Private School Tax Subsidies Blur the Line Between Charitable Gift and Money Laundering

This post from October 2016 was updated on February 23, 2017.

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 an ITEP report reveals that the federal government does not always agree, at least with regard to certain gifts to private K-12 scholarship funds. Released late last year, the report’s findings may gain renewed public interest because the newly confirmed Education Secretary, Betsy DeVos, is a proponent of using public dollars for private school education and President Trump, according to reports, is considering a policy that would funnel federal dollars to private schools via federal income tax credits.

Tax incentives for charitable giving are common in the United States. More than 30 states, for example, allow a write-off for charitable donations that reduces the cost of giving by roughly 5 to 10 percent, depending on the state. A growing group of states, however, are using their tax codes to supercharge their charitable donation incentive for contributions to private K-12 scholarship funds.

In 17 states, tax credits for donations to private school scholarship funds reduce the cost of a donation by 50 percent or more. Even more remarkable is that in five states, tax credits equal to 100 percent of the donation are actually designed to wipe out the entire cost of donating to these schools. When a 100 percent tax credit is made available, the state is effectively bankrolling the entire donation at no true cost to the taxpayer that allegedly “donated” the funds. In essence, many of these policies have more in common with money-laundering schemes than they do with actual philanthropy.

But this may not even be the most unbelievable part of the arrangement. As explained in our report, certain high-income taxpayers can turn a profit by claiming a federal charitable deduction for so-called “donations” that were already 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.

There are currently ten states (Alabama, Arizona, Georgia, Louisiana, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Virginia) where such profit-making schemes are possible. That list could soon grow, however, if states such as Arkansas, Idaho, Kentucky, Minnesota, Missouri, and Nebraska decide to move forward with similar credits currently under discussion.

These and other state tax subsidies collectively funnel more than $1 billion in public funding toward private schools every year. As our report explains, these subsidies function much like school voucher programs and have even been referred to as “neovouchers.” Relative to traditional vouchers, however, the lack of transparency in tax subsidy programs makes them better suited for skirting public opposition or even circumventing constitutional obstacles that sometimes stand in the way of spending public dollars on private schools. 

Read the report for more information on how high-income taxpayers are using neovouchers to turn a profit, and on the dubious educational benefits and general lack of accountability inherent in such programs.