Incentives Watch: Debate Rages On Over Scholarship Tax Credits as Legal Challenges Continue to Fall Short

Quality education, just as quality cars or clothes, comes with a price. Low- to moderate-income families who live in areas with underperforming public schools are often at a distinct disadvantage because they can’t afford private school tuition. This disparity, combined with their popularity and ability to spark litigation, ensures scholarship tax credits remain in the forefront of several states’ education and budget conversations.

Scholarship state tax credits are traditionally awarded for donations to qualified scholarship organizations, or some other nonprofit group, that use the donated money to provide scholarships to students attending private schools. The amount of the tax credit the taxpayer making the donation receives is usually equal to a percentage of the money contributed, up to a specified cap amount. Those who support these credits argue that they remove the financial constraints on families seeking better education for their children.

Over the past several months, a handful of states have had open debates about scholarship tax credits. In Nebraska, the Platte Institute, a nonprofit research and educational institute, has come out in favor of the state’s proposed scholarship tax credit, urging its passage. In New York, Governor Cuomo views the state’s proposed education credit as so imperative that he has tied its enactment to the passage of other education reform programs. Last month, Maryland Governor Larry Hogan voiced his support in favor of a bill that would create a scholarship credit in Maryland.  

These credit programs often face resistance however. Those who oppose these types of credits argue they allow tax revenue to be directed to religious schools while taking money away from public schools in dire need of funding. In both New York and Maryland, prior attempts to pass a scholarship credit have failed.

Opponents also argue that scholarship credits run afoul of constitutional requirements. In Alabama, the debate came to an end on March 2. In Magee v. Boyd, the Alabama Supreme Court upheld the state’s scholarship tax credit and another education credit available to taxpayers who live in failing school districts and pay to send their children to private school. Several different challenges to the constitutionality of the Alabama credits were made, but none proved to be persuasive. The court held, in part, that it is not the state who decides where to the money goes.

This ruling overturns a lower court ruling finding the credits unconstitutional. In May 2014 the Alabama Department of Revenue stopped allocating credits under these programs in response to that ruling.

In Duncan v. The State of New Hampshire, a case from this past year revolving around scholarship tax credits, the New Hampshire Supreme Court upheld the constitutionality of New Hampshire’s scholarship credit program. Although Duncan was decided based on the plaintiff’s lack of standing, the outcome of the case is the same. In Mcall v. Scott, litigation remains ongoing to determine if the plaintiffs have standing to challenge Florida’s scholarship credit.

As they become a major player in the education landscape, the debate over scholarship tax credits is most likely going to continue.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should states enact scholarship tax credits?

For more information about scholarship tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.