text: Background As of January 2018, there were 22 TCS programs authorized across 18 states (see fig. 1). All TCS programs are state programs; there are no federal TCS programs. Decisions about whether to develop and operate a TCS program (and how to structure the program) are completely at the discretion of each state; there is no federal role in establishing these programs. Most TCS programs began within the last 10 years; the first TCS program awarded scholarships in Arizona in 1998 and Florida created the newest program in 2018, according to state program documents and officials. Scholarships are funded through donations from private individuals and businesses, and the financial impact to states from TCS programs primarily occurs through forgone revenue resulting from the associated tax credits. In all 22 programs, state agencies and nonprofit organizations both play a role in administering the programs, with the specific responsibilities varying by program: State departments or agencies responsible for tax administration, education, or both, generally administer these programs. For example, they may approve schools or nonprofit scholarship granting organizations or disseminate program information or guidance to potential donors, scholarship students, or the public. Nonprofit scholarship granting organizations (SGO) are generally responsible for managing some aspects of the donation process— such as collecting donations—as well as awarding scholarships to students. Most Programs Use Income to Determine Student Eligibility and Consider Various Factors When Setting Scholarship Award Amounts States’ TCS programs often determine student eligibility for scholarships based on household income and use a range of factors to determine scholarship award amounts. Eligibility Requirements Income requirements: Seventeen of the 22 TCS programs have income limits (i.e., the maximum amount of household income a student can have and still be eligible for a scholarship). As shown in figure 2, income limits varied widely among programs, ranging from just under $32,000 to about $136,500 per year for students from a four-person household in SY 2017-2018. For context, we compared these income limits to the 2012- 2016 5-year ACS estimates of state median household income for four- person households. Six of the 17 programs had household income limits in SY 2017-2018 above their state’s median income. This included two programs each in Arizona and Pennsylvania which collectively accounted for about one-third of all TCS scholarships awarded to students in SY 2016-2017, according to state-reported data. Of the 17 programs that have household income limits, 6 also require SGOs to further consider income when selecting scholarship recipients among eligible students. Such requirements include giving preference to scholarship applicants from lower-income households or ensuring that a certain percentage of scholarship recipients come from lower-income households. Of the remaining five TCS programs that do not use income to determine eligibility, three use one or more other types of eligibility criteria, such as whether the student has a disability, and two—Montana’s TCS program and Arizona’s Original Individual Income Tax Credit program—are open to all school-aged residents. TCS programs collected limited information on the household incomes of scholarship recipients. The 11 programs that had income information on recipient families collected and reported it in different ways. For example, the Alabama program requires SGOs to report the total number and amount of scholarships awarded to students qualifying for the federal free and reduced-price lunch program and makes the information publicly available. Arizona makes an annual report publicly available on the state’s four TCS programs, including breakdowns of the number of students receiving scholarships from various income levels. Other eligibility requirements: Some TCS programs’ eligibility criteria for student scholarship recipients include other factors, such as students’ disability status or previous schooling. Specifically, 7 of 22 programs are limited to students with disabilities or allow students with disabilities to qualify for a scholarship even if they do not meet some requirements for students without disabilities. For example, to be eligible for Virginia’s program, all students must have a household income below a certain amount, but that amount is higher for students with disabilities. South Carolina’s program is limited to students with disabilities. In addition, some programs may require students to have previously attended a public school (9 of 22) or live in the attendance area of a public school with performance challenges (5 of 22). See appendix II for more information on the eligibility criteria of TCS programs. Scholarship Uses and Amounts TCS programs have different requirements for how students can use their scholarships and different methods for calculating scholarship amounts. More than half of the programs (13 of 22) allow students to use their scholarship money for costs like transportation and books in addition to tuition, whereas the remaining programs (9 of 22) require scholarships funds to be used for tuition only. Four programs allow donors