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Researcher: N.H. school choice bill could create ‘tax shelter’ for rich



Monitor staff
Sunday, February 18, 2018

A bill to expand New Hampshire’s Education Tax Credit program has some worried the state could create a tax shelter for the wealthy.

Currently, businesses can donate to certain school choice scholarship programs and receive a tax credit worth 85 percent in return. House Bill 1686 would make that tax credit available to interest-and-dividends taxpayers – those who pay a 5 percent tax on certain types of passive income.

“What the sponsors have done is open up this tax credit to the average person,” said Republican Rep. Norman Major, the chairman of the House Ways and Means Committee, which recently recommended the bill on a party-line vote.

But some Democrats are warning that expanding the tax credit to individuals, instead of just businesses, will mean rich, savvy taxpayers will be able to stack the credit along with a federal deduction for charitable giving – and end up saving more in taxes than what the donation was worth.

“These high-income interest-and-dividends taxpayers can actually make a profit from this if they take advantage of this particular education tax credit and then go ahead at the federal level and use that as a deduction,” said Rep. Joelle Martin, a Milford Democrat on the committee.

Carl Davis, the research director at the Washington-based Institute on Taxation and Economic Policy, has written extensively about ETCs as tax shelters.

Nationwide, about $1 billion in potential tax dollars is diverted each year into these scholarship organizations, according to a 2016 ITEP report by Davis. What kinds of tax credits states allow under ETC programs, and how generous they are, vary widely. But in at least nine states, the types of credits allow donors to stack state and federal tax breaks – and come out ahead.

Davis points out that scholarship organizations, wealth managers and schools will advertise ETC programs in those states using phrases like “profit” and “make money.” One Georgia accountant, for example, blogged for the accounting firm True Wealth Management that “if you are a taxpayer stuck in Alternative Minimum Tax (AMT), this charitable contribution can make you money! That’s right, AMT filers are ahead by 28% on these contributions.”

“This isn’t an appeal to people’s charitable side. It’s advice about how to make a buck,” Davis said.

The appeal works, too. In Georgia, the state’s $58 million in ETC tax credits was snapped up within hours in 2016.

As it stands, Davis said, it’s unlikely New Hampshire’s current ETC programs allows for this kind of abuse, although it’s conceivable that noncorporate business entities could take advantage. That’s because corporations can’t claim a deduction on a donation they received a credit for at the state level.

“Basically, the shelter only works when the state taxes being cut (e.g., BPT) are nondeductible at the federal level anyway, but the charitable gift being made is deductible. Some taxpayers are in this situation and others aren’t,” he said.

But expanding the tax credit to interest-and-dividends taxpayers, he said, will “make an egregious tax shelter available to many high-income New Hampshire residents.”

“Making so-called ‘donations’ to the program will become a routine part of financial planning for some savvy taxpayers,” he said.

Plenty of interest-and-dividends taxpayers aren’t wealthy. But Davis said it’ll be the rich who have the biggest incentive to donate, because the bigger the donation and credit, and the higher the tax bracket, the higher the potential profit.

The state’s ETC program, enacted in 2012, has been a favorite cause of conservatives and school-choice proponents, who see the scholarships as a necessary escape hatch for students let down by public schools. The grants, which go up to $4,700, help pay for private school or home-schooling expenses for low-income students.

Democrats and public school advocates, on the other hand, contend that the program drains the state of needed resources, weakens public schools and is unconstitutional because it helps pay tuition at religious schools.

Available tax credits under the program are currently capped at $5.1 million. Donations have grown quickly, but have until now stayed well under $1 million.

Democrats worry requests for credits will blow up if it becomes profitable to donate, and point out that the cap isn’t set in stone – it goes up by 25 percent once 80 percent of credits are claimed.

“From a guardianship-of-the-state’s-revenues perspective, this could snowball into a huge reduction in state revenues,” Martin said.

Rep. Major, meanwhile, said it’s worthwhile to try to expand availability of the program. And he said legislators can track what kind of people end up claiming the credit, and make changes if the wealthy are snapping them up.

“It’s like anything else – you’ve got to try,” he said.

HB 1686 next heads to the full House for a vote.

(Lola Duffort can be reached at 369-3321 or lduffort@cmonitor.com.)