As of November 2006, seven states have enacted tax credit or deduction programs. Illinois, Iowa and Minnesota allow a tax credit or deduction to parents for their child's educational expenses, while Arizona, Florida, Pennsylvania and Rhode Island allow a tax credit to corporations for contributions to scholarship funding organizations or educational improvement organizations that then distribute the contributions in the form of student scholarships and grants to public schools. Arizona and Iowa allow individual income tax credits for donations to organizations that distribute scholarships or tuition grants. Arizona also offers a non-refundable tax credit for contributions made to public schools for extracurricular activities or character education programs.
Arizona
In 1997, the Arizona Legislature established two non-refundable individual income tax credits, a private school tuition credit and credit for contributions or fees made to public schools. The private school tuition credit provides taxpayers with a dollar-for-dollar tax credit up to $5,000 for an individual and $625 for a married couple for contributions made by the taxpayer to school tuition organizations that grant scholarships for students to attend private schools. In 2005, the Legislature eliminated the marriage tax penalty, raising the maximum amount a couple can donate to a scholarship program to $1,000. See A.R.S. 43-1089 for more information.
Taxpayers may also receive a tax credit up to $200 for an individual and $250 for a married couple as a reimbursement for any fees paid to the school for extracurricular activities (e.g. band uniforms, equipment, uniforms for varsity athletics, science lab materials or in-state or out-of-state trips for purposes of a competitive event). Such activities are school sponsored in nature and require students to pay a fee to the school in order to participate. In 2005, as part of the eradication of the marriage tax penalty, the Legislature raised the maximum amount a couple can donate for expenses toward extracurricular activities at public schools to $400. See A.R.S. 43-1089.01 for more information.
In 2006, the Arizona Legislature enacted a corporate tax credit. The law allows corporations to claim an income tax credit for contributions made to a school tuition organization (STO) that provides educational scholarships and tuition grants to children of low-income families starting in the 2007 tax year. It caps the annual aggregate amount of the tax credit at $10 million in any fiscal year and provides that the aggregate amount of the tax credit cap from the previous fiscal year shall be annually increased by twenty per cent until 2011.
The law requires an STO to use 90 percent of the corporate contributions (that qualify for the tax credit) to provide an educational scholarship or tuition grant to a child whose family income does not exceed 185 percent of the income limit required to qualify for a free or reduced price lunch. The students must have either: a) attended a public school as a full-time student for the first 100 days of the prior fiscal year and transferred to a qualified school; b) enrolled in a qualified school in a kindergarten program; or c) received a scholarship or tuition grant from the STO, if the child continues to attend a qualified school in a subsequent year. In addition, it allows a child who receives a scholarship or tuition grant, as a result of a qualifying corporate contribution, to attend a private school of the parents’ choice. The law prohibits an STO from issuing a scholarship or tuition grant in an amount greater than $4,200 for grades K-8 and $5,500 for grades 9-12 in 2006 and increases the limitation by $100 each year thereafter. It requires a qualified school to annually administer and make available to the public the aggregate test scores on a nationally standardized norm-referenced test, preferably the Arizona Instrument to Measure Standards (AIMS) test and requires all teaching staff and other personnel with unsupervised contact with children to be fingerprinted. Finally, it requires the Joint Legislative Income Tax Credit Review Committee to review the tax credit in 2011. See A.R.S. 43-1183 or SB 1499 for more information.
Arizona's individual income tax credits were challenged and upheld in court in 1999. In Kotterman v. Killian, (1999), the court held that the credit did not violate either the federal Establishment Clause or the state constitution's Blaine Amendment prohibiting appropriations to sectarian institutions.
Florida
Corporate Tax Credit Scholarship Program
In 2001, Florida enacted a program that allows businesses and corporations to be eligible for income tax credits if they make contributions to non-profit organizations that grant scholarships to low-income students. The law requires the scholarship organizations to use 100 percent of contributions made by corporations to cover tuition, textbook expenses or transportation for children who qualify for the federal free or reduced lunch program. The amount of the scholarship cannot exceed $3,500 for a student enrolling in an eligible nonpublic school and $500 for a scholarship awarded to a student enrolling in a public school outside the student's residential district. Corporations may contribute up to 75 percent of the amount of their tax due. Corporations cannot contribute more than $5 million to any single scholarship fund. The total amount of tax credits cannot exceed $88 million per fiscal year. See Fla. Stat. § 220.187 for more information.
