Education Tax Credits

February 26, 2013

HSLDA’s Position on Tax Credits Generally

As parents become increasingly dissatisfied with the performance of public schools, their interest in alternatives in the form of private, religious, charter, and homeschools is growing. However, the method of education funding remains a big obstacle between students and the quality education parents seek for their children. Most parents already pay for their child’s public education through taxes. When parents choose to educate their child privately, they are effectively paying twice for education—once for a public education they do not use and once for a private or homeschool education they do use.

In response to this problem, lawmakers at both the state and federal level have proposed varying forms of education tax credits and education tax deductions. They are designed to rectify the discrepancy by allowing parents to be reimbursed, at least partially, for tuition and other expenses for non-public education. A tax credit can be claimed (subtracted) against the amount of tax owed whereas a tax deduction is subtracted from a taxpayer’s gross income, lowering the total amount of earnings on which the final tax is paid. Typically, a credit or deduction will be equal to the amount of actual education expenses.

For example, someone owing $3,000, eligible for a $500 credit, would ultimately owe the government $2,500. The credit eases the financial burden for parents who choose to educate their children through private or homeschool. In this way, parents not using public education do not have to pay the full amount for a service they do not use.

While many opponents of the education tax credit say that it will detrimentally affect the public school system by taking away funding from necessary programs, supporters realize that giving parents more freedom will encourage healthy rivalry between schools and that this competition will promote improved performance.

Although a credit or deduction could be helpful for homeschoolers, HSLDA opposes any tax break legislation that could come with governmental regulations. Homeschoolers have fought far too long and much too hard to throw off the chains of government regulation that hinder effective education and interfere with liberty. It would be inconsistent and foolhardy to accept tax incentives in exchange for government regulation. However, HSLDA supports tax credits that promote educational choice without threatening any regulation of homeschoolers. There are many different education tax credit models currently being proposed and discussed. Some include an actual tax credit for personally incurred educational expenses for one’s own child; others set up a middleman (usually called a scholarship tuition organization, STO) that collects donations from individuals and corporations which receive a credit for the gifts to the STO. Usually, the STO is required to distribute at least 90% of all funds received to schools or students for educational expenses. Regardless of the education tax credit model, HSLDA continues to support and fight for education tax credits at the local, state and federal levels in order to eliminate the “double” taxation of private and homeschool parents.

Below are a list of education tax credit laws already on the books and information about key education tax credit legislation being offered by state and federal lawmakers.

Current Education Tax Credit Laws

Since 1987, Iowa, Minnesota, Arizona, and Illinois have each enacted education tax credit laws geared toward helping low income families, combating poor quality of public education, and helping students with learning disabilities. These credits are available for individuals, while Florida, Indiana, Pennsylvania and New Hampshire have laws that allow the creation of “scholarship tuition organizations,” also known as STOs. These STO’s receive donations from businesses that in turn are given a tax credit based on their contribution. A summary of each tax credit laws is below. Actual statutes should be consulted for full details and restrictions.

Iowa’s Tuition Credit

Iowa was the first state to pass legislation providing for a tuition credit. In 1987, the Iowa General Assembly added to Iowa Code § 422.12 a credit “equal to twenty-five percent of the first one thousand dollars which the taxpayer has paid to others for each dependent in grades kindergarten through twelve, for tuition and textbooks of each dependent in attending an elementary or secondary school situated in Iowa, which school is accredited or approved under section 256.11.” However, because competent private instruction (CPI) does not constitute a school that “is accredited or approved under section 256.11,” most homeschool families will not be able to claim this credit.

Arizona’s Scholarship Tuition Organization

Ten years later, Arizona followed in Iowa’s steps with a credit applicable when cash contributions are made to a 501(c)(3) scholarship tuition organization (STO). The STO, in turn, grants scholarships to individual students for their private or public education. An individual can receive up to a $500 deduction for contributions to a qualified STO. Corporations and joint filers can receive up to a $1,000 deduction as outlined in section 43-1089 of the Arizona Revised Statutes.

Minnesota’s Education Tax Credit and Tax Deduction

Minnesota’s tax credit is similar to the Iowa statute, but it allows for 75 percent of education-related expenses instead of 25 percent, and up to $1000 per qualified child. The maximum credit is reduced for families with a household income over $33,500.