to recommend that their donations fund scholarships for specific students. Average scholarship awards in SY 2016-2017 ranged from $500 to $5,468 per student among the 16 programs that published such information or provided it to us. (See appendix II for more information). Most programs require SGOs to consider one or more factors related to student or school characteristics when determining scholarship award amounts. As shown in table 1, these factors may include the cost of private school tuition or the state funding amounts for public school students, among other factors. See appendix II for more information on program requirements related to scholarship amounts. Effect of TCS Donations on Taxes Owed Depends on Factors Such as Tax Credit Percentages and Individual Circumstances The extent to which TCS program donations affect the amount that donors owe in state and federal taxes depends on program characteristics—such as the percentage of the donation that the rules of the program allow donors to claim as a state tax credit (referred to in this report as “tax credit percentages”) and limits on donation amounts—along with donors’ financial circumstances. Almost all of the TCS programs (20 of 22) offer tax credits to businesses for income or other types of taxes, while more than half offer tax credits to individuals for their income taxes (13 of 22). More than half of programs (13 of 22) offer tax credits for cash donations only, while the remaining 9 programs also allow for at least one type of “in kind” donation, such as a property donation. Tax Credit Percentages Eleven of the 22 programs allow eligible donors (either individuals, businesses, or both) to claim 100 percent of their donations as state tax credits, meaning that, for each dollar donated, the amount of state taxes owed (i.e., the donor’s tax liability) is reduced by a dollar, up to any maximum donation limits set by the program. The other 11 programs offer tax credits of 50 percent to 85 percent of donations (see table 2). For example, Indiana and Oklahoma offer tax credits of 50 percent of the donation value, meaning that donors can reduce their state tax liability by 50 cents for every dollar donated. All but one of the programs prohibit donors from receiving a tax credit greater than their tax liability in a given year, although two thirds of the programs allow donors to carry forward portions of the credits to use in future years. Limits on Tax Credit Amounts Sixteen of the 22 programs limit the amount of tax credits each donor may claim per year and programs vary in how they structure these limits. The programs that set annual limits for donors generally do so in one or both of the following ways: Dollar amount limits: Thirteen programs limit the dollar amount of TCS program tax credits that donors can claim in a given year. These limits ranged from a maximum tax credit of $150 for either individuals or businesses in Montana’s program, to a maximum tax credit of $1 million for either individuals or businesses in Illinois’ program in CY 2018. Limits based on percentage of tax liability: Four programs limit the amount of the TCS program tax credits a donor can claim to a percentage of the donor’s total income tax liability. These limits ranged from 50 to 90 percent of a donor’s income tax liability in CY 2018. For example, in South Carolina donors could receive a tax credit up to 60 percent of their total income tax liability for the year of the donation. All but three programs specify a maximum total amount, or cap, of TCS program tax credits that may be claimed each year for the program as a whole (see table 3). Programs’ procedures vary if the cap is reached in a given year. For example, in Rhode Island, potential donors may apply for credits on a “first come, first served” basis once the application period starts until all credits are taken. In 2018, all of the credits were claimed on the first day of the application period and a drawing was held to determine who would receive credits among those who applied on that first day. Georgia’s TCS program offers a maximum tax credit percentage of 100 percent when total donations do not exceed the donation cap. However, if total donations exceed the program cap, the allowable tax credit percentage is prorated among donors who apply on the day the program- wide cap on tax credits is reached. Twenty programs published or provided us with information on donation amounts, such as total donations and average donations. Among these programs, total program-wide donation amounts in CY 2016 ranged from $43,865 to $553 million. (See appendix III for more information about donation amounts.) TCS Donations and Federal Taxes for Individual Donors In addition to reducing their state tax liabilities, some individuals who make TCS program donations may also be able to reduce their federal income tax liabilities through the federal tax deduction for charitable contributions. In August 2018, IRS and Treasury published proposed regulations that, if finalized without modification, would change the extent to which individuals who make TCS program donations can reduce their federal tax liability. However, the proposed regulations were not final at the time this report was published and are therefore subject to change. As a result, the information we present below does not address the proposed regulations. Currently, the extent to which individuals may reduce their federal income tax liabilities as a result of their TCS donation depends on their specific circumstances, such as whether they itemize their deductions (versus taking the standard deduction), the federal rates at which their income is taxed, and the amount of federal deductions they take for state and local taxes. More specifically, the effect of a TCS donation on an individual donor’s federal tax liability depends on the following: Itemizing federal deductions and taking the deduction for charitable contributions: Taxpayers benefit from itemizing deductions—such as those for state and local taxes, mortgage interest, and charitable contributions—if they exceed the standard deduction. Taxpayers, including TCS donors, may only claim a federal deduction for charitable contributions if they itemize. Federal tax rate: The reduction in federal taxes owed as a result of the federal deduction for charitable contributions depends on the donor’s applicable federal tax rate. Given the same deduction amount, taxpayers subject to higher tax rates will generally reduce their tax liabilities by larger amounts than taxpayers subject to lower tax rates. Deduction for state and local taxes: When filing federal taxes, taxpayers who itemize may take a deduction for state and local taxes they have paid during the tax year. Beginning in tax year 2018, individual taxpayers may deduct no more than $10,000 in state and local taxes on their federal tax returns. Taxpayers who claim state tax credits for TCS program donations reduce their state tax liability, which may in turn reduce the amount they may deduct on their federal tax return for state and local taxes paid. Interaction between the federal deduction for charitable contributions and the federal deduction for state and local taxes: Generally, if a donor pays $10,000 or less in state and local taxes, the amount of the deduction for charitable contributions may be fully or partially offset (i.e., canceled out) by a decrease in the deduction for state and local taxes paid as a result of the TCS program tax credit. Conversely, taxpayers who pay more than $10,000 in state and local taxes cannot deduct the full amount of state and local taxes they paid. Therefore, the reduced state and local taxes paid as a result of the tax credit generally may not offset the amount of the deduction for charitable contributions for these taxpayers. See figure 3 for a description of how individuals’ TCS program donations could affect their federal tax liabilities. Combined Reduction in State and Federal Tax Liability TCS program donations can lead to a range of possible changes to an individual’s state and federal income tax liabilities, including some scenarios where donors could reduce their combined state and federal tax liability by an amount that is greater than the amount of their donation (see for example, Donor A in figure 4). Figure 4 shows four examples of how state and federal income taxes may be reduced for hypothetical individual donors in states with 100 percent and 50 percent tax credit scholarship programs. Agency Comments and Our Evaluation We provided a draft of this report to Education and IRS for review and comment. While the draft was under review at these agencies, IRS and Treasury issued proposed regulations related to state tax credits and the federal deduction for charitable contributions. We updated the report to include information about these proposed regulations but did not alter our analysis to reflect the proposed regulations because they were not final at the time this report was published and are therefore subject to change. We provided a revised draft to IRS as the revisions directly relate to IRS’s areas of responsibility, and informed Education about our approach to addressing the proposed regulations. IRS did not provide formal comments on the draft report. Education’s comments are reproduced in appendix I. Education also provided technical comments, which we incorporated as appropriate. In its comments, Education noted that it has no role in developing, operating, or overseeing TCS programs, and provided a variety of comments and observations on the draft report. For example, Education suggested that we add additional details about certain TCS program requirements, such as more information about state tax rules and permissible uses of scholarship funds. We incorporated these comments as appropriate. Education also suggested that we delay publication of this report until the IRS regulations are finalized, as Education thought that the report could be more helpful at that time. GAO policy is to communicate audit and evaluation results in a timely manner to decision makers and others who either requested the work or may need the information to bring about needed changes. Therefore, we are issuing the report as planned. We are sending copies of this report to the appropriate congressional committees, the Secretary of Education, and the Commissioner of Internal Revenue. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (617) 788-0580 or nowickij@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Appendix I: Comments from the Department of Education Appendix II: State Tax Credit Scholarship Program Eligibility and Scholarship Award Characteristics Appendix III: Information About Tax Credit Scholarship Program Tax Provisions Program name Programs available for both individual and business donors Alabama Educational Scholarship Program $50,000 or 50% of tax liability, whichever is lower (individual) 50% of business tax liability $1,000 (individual) 75% of business tax liability $1 million (individual and business) $350,000 (Individual and business) $150 (Individual and business) $1,000 (individual) $100,000 (business) 60% of tax liability (Individual and business) Virginia Education Improvement Scholarships Tax Credits Program Programs available for individual donors only Arizona Original Individual Income Tax Credit Program $81,250 (individual) No limit for business donors $555 (individual) $552 (individual) Percent of donation that may be claimed as a credit Maximum donation amounts vary from 50% to 100% of tax liability $510,000 or no more than 10% of program credits 2 percent of wages paid no In Oklahoma, Pennsylvania, and Rhode Island, the percentage of donations that can be claimed as a tax credit increases if donors commit to donating for 2 years. In Oklahoma, that percentage increases from 50 percent to 75 percent. In the two Pennsylvania programs and the Rhode Island program, the percentage increases from 75 percent to 90 percent. Program name Programs available for both individual and business donors Alabama Educational Scholarship Program Total donations in CY 2016 (rounded) Appendix IV: GAO Contact and Staff Acknowledgments GAO Contact: Staff Acknowledgments: In addition to the individual named above, Nagla’a El-Hodiri (Assistant Director), Barbara Steel-Lowney (Analyst-in-Charge), Jeff Arkin, and Jessica L. Yutzy made key contributions to this report. Also contributing to this report were Deborah Bland, Lilia Chaidez, Sarah Cornetto, Caitlin Cusati, Paulissa Earl, Alison Grantham, Kirsten Lauber, Sheila R. McCoy, Mimi Nguyen, Jessica Orr, Michelle Philpott, Paul Schearf, and Andrew J. Stephens.
target: TCS programs offer state tax credits to individuals or businesses that donate to scholarship funds for students to attend private elementary and secondary schools. Through these credits, donors may reduce the amount they owe in state taxes by the full or a partial amount of their donation, depending on each program's rules. Designing a TCS program requires that many decisions be made, such as which students will be eligible to receive scholarships and the effect donations will have on donors' state taxes. GAO was asked to review key characteristics of TCS programs. This report examines (1) state TCS programs' policies regarding student eligibility and scholarship awards, and (2) how donating to a TCS program could affect the amount of state and federal taxes owed by donors. For both objectives, GAO reviewed publicly-available documents about student eligibility and tax provisions for all 22 programs authorized as of January 2018 and verified the accuracy of the information with state program officials. GAO did not conduct an independent legal review of state laws and regulations. GAO also interviewed federal officials and reviewed relevant federal guidance and policy documents. In 2018, there were 22 tax credit scholarship (TCS) programs authorized across 18 states, which provide state tax credits for individual and business donations that fund scholarships for students to attend elementary and secondary private schools (see figure). To determine the eligibility of students for these scholarships, most TCS programs use household income and have various approaches to determine scholarship award amounts. Income limits vary widely among programs, ranging from approximately $32,000 to $136,500 per year for students from a four-person household in school year 2017-2018. Programs have different requirements for how students can use their scholarships and different methods for calculating scholarship amounts. More than half of the programs (13 of 22) allow students to use their scholarship money for costs like transportation and books in addition to tuition, whereas the remaining programs (9 of 22) require scholarships funds to be used for tuition only. Average scholarship awards in school year 2016-2017 ranged from $500 to $5,468 per student among the 16 programs that published or provided GAO with such information. The effect of TCS donations on donors' tax liability depends on program characteristics and donors' financial circumstances. Specifically, half of the 22 programs allow eligible donors to claim 100 percent of their donations as state tax credits, meaning that for each dollar donated, state taxes owed are reduced by a dollar, up to any maximum set by the state. The remaining 11 programs allow donors to claim from 50 to 85 percent of their donations as state tax credits. Programs often specify a maximum tax credit that may be claimed each year by a donor, by all donors combined, or both. Individual donors may also reduce their federal tax liabilities through the federal deduction for charitable contributions, depending on their financial circumstances and applicable tax provisions.