DeVos tax credit helps red states caught in blue-state SALT spat

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Education Secretary Betsy DeVos is riding to the rescue of a private-school tax break that was ensnared in a bitter fight between the Treasury Department and Democratic states that sought to circumvent caps on state and local deductions under the Trump tax overhaul.

DeVos and two Republican lawmakers are pushing a plan to pump $10 billion in federal tax credits into private school scholarship funds — a longstanding GOP priority. These programs that were accidentally hit as Treasury proposed to block Democratic states from creating their own charitable funds to circumvent a cap on tax breaks for state and local tax deductions, known as SALT.

President Donald Trump’s tax law limited SALT deductions at $10,000, a pittance for New York, New Jersey and California, high-tax states that also happen to be Democratic bastions. These states quickly established funds for charitable purposes and passed laws to create tax credits for donations to those funds, which mimicked ones used for years in red states as a way to raise money for private schools.

Several high-tax states created programs that would allow their residents to circumvent the deduction cap by creating charitable funds for a variety of programs where donors can get a state tax credit in exchange, effectively removing the SALT limitation.

The Treasury Department issued new rules to block that workaround. Yet those broadly written rules also would severely restrict the tax benefits Republican states can give to donors of their private-school tuition scholarships funds.

Many of these programs allowed the donor to reap state and federal tax benefits that exceeded the amount of the original donation. And those funds encouraged families to enroll their children in private schools and embrace school choice.

DeVos, a longtime proponent of school choice, has a plan to mitigate some of the damage that fellow activists say would be done to education tax credit programs — prevalent in GOP strongholds like Alabama, Georgia and Arizona — by the Treasury action.

Her $10 billion program would allow private-school donors to recoup some of the federal tax benefits they would lose under the Treasury rules, expected to become final in the coming months. The federal tax breaks would add to the more than $1 billion in state tax credits already available from the 18 states that offer scholarship programs.

The DeVos plan “wouldn’t reverse the regulations, but at a time when the rules might dampen enthusiasm for donating, it would more than offset it in terms of the number of dollars donated,” said Carl Davis, research director at the left-leaning Institute of Taxation and Economic Policy.

It’s hard to quantify just how much the Treasury proposal would affect donations to plans that give tax credits for philanthropy. Robert Enlow, chief executive officer at EdChoice, a school choice advocacy group, said fewer donors are giving to state programs, though he acknowledged he doesn’t know if that’s tied to the Treasury proposal or other economic factors.

The Treasury rules would prevent donors from stacking state credits and federal deductions to reap tax breaks beyond the value of charitable gift. Under the current rules, donors can get as much of a credit as their state offers, up to 100 percent. On top of that, they can write-off the gift as a charitable deduction on their federal return.

Treasury’s rules would stop “this profitable venture of donating to charity,” said Kyle Pomerleau, an economist at the right-leaning Tax Foundation.

The DeVos plan, which is sponsored in Congress by Republican Senator Ted Cruz of Texas and Representative Bradley Byrne, an Alabama Republican, gives a federal dollar-for-dollar credit on the amount of the donation in any state, but prevents additional tax breaks on top of that.

“The key element of the proposal is freedom for all involved,” DeVos said in a statement. “Students, families, teachers, schools, states — all can participate, if they choose, and do so in the ways that work best for them.”

That might prompt some blue states that don’t have scholarship funds to set them up. Otherwise, they’d be leaving money on the table, with taxpayers free to donate across the country, Enlow said.

Yet DeVos’s proposal has a long road to becoming a law. It will face outright resistance from Democrats who control the House and some Republicans who don’t want to see government programs involved with private schools. Treasury’s regulation, however, doesn’t require Congress to act, and will likely become final in the coming months.

Enlow said it will be an “uphill battle” to get the DeVos plan taken up in Congress. And even if it did, the number of donors may still decline as more restrictions prevent claiming several tax breaks against one donation.

“It’s still not going to bring the opportunists back into the fold,” Davis said. “There are some people who only donated to this because they were told by their accountant that it’s a smart tax move.”

Bloomberg News
Tax credits SALT deduction Tax deductions Tax reform Philanthropy