Incentives Watch: Back to (Private) School? Tuition Tax Credits Under Scrutiny Yet States Continue to Enact Them

An increasing number of states are enacting tax incentives designed to allow certain students to enroll in private schools. Most of these incentives are targeted towards low-income students currently enrolled in underperforming schools.

Why the sudden surge in this type of incentive? “Recovering state revenues are fueling the growth of such programs,” reports a Statelinearticle.

“Some 23 states and the District of Columbia now have some kind of program to support private education with state dollars,” notes the article, based on numbers provided by the Friedman Foundation.

However, these tax incentives are often the subject of debate because it is argued that public funds should not be used for religious schools.

The Strafford Superior Court in New Hampshire recently ruled that the state’s education tax credit program was unconstitutional. The credit, which is given to businesses donating to scholarship organizations, violated the no-aid clause of the state constitution by allowing the scholarship funds to be applied toward tuition at religious schools, reports a Bloomberg BNA Weekly State Tax Reportarticle.

Nonetheless, states continue to enact these types of credits. For example, Alabama recently enacted two new tax credits – the failing schools credit and the scholarship organization contribution credit. The failing schools credit is a refundable credit for the parents of a student enrolled in, or assigned to attend, a failing school and is for the cost of transferring the student to a nonfailing public school or private school of the parents’ choice.

As a complementary incentive, Alabama offers a tax credit for contributions to a scholarship-granting organization. The credit equals the total contributions made to a scholarship-granting organization during the taxable year for which the credit is claimed, up to 50 percent of the taxpayer's tax liability.

In order to offset the expected loss of revenue to the state as a result of offering these two tax credits, Alabama set aside $40 million, the Stateline article notes.

For more information about the various school tax credits and incentives, check out Bloomberg BNA’s Credits and Incentives Portfolios.

In other developments . . .

The South Carolina Supreme Court recently ruled that Centex Homes is not eligible to claim more than $5 million in tax credits for investing in infrastructure projects because it is a partnership, according to a Bloomberg BNA Weekly State Tax Reportarticle by Andrew M. Ballard.

By: Kathleen Caggiano

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