May 24, 2018

(SCHOOL CHOICE AND VOUCHERS, GUEST BLOGS, ED FUNDING) Permanent link

Guest Post: IRS Considers Action Against SALT Credits. Will it Give the Voucher Tax Shelter a Free Pass?

By Carl Davis, Research Director for the Institute on Tax and Economic Policy

When Congress was considering capping the deduction for state and local tax (SALT) payments last year, numerous lawyers warned that states would likely circumvent the hastily devised cap by helping their residents convert state tax payments into fully deductible charitable gifts.

To make this conversion, states would offer “workaround tax credits” offsetting most or all of the cost of “donating” to support public services (New York, New Jersey, Connecticut, and Oregon have since enacted these credits). Lawyers knew to offer this warning, which Congress ignored, because this abuse of the charitable giving deduction was already taking place in many “red states” with tax credits supporting K-12 private school vouchers.

A new ITEP report explains the close parallels between the new workaround credits and existing state tax credits, including those benefiting private schools. The report comes the same day that the IRS and Treasury Department announced they would seek new regulations related to these tax credits. It notes that the SALT workarounds are emblematic of a broader weakness with the federal charitable deduction. And it cautions regulators to avoid a “narrow fix” that will only address the newest SALT workarounds (which, so far, have only been enacted in blue states) without also addressing other abuses of the deduction, which have long been employed by red states.

The new IRS notice is light on details, suggesting that regulators do not yet know how they will navigate this complex policy area. ITEP’s new report discusses in detail the two main options that the IRS could choose to pursue:

  1. Broad action that improves the tax code’s measurement of charitable giving, and requires taxpayers to subtract state tax benefits they received when calculating the portion of each gift that was truly “charitable.”  For example: if a taxpayer donates $100 and receives a $60 state tax credit in return, only the remaining $40 would be considered a charitable gift for federal tax purposes.

Or

  1. Narrow action that requires examining every entity (government agencies, public universities, nonprofit organizations, etc.) receiving a donation reimbursed with a tax credit. Based on the outcome of that examination (using criteria that are not yet known), the IRS would either: (a) turn a blind eye and grant a full federal charitable deduction even when the alleged “donation” was reimbursed with a state tax credit, or (b) categorize the reimbursed portion of the donation as a state tax payment subject to the $10,000 SALT cap.

Pursuing the narrow fix would require drawing arbitrary distinctions within the wide range of public entities, quasi-public entities, and heavily-regulated nonprofits currently benefiting from state charitable tax credits. It would also lead to perverse outcomes in which red-state tax shelters would be left intact while the newer, and sometimes less-lucrative, blue-state equivalents would be shut down. As the report explains:

It turns out that high-income taxpayers living in states such as Alabama and Pennsylvania are already enjoying the personal financial benefits of SALT cap workarounds, while those living in California, New York, and elsewhere are still waiting for their lawmakers to finish debating or implementing workaround credits.

Accountants in Alabama and elsewhere are marketing existing state tax credits for private schools using the exact same sales pitch that drew the IRS’s attention to the new credits in New York and other states.  For example, an accounting firm’s tax advice that has been promoted by the Medical Association of Alabama explains that making a “donation” to support private school vouchers is “an opportunity to preserve your state tax deduction.” In Pennsylvania, meanwhile, a similar tax credit is being touted as a tool for “bypassing the $10k state and local tax deduction limitation.”

These sales pitches are not merely idle chatter.  This year, Alabama’s entire allotment of $30 million in tax credits was snatched up in just two months, and SALT cap avoidance was reportedly on the minds of many claimants.

These private school voucher shelters have been problematic for years, as ITEP and AASA have explained. Any IRS action targeting the newest “workaround credits” needs to address these longer-running tax shelters as well. Failing to do so would be unfair and arbitrary, and a step backward for federal tax policy.

May 24, 2018(1)

(ESEA, ED FUNDING) Permanent link

USED Announces Upcoming Webinars for LEAs re: Student-Centered Funding Pilot

AASA received the following information in an email from the US Education Department:

Earlier this year, the U.S. Department of Education (Department) announced a new pilot to afford local educational agencies (LEAs) flexibility to create equitable, student-centered funding systems.  The purpose of this pilot is to provide an LEA with the flexibility to combine state, local, and eligible federal funds that it will allocate to schools using a formula that provides additional funding for students from low-income families, English learners, and other disadvantaged students.  In exchange for meeting the requirements of the pilot and using a student-centered funding formula, the LEA receives freedom from many of the federal require-ments for the funds included in the system (e.g., tracking time and attendance; creating schoolwide needs assessments and schoolwide plans for operating a schoolwide program under Title I, Part A; spending funds on particular allowable uses). 

The Department first accepted applications in March and will accept a second round of applications by July 15, 2018.  Please note that the Department recently updated the application, which is available on our website.

To support LEAs interested in applying this summer, the Department is hosting a series of two webinars, each of which will be repeated. 

 

 

The intended audience is LEA staff, though other interested parties are also welcome.  To join a webinar, please select the link for the relevant session.  The webinars will be recorded, and the recordings as well as slides will be posted with related resources on our website.  

An LEA applying by July 15, 2018, will be proposing a system that would be implemented in the 2019-2020 school year, which provides time for transition to implementing an approved plan.  We are eager to receive applications from interested LEAs who share our enthusiasm about the program, the flexibility it gives local leaders, and its potential impact on equity and transparency in resource allocation.  If you have questions about the webinars or the application, please contact WeightedFundingPilot@ed.gov

 

 

May 24, 2018

(ESEA) Permanent link

Meaningful Local Engagement Under ESSA: Issue 2

AASA was pleased to collaborate and contribute with a handful of education organizations to the latest handbook from Opportunity Institute and Council of Chief State School Officers to support local leaders working more collaboratively to include students, families, educators and partners into the ESSA policy making and implementation process. 

The handbook is titled Meaningful Local Engagement Under ESSA Issue 2: A Handbook for Local Leaders  on Engagement in School Improvement and is designed for state education leaders, school and district leaders and advocates to inform efforts to engage peers and stakeholders in all aspects of planning and implementation of ESSA. This handbook is a follow up to Meaningful Local Engagement Under ESSA: Issue 1.

Access the handbook