems like it would be easy to do, however, it’s actually very difficult to evaluate the impact with any degree of certainty because we are right now in between the old tax code and the new tax code.

People who believe in a cause probably will continue to donate, even if they don’t get as much tax benefit as they used to. But Lesley Searcy says the government’s goal should be to make it easier for people to give, not harder.

SEARCY: Alabama’s a very generous state, and there are many people in the state that want to support these programs. But anything that makes it easier to raise the funds that provide the monies for these kids, that’s where we need to be moving.

Reporting for WORLD Radio, I’m Leigh Jones.

(Alabama Opportunity Scholarship Fund) Students at Little Flower Catholic School in Mobile, Ala.

(Mark Moran/The Citizens’ Voice via AP) In this Nov. 22, 2017, file photo, a patron donates money in a Salvation Army red kettle in Wilkes-Barre, Pa.

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