The Education Tax Credit: How does it work?
Serious misunderstandings about the state’s Education Tax Credit Program seem to be driving the effort to eliminate it. At least, they’re driving the narrative behind that effort. Misconceptions are so pervasive that legislators are repeating them in public statements.
Experienced drivers know that it’s dangerous if even a few people wind up going the wrong way. It’s worse if they persuade others to follow. There is too much misinformation circulating about the program to correct all of it here, but for the moment we can offer a quick summary of how it works and how much money is involved.
The Education Tax Credit Program, passed in 2012, allows businesses and individuals to claim a tax credit for donations made to qualifying scholarship organizations. Deductions may be claimed against the business enterprise and business profits taxes as well as the interest and dividends tax. Tax credits are equal to 85 percent of the donation. So a donation of $1,000 earns a tax credit of $850.
Some critics say this credit far exceeds standard practice. It doesn’t. Donors to the Community Development Finance Authority earn a tax credit equal to 75 percent of their donation.
Donations to this Education Tax Credit Program fund scholarships for low-income families to help cover the cost of education purchased outside of the traditional public school system.
In the current program year, donations to scholarship organizations are capped at $6 million, with a maximum available tax credit of $5.1 million. Some legislators, including the sponsor of HB 632, a bill to eliminate the program, have mistaken these legal maximums for an appropriation from the state budget.
“By reversing this unjust carveout, $6 million currently set aside for the education tax credit program would be appropriated fairly, taking into account all Granite Staters’ needs,” Rep. Joelle Martin, D-Milford, said in testimony before the House Ways and Means Committee in February.
Every part of that statement about the program is incorrect. There is no state money set-aside for the program. And the credits do not come close to totaling $6 million.
Here is how it actually works.
Individuals or businesses donate to the scholarship organization. The donors then give their donation receipts to the Department of Revenue Administration (DRA). The DRA then issues them a credit for 85 percent of the amount of the donation.
The credit is like a coupon. It can be redeemed when a donor files his or her taxes. But to claim it, the donor has to have a tax liability against which to apply the credit. Many donors never use the credit because their business or I&D tax liability is too low.
The Department of Revenue Administration’s Tax Expenditure and Potential Liability Report for fiscal year 2018 lists the total tax credits awarded under the Education Tax Credit Program since its start in 2013. The tax credits through FY 2018 have totaled $797,000.
(Note: The Department of Revenue Administration switched from calendar-year to fiscal-year reporting in 2014. It lists no Education Tax Credits claimed in its 2013 report, but notes that the 2014 figure includes the last six months of 2013.)
Education Scholarship Tax Credits Claimed
FY 2014: $20,000
FY 2015: $115,000
FY 2016: $93,000
FY 2017: $188,000
FY 2018: $381,000
The DRA’s latest report on the program shows that tax credits of $1,405,335 have been claimed through February 11 of this year.
So for the life of the program, only $2.2 million in credits has been claimed. That’s a little more than a third of the amount that the sponsor of HB 632 claimed the program cost annually.
There are many additional misperceptions that are coloring the debate about this program. We will address those in future posts. For now, we hope this clears up a few of the biggest misunderstandings.
