I often see tax proposals that are well-intentioned but poorly designed. I sometimes see ideas that are well designed but wrong-headed. Then, there is President Trump’s plan to provide a 100 percent federal income tax credit for individuals and businesses that contribute to scholarship funds for private K-12 schools. It hits the daily double: It is bad policy paired with horrific design. Sort of the tax policy version of cheap red wine mixed with Dr. Pepper.
Yet the idea is one of the few new tax initiatives in the budget Trump proposed yesterday. It seems to have first been dreamed up by Education Secretary Betsy DeVos and then turned into legislation by Sen. Ted Cruz (R-TX).
We don’t know exactly what Trump is proposing since the Treasury Dept. no longer provides detailed descriptions of the President’s tax proposals. But Cruz’s bill, called the Education Freedom Scholarships and Opportunity Act, gives us a rough idea: If taxpayers play their cards right, the federal government would effectively reimburse the entire cost of their child’s private school education.
A generous subsidy
Even if taxpayers are not contributing to their own child’s K-12 schooling, the bill would create an extraordinarily generous subsidy for individuals or businesses that donate to private schools, including religious schools. In effect, this credit allows taxpayers to direct federal funds to the private or religious schools they prefer.
The bill would even allow credits for home schooling, as long as the funds were funneled through an authorized “scholarship-granting organization.” Imagine, you could claim a 100 percent tax credit to pay yourself to home school your child.
The credit (combined with any state and local tax subsidies) could be equal to 100 percent of contributions in any taxable year. Individuals could give up to 10 percent of their Adjusted Gross Income (AGI) annually. And the Cruz bill also allows taxpayers to stretch out the credits for five years, so that if they exceed the limits in one year, they could simply carry the credits forward to future years.
Corporations could claim a credit for 100 percent of their contributions up to 5 percent of the firm’s taxable income.
State scholarship programs
The credits would fund state scholarship programs for private schools, currently being run in 18 states. The US Treasury limited the ability of those states to grant their own income tax credits last year. That occurred when Treasury barred Blue State governors from using a similar charitable giving credit to allow taxpayers to avoid the Tax Cuts and Jobs Act’s $10,000 cap on state and local tax (SALT) deductions against federal taxable income.
The Treasury lawyers were unable to block the efforts to work around the SALT cap without also curbing state tax credits for donors to state-designated private school scholarship funds. The new Trump plan would use a 100 percent federal credit to subsidize the same contributions to those state-authorized funds.
Trump’s plan would cap the K-12 credits at $5 billion annually (Cruz would add another $5 billion for vocational training scholarships). But it is not clear how such a cap on tax credits could be administered: If the credits are oversubscribed, would the first taxpayers who made contributions or who claimed the credits get full benefits and others get nothing? Or would oversubscribed credits somehow be reduced through some formula?
An attack on publicly-funded schools
In his State of the Union address Trump explicitly promoted the credits as an attack on public schools. “No parent,” he said, “should be forced to send their child to a failing government school.”
And Trump is doubling down on that view by proposing major cuts in federal assistance to K-12 education, including a nearly offsetting $4.7 billion reduction in funding for schooling for disadvantaged children and cuts in federal support for publicly-funded charter schools.
Of course, no one is forcing children to attend public schools, to say nothing of failing ones. In most states, children have a wide range of options from homeschooling to religious schools to publicly-funded charter schools.
Indeed, it turns out the fourth-grader Trump used as a prop to promote his plan during the State of Union address, Janiyah Davis, already is attending a highly competitive publicly-funded charter school in Philadelphia. DeVos personally contributed to a scholarship fund to send her to a religious school instead. Under Trump’s plan, DeVos might get a dollar-for-dollar federal tax credit for such gifts.
The issue isn’t what schools children must attend. It is whether government should provide a 100 percent subsidy to the individuals and businesses that choose to make contributions to private schools. And by that standard, Trump’s plan gets a failing grade for both tax and education policy.