The Internal Revenue Service is currently looking at a tax loophole that was made much broader by the so-called Trump tax cut bill last year. The bill put a $10,000 limit on federal deductions for state and local taxes (commonly referred to as SALT). This sent some people scurrying for other ways to cut their tax liability.
In the case of Alabama, donations to scholarship granting organizations, did the trick for some. This is because an SGO donation is considered a “charitable” donation by the IRS, when it fact it isn’t because the state of Alabama reimburses the donor dollar for dollar through a tax credit.
Maggie Garrett is a Washington-based attorney (who once lived in Montgomery) recently wrote an excellent article detailing what is going on. With her permission, here it is:
“Private school voucher proponents are up in arms because the IRS has proposed closing a federal tax loophole that allows individuals who donate to voucher programs to make money off their donations. Vouchers are already troubling because they reduce the total funds available for public schools, waste taxpayer money on programs that are proven ineffective, lack transparency and provide no accountability to the taxpayer. A new wrinkle, however, is voucher proponents are pushing voucher programs as a way for individuals to cash in personally and line their own pockets with your tax dollars.
How does this loophole work?
Several states have adopted voucher programs called tuition tax credits (TTCs). Under this scheme, the government doesn’t give money directly to the student to attend private school. Instead, individuals or corporations “donate” money to an intermediary organization, often called a scholarship organization, and the scholarship organization writes a check for tuition to a private school. The state then fully reimburses the donor through a dollar-for-dollar tax credit.
These “donors” aren’t charitable; in fact, they really aren’t spending a dime because the government fully repays them. Normally, when you donate to charity, the government doesn’t just turn around and give you all your money back. But here, the state has set up a shell game. All the money for the private school voucher still comes from the public treasury – money that’s sent to private schools rather than used for public schools or other public services.
But the federal tax loophole creates a whole other level of fiscal irresponsibility. In six states, after the “donor” is fully reimbursed on their state taxes, the taxpayer can also take a federal tax deduction off the same “donation.” This allows the donor to make money off their donation to the voucher program.
For example, imagine that a wealthy South Carolinian who is in the top tax bracket gives $1 million to a “scholarship organization” that funds the state’s private school voucher program. South Carolina will reimburse that donor $1 million – this means the donor hasn’t spent anything. Nonetheless, the federal government considers that $1 million a charitable donation and therefore not taxable. At the top federal income tax bracket of 37 percent, the donor saves $370,000 on their federal taxes. But because the donor was reimbursed by the state for every dollar of their $1 million donation, that extra $370,000 savings is pure profit. It’s outrageous.
The biggest loser in this scheme is the public schools. All $1.37 million in state and federal tax breaks could have been used to fund our public schools; instead, it is used to fund private, mostly religious schools and wealthy individuals.”
As evidence that this loophole is beneficial to Alabama SGOs, donations to them reached their annual cap of $30 million back in March. That had never happened in prior years.
When the Alabama Accountability Act passed the legislature in 2013, the Senate vote was 22-11 and the House vote was 51-26. And though that was just five years ago, in the world of politics, it was long ago. We have now had an election in 2014 and are having another this year.
And the “yea” votes have shrunk noticeably.
Of the 22 in the Senate, a maximum of nine will be in the 2019 legislature. They are: Arthur Orr of Decatur; Greg Reed of Jasper; Clay Scofield of Guntersville; Del Marsh of Anniston; Jabo Waggoner of Birmingham; Cam Ward of Alabaster; Gerald Allen of Tuscaloosa; Tom Whatley of Auburn and Jimmy Holley of Elba.
Of these, Marsh, Ward, Waggoner, Allen and Whatley have opposition from a Democrat on Nov. 6. While all the incumbents are favored, their re-election is still to be decided. Orr, Reed, Scofield and Holley have no general election opposition and will serve in 2019.
Of the 51 House votes, a maximum of 22 will take their seat in the next session. They are: Lynn Greer, Rogersville; Terri Collins, Decatur; Allen Farley, McCalla; Mike Ball, Huntsville; Howard Sanderford, Huntsville; Mac McCutcheon, Huntsville; Kerry Rich, Guntersville; Becky Nordgren, Gadsden; Randy Wood, Anniston; Bob Fincher, Woodland; K. L. Brown, Jacksonville; Dickie Drake, Leeds; Jim Carns, Birmingham; April Weaver, Alabaster; Jim Hill, Moody; Allen Treadaway, Morris; Bill Poole, Tuscaloosa; Harry Shiver, Stockton; Steve Clouse, Ozark; Joe Faust, Fairhope; Steve McMillan, Bay Minette and Victor Gaston, Mobile.
Of these, Mac McCutcheon, Kerry Rich, April Weaver, Jim Hill, Bill Poole, Steve Clouse, Steve McMillan and Victor Gaston have no opposition in the general election.
The short of it. Any legislation that may come before the legislature concerning the Alabama Accountability Act will find a much different playing field than in 2013.
For the second time in less than a week, the school board of a large system has passed a resolution calling for the legislature to repeal the Alabama Accountability Act. This time it was Montgomery on a 5-1 vote.
Several members were forceful in their support of the resolution. Arica Smith said that with budgets as difficult as they now are, diverting money from public schools, as the act does, can not continue. Member Melissa Snowden echoed her statement.
Superintendent Ann Roy Moore reminded the board that studies by the University of Alabama show that students in private schools on AAA scholarships do not outperform public school students.
