School Choice Fallacies
By Martin Lueken, Ph.D., Michael Shaw
In light of increased media attention paid to school choice programs, school choice detractors allege that tax-credit scholarship programs lead to “profit,” “double-dipping,” “get-rich schemes” and “tax shelters” for donors. Tax-credit scholarships are programs that help low- and middle-income K–12 families access a better educational fit for their children by allowing taxpayers to receive full or partial tax credits when they donate to nonprofits that provide private school scholarships. In this brief, we examine tax codes more broadly to gain context around such serious claims. Read on to learn why those leveling the arguments against tax-credit scholarship programs are misguided in their interpretations of this particular school choice policy.
In this report, you will learn:
This tax credit characteristic is not unique to K–12 tax-credit scholarship programs.Criticizing school choice tax credits but not the hundreds of other tax credit policies available in states is inconsistent. School choice detractors have labeled tax-credit scholarship programs as policies that lead to “profit,” “double-dipping,” “get-rich schemes” and “tax shelters” for donors. Yet states have enacted hundreds of other tax credit programs. Many dollar-for-dollar state tax credits, including tax credits for classroom supplies, child services agencies and general charitable giving allow for this same practice.
The key to understanding claims of “profit” and “double-dipping” is understanding Alternative Minimum Tax (AMT).In states with tax-credit scholarship programs, taxpayers subject to the AMT can make donations to scholarship organizations (SOs) and receive tax credits to reduce their state tax liability. At the same time, AMT filers can deduct their charitable contributions from their federal taxable income to reduce their federal tax liability. As a result, the reduction in tax liability can exceed the amount they contributed. But it is also possible for taxpayers who do not make charitable contributions to still receive the same level of tax benefits because they can deduct their state tax liability from their federal taxable income. If AMT filers could deduct their state taxes from their federal taxable income, then the amount that taxpayers can reduce their tax liability would be equivalent for all taxpayers at the same income level, putting them on equal footing. The so-called “profit” would go away because taxpayers subject to the AMT cannot deduct their state taxes from their federal taxable income while the majority of non-AMT taxpayers can.
Many AMT filers who could benefit from so-called “double-dipping” tend not to be the nation’s wealthiest taxpayers.AMT filers tend to be middle- and upper-middle-class taxpayers and large families.
To the extent that Americans want to change this feature of the federal tax code, there are simple options.For instance, Congress may, at any time, change the law to prevent taxpayers who file AMT from deducting their charitable contributions from one’s federal taxable income. This approach, however, will likely dampen incentives in place for taxpayers to invest in their states.