Menu
Tax Notes logo

Advocacy Group Seeks SALT Deduction Cap Clarification

JAN. 31, 2020

Advocacy Group Seeks SALT Deduction Cap Clarification

DATED JAN. 31, 2020
DOCUMENT ATTRIBUTES

January 31, 2020

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

RE: IRS REG-107431-19

Dear Ms. Lam:

On behalf of The Arc, I write to comment on Regulation 107431-19. The Arc promotes and protects the human rights of people with intellectual and developmental disabilities and actively supports their full inclusion and participation in the community throughout their lifetimes.

While we take no position on the state and local tax (SALT) deduction nor the cap itself, we are concerned about the proposed regulation that may allow donors to profit from their contributions to education programs that are allowed to discriminate against students with disabilities.

We appreciate the steps that Treasury has taken to curtail taxpayers' ability to profit on contributions to state tax credit school voucher programs. Taxpayers should no longer be able to receive financial gain from claiming both a state tax credit and federal charitable deduction for donating to private school voucher programs. It was entirely unacceptable that tax credit programs in a dozen states were used to pay schools that are allowed to exclude students with disabilities while also allowing individual or corporate donors to obtain a tax benefit.

We have serious concerns about school voucher programs because neither the full rights under the Individuals with Disabilities Education Act (IDEA) nor the accountability under the Every Student Succeeds Act (ESSA) outlined below apply to students who are placed by their parents in private schools in any state. In addition, these voucher programs typically siphon general state and local revenue from public schools that are obliged to accept and serve students with disabilities.

Rights

Under the IDEA, public schools are required to provide for evaluation, free appropriate public education, individualized education plans (IEPs), least restrictive environment, parent participation,

and procedural safeguards (known as “due process”) to challenge school decisions. Private schools have no legal obligation to accept a student with disabilities for admission, unlike public schools (referred to as the “zero reject” principle in IDEA). Assuming the student is admitted to a private school, the school does not have to accept the student's IEP or provide special education and related services (such as speech therapy, assistive technology, and transportation).

Accountability

Under the ESSA, public schools are held accountable for how students — including the subgroup of students with disabilities — learn and achieve. Schools must measure and publicly report academic achievement, academic progress, English language proficiency, and high school graduation rates. ESSA requires that schools look at the performance for all their students, as well as at the performance of the disability subgroup, to see if long-term goals and interim measures of progress are being met. This means that the performance of students with disabilities is not masked by school averages. And, most importantly, ESSA requires that schools take action if students with disabilities consistently underperform in: 1) Annual assessments of academic achievement in reading, math, and science; 2) English language proficiency; 3) For elementary and middle schools, a “measure of student growth” or other academic indicator that allows for meaningful differentiation in student performance; and 4) High school graduation rates.

Transparency

Not surprisingly, little is known about how voucher programs that serve more than 500,000 children in 26 states, the District of Columbia, and Puerto Rico are meeting the needs of students with disabilities. Among the data that is not available — and is of great interest to the disability community — is whether these programs are resulting in greater segregation of students in “disability only” schools. In 2003, the National Council on Disability noted that in Florida, that has one of the largest voucher programs:

”[T]he special education vouchers were apparently providing the stimulus for new schools to serve only students with disabilities. The end result of large-scale voucher extensions to students with disabilities could lead to a new kind of segregation at public expense. Families and advocates in focus groups indicated that students often, but not always, used scholarships or vouchers to attend segregated schools. State departments of education do not currently track where parents use their vouchers, thus making it impossible for respective state governments to determine whether school choice programs are leading to segregation of students with disabilities. However, given the least restrictive environment mandate of IDEA, this kind of transparency should be required.”1

The IDEA requires students with disabilities in public school to be educated alongside their peers without disabilities to the maximum extent appropriate. The decision to place a student in a more segregated setting is made by an IEP team, which includes parents. By contrast, voucher systems allows parents to unilaterally place a child in a segregated setting using taxpayer funds. Such segregation can have long-term costs, including reduced opportunities for learning, employment, independent living, and social engagement.”2

Flawed Rating system

In the absence of actual evaluation of voucher programs, the pro-voucher Federation for Children recently published a guidebook with separate ratings and scores for both general voucher programs and those specifically for children with special needs.3 The scoring criteria for general voucher programs includes only eligibility and process information and no consideration of student outcomes. It does however, include the following concerning criteria that reflect a strong socio-economic bias: 1) “limited by income” whereby programs with no income limits or 200% of the federal poverty level are scored highest; and 2) “limited by prior public school attendance” which allows students to participate who have never attended a public school, undermining pro-voucher arguments about the need to flee failing public schools. It also includes several factors which receive the highest scores for merely meeting basic requirements of public and private schools: academic testing, reporting academic results, background checks, and financial reporting.

Similarly, the criteria to rank the 21 special needs scholarship programs nationwide that served over 73,000 students in the 2018-19 school year only included eligibility and process information and no consideration of student outcomes. The guidebook does however, assign the greatest point value for allowing voucher funding to be used for brand new-start up schools and for average scholarship amounts that equal the state and local per-pupil expenditure for a given disability (which only 3 of the 17 listed programs do). In fact, 5 of the 17 programs cover less than 60% of the average per pupil expenditure for the given disability.

