The Monthly Debrief Podcast with the EdChoice State Team – November to December 2018

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Our Podcast Transcribed

Michael Chartier: Thank you everybody, and welcome to another edition of EdChoice Chats. Usually we would be looking back about what happened in November and what we think will happen in December, but it’s a little slow month. We just had some elections, I guess. People got voted in and out of office, so it’s a little slow month for that.

Michael Chartier: So, we’re going to have a special guest on, our vice-president of our LDEC, the Legal Education and …

Leslie Hiner: Legal Defense and Education Center.

Michael Chartier: Oh, well thank you. I always forget that. But Leslie Hiner is going to be on, and she was out in Washington, D.C., talking to the IRS, if I remember correctly, about some proposed rules that they’re going to put into place. I think we’re going to be spending a little bit of time talking about that. So Leslie, you want to introduce yourself and say hi to our viewers, or listeners?

Leslie Hiner: Well, hello, yes. This is Leslie Hiner, and I look after our legal affairs around here at EdChoice. And that normally does not include getting involved or anywhere close to the IRS or the Department of Treasury. However, that all changed this year when the Secretary of the Treasury decided to propose a new IRS rule that actually directly impacts tax-credit scholarship programs, which we now have 23 of those in 18 states. They’re pretty far reaching, and they do touch on the viability of scholarships for, oh, jeez, I think it’s almost 300,000 students. So, we’re taking this very seriously, and now, I pay attention to IRS rulings and tax.

Michael Chartier: Very, very scintillating reading, I am sure.

Leslie Hiner: It is.

Michael Chartier: Leslie, so you were out in D.C., what was it, the beginning of November. Tell our listeners what exactly happened? Why were you out there? What is the process? How do things happen at the federal level when it comes to executive branch rule-making?

Leslie Hiner: Oh, well, that’s really the big question, Michael. Before I go into the fine details of this, it’s our mission to carry forward the legacy of Milton and Rose Friedman. Both of them were very clear about their intentions about education, that education is best when it’s closest to home, and as far as government is concerned, it’s very much a state and local matter, not a federal matter. And yet, we find that the federal regulatory process is having a direct and negative impact on what are truly very local- and state-directed tax-credit scholarship programs.

All of which is to say, this was brand new. We don’t go to Washington on a regular basis and get involved in the rules process. So it’s been a great learning curve for me, and thankfully, we have some friends who have been helpful. Let me try to explain it, then, to those who are listening in a way that makes as much sense as possible. Although, I will tell you on the outside, there’s parts of this that don’t make a lot of sense to me. But that’s just part of Washington, I guess.

First of all, there was a rule that was enacted, or an intent to enact a rule, on August the 23rd. The IRS said that the rule would become active on August 28th. Then after the rule went into effect on August 28, then there would be a time period for public comment for what was called a proposed rule.

Now, the rule was … The technical jargon is that it is a proposed rule, but it’s in effect. So, just right on the outset, there were a lot of people who were very confused about this. How can you have a proposed rule that you’re allowing public comment so you can decide whether it works or if it’s a problem, but it’s also in effect at the same time? But that’s how it is. That’s the way it is.

So, August 28th, the rule went into effect. There was a public comment period until October the 11th. Then on November 5th, then there was one day devoted to public testimony, and at this point, we are awaiting some kind of finalization of this rule from Steve Mnuchin, who’s the Secretary of the Department of Treasury. That’s the process in a nutshell, so people understand the rule’s in effect, but we’re trying to change the final outcome of the rule.

Michael Chartier: And when do you think that final outcome could potentially be determined? I mean …

Leslie Hiner: Oh boy. We really hope it’s before the end of the year, Michael. This involves taxes, and taxes are on a calendar basis. Of course, they’re going to have some impact on scholarship programs, so the sooner we know, the better.
But let me tell you the crux of the matter. The crux of the matter is this: that for the state tax-credit scholarship programs, if you give money to a scholarship granting organization in one of those states, then the state will give you a state tax credit for a certain percentage of the amount of money that you donated. In our tax-credit scholarship programs, that could be 50% of your contribution. It could be 100% of your contribution.

Now, the question arose as to why 100%? Is that really a charitable contribution? Well, the answer to that question is very simply, “Yes.” First of all, it’s private money that is given to scholarship granting organizations, and doesn’t come from the state. It’s private money, and nobody has to give that money away, but they do. And secondly, states will enact tax credits as a way to incentivize behavior. In this case, the states have determined that offering children scholarships to attend the schools of their family’s choice, that that is a very distinct public good, and the state wants that public good to expand. So, that’s why they offer state tax credits as an incentive to people to participate, put private money into this education system, help these kids. That’s it in a nutshell.

Now, the problem with that is that then individuals who give money to scholarship granting organizations, because it is a charitable contribution, could also claim a federal charitable deduction. Now, that’s not actually a problem for any charitable act, contribution. We can claim a charitable deduction on our federal returns. However, it became a problem along about June, early June of this year, when the state of New York was the first state to enact what I refer to as a dummy non-profit. Set up a state-controlled non-profit, where individuals could pay all of their state and local taxes into that non-profit. And notice my terminology. I said that on purpose.