Here is the entirety of the resolution:
Whereas, the legislation known as the Alabama Accountability Act was
passed in 2013 with no guidance or input from educators; and
Whereas, this act was initially touted as a way to help students who
attended “failing schools” by offering them a pathway to non-failing schools
or scholarships to private schools; and
Whereas, various studies have consistently shown that less than 35
percent of all scholarships go to students “zoned” for “failing schools”; and
Whereas, research from the University of Alabama about academic
achievement of students in the Alabama Accountability Act shows, “In 78
percent of the comparisons made between scholarship recipients and
public school students, there was no statistically significant difference
between the scholarship recipients and students attending public schools;”
Whereas, each dollar designated for scholarships is a dollar diverted from
the Alabama Education Trust Fund; and
Whereas, since 2013 the total amount of such donations is $146.6 million
which amounts to approximately $5.8 million for the Montgomery County
school system; and
Whereas, the Montgomery County school system is struggling mightily to
meet its financial obligations and is presently predicting a deficit budget for
the 2018-19 school year:
Now, therefore, be it resolved, that the Montgomery County board of
education strongly recommends to the Alabama legislature that the
Alabama Accountability Act be repealed when the legislature meets in
regular session in 2019.
It is expected that other schools boards around the state will take similar actions.
Since in my case, seeing is believing, when I heard that the Baldwin County school board was to pass a resolution on Oct 18 calling for repeal of the Alabama Accountability Act, I climbed in my 19-year old car and headed toward Bay Minette.
Sure enough, right on schedule, board member David Tarwater presented the resolution and it passed. Several board members expressed their disappointment in this legislation and the impact it has on the Education Trust Fund,
So after a 300-mile round trip I plopped down in front of my computer about 10:30 p.m. and wrote this article. I am happy that it touched a nerve. Many shared the piece on Facebook and twitter and sent me an email.
As of mid-afternoon on Sunday, Oct. 21, the article had 1,748 “hits” on the blog and had “reached” 5,979 on Facebook. I wish I could claim this was normal for everything I post, but it isn’t. It was a nice increase. And while I know there are blogs that get zillions of views, this ain’t one of them–though we do get several hundred thousand views each year.
Still, the fact that 1,748 people paused to read this message on their computer, I pad, smart phone or whatever is intriguing to me. And I dare say that was double the number of folks at the high school football game I attended in Fayette County Friday night.
From all indications, other local school boards will follow the actions of Baldwin County. And they should. This bill was passed in 2013 with ZERO input from educators so it is high time that the education community be heard about legislation that has diverted $146.6 million from public schools.
Do you know a school board member? Are you on a school board? Do you know a legislator?
If so, pass along the news about what Baldwin County did on Oct. 19. The 2019 regular session of the legislature is an opportune time to repeal this bill. In 2013 AAA passed the Senate with 22 votes and the House with 51 votes. However, of the Senate votes, at the max only nine of them will be in the 2019 Senate. (And of these nine, six have general election opponents so that number might shrink.) Of the 51 House votes, only 22 may return. (Some 14 of these have an opponent in November.)
Education must stand up for itself. Education supporters must speak out. If I can drive 300 miles on a Thursday night, surely you can take a few moments to send some emails.
The Baldwin County school board said, “enough is enough” and passed a resolution on Oct. 18 calling for the repeal of the Alabama Accountability Act.
This move was spearheaded by board member David Tarwater. After the vote, Tarwater thanked other board members and said that, “I took this personally.” He explained that when the law was passed in 2013 his son was a teacher at a Mobile County public school that had more than 90 percent poverty rate. He had first hand knowledge of how hard his son and others at the school worked and how much they invested in their students.
“Yet, under this law the school was labeled as “failing” and devastated everyone who worked there. There is simply no reason to treat educators this way,” Tarwater added.
While the resolution makes a number of key points, two that stand out are:
“WHEREAS, AAA has now accumulated five years of historical data establishing that it has not served its intendd purpose, and instead has caused harm to the financial well-being and academic progress of public schools systems in Alabama
WHEREAS, the Baldwin County Public School System is the most rapidly growing school system in Alabama, and like other public school systems in the state is not adequately funded.”
The system has had an annual growth rate of 507 students per year for the last 15 years.
From all indications, other school boards will follow Baldwin’s lead with resolutions of their own. In light of the fact that this legislation was passed in 2013 with ZERO input from educators, it is fitting that educators are now speaking their mind.
Numbers are often tossed around about the Alabama Accountability Act that may, or may not, be completely accurate. After all numbers that would be useful to know are simply not available. Like how many students on scholarships to private schools actually attended a public “failing” school at some point.
So let me share numbers I use and my rather simple methodology of working with them.
This act was passed in 2013 and scholarship granting organizations (SGOs) began collecting donations for scholarships that year.
Here are the yearly totals:
2014-$16,060,311 (This includes $2,649,553 collected in 2015 and allowed to be added to 2014 total)
The annual donation cap is $30 million My numbers show that 2018 is the first year this cap was reached. I pulled these numbers from the Revenue Department web site. Some may have been adjusted slightly as Revenue reviewed all donation applications.
In the 2017-18 school year, there were 726,924 students in public schools from first through 12th grade. You can find these figures, plus lots of others, here at the state department’s public data web site.
So when you divide $146,617,919 by 726,924 you find that as of the end of the 2017-18 school year, the cost of AAA per student was $201.69. Multiply this number by the number of students in a system, and you see how much has been diverted from the Education Trust Fund per student in this system. For example, Montgomery County had 29,124 students pre-K through 12 last year. That is a total of $5.8 million we have lost.
Or look at it this way. last year Alabama had 341,726 students in elementary classrooms (one through sixth.) At an average of 22 students per classroom, that is 15,533 classes. AAA has cost each one of these $4,437.
Do you know an elementary school teacher who wouldn’t love to have this much money to spend on supplies, etc.?