“Education-related expenses for a qualifying child in kindergarten through grade 12” are covered in the credit. Minnesota Statutes § 290.0674 was added in 1998 and specifies qualifying expenses as tuition, textbooks, up to $200 for personal computer hardware, and transportation, but with more detailed specifications for each category.

Minnesota also allows parents to claim a tax deduction for qualified expenses. Minnesota Statutes § 290.01. The maximum deduction amount is $1,625 per student in grades K-6, and $2,500 per student in grades 7-12. The deductions may be used for expenses which would otherwise fall within the tax credit program, but the same expenses may not be used to claim both a credit and a deduction.

Illinois Education Tax Credit

In 1999, the Illinois legislature passed legislation that allows parents to receive a tax credit equal to 25% of any amount they expend in excess of $250 for tuition, book fees, and lab fees, but not to exceed $500 annually. This credit is available to any public or private school student. (Under Illinois law, homeschooled students have the same legal status as private school students.) This provision is covered in 35 Illinois Compiled Statutes 5/201.

Louisiana Tuition Deduction

In 2008, the Louisiana Legislature passed a tuition deduction that allows taxpayers to deduct 50% of any educational expenses paid for the homeschooling of their dependent children, up to $5,000 per child or the total taxable income of the individual, whichever is less. For the purposes of this section, “educational expenses” is defined to included “amounts expended for the purchase of textbooks and curricula necessary for [the] home-schooling of each child.” Louisiana Revised Statutes § 47:297.11. A similar provision applies to educational expenses incurred in connection with sending a child to public or private school.

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The tax credits listed above are for individuals. Florida, Pennsylvania, and Rhode Island offer tax credits for businesses that make contributions to scholarship tuition organizations (STO).

New Hampshire STO

NH RSA 77-G was passed in 2012 over then Governor Lynch’s veto. The law permits businesses in the state to apply a tax credit against the business profits tax or the business enterprise tax of up to 85% for each donation to a qualified STO. No donor is permitted to receive more than 10% of the available aggregate tax credits.

Florida’s STO

In Florida, businesses can contribute up to 75 percent of the amount of tax they owe to scholarship-granted organizations and receive dollar-for-dollar credit. Under section 220.187 of Florida Statutes, in effect since 2002, organizations can receive this credit, but the state has limited the number of credits it grants to $118 million annually.

Pennsylvania’s EITC

Pennsylvania’s Educational Improvement Tax Credit (EITC) provides tax credits for business firms that donate to scholarship organizations or educational improvement organizations which support schools located in Pennsylvania. The EITC statute limits the definition of an eligible “school” to public or nonpublic schools, which excludes most home instruction options in Pennsylvania. The maximum per-business donation is $750,000 per year, up to 75% of which can be deducted from the eligible state tax burden of the donor business. The deductible percentage jumps to 90% if the business commits to donate the same amount to the same organization for two consecutive tax years. The total amount of EITC tax credit awards for contributions to scholarship programs is currently capped at $60 million.

Rhode Island’s STO

In 2006, the Rhode Island Business Entity Scholarship Tax Credit Program was signed into law. This program allows business entities to claim a credit for 75% of the contributions they make to a Scholarship Granting Organization, or 90% of the same if the second-year donation is worth at least 80% of the first year’s donation, with a maximum credit of $100,000, and a statewide cap of $1 million. In order for students to be eligible for these corporate scholarships, they must be from a family whose income is at or below 250% of the federal poverty level. Rhode Island Gen. Laws § 44-62.

Georgia SSO

In 2008, Georgia passed legislation to allow for the creation of Student Scholarship Organizations also known as “SSOs.” The program provides for individuals and corporations to receive income tax credits for donations to Student Scholarship Organizations (SSOs). Individuals may claim a dollar-for-dollar tax credit of up to $1,000 and married couples filing jointly may claim a credit of up to $2,500. Corporate taxpayers may claim a dollar-for-dollar credit for donations up to 75 percent of their total tax liability. The program has a $50 million cap in tax credits per year. Eligible students must have attended a Georgia public school or be entering kindergarten or first grade. In 2009-10, 11 SSOs supported 1,900 students with scholarships valued at $13 million.

Indiana SGO

In 2009, Indiana Code 6-3.1-30.5 and Indiana Code 20-51 created a School Scholarship and School Scholarship Tax Credit Program. Funding for scholarships come from private, charitable donations to qualified scholarship granting organizations (SGOs). Donors (individuals or corporations) are eligible to take advantage of a 50% credit against their state tax liability for contributions made to an SGO. There are no limits on the size of qualifying contribution to an SGO, the entire tax credit program has a limit of $5 million in credits per state fiscal. This permits up to $10 million in donations and scholarships.

  Year Maximum Amount Expenses Allowed Statute
For Individuals
Iowa 1987 $250 tuition, textbooks § 422.12
Arizona 1997 $1,000 individual
$2,000 joint
STO
donations
§ 43-1089
Minnesota 1998 $1,000 tuition,
textbooks,
transportation,
computer
equipment
§ 290.0674
Illinois 1999 $500 tuition,
materials
35 ILCS 5/201
Louisiana 2008 $5,000 textbooks,
curriculum
§ 47:297.11
For Businesses
Florida 2000 75% of tax liability STO donations § 220.187
Pennsylvania 2009 $750,000 EITC
donations
72 P.S. § 8701-F et seq.
Rhode Island 2006 $100,000 STO
donations
§ 44-62
For Businesses and Individuals
Indiana 2009 50% of donation SO
donations
§6-3.1-30.5 &20-51
Georgia 2008 $1,000 Individuals;
$2,500 joint;
up to 75% tax
liability for businesses
SSO
donations
O.C.G.A. §20-2A-1

Federal Tax Credit Bills

As education choice is becoming more popular and vouchers—a direct governmental grant to private and charter schools—are gaining prevalence, education tax credit legislation is also increasing in volume on both a federal and a state level.

For example, Senator David Vitter (LA) introduced The Home School Opportunities Make Education Sound Act (HOMES Act S. 3076) in June 2008. The goal of the HOMES Act was to amend the Internal Revenue Code of 1986 to provide an optional tax deduction for parents who choose to homeschool their children. The legislation called for a tax deduction of $500 per child (with an annual limit of $2,000) for education related expenses, including books, supplies, academic tutoring, special needs services, and computer equipment. The legislation would have given families who do not itemize their tax returns a similar standard deduction. This legislation would have applied to all homeschool programs, including those in states that only have a private school statute. This legislation was never adopted by Congress, but it is similar to other bills that have been introduced in the House and Senate over the years.

For the most up-to-date information on federal legislation, visit HSLDA’s Federal Relations legislation page.

State Tax Credit Bills

States periodically introduce education tax credit legislation, which HSLDA wholeheartedly supports. Unfortunately, of the many bills that have been introduced in recent years, very few have been passed into law. However, HSLDA continues to monitor and lobby for such measures.

Constitutionality Issues

While these tax credits enable parents to keep their money and use it for education, some opponents raise questions concerning their constitutionality. In three states with existing education tax credit laws—Arizona1, Illinois2, and Minnesota3—suits have been brought against the tax credit laws. The suits were based on the Establishment Clause because these credits also apply to religious school tuition. Furthermore, opponents cite the Blaine Amendment, which prohibits appropriating funds to religious or sectarian schools.

All three court cases, however, have upheld the constitutionality of tax credits because government money is not being directly given to these schools. The courts ruled that state recognition of tax credits does not involve giving any government funds to institutions.

The ACLU has brought a similar suit against the New Hampshire tax credit law. HSLDA is working with those preparing to defend the law. This lawsuit does not allege any federal constitutional defects and seeks to avoid the standing issues which were problems for the Arizona lawsuit by virtue of RSA 491:22 that appear to give taxpayers standing to challenge unauthorized or unlawful acts by the taxing authority.

Endnotes

1. Kotterman v. Killian, 972 P.2d 606 Ariz. (1999).

2. Griffith v. Bower, 319 Ill. App. 3d 993 5 Dist. (2001).

3. Mueller v. Allen, 463 U.S. 388 (1983).