Here is an edited transcript of NHPR’s reporting on the background of HB 1686, which expands the 2012 voucher program funded by business tax credits by granting tax credits on interest and dividend income:
For over a year now, education policy watchers in Concord have focused their attention on a controversial bill that would create Education Savings Accounts. But meanwhile, another bill popular with the school choice proponents has been making its way through the legislature, largely unnoticed.
House Bill 1686 would expand that state’s existing education tax credit program, which provides scholarships for students to attend private school or homeschool. It will be up for a vote before the full House of Representatives this week.
NHPR reporter Jason Moon joined All Things Considered host Emily Quirk to talk about the bill.
So this is a bill that would expand the education tax credit program. Let’s just back up for a moment and remind people what that program is and how it works right now.
The education tax credit program was passed in 2012 and it was really New Hampshire’s first step into the world of school choice.
At its core, the program is a way for the state help parents who want to educate their kids outside the public school system.
It does that by incentivizing businesses to donate to a scholarship fund. The way it works right now is that businesses can donate money to a scholarship organization and then later they can take 85% of the amount they donated off of their business profits tax. So if a business donates $100, they get to subtract $85 from the amount of business profits tax that they owe….
(That’s accurate enough at a summary level, but the details are actually more complex. In the end, it can cost a business as little as $450 to make a $10,000 contribution.)
Ok so that’s how the program works now – what would this bill change?
It would allow individuals, not just businesses, to make donations to the scholarship fund and get a tax credit – specifically, individuals who are paying the interest & dividends tax.
So the basic idea here to grow the amount of money coming into the education tax credit program. Because, while the program has been growing since it began about 5 years ago, it’s not as popular with businesses as some would hope.
Right now there’s a cap of about $5 million on how much tax credits can be given out under the program, but as of last fiscal year the program hadn’t even reached 5% of that cap….
It looks like this bill is sponsored by Republicans only. What are Democrats saying about it?
They are opposed on the philosophical grounds you might expect for a school choice debate. They didn’t like this program when it first passed and they see this is another attempt at siphoning money away from public schools.
But opponents have another concern that has more to do with tax policy than education. Here’s Democratic State Rep Joelle Martin.
“They can actually double-dip. So, if they make a donation as an offset of their education tax credit, they can then also at the federal level make a charitable deduction. And all summed up, it ends up that they actually make a profit.”
So what she’s claiming there is that if someone donates to a scholarship program under this bill, they could combine state and federal tax credits and actually make money.
Well is she right? Could people actually profit from this tax credit?
I wanted to check this out so I went and spoke to Phil Sletten, he’s a tax policy expert at the New Hampshire Fiscal Policy Institute.
He told me that profit might not be the right word but, yes, the way the bill is currently written it would be possible for some people to reduce their tax liability by more than they donate.
He walked me through an example to demonstrate where an individual donates $10,000 to a scholarship organization. So, on their state taxes they could take the 85% off for the education tax credit program. Then on their federal tax return, if they’re at the top income rate they could take up to %37 off for the charitable giving deduction. In the end, they could reduce their tax liability by a little over $12,000, even though they only donated $10,000.
There’s no way to know how many people would take advantage of this tax credit stacking. There are about 55,000 people in New Hampshire who pay the interest and dividends tax, but a lot of those people aren’t making enough for this to really make sense for them.
But there are many other people throughout the country who take advantage of New Hampshire’s favorable trust statutes. New Hampshire is now what the Wall Street Journal (reported by the New Hampshire Business Review) called “a kind of mini-Switzerland for wealthy Northeast families.” That’s what makes this such a large potential expansion.
But in other states that have similar programs that allow for this stacking, there are financial planners who advertise this as a way for people to, in their words, make a profit.
Supporters of the bill I’ve spoken with don’t really seem too concerned about the tax credit stacking. The bill is designed to get more money into the education tax credit program, and whether people are able to get ahead while doing so, just doesn’t seem to be a concern.