They’re giving their state and local tax dollars that they owe to this non-profit, but they are actually paying their taxes through the non-profit.

The result is that they can then take a full federal charitable deduction for the taxes that they paid into this state-controlled non-profit.

There’s nothing charitable about it at all. Zero. There is no charity here whatsoever, except for the charity of lawmakers in that state that decided to give their high-income wage earners a bonus, an opportunity to skirt the tax laws.

Now, this comes back now full circle to the federal tax law. Under the new federal tax law, those same individuals would only have been able to deduct up to $10,000 of state and local taxes. But in a state like New York, it’s a very high-tax state, those state taxes are high, and if you are a high-income earner, you’re paying a lot of money in state and local taxes in New York. So, the new tax law put a limit on how much those individuals could deduct from federal taxes, and in fact, that limit that’s in place was meant under the new tax code in the last budget of the United States to pay for the tax cuts that were afforded to middle- and lower-income wage earners. So, it’s a very significant tax policy, but there were some people in the high tax states who were trying to cheat the system, and not pay.

Michael Chartier: In these states, New York for example, where a lot of those high earners, when they would donate their money to these state-run non-profits, what would those non-profits do with the money? Where would the money go after that?

Leslie Hiner: Well, that’s a very interesting question, because there were a couple other states, also high-tax states, that decided to try to follow the same example. So, you had New York, Maryland, Connecticut, New Jersey, California of course, but they all tried different versions of the same idea.

But let’s say, for example, if you are a high-income wage earner, and you pay all your state and local tax into a non-profit for, say, public education. Well, you’re going to put a lot of money into that? The state’s going to either take that money back out, or then that’s the amount of money that they won’t have to pay, that the state won’t have to pay, into public education, because that high-income wage earner has already front-loaded the money into whatever they were going to allocate for public education. It’s a shell game, to be sure.

Now, I will say in their defense that we’re talking about a lot of money here, to the tune of about, it gets about $668 billion over the next several years. That’s how much money, then, these high-income wage earners would be paying into the federal system that they didn’t previously pay, so it’s significant. It’s significant. There’s no question.

Nonetheless, this issue was fully debated when Congress was considering the tax bill. People went to Congress, and they argued both sides, and at the end of the day, the high-tech states lost the argument. So, I’m sorry, but in our democratic process, we don’t always get what we want. They didn’t get what they wanted, but they don’t get to cheat the system in the process. And it’s the downside to all of this is that because of those actions, the rule that was enacted by the IRS is a very broad rule, and it impacts every charity whose donors can claim a state tax credit for their donation.

So, for example, it’s not just in the education area. Clearly, our scholarship granting organizations are impacted by this, but also, rural hospitals in Georgia are directly impacted by this. They have a beautiful program in Georgia. It’s a way that private dollars can come in to non-profits to fund rural hospitals in Georgia, and it’s been working great for many years. We also found that, at the public hearing on

November 5th at the IRS, that there were several people representing land preservation groups.
For example, people representing The Nature Conservancy was there, and I have to give a plug here to Eleanor Brown, who spoke on behalf of the Virginia Outdoors Foundation. She was just exceptional in her testimony. And we found that we were very much aligned. The educational choice people are very much aligned with The Nature Conservancy and land preservation people. We have virtually similar issues.

But there are also other initiatives and non-profits that are impacted, those that provide economic development support in low-income neighborhoods, they are impacted. Environmental, alternative fuels non-profits are also impacted by this. Any public good that a state has determined needs incentivizing for the private sector for individuals to contribute to support that public good, all of those programs are negatively impacted by the new IRS rule. It needs to be fixed. It needs to be narrowed to make sure that the bad actors don’t get to be bad actors anymore.

Michael Chartier: Sure.

Leslie Hiner: But that the actions of those high-tax states, that those remain in their own category, and that that action should not negatively impact all the good that’s being done across the country by these programs.

Michael Chartier: So, what things did you say to the IRS? Do you have a brief snippet of your … if you can boil down your testimony into maybe a minute or two?

Leslie Hiner: Can do that. We only had a minute or two in testimony, so it was tough, but-

Michael Chartier: You didn’t get out there and filibuster and …

Leslie Hiner: Couldn’t filibuster, no. It was very unlike me.

Michael Chartier: Okay. Well, that’s …

Leslie Hiner: Could have talked for hours, the IRS. But we had, for EdChoice, there were two of who testified. Brandt Hershman, who is a counsel for us, and an old friend also from Indiana, who is a former state senator, he testified. He delivered more of our technical comments, and then I weighed in with the rest.

On the technical side of things, we have found a way that the IRS can alter the rule so that they can do exactly what I was just talking about. They can distinguish those non-profits that are privately-controlled true charities versus those non-profits that are state-controlled entities for collecting taxes.

