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Private Education Council Seeks Rescission of SALT Cap Regs

JAN. 31, 2020

Private Education Council Seeks Rescission of SALT Cap Regs

DATED JAN. 31, 2020
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January 31, 2020

CC:PA:LPD:PR (REG–107431–19)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: REG-107431-19 Treatment of Payments to Charitable Entities in Return for Consideration

Dear Internal Revenue Service:

The Council for American Private Education (CAPE) submits the following comments on the proposed regulations referenced above. CAPE is a coalition of national organizations and state affiliates serving private elementary and secondary schools. There are over 33,000 private schools in America. One in four of the nation's schools is a private school. More than five million students attend these schools. CAPE member organizations represent more than 80 percent of private school enrollment nationwide.

Deleterious Effects of Regulations

Advocates of scholarships for children from low income families have spent the last seventeen months expressing concern over the IRS regulations originally proposed on August 27, 2018. Those concerns, unfortunately, were not without merit, as scholarship granting organizations (SGO) in various states have reported that donations to scholarship programs affected by the regulations have been, in some cases, severely disrupted. Some SGOs that work with CAPE affiliates in the states report a spike in donations immediately prior to August 27, 2018, followed by a dip in giving that never returned to the previous level.

In Iowa, it is believed that there was a shortage of $1,735,627 in tax credits distributed in 2019, causing the Iowa program to fail to exhaust all of its tax credits for the first time since the recession of 2008. Because donors receive a 65% state income tax credit, $2,670,195 in total donations to SGOs was lost. Since an average scholarship is $1,600, this means approximately 1,668 students will lose their scholarship. When SGOs polled donors as to why they were not donating at all or were reducing their donation amount, overwhelmingly the reason given was the 2018 rule from the Treasury Department affecting the federal deductibility of SGO donations.

A sharp decline in contributions has been observed in Kansas, Virginia, and South Carolina as well, which means fewer scholarships for children from low income families.

Administration Policy

It is no small irony that during the same time that the Department of Treasury has doggedly refused to roll back its new policy that is demonstrably doing damage to tax credit scholarship programs in the states, the Department of Education has taken the lead on a proposal to establish a federal tax credit to support tax credit scholarship programs in the states. On December 9, 2019, President Trump personally hosted a roundtable at the White House with school choice leaders, where he and Secretary DeVos reiterated their support for such a tax credit. Remarkably, a mere eight days later, the Internal Revue Service (IRS) issued proposed regulations that continue to disincentivize giving to these very same programs the Administration is otherwise trying to support. While we appreciate the Administration's very vocal support for Education Freedom Scholarship legislation, it should perhaps consult the Hippocratic Oath: “First, do no harm.” The Administration appears to be at war with itself over school choice, with the dreams of poor, often minority families hoping for a scholarship to an outstanding school the collateral damage.

Future Administrations

If this policy represents the best a pro-school choice administration can do, advocates of these programs have much to fear from any future administration that might be hostile to school choice. For the current Administration has kicked open the door to federal antagonism towards state tax credit scholarship programs through the tax code.

For over twenty years, tax credit scholarship programs have gone about their business, providing educational opportunities to families in need, without interference from Washington. It seems there are many ironies in the fire, as it took a Republican presidential administration, purportedly committed to the principles of federalism and school choice, to suddenly drop the federal hammer on state school choice programs. Rest assured, future administrations less committed to these principles will be all too eager to revisit these rules and make them even more onerous for school choice programs, especially now that the blueprint has been established.

Purpose

When the IRS first issued notice that proposed regulations concerning the deductibility of state and local tax (SALT) payments would be forthcoming, its statement specifically cited the fact that “some state legislatures have adopted or are considering legislative proposals allowing taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed” in response to the Tax Cuts and Jobs Act's (TCJA) new limitation on the deductibility of state and local taxes. However, rather than propose regulations narrowly targeting those SALT “workarounds,” the IRS issued an overly broad proposal that affects long existing tax credit programs.

Long existing tax credit scholarship programs are entirely different in intent and kind from recent state-level attempts to maneuver around the new SALT Cap. Unlike those workarounds, tax credit scholarship programs were not devised as a way of circumventing the provisions of the TCJA, or any other federal tax law. Rather, for two decades, states have been passing tax credit scholarship laws with one purpose in mind: helping children attend private schools their families might not otherwise be able to afford. It remains a mystery why a legitimate attempt to address the issue of state workarounds needed to involve tax credit scholarship programs at all.

Conclusion

The full extent of the harm these regulations have done to tax credit scholarship programs in the states cannot be known. SGOs in states mentioned above are confident that at best, the regulations have caused considerable uncertainty on the part of donors, and at worst, have caused the loss of perhaps thousands of scholarships. It is not the proper place of a federal agency to unleash this kind of disruption upon long existing state programs, particularly ones that serve the common good in this way.

Whereas rulemaking to respond to circumvention of the new tax law makes sense as an agency function, upending longstanding state programs not designed in any way as tax circumvention schemes does not. If there is a problem with state tax credit scholarship programs requiring federal attention after all these years, Congress should take action, not unelected officials at the Treasury Department. What has been done here is not enforcement, it is legislating.

We encourage the Administration to either rescind these regulations as they pertain to tax credit scholarship programs, or to develop a new approach, so that needy children do not lose scholarships because of agency rulemaking that disincentivizes giving.

Thank you for the opportunity to submit testimony on this important issue.

Sincerely,

Michael Schuttloffel
Executive Director
Council for American Private Education
Washington, DC

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