Helping Needy Kids or Destroying Public Education? Tax Credits for Donations to Scholarship Funding Organizations

Photo by: Cole Hayes

If House Bill 1104 becomes law, North Carolina will become the tenth state to grant tax credits for donations to what are called “scholarship funding organizations” – nonprofit organizations that give scholarships or tuition grants to economically disadvantaged children in public schools to allow them to attend the private school of their choice.  The concept seems appealing, but the bill has sharply divided the General Assembly along party lines.  Its Republican proponents assert that allowing these tax credits helps poor children get out of failing public schools and into private schools that would otherwise be out of their family’s financial reach.  Democrat opponents argue that these tax credits divert money into private schools and private industry that would otherwise be used to fund public education, with the ultimate goal of privatizing the entire education system.  The bill passed the first reading in the House on May 24 and is currently awaiting consideration by the House committee on education.

House Bill 1104

Under the current edition of House Bill 1104, only corporations are eligible to receive tax credits for donations to scholarship funding organizations.  Some states allow both individuals and corporations to claim tax credits for these donations.  Representative Mike Hager, one of the bill’s primary sponsors, explains that corporations were a good place to start for North Carolina. Companies in the state were actually asking for the tax credit, and “that’s where the big money is.”

The value of the credit is equal to the amount of the donation, reduced by the difference between federal corporate income tax with the credit and the amount of federal corporate income tax without the credit.  The total amount of tax credits available is subject to a statewide cap of $40 million for 2013. For 2014 and thereafter, the cap increases by 35% when at least 90% of the total amount of tax credits allowable for the preceding year was claimed.  In order to ensure that credits claimed do not exceed the statewide cap for a given tax year, taxpayers must obtain written certification from the secretary of revenue prior to claiming a credit.  The credit is applicable to income tax, excise taxes on beer, wine and liquor, and the insurance gross premium tax.   Rep. Hager says that the credit was made applicable to excise taxes on alcoholic beverages because beer and wine distributors are closer to their communities by virtue of being regional, rather than national, companies and thus have a greater incentive to give back to the communities that support them.  Allowing credits for more than just income tax also broadens the spectrum of potential donors to scholarship funding organizations.

Like many states with similar programs, House Bill 1104 would allow any unused portion of the credit claimed against income tax or insurance gross premium tax to be carried forward for the succeeding five years.  Any unused portion of the credit claimed against excise taxes on beer, wine, and liquor may be carried forward for the succeeding five months.

The Partisan Divide

Representative Rick Glazier held a press conference on June 12 to discuss House Bill 1104.  He promised that the Democratic minority in the General Assembly will fight this bill, as it marks what he considers the first phase of the destruction of North Carolina’s public education system.  Also present to speak against the bill were Ms. Evelyn Bulluck, the president-elect of the North Carolina School Boards Association; Representatives Ken Goodman and Ray Rapp; and Dr. Bill Harrison, chairman of the North Carolina State Board of Education.  Ms. Bulluck stated that all 115 local boards of education are firmly against the bill, claiming that it undermines public education by diverting revenue to benefit a few select children.  The tax credits “amount to nothing more than a voucher program,” argues Bulluck, referring to the school choice programs that many state courts have held violate the Establishment Clause because tax revenues were benefitting private religious schools.  Ms. Bulluck asserts that if this tax credit program is permitted to go forward, students who have economic means will leave the public school system, leaving only the economically disadvantaged students who lack parental support and thus cost more to educate.  As a result, public schools will continue to decline, increasing criticism of the education system, and leading to further privatization.

Dr. Harrison echoed these sentiments, adding that this tax credit program places private interests above the common good.  “Within three to five years we will be looking at vouchers for all students,” says Harrison.  “The Republicans have slipped a major policy issue into a budget bill.”  Representative Rapp agreed, arguing that this issue needs to be fully vetted, which it cannot be during the short session.  “This is just one more step in the assault on public education.”