They can draw that distinction in the law. They can do it in a way that’s legally sound, that’s good public policy, and they can do it today. So, that’s one of the things that we’re arguing. Also, if they are not so inclined to actually find a real solution at this point, we also recommended that this new law, this new rule, not kick in for at least two years.

We’re operating under a brand new tax code right now. We haven’t even filed our taxes yet under the new tax code, and yet, we have Treasury guessing how people are going to file their taxes, and nobody really knows. So, until we’ve gone through the first tax filing, but then the second tax filing is really the key. After we’ve been through two tax filings under the new code, then everyone will know how people are filing their taxes, whether they’re going to itemize deductions, or they’re not going to itemize deductions. Any loopholes in the system will be revealed, and then we could go forward.

Well, that would take us to January of 2020, which would also give all of these non-profits an opportunity to really understand exactly what’s going to happen with their donors, how many will continue to give, how many will not continue to give. And states can also take a look at that too, and have time to make whatever necessary adjustments they need to make to preserve these non-profits that are delivering this true public good. That’s us on the technical side.

Rounding out this argument, what I talked about is the human consequence to this, and also the fact that scholarship granting organizations actually started in Indianapolis. The first scholarship granting organization that was broadly for all children of low income to attend any school in the inner city of Indianapolis began in 1991 with a wonderful man named J. Patrick Rooney.

Well, Pat was a very successful business guy, and as he liked to say, yeah, he had a lot of money, but you know, had to put it to good use, and so he was always looking for that. He was always looking for ways to do good. And he got really annoyed with, as he said, “his rich friends,” who didn’t do that. It came to his attention that there were kids in the inner city of Indianapolis who were just failing at alarming rates, and their lives were going nowhere, and the sorrow of that was just more than he could bear. So, he decided to put his money into helping these kids and these families, and he hit up his rich friends to write a check, and say, “Hey, do some good. These kids need our help. We can help them. We’re going to do it.” And that’s what they did.

The program was really successful, really successful. He had kids whose parents were drug-addicted, living on the streets, who found a school to go to where they loved the children, cared for them, reached out to the parents. It’s just such an uplifting story. However, there are limits to how many rich friends you might know. Then what? What happened was the success was so great that it became clear that some kind of incentive from the state to encourage others to give to this would be necessary to be able to meet the demand, and also to keep the program going for as long as it was necessary.

So, here in Indiana we’re very familiar with why school choice is so necessary. We’ve seen it up close and personal. We’ve seen the good that comes from tax-credit scholarship programs. We’ve seen the good that comes when people do open their hearts and open their wallets to support another … someone else’s child’s success in life. There’s something quite good about that.

You know, I’ve talked a lot about the public good. There is a public good per se in doing this, but I think public good goes a little further with these scholarship programs because the good that you feel as an individual and … excuse me, I get a little worked up about this, thinking about Pat and what he did, but the good that you feel as an individual is simply a feeling that’s irreplaceable. This is the right thing to do. So, we are fighting pretty hard now with the IRS to get this right and allow these families and these children to continue to experience success in their lives. It’s important.

Michael Chartier: Thank you for all the work that you do on that, Leslie. I know that those kids maybe … they probably don’t even know what’s going on. But it’s nice to know that there are people like yourself and others out there that are fighting and advocating on their behalf to receive the scholarships that are, quite honestly, going to change their lives, and are changing their lives. So, thank you for that.
I think you’ve done an incredible overview. I think you’ve given our listeners something to think about, and given them an insight on what’s going on there, what’s going on out in D.C., and I think that you’ve pretty much summed up everything that they need to hear. I certainly can’t add to that, so I’ll sign us off, if that’s okay with you.

Do you have anything to add?

Leslie Hiner: I would encourage people to check back on our website and our tweets and however else our communications reaches out to people to communicate, because again, we are anticipating and certainly hoping that there will be a conclusion to the IRS rule by the end of the year, at least soon.

Michael Chartier: Okay.

Leslie Hiner: And as soon as that happens, we’ll make sure to let people know.

Michael Chartier: Perfect. No, that’s perfect. It’s probably a good time then to pitch two things. In that vein, obviously, sign up for our emails at www.eddhoice.org. Again, that’s www.edchoice.org. Follow us on social media, @edchoice. Again, that’s @edchoice. We’re going to be releasing our new ABCs of School Choice, coming out in January, so if you want to sign up for that, you’ll be the first to hear about our new ABCs. If you have an idea for us to talk about in a future podcast, please email us at media@edchoice.org. Again, that’s media@edchoice.org. And please feel free to subscribe to this podcast on SoundCloud, iTunes and Stitcher. If you’d sign up to those places, we’d greatly appreciate it.

Again, this is Michael Chartier, our senior director of state relations, and Leslie Hiner, our vice president of our legal department, and thank you very much again for listening to this November/December EdChoice Chat.

Leslie Hiner: Thank you, Michael.