Further, most special needs voucher programs only require that the student have an IEP, 504 plan, or other private school record of disability. Unlike public schools that must accept and serve all qualifying students with disabilities, voucher programs are allowed to pick and choose among disability categories for eligibility. According to the Guidebook, 4 of the 17 special needs programs listed discriminate by type of disability. No less importantly, the ranking system speaks only to eligibility, and not actual acceptance, attendance, and performance of students with different type of disabilities.

Students with “low incidence” disabilities (blindness, deafness, intellectual disability) could be eligible but not admitted while those with high incidence ones (like learning disabilities) are more likely to be admitted and served. Not coincidentally, students with low incidence disabilities generally cost more to serve. The lack of information on type of disability in voucher programs was confirmed by the Government Accountability Office which found that about half of these programs collected information on primary diagnosis categories required under the IDEA: Autism; Deaf-blindness; Emotional disturbance; Hearing impairment; Intellectual; disability; Multiple disabilities; Orthopedic impairment; Other health impairment; Specific learning; disability; Speech or language impairment; Traumatic brain injury; Visual impairment. Among the 10 programs specifically for students with disabilities, GAO found 3 were for specific disabilities (Dyslexia, Autism, and speech-language disabilities)4.

Reducing Resources for Public Schools

School voucher programs transfer public money to the private sector, exacerbating the chronic under funding of the federal IDEA. When the IDEA was first passed in 1975, Congress committed to covering up to 40% of the additional cost of special education. In the past two decades alone, students receiving special education have increased by 25%. Yet, the IDEA state grant program is presently only receiving about 14% of the additional cost of special education and has never reached half of the share included in the original law.5 The considerable pressure on state and local budgets is resulting in a range of unfortunate actions, including districts and schools limiting hiring of qualified personnel and providers and restricting service hours. Predictably, this results in some parents of students with disabilities being frustrated with the public school system and seeking out voucher programs, which in turn results in even fewer resources for public schools to meet the needs of students with disabilities.

Concern Over the Proposed Regulation

I would like to express concern with one aspect of the proposed regulation that could open the door to inappropriate tax avoidance opportunities for taxpayers who donate to certain school voucher programs. I am concerned that some owners of passthrough businesses may be able to circumvent the $10,000 SALT deduction cap established in the Tax Cuts and Jobs Act of 2017. This could be done by recharacterizing the nondeductible portion of their SALT payments as deductible business expenses.

Example 2 provided in 1.162-15(a)(2)(ii) states that a business partnership (P) may deduct a $1,000 payment to a charity as a business expense even if it “expects to receive a $1,000 income tax credit on account of P's payment, and . . . the credit can be passed through to P's partners.” This example affords the business a $1,000 increase in their business expense deductions even though their “expense” was entirely offset by a state income tax credit. This outcome may not be problematic if the business's partners also see an offsetting decrease of $1,000 in their SALT deductions. But the example seems to leave open the possibility that these partners can increase their business expense deductions even in situations where their SALT deductions will remain unchanged because, both before and after the payment to the school voucher program, they will continue deducting the maximum allowable amount of state income tax ($10,000).

By redirecting a mandatory $1,000 payment away from their state government and toward a school voucher program instead, they have avoided the SALT cap limitation and have engaged in behavior that could prove profitable for the business based on the federal income tax consequences alone. In other words, the language in this proposed regulation may embolden some businesses to attempt to circumvent the SALT deduction cap by donating to school voucher programs. This is because the regulation fails to adequately delineate between using a state income tax credit to offset taxes that would have been deducted for federal purposes, or using that credit to offset taxes that would have been nondeductible.

We ask that the IRS clarify that the SALT deduction cap cannot be circumvented for businesses that donate to school voucher programs in this manner and defer to the comments submitted by the Institute on Taxation and Economic Policy for additional explanation of how this could be avoided.

Sincerely,

Annie Acosta
Director of Fiscal and Family Support Policy
The Arc
Washington, DC

FOOTNOTES

1Choice and Vouchers — Implications for Students with Disabilities, Choice and Vouchers — Implications for Students with Disabilities (2018). Available at https://ncd.gov/sites/default/files/NCD_Choice-Vouchers.docx

2The Arc of The United States and the American Association on Intellectual and Developmental Disabilities Education Position Statement (2018). Available at https://thearc.org/wp-content/uploads/2019/08/16-117-The-Arcs-Position-Statements_C5_Education_updated-1.pdf

3American Federation for Children Growth Fund (2020). 2019 School Choice Guidebook. Available at https://www.federationforchildren.org/guidebook/

4U.S. Government Accountability Office (2016). School Choice: Private School Choice Programs Are Growing and Can Complicate Providing Certain Federally Funded Services to Eligible Students. Available at https://www.gao.gov/assets/680/678994.pdf

5Fiscal Year 2020 Budget Request, U.S Department of Education, H-24. Available at https://www2.ed.gov/about/overview/budget/budget20/justifications/h-specialed.pdf

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID