Even though supporters have long claimed that the Alabama Accountability Act was created to help kids, some of us have maintained that it was always more about tax breaks than education. Now with changes in Federal tax code, that contention is even more true as you see in this article in the Montgomery Advertiser.
The article points out:.
“With changes made by the federal tax overhaul, high-income taxpayers have been on a search for ways to make up the major decrease in deductions that can be claimed. The Alabama Accountability Act appears to be one answer.
Passed into law in 2013, legislators set a cap of $30 million, up from the $25 million for two years, that can be donated under the AAA. In 2017, the cap wasn’t hit until the last day of the year and in the previous years, the cap wasn’t hit at all.
But in 2018, that cap was hit by March 1, six times faster than the year before. Warren Callaway, executive director of Scholarships for Kids, one of the largest AAA scholarship providers serving Alabama, and Frank Miles of the Department of Revenue said this was because of the federal overhaul.
Ads promoting lucrative tax benefits of donating under the act have been circulated throughout the state, as well as in many of the 17 other states with similar tuition tax credit programs, said Carl Davis, research director of the Institute on Taxation and Economic Policy, a non-profit, non-partisan research organization.
For example, the Alabama Opportunity Scholarship Fund, one of the state’s seven Scholarship Granting Organizations, writes on its website’s donor page that with the new tax laws, “… news and research organizations as diverse as The New York Times, The Washington Post and the Tax Foundation point out that taxpayers now have even more incentive to donate to a qualified scholarship-granting organization such as the Alabama Opportunity Scholarship Fund.”
The particular change that is impacting these programs is the cap on state and local tax deductions, known as SALT deductions. Previously, there was no limit on the amount of SALT that taxpayers could claim as a federal tax deduction. With the overhaul, they now can claim just $10,000.
To make up for that loss, taxpayers are scrambling for other means to boost their deductions. With a donation to the AAA, taxpayers gain a dollar-for-dollar tax credit on their SALT, up to $50,000, and can then claim their donation as a federal tax deduction as well. The result is a tax cut greater than the actual donation.
“Accountants and private schools in Alabama and around the country have really embraced these tax credits as a federal tax shelter,” Davis said, adding that, “It is a savvy financial decision, but it has little to do with actual charity.”
Generally, he said, charitable deductions only offset part of the cost of donating. A high-income person making a $100 donation to a nonprofit might get $37 back on their federal forms and $5 back on their state forms and the other $58 would come out of the donor’s pocket. While under the AAA, a donor’s full donation is subtracted from his/her state income tax liability, leaving the state to “foot the bill in its entirety, in the form of reduced revenue collections.” And if the taxpayer receives a federal deduction as well, a $100 donation under the AAA can lead to more than $100 in tax cuts.
Based on Davis’ calculations, if nothing is changed, the “worst-case scenario” is that donations totaling $30 million under the AAA could trigger $41 million in combined state and federal tax cuts. This means that, rather than making a financial sacrifice, donors would walk away with an $11 million gain for themselves.
“Unless the IRS does something about this,” Davis said, “this is really just free money to anyone who has a high enough income and is getting good tax advice.”
As we say in Red Level, the cat is out of the bag.