Private School Choice: Requirements for Students and Donors Participating in State Tax Credit Scholarship Programs
Released: 2018-09-18T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: 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.

section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: State tax credit scholarship (TCS) programs offer 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. In some  cases, TCS program donations may also affect the amount of federal  taxes donors owe, through the federal deduction for charitable  contributions. TCS programs are one type of private school choice  program that states have established to help fund students’ attendance at  private schools. Other types of private school choice programs include  school voucher and education savings account programs. As of January  2018, there were 22 TCS programs authorized across 18 states, with an  additional program enacted later in the year. In school year (SY) 2016- 2017 (the most recent year for which information was available), TCS  programs collectively awarded scholarships totaling more than $856  million, according to state-reported data.

Designing a TCS program requires that many decisions be made, such  as who will be eligible to receive scholarships and the effect donations will  have on the amount donors owe in state taxes. You asked us to review  key characteristics of state-administered 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.

To complete our work for both objectives, we reviewed publicly-available  information about student eligibility, scholarship awards, and tax  provisions for the 22 TCS programs that were authorized by the  beginning of 2018. We verified the accuracy of this information with state  officials from each program. We did not conduct an independent review  of state laws and regulations. Throughout the report, we provide the most  recent and complete information available for the various types of  information. Specifically, unless otherwise noted, student eligibility  requirements are as of SY 2017-2018 and tax provisions are as of  calendar year (CY) 2018. Scholarship amount information is from SY  2016-2017 and program donations made by taxpayers are from CY 2016.

We also used economic data from the 2012-2016 American Community  Survey (ACS) 5-year estimates administered by the U.S. Census  Bureau. ACS is a national survey that collects information about social,  economic, demographic, and housing characteristics from a sample of  households. For this report, we used ACS estimates of the state level  median income for a four-person household to provide context for TCS  program income eligibility requirements in relation to state income  distributions. For the TCS programs with income eligibility requirements,  we calculated program income limits for a four-person household based  on each TCS program’s income eligibility requirements for SY 2016-2017  and 2017-2018. We then compared these limits to 2012-2016 5-year ACS  estimates of state median household income for four-person households.  In addition to verifying the program data we collected with state officials,  we reviewed ACS documentation on survey design and methodology  used to produce the estimates of state median household income. We  concluded that the data presented in this report were sufficiently reliable  for the purposes of our reporting objectives.

In addition, we spoke with officials at the U.S. Department of Education to  obtain their observations about the state programs, and identify whether  the department had conducted research related to TCS programs. We  also spoke with other stakeholders such as TCS program researchers to  understand current research and emerging issues regarding these  programs.

For the second objective, in addition to reviewing program documents  and verifying the information with state officials, we developed illustrative examples of how TCS donations may affect state and federal tax liabilities  for donors with varying tax circumstances—including examples that  assume different percentages of a donation that donors are allowed to  claim as a state tax credit (referred to in this report as tax credit  percentages). Specifically we developed examples that assume a 50  percent TCS program tax credit and examples that assume a 100 percent  TCS program tax credit, which represent the smallest and largest tax  credit percentages offered by existing TCS programs. In August 2018, the  Internal Revenue Service (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. We did not address the proposed regulations in our  analysis because they were not final at the time this report was published  and are therefore subject to change. We also reviewed relevant federal  laws, regulations, and other documents related to federal tax policy and  spoke with the IRS regarding federal deductions for charitable  contributions and state and local taxes.

We conducted this performance audit from January 2018 to September  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: 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.

section_title: Most Programs Use Income to Determine Student Eligibility and Consider Various Factors When Setting Scholarship Award Amounts
paragraphs: States’ TCS programs often determine student eligibility for scholarships  based on household income and use a range of factors to determine  scholarship award amounts.
subsections: section_title: Eligibility Requirements
paragraphs: 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.

section_title: Scholarship Uses and Amounts
paragraphs: 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.

section_title: Effect of TCS Donations on Taxes Owed Depends on Factors Such as Tax Credit Percentages and Individual Circumstances
paragraphs: 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.
subsections: section_title: Tax Credit Percentages
paragraphs: 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.

section_title: Limits on Tax Credit Amounts
paragraphs: 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.)

section_title: TCS Donations and Federal Taxes for Individual Donors
paragraphs: 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.

section_title: Combined Reduction in State and Federal Tax Liability
paragraphs: 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.

section_title: Agency Comments and Our Evaluation
paragraphs: 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.

section_title: Appendix I: Comments from the Department of Education

section_title: Appendix II: State Tax Credit Scholarship Program Eligibility and Scholarship Award Characteristics

section_title: Appendix III: Information About Tax Credit Scholarship Program Tax Provisions
paragraphs: 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)
subsections: section_title: Percent of donation that may be claimed as a credit
paragraphs: 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.

section_title: Program name Programs available for both individual and business donors Alabama Educational Scholarship Program
paragraphs: Total donations  in CY 2016 (rounded)

section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact:

section_title: Staff Acknowledgments:
paragraphs: 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.


Question-summary annotations: questions: question: How do most TCS programs determine the eligibility of students for scholarships?
answer: To determine the eligibility of students for these scholarships, most TCS programs use household income and have various approaches to determine scholarship award amounts.

question: How do the income limits range amoung programs?
answer: 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.

question: What are the different requirements and methods for how students use their scholarships and for calculating scholarship amounts?
answer: 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.

question: What did the average scholarship awards in 2016-2017 range from?
answer: 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.

questions: question: What determines the effect of TCS donations on donors' tax liability?
answer: The effect of TCS donations on donors' tax liability depends on program characteristics and donors' financial circumstances.

question: What does it mean for the donors when a donor is able to claim 100 percent of their donations as state tax credits?
answer: 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.

question: For the other programs that don't allow donors to claim 100 percent of their donation as state tax credits, how much are they able to claim as state tax credits?
answer: The remaining 11 programs allow donors to claim from 50 to 85 percent of their donations as state tax credits.

question: How is the minimum and maximum state tax credits determined?
answer: 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.

questions: question: Who do TCS programs offer state tax credits to?
answer: TCS programs offer state tax credits to individuals or businesses that donate to scholarship funds for students to attend private elementary and secondary schools.

question: What can donors do with these credits?
answer: 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.

question: What decisions need to be made when designing a TCS program?
answer: 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.

question: How are the characteristics of TCS programs reviewed?
answer: GAO was asked to review key characteristics of TCS programs.