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Schools Group Seeks Exemption Under SALT Cap Regs

JAN. 31, 2020

Schools Group Seeks Exemption Under SALT Cap Regs

DATED JAN. 31, 2020
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January 31, 2020

The Honorable Steve Mnuchin, Secretary of the Treasury
Internal Revenue Service, United States Department of the Treasury
1500 Pennsylvania Avenue, NW, Washington, D.C. 20220

Docket Number: REG-107431-19
RIN: 1545-BP40

The American Association of Christian Schools (AACS) writes to express concern over the proposed rule, “Contributions in Exchange for State or Local Tax Credits” (IRS REG-107431-19), as it has the great potential to hinder the efforts of charities that provide needed and helpful services to families and communities. We are specifically concerned with the negative impact the proposed rule will have on scholarship granting organizations (SGOs) which provide educational options for young students across the country.

The AACS is a national organization with over seven hundred schools offering educational opportunities to children and families across America. Our schools function as nonprofit ministries and provide preschool, elementary, and secondary education in both rural and urban areas. Many of our schools serve low-income families who are able to utilize scholarships, provided through an SGO, to pay for their child's tuition. These SGOs are privately funded, and those who make donations are afforded a tax credit by their state. These tax credit scholarship programs have greatly aided thousands of families as they seek to choose the best education for their children.

We understand the proposed rule (IRS REG-107431-19) is an effort to correct a problem that arose after the passage of the Tax Cuts and Jobs Act (TCJA). The TCJA streamlined the tax code by consolidating exemptions and equalizing certain deductions in all fifty states, one of these being the state and local taxes (SALT) deduction. Under the new law, the SALT deduction is capped at $10,000, and this change significantly affects those in high-tax states who once were able to deduct their high state and local taxes from their federal tax burden. With the new cap in place, some high-tax states, such as New York, New Jersey, and Connecticut, have found workarounds to preserve their federal tax deductions over $10,000 by creating essentially “pass through” charities which effectively launder local tax dollars so that residents may claim their tax payments as charitable deductions. (While the TCJA limited SALT deductions, it did not limit charitable deductions.)

We recognize that the intent of the proposed regulation is to correct the state workaround concocted by a small number of states, but the long-term effect will be to hinder the work of preexisting legitimate charities that have depended on the charitable deduction. We submitted public comments in October 2018 which addressed our concerns that the 2018 regulations (IRS REG 112176-18) would hinder contributions specifically to scholarship granting organizations which offer school choice opportunities and educational freedom to thousands of students across America. Unfortunately, neither the finalized regulations released in 2019 nor the current proposed regulations address these concerns, so we offer the following comments. We urge you to consider the following points and make necessary changes in order to ensure the continuance of the great work of charitable organizations such as scholarship granting organizations.

1. Scholarship granting organizations existed before the Tax Cuts and Jobs Act, and therefore, are not an effort to bypass federal law. Prior to the passage of the Tax Cuts and Jobs Act, SGOs were successfully functioning in 18 states, helping over 270,000 students attend the school that best meets their educational needs. A surge in private school choice over the past twenty years has encouraged the growth of state tax credit programs to support SGOs. These programs were not established as an effort to subvert the federal tax law, but rather were created before the law was even introduced, as an effort to meet the educational needs of children and families. Contributions made to these are not an effort to avoid federal taxes but are rather a gift to help children and families find the best educational method that helps their children. SGOs are established and funded by private citizens, unlike the imitation charities high-tax states have set up to bypass TCJA. As such, they act as real charities that significantly improve the lives of those they exist to serve.

2. Scholarship granting organizations are privately funded, and therefore, are an effective non-governmental way to bring education choice to families. The purpose of SGOs is to help families choose the best educational plan for their children, and the organizations are funded through private contributions made by individuals and corporations. Those who make the contributions are granted tax credits from their states, allowing the SGOs to operate independently of the government and government funds. Multiple studies show that school choice programs save money and reduce the financial burdens on public school systems.

The United States Supreme Court confirmed this principle in their decision for the case Arizona Christian School Tuition Organization v. Winn, 563 U.S. 122 (2011). The opinion of the court clarified that the scholarship granting organizations, referred to as “school tuition organizations” (STOs), were created by “the decisions of private taxpayers regarding their own funds.” The opinion further explained, “Private citizens create private STOs; STOs choose the beneficiary schools; and taxpayers then contribute to STOs. While the State, at the outset, affords the opportunity to create and contribute to an STO, the tax credit system is implemented by private action and with no state intervention.” Id, 143.

3. The proposed regulations will have the negative effect of reducing the charitable contributions made to SGOs, which will in turn hurt school choice and the educational options available to low-income parents. The proposed rule seeks to prevent state workarounds by limiting charitable deductions. In so doing, it will lower the incentive for people to give charitably, and in some states, it will even cost taxpayers to give charitably. Under the proposed rule, taxpayers could only deduct charitable donations from their federal taxes that have been reduced by the amount they were able to receive through a state tax credit program. States where existing SGOs thrive would suffer from the loss in funds, and states considering starting charitable scholarship programs would be disincentivized. For instance, in Georgia, rural hospitals and SGOs saw increased donations when residents were incentivized to donate to these charities with a dollar-for-dollar state tax credit. By lowering the federal benefit of donating, the IRS will undo Georgia's success and harm rural hospitals and scholarship funds that rely on charitable donations. By making it more difficult for people to give to these charities, the IRS will inadvertently harm the children who rely on SGOs. Without well-funded SGOs, many of those students would have to return to the negative learning environment they fled in the first place.

The Administration has made a concerted effort to ensure a quality education for each child by advancing school choice, a position which we have strongly supported. However, the proposed rule would counteract positive steps made by the Administration by hindering the incentives to give charitably to school choice that is already being accomplished through tax credit scholarship organizations.

While the AACS supports the attempt to weed out opportunists in the tax system and make taxes fair and equitable, we strongly urge the IRS to reexamine its method of ensuring fairness by allowing scholarship funds to continue operating as before.

We urge the IRS to reconsider its proposed rule and provide an exemption to allow state tax incentives for legitimate charitable organizations like SGOs that have existed for decades to give students a chance at a better education. The current proposed rule seems to punish previously existing, legitimate charities and will have the unintended negative consequences of hindering the expansion of educational freedom and diversity which is a foundational hallmark to our nation's heritage and future success.

Thank you for your consideration of our concerns.

Sincerely,

Maureen Van Den Berg
Policy Analyst
American Association of Christian Schools
Chattanooga, TN

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