Incentives Watch: The Separation of Church and State Ignites Litigation Involving Scholarship Tax Credits

Education and taxes have historically been interlocked. Traditionally, taxes were collected to help fund public school systems. However, states that offer scholarship tax credits are turning the tax-education paradigm on its head, by lowering the taxes of those who contribute while giving funding to private and religious schools. This is not a paradigm shift that is going smoothly however, as recent cases in New Hampshire and Florida show.

Scholarship or tuition tax credit programs allow businesses and individuals to claim tax credits in proportion to donations made to a qualified scholarship or tuition organization. These third-party organizations fund scholarships for students who wish to attend schools other than their assigned public school, including private and religious schools. Altogether, 14 states currently offer some form of tuition or scholarship credit, according to the National Conference of State Legislatures.

In many states, these credit programs offer taxpayers an opportunity to generate substantial credits. Georgia’s scholarship credit, for example, equals 100 percent of donations, up to 75 percent of a corporate taxpayer’s tax liability, to a qualified, scholarship organization with a state wide cap of $58 million. Even in Indiana, a state with a comparatively small scholarship credit, taxpayers receive a credit equal to 50 percent of donations to a qualified scholarship organization, up to the state wide cap of $7.5 million.

Several states also place a dollar limitation on the credit allowable for each eligible taxpayer. Taxpayers in Oklahoma, for example, may only claim a credit for 50 percent of their donations, up to $100,000 for businesses or between $1,000 and $2,000 for individuals, depending on their filing status. 

In McCall v. Scott, the scholarship tax credit program in Florida is currently being challenged by the Florida Education Association, along with the Florida School Boards Association and the Parent Teacher Association, reports an August 28 U.S. News & World Report article. The complaint claims the credit violates the state constitution, because these credits allow the use of taxpayer money to fund private and religious schools, the latter of which violates the separation of church and state. In Florida, 82 percent of the students who participated in the program attended a religious school, while only 30 percent of the schools that participated were nonreligious, according to the article.

A PDK/Gallop poll shows that two-thirds of Americans are against school voucher programs, U.S. News & World Report reports, meaning that challenges to these scholarship credits will most likely continue. The article further points out that other complaints against the program include the lack of uniform standards and regulation for private and religious schools, as well as a fear that cash-strapped public school systems will lose even more funding.  

Florida isn’t the only state recently making news because of challenges to its scholarship tax credit program. In Duncan v. The State of New Hampshire,the New Hampshire Supreme Court ruled that the law allowing New Hampshire taxpayers to file a complaint against the state regardless of their ability to show they were harmed is unconstitutional and in the process determined that the plaintiffs lacked standing to challenge the state’s scholarship credit, reported the New Hampshire Public Radio on Aug. 28. However, the court stressed that a citizen with proper standing could theoretically challenge the credit in the future. Furthermore, a bill to repeal the credit has been passed in New Hampshire’s House of Representatives, although it has been tabled in the Senate, a Sept. 1 Christian Post article stated.

Taxes have always been integral to education and this is unlikely to change in the future, but what remains to be seen is if the tradition of raising funding for public schools through taxes will be supplanted by generating scholarships for students through tax credits.

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should the use of scholarship tax credits be permitted to generate funding for private or religious schools? 

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.

By:  Jason Plotkin

Follow Jason on Twitter at:  @jplotkinSALT.

Follow BBNA on Twitter at: @BBNATax.