Two dirty little secrets about tuition tax credits

by David Safier
Here are two facts lots of people aren't aware of about the way School Tuition Organizations (STOs) give out individual tuition tax credit money.

1. People who give tuition tax credits can recommend who they want the scholarship to go to, so long as the child is not a dependent. The STO
   doesn't need to honor the recommendation, but it usually does.
2. Scholarships given by STOs don't have to be means tested. They can go to children of any family, regardless of income.

Keep in mind this is government money in all but name. In essence, tuition tax credits are vouchers for states that can't pass vouchers — either vouchers have been ruled unconstitutional, or they've been voted down when they're put on the ballot, or voted down in the legislature. (Hence the label, Backdoor Vouchers). That means taxpayers are footing the bill for the scholarships.

The first of the two items sets the tone for the entire tax-credit-to-scholarship procedure. The fact is, most people who give tuition tax credit donations recommend the student they want the money to go to.

Think of how this works for parents who want to lower the cost of their children's tuition. Mr. and Mrs. Smith give a $1,000 tax credit and recommend the scholarship goes to Johnny Jones. Meanwhile, Mr. and Mrs. Jones give a $1,000 tax credit and recommend the scholarship goes to Sally Smith. Bingo! Johnny and Sally get scholarships, and it cost doesn't anyone, except the state general fund, a penny.

If the Smiths and Joneses have relatives in the state, they can work on them to give tax credits as well. And they can hit up their friends. Remember, since it costs nothing to give a tuition tax credit, the Smiths and the Joneses can present the donation as a cost-free family gift or a neighborly act.

A friend wrote this to me recently:

Private schools are often very open in telling parents to hit up family and friends for donations. Here's an example in a brochure from the Ascension Lutheran School in Tucson:

"Solicit donations to . . . financially assist in supporting their children specifically." You can't make it any clearer than that.

And if a school or STO wants to maximize its donations from people without children in private schools, it helps to emphasize the recommendation angle. This is from a brochure put out by Gethsemane Lutheran School in Tempe (I'm not picking on Lutherans. I just happen to have these two brochures.)

The reason the recommendation system works is that means testing is not part of the law. If their children are recommended by a donor, millionaires, or anyone who can afford private school tuition, can get scholarship money. So, while Gethsemane Lutheran says need is factored into the scholarship equation, it implies that need won't be considered if a specific child is recommended.

Elsewhere in the Gethsemane brochure,it tells people to send their tax credit dollars to Yarbrough's ACSTO. I talked with an ACSTO employee a while back, who told me approximately 80% of the donations they receive have recommendations attached, and said the recommendations are honored in most cases.

Dollars that would otherwise go into the state coffers as taxes are given out as private school scholarships, not to the most deserving or the most needy, but to those families who can rustle up the most tax credit recommendations. Since people who give tax credits have to make enough income to pay income tax, and they also have to be able to afford to part with $500 to $1,000 for a few months before they get it back at tax time, people with middle class or higher incomes are going to be overrepresented among the people giving tax credits. And it makes sense that, more often than not, they'll be recommending children from the same economic class — their family, friends and associates — meaning that tax credit scholarships are likely to favor people who have money over those who don't.

I'm not a fan of tuition tax credits in any form, but I'll say this for the corporate tax credit legislation. At least it's targeted well. The scholarships can only go to families making no more than 185% of the income that would qualify a child for free lunch, and the child must have been attending a public school the year before.

Not so with individual tax credit donations. Their target audience is children already in private schools whose families are economically stable, if not affluent.