How Florida blocks ‘double-dipping’ on school choice scholarship donations

A headline in The New York Times carries a damning allegation: In some states, contributing to a school choice nonprofit can earn donors a “profit.”

The allegation is based on a new report by the national association of school district superintendents. It argues in some states, donors can contribute to a nonprofit organization that funds private school scholarships. For every dollar they donate, their state tax bill is reduced by a dollar. Then, those donors can turn around and claim a federal tax deduction for their charitable contribution. As a result, they wind up better off financially than if they hadn’t donated at all.

That money-making scenario is illegal in Florida, home of one of the oldest — and, by far, the largest — tax credit scholarship programs in the nation. (Step Up For Students, which publishes this blog and pays my salary, is the largest scholarship granting organization in Florida.)

The Times and the superintendents association both note “double dipping” isn’t possible in every state. But neither bothers to mention that Sunshine State statutes specifically prohibit it. 

220.1875 Credit for contributions to eligible nonprofit scholarship-funding organizations.

(1) There is allowed a credit of 100 percent of an eligible contribution made to an eligible nonprofit scholarship-funding organization under s. 1002.395 against any tax due for a taxable year under this chapter after the application of any other allowable credits by the taxpayer. The credit granted by this section shall be reduced by the difference between the amount of federal corporate income tax taking into account the credit granted by this section and the amount of federal corporate income tax without application of the credit granted by this section.
(2) A taxpayer who files a Florida consolidated return as a member of an affiliated group pursuant to s. 220.131(1) may be allowed the credit on a consolidated return basis; however, the total credit taken by the affiliated group is subject to the limitation established under subsection (1).

Other states could borrow this statutory safeguard. It would fix an unnecessary chink in the armor of the school choice movement, which allows opponents to claim scholarship programs are  “tax shelters” for donors, taking the focus away from expanding educational options for disadvantaged students.

It’s worth noting that none of the reports documented an actual instance where a donor turned a profit. They do outline some hypothetical scenarios, mostly involving wealthy donors who are subject to the alternative minimum tax or bring in lots of investment income. And they note that some schools, scholarship organizations and financial advisers in states like Georgia advertise this possibility.

Right now, Florida funds half a billion dollars in scholarships, or roughly half the credit scholarship dollars raised nationwide. In other words, it’s safe to say the majority of scholarship donations around the country are subject to limits on donor double-dipping.

One Response to How Florida blocks ‘double-dipping’ on school choice scholarship donations

  1. Kim Dyson May 19, 2017 at 8:15 am #

    The Times and the superintendents association both state that donors can claim a federal tax deduction for a charitable contribution after taking a credit on their state income tax returns for remittances to certain state tax credit programs

    I would argue that the jury is still out on whether that is a fact or an opinion.

    A 9/12/06 Information Letter I received from the IRS (as the CFO for the Florida School Choice Fund) on this very matter states, “[a] charitable contribution deduction under Section 170 may not be allowable for a payment that qualifies for the…Tax Credit if the credit is viewed as a quid pro quo benefit that eliminates the necessary charitable intent for federal tax purposes.”

    It goes on to state “… arguably the taxpayer’s transfer of the credit to the state to satisfy the taxpayer’s state tax liability should be viewed as a payment of state tax for purposes of the federal deduction for tax payments in section 164 or for section 162.”

    Although the Letter specifically references Florida’s Tax Credit Scholarship program in certain sections, those sections that discuss whether or not the charitable intent required for a Section 170 deduction is met is germane to all state tax credit programs.