A new report released today takes a look at states’ tax expenditures that benefit private K-12 schools, revealing that some wealthy taxpayers can actually turn a profit from these tax credits. You’ll recall that the Montana legislature passed one of these measures last session, which went into law in 2015. The bill (SB 410) allows a taxpayer to take a tax credit for a donation to an organization that provides scholarships to private school students. MBPC released a report raising concerns about this – and several other proposals – that divert state taxpayer dollars from investments in our quality public schools to private schools.
But the report by the Institute on Taxation and Economic Policy (ITEP) does more than just raise concerns about taxpayer dollars benefiting private institutions – it reveals that some high-income taxpayers are actually able to turn a profit as a result of this credit. This means that for some wealthy taxpayers, they can actually get a total tax cut that exceeds the size of the original donation.
How is this possible?
ITEP goes into a lot of detail on how this scheme works. In summary, the Montana tax credit is structured to reimburse a taxpayer for 100 percent of the cost of the donation (in Montana, capped at $150, or $300 for a married couple). In other words, for a household with tax liability, a donation up to the cap essentially costs nothing to the donor and is fully-funded by Montana taxpayers. To add to that, IRS also allows taxpayers to take a federal charitable deduction for their private school donation.
While most taxpayers would have a corresponding reduction in their federal deduction for state income taxes paid (and it would then be a wash), taxpayers who are subject to the federal Alternative Minimum Tax (AMT) are under different rules and can use the charitable deduction to lower tax liability and “double-dip” on the tax benefit of the donation. Depending on their marginal tax rate, these households could receive up to $105 in profit on the donation. In Montana, nearly 10,000 taxpayers are subject to the federal AMT, and about 80 percent of those have incomes more than $200,000 a year.
This tax scheme doesn’t benefit students or our education system, but instead benefits high-income households that can take advantage of a sophisticated tax planning technique.
Montana is not alone. Ten other states have similar “profit-making schemes” structured as private school tax credits. In fact, the levels of profit possible in some states are staggering. As ITEP notes, the cap on Montana’s credit limits the amount that one can profit – but profit, nonetheless.
Montana taxpayers and the state legislature should take note of how this credit can be manipulated by a small percentage of wealthy households and consider repeal (or at the very least, refrain from expanding this terrible policy).
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.