In the coming days, you’re going to hear a lot about helping students that are poor, and school choice, and scholarships. It’s all going to sound very uplifting, and positive, and why of course we want to help those underprivileged children!
Just keep this in mind: It’s all a scam to benefit the wealthy.
It’s called a “scholarship tax credit,” and it’s another wolf-in-saint’s-clothing scheme that think tanks on the right seem to come up with on a regular basis. It purports to help students who are too poor to attend the private school of their choice – because, of course, every public school everywhere is horrible all the time, and private schools are the salvation of humankind.
What this proposal is, in fact, is a right-wing three-fer:
- It takes money away from the government.
- It takes money away from public schools.
- And it benefits the wealthy donors that help elect the people pushing it.
We could spend some time exploring the first two points, but for anyone who has followed right-wing thinking, those are obvious goals of that movement. (You can read more about point #2 in this article: Why are Republicans attacking your public schools?)
What we need to look at today is the third point: how this proposal is a windfall for the wealthy, and why it is a disaster for everyone else.
Tax deduction versus tax credit
First of all, to see just how bad this is, you need to understand the difference between a tax deduction and a tax credit. I covered this in this explainer article, but here are the basics:
- A tax deduction comes off your taxable income. The value of the tax deduction is calculated by multiplying the deduction by your tax rate. So, on your federal taxes, if you are in the 25% tax bracket, a $1000 charitable donation takes $250 off your taxes.
- A tax credit, on the other hand, comes directly off your taxes. It doesn’t matter what bracket you are in, or your taxable income; the tax credit offsets your taxes directly. So, a $1000 tax credit takes $1000 off your taxes.
As you can see, there is a BIG difference between a tax deduction and a tax credit. Tax credits make a much bigger difference to the taxpayer’s bottom line – AND, to the state’s bottom line.
The proposed scholarship tax credit
Now let’s see how the “scholarship tax credit” works out.
The basics are simple: for every $1.00 you give to a qualified private school that gives scholarships, you get $0.95 off of your Kentucky taxes. (Technically, you don’t give directly to the school; you give to something called a “scholarship granting organization,” and they give to the school.) If you give a multi-year gift, it’s $0.97. So, 95% to 97% of your donation is given back to you in a tax credit. Sweet, huh?
There’s a limit to how many of these the state will give back in a year, so you want to line up for them early. However, if the state budget allotment for these credits gets used up, that allotment automatically increases the next year. (The cost of Florida’s program, which has the same growth provision, has gone from $229 million to $874 million in just six years.)
Here’s the dramatic difference
To illustrate the dramatic effect this credit would have, let’s compare two taxpayers, using the 97% credit.
| Taxpayer 1 | Taxpayer 2 | |||
| Taxable income | 150,000 | Taxable income | 150,000 | |
| Taxes before deductions | 7,500 | Taxes before deductions | 7,500 | |
| Charitable donation | 10,000 | Scholarship donation | 10,000 | |
| Tax effect of charitable donation | (500) | Tax effect of scholarship donation | (9,700) | |
| Net tax bill | 7,000 | Net tax bill | 0 | |
They both have the same taxable income, and the same taxes at Kentucky’s universal income tax rate of 5%.
Taxpayer 1 makes a charitable donation to the private school of his choice, which lowers his taxes by $500 (the $10,000 charitable donation times the 5% tax rate).
Taxpayer 2, on the other hand, uses that same $10,000 to make a scholarship donation to the school of her choice. The result? She gets $9,700 taken off her taxes, resulting in a tax bill of zero, as in “I don’t have to pay any taxes this year.” It’s a zero tax bill, and not a refund, because the scholarship tax credit can only lower your taxes – it can’t generate a refund. (A moment of sanity in the midst of the giveaway.)
And the state, by the way, has $9,700 less to fund the public school right down the street from Taxpayer 2.
Now let’s up the ante some.
| Taxpayer 1 | Taxpayer 2 | |||
| Taxable income | 450,000 | Taxable income | 450,000 | |
| Taxes before deductions | 22,500 | Taxes before deductions | 22,500 | |
| Charitable donation | 30,000 | Scholarship donation | 30,000 | |
| Tax effect of charitable donation | (1,500) | Tax effect of scholarship donation | (29,100) | |
| Net tax bill | 21,000 | Net tax bill | 0 | |
These are two taxpayers who both have taxable incomes of $450,000. Their tax rates are the same. One makes a charitable donation of $30,000 and saves $1,500 off her tax bill. The other makes a scholarship donation of $30,000 – and saves $29,100 on his tax bill, resulting in another tax bill of zero, nada, no taxes paid. (And that school down the street has $29,100 less to spend on teaching ALL children.)
In both cases, the taxpayers donated the same amount. But, through the scam of the scholarship tax credit, some of the taxpayers had their state taxes completely eliminated.
And, as you can see, the more money you donate, the greater the return to you. (#Math)
Oh, and there’s one more cool giveaway included in this scam of a bill – if you donate STOCK instead of cash, you still get the full credit, AND you don’t have to pay capital gains on the stock.
If YOU were a taxpayer with money to make a donation, which path would YOU choose?
And, just to drive home the point – the scholarship donations not only give the persons using them a tax advantage, they also take about 20 times more money out of the state budget than a charitable donation, thus giving us even less money to spend on public education.
Call it what you want – it’s a scam to benefit the wealthy
So, in the coming days, as this debate begins, ignore the flowery words about choice, and underprivileged, and education. Remember just these four words:
Tax credit.
Hurts schools.
And one more:
Scam.
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