Teachers’ Union Addresses Private School Voucher Program Donations

January 31, 2020

Mon Lam
Department of the Treasury
Internal Revenue Service 1111 Constitution Ave. NW
Washington, DC 20224

RE: IRS REG-107431-19

Dear Ms. Lam:

On behalf of the 1.7 million members of the American Federation of Teachers, I write to urge the IRS to use its rulemaking authority to support policies that promote the use of public revenue for public services, and to close loopholes that allow private profiteering in ways that undermine public education.

Our country has a history of supporting and providing for public education. Yet, since the Great Recession, we have experienced chronic disinvestment in our schools, and 21 states still spend less on public schools than they did before the recession. Simultaneously, some states have diverted public money — both state and federal funding — away from public education and toward individual profit and private school voucher programs.

Private school tax credits exacerbate the funding shortfalls of public schools. For example, according to research by the Grand Canyon Institute, private school tax credits in Arizona amounted to $150 million in 2017 and “cost the state around $10,000 from the General Fund for each new private school student who would not have otherwise enrolled. This amount far exceeds the amount allocated from the General Fund per student to public schools.”¹ A growing body of research into the impact of market-based education has also found that the expansion of the market undermines the ability of traditional public schools to maintain scale and provide services, thereby hurting everyone who utilizes public services.

For some taxpayers contributing to private school voucher programs, the combined federal deduction and state tax credit exceeded the value of the contribution, and the IRS largely addressed this in 2018.² Please see our 2018 comments on this topic (Contributions in Exchange for State or Local Tax Credits (REG-112176-18), Docket Number: IRS-2018-0025) for additional information.

While the IRS has taken steps to rein in the use by individuals of this loophole that allowed certain individuals to turn a profit by subsidizing private schools, one aspect of the current proposed regulation could open the door to inappropriate tax avoidance opportunities for some taxpayers. The current proposal seems to allow the possibility that some owners of pass-through businesses could continue to profit via a voucher tax credit scheme. Specifically, Example 2 of 1.162-15(a)(2)(ii) indicates that these owners will be able to receive a business expense deduction even when their “expense” is reimbursed through a state tax credit. Unless additional clarification is provided, this example risks emboldening businesses such that they will attempt to manufacture lucrative federal tax deductions, at little actual cost to themselves, by donating to private school voucher programs.

The IRS should not allow profitable businesses to continue to gain from the diversion of tax dollars to private education, while closing the door for support for basic state and local services: We urge the IRS to end any incentive to subsidize private schools by clarifying that business deductions cannot be used to game the system in this manner.

Thank you for considering our views on this important issue.

Sincerely,

Randi Weingarten
President
AFT
Washington, DC