Representative Hager readily admits that the tax credit program is indeed shifting money away from public schools, but he points out that what matters is student performance.  “And there is no correlation between teacher pay and student performance.”  He offered the following statistics as evidence: of the top ten states in per-pupil spending, four have lower graduation rates than North Carolina.  In addition, North Carolina spends around $200 million per year in remedial training in English at its community colleges.  Hager says that North Carolina has a responsibility to find and help children trapped in the cycle of poverty begetting poor education, begetting more poverty.  “Education is the key to success,” says Hager, who grew up in a textile mill town in Gaston County.  Now an engineer and a member of the House of Representatives, he says, “I’m here today because my parents knew the value of a high school and college education.”   When I asked him about the bill’s chances of getting through the House, he said the major issue will be explaining that this program results in a net positive for the state.  “People can’t see how the money flows. The state saves money and the child gets a better education.”

Avoiding Potential Abuses

A recent article in the New York Times entitled “Public Money Finds Back Door to Private Schools” identified some problems that states have faced with their tax credit programs.  The article claimed that scholarship money was being used not just to benefit poor families but also to attract talented athletes to private schools and expand the payrolls of the nonprofit companies distributing the scholarships.  Some of the people interviewed said that families with children already in private schools were “swapping” donations with each other by designating donations for the other family’s children.

House Bill 1104 sets up safeguards to ensure that the scholarship money is being used to help economically disadvantaged children, says Rep. Hager.  First, there are several requirements that the scholarship funding organization (SFO) must meet to distribute scholarships.  Each SFO must be certified by the Division of Nonpublic Education; must maintain separate accounts for donation scholarship funds and operating funds; cannot award scholarships to students within five degrees of kinship of family of paid staff or board members of the SFO; and cannot be affiliated with the nonpublic school attended by a student receiving scholarship funds from that SFO.  Additionally, 100% of the donations must be used to fund scholarships if the SFO has been certified for 24 consecutive months or less, and at least 91% of the donations must be used for scholarships if it has been certified for more than 24 consecutive months.  Donors may not designate donations for the direct benefit of a particular school or student.  The availability of scholarships may not be limited to students of only one school, and scholarships must be granted in the order in which applications are received.

Second, the bill provides for a substantial degree of government oversight.  Each SFO must undergo an annual audit.  Reports are submitted annually by the SFO, by an independent research organization, and by the Division of Nonpublic Education.  The independent research organization will compare the learning gains of eligible students in nonpublic students to the statewide learning gains of public school students with similar socioeconomic backgrounds.  Failure to comply with these requirements results in a written notice from the Division, and if the deficiencies are not corrected within 90 days, the SFO’s certification will be revoked.

Lastly, to ensure that scholarship money reaches its intended recipients, the bill places obligations on the nonpublic schools and students receiving the scholarship funds.  Standardized testing is required for nonpublic schools enrolling more than twenty-five students, and the scores must be reported to the independent research organization described above.  A parent or guardian must endorse the scholarship voucher in person at the site of the nonpublic school where the child will be attending.  In order to be eligible to receive scholarship funds, the student must have been a full-time student at a public school during the previous semester, received a scholarship from an eligible SFO during the previous school year, or be entering kindergarten or the 1st grade.  The household income level of the recipient’s family must not be in excess of 225% of the federal poverty level.  Schools are also responsible for providing annual progress reports to the parent or guardian of a student who received a scholarship, conducting a criminal background check for the staff member with the highest decision-making authority, reporting graduation rates of students in the program, and conducting a financial review with an independent accountant in years that the school receives more than $500,000 in scholarships.

It will be interesting to see what changes are made to House Bill 1104 if it survives committee, the House, the Senate, and the Governor’s veto power.  The debate will certainly be lively, but I hope that members of the General Assembly and the public will keep in mind what should be the ultimate goal of all education bills: to ensure the opportunity for a quality education for all of North Carolina’s children.


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About Jim Small, Former Senior Staff Writer (8 Articles)
Jim graduated from Campbell Law School in 2013 and received his Bachelor of Arts in Prelaw from Bob Jones University in South Carolina. He worked as a Research Assistant to Professor Amy Flanary-Smith, conducted research for McCuiston Law Offices in Cary, NC, and completed an externship in the Research Division of the North Carolina General Assembly.
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