Education advocates clashed at an IRS hearing on Monday as the agency considers proposed regulations that could have major implications for private education scholarships.
The agency proposal is pitting advocates for private schools against supporters of public schools. At issue are proposed rules designed to prevent blue states from circumventing the cap on state and local deductions in President Trump’s tax law.
{mosads}At Monday’s hearing, school-choice advocates and religious organizations argued the IRS should limit the scope of its proposed rules. They worry the guidance as drafted would lead to fewer donations to organizations that provide scholarships or vouchers for students to attend private schools.
“This tax policy has the potential to harm a lot of the families and the students that we currently serve,” said Leslie Hiner, vice president of legal affairs at EdChoice.
But groups in the public school sector argued the IRS should not provide a carve-out for state programs that provide tax credits for such donations. They say people often make donations to the private school-choice programs to limit the amount they pay in taxes.
“These programs have long been used to flout federal tax law by allowing taxpayers to claim charitable deductions for behavior that is nothing of the sort,” said Sasha Pudelski, advocacy director at AASA, The School Superintendents Association.
The IRS and Treasury Department proposed rules in August in an effort to block blue states’ efforts to circumvent a key provision in Trump’s tax law.
The 2017 tax law capped the state and local tax (SALT) deduction at $10,000, a move that angered politicians in high-tax, Democratic-leaning states, whose residents rely more heavily on the SALT deduction.
In response to the tax law, New York, New Jersey and Connecticut enacted legislation designed to provide workarounds to the cap. The workarounds allow residents making donations to state and local funds to receive a credit against their state and local taxes. The goal was for the residents to be able to deduct those donations as charitable contributions on their federal tax returns, since the charitable deduction was not capped under the new tax law.
But under the IRS’s proposed rules, taxpayers will only be able to claim the federal charitable deduction for donations greater than the amount of the tax credits they received from the state. For example, if a taxpayer donated $1,000 to a state fund and received a tax credit from his or her state of 70 percent, he or she would only be able to claim a federal deduction for $300 of his or her donation.
The proposed rules would cover the SALT cap workarounds in blue states as well as tax-credit and donation programs in red states that pre-date the tax law. Those include programs that offer tax credits for donations to private-school scholarship programs.
The administration has downplayed the effect of the proposal.
Treasury Secretary Steven Mnuchin said when the proposed rules came out that Treasury expects the guidance to have no impact on the federal tax benefits for donations to school-choice programs for nearly all taxpayers.
In September, the IRS issued a clarification to the proposed rules that provide that businesses that make business-related donations to charities and governments, including to school-choice programs, and receive state tax credits can deduct the donations on their federal tax returns as business expenses.
Still, school-choice and religious groups argued that the proposed rules overreach and should be reconsidered so that donors to school-choice programs don’t see their federal charitable tax deduction reduced. They insist the programs are charitable in nature and aren’t being used to circumvent the SALT deduction cap.
They want the rules reducing federal charitable deductions when taxpayers receive state tax credits to only apply in cases where taxpayers make contributions to states for public purposes. They also made the case that the agency should treat donations that get state tax credits as they did before the 2017 tax law.
“The adverse impact of the proposed regulation on these [scholarship] programs will harm thousands of students that depend upon these scholarships and their families that struggle to afford their tuition,“ said Allen Fagin, executive vice president of the Union of Orthodox Jewish Congregations of America.
However, other groups at the hearing, including representatives of public schools and the left-leaning Institute on Taxation and Economic Policy (ITEP), defended the application of the IRS guidance to the tax-credit scholarship programs. They argued that there is evidence that these programs had been advertised as tax shelters before the 2017 tax law.
“This regulation would represent a major improvement over the status quo, particularly because it takes a broad approach to state and local tax credits,” said ITEP research director Carl Davis.
Scott Dinwiddie, an associate chief counsel at the IRS, said at the end of the hearing that the agency will take the speakers’ comments into consideration as it works to finalize the rules.
“We have our work cut out for us,” he said. “This is a complicated area that impacts many things that tax policy generally doesn’t, at least not in the tax-accounting world.”
Dinwiddie told The Hill after the hearing that he doesn’t know when the rules will be finalized and that he doesn’t know how the final rules will treat scholarship tax-credit programs.
“Obviously that’s a big issue that we need to consider,” he said.
In addition to school-choice advocates, land conservation groups also argued at the hearing that the rules are too broad. They worry about the impact on land donations for conservation.
Elected officials in high-tax states strongly oppose both the tax law’s cap on the SALT deduction and the IRS’s proposal to crack down on efforts to circumvent the cap.
Steve Bellone (D), county executive of Suffolk County, N.Y., said blue states felt “shock and frustration.”
“[T]he IRS has decided to amend its regulations, divert from past practice, punish charitable donors, undermine recipients of charitable donations and in effect politicize the regulatory process, in order to punish donor states such as New York State that send more of our tax dollars to Washington than we ever see in return,” he said.