In 2006, the Legislature amended the Corporate Tax Credit Scholarship Program to provide for fiscal and academic accountability. The program now reduces the amount of credit set aside for small businesses from 5 percent to 1 percent and allows the total amount of tax credits that may be granted to be adjusted each year by the same percentage as the increase or decrease in total funding under the Florida Education Finance Program. The total amount of tax credits that may be granted, however, may not increase by more than 5 percent in any year and the amount may not increase unless the prior year's total tax credit limit is reached. The Legislature deleted the provision that forbids a taxpayer from contributing more than $5 million to any single eligible scholarship-funding organization (SFO) in a given year. It requires an SFO to obligate, rather than spend, in the same fiscal year in which the contribution was received, 100 percent of the contributions for scholarships, provided that up to 25 percent of the total contributions may be carried forward for scholarships to be granted in the following fiscal year. It authorizes a taxpayer to rescind an application for a CTC credit. It requires a nonprofit SFO to file its audit with the auditor general and the DOE within 180 days after completion of the SFO’s fiscal year. It provides for the transfer of funds, with prior approval by the Department of Education, to another eligible SFO if additional funds are needed to meet scholarship demand. It requires an SFO to maintain separate accounts for scholarship funds and operating funds. It requires criminal background checks of owners and operators of SFOs and private schools. It eliminates certain private schools, such as correspondence schools and distance learning, from the list of eligible private schools under the CTC program. It allows private schools to demonstrate fiscal soundness by being in operation for at least three school years or obtaining a surety bond or letter of credit for the amount equal to the scholarship funds for any quarter and filing the surety bond or letter of credit with the Department of Education. It requires a private school to employ or contract with certain qualified teachers. It prohibits a home school from participating in the program. Students who received a scholarship from the State of Florida the previous year receive the same priority in awarding of scholarships as students who received a CTC scholarship the previous year, subject to the low-income eligibility requirements under the CTC. It requires a private school annually to administer or make provisions for scholarship students to take a nationally norm-referenced test that compares to the Florida Comprehensive Assessment Test (FCAT). Current scholarship students may continue participating in the CTC program if parental income exceeds the current eligibility requirements, as long as the income does not exceed 200 percent of the federal poverty level. It prohibits a student from simultaneously receiving a scholarship under the McKay Program or the Opportunity Scholarship Program while receiving a CTC scholarship. It increases the CTC tuition scholarship from $3,500 to $3,750. It requires the DOE to revoke the eligibility of SFOs, private schools and students who fail to meet the requirements of the CTC program. It requires a public university or other independent researcher to report year-to-year improvements in student performance without disclosing a student’s identity. Finally, it creates a new section in statute to provide accountability measures for state scholarship programs that retains several of the provisions removed from the McKay scholarship section, s. 1002.39, F.S. See SB 256 for more information.
Illinois
In 1999, Illinois established a program granting income tax credits not to exceed $500 for qualified education expenses. Parents are eligible for a tax credit for 25 percent of whatever they spent on their child's books, tuition and lab fees. To be eligible, parents must spend at least $250. See Illinois Statute Chapter 35, Article 2, Sec. 201(m) for more information.
In Griffith v. Bower (2001) and Toney v. Bower (2001), two different panels of the Illinois court of appeals upheld the constitutionality of the Illinois state income tax credit for educational expenses.
Iowa
Starting in 1987, Iowa allowed a tax deduction of up to $1,000 spent on each dependent's elementary and secondary education expenses, including tuition and textbooks, excluding, however, the costs of religious materials and extracurricular activities. Taxpayers who did not itemize their deductions are eligible for a tax credit equal to 5% of the first $1,000 paid for each dependent's acceptable educational expenses. Policymakers have eliminated the tax deduction and revised the tax credit provision. Due to this revision, parents are only allowed to claim a tax credit of up to 25 percent of the first $1,000 for each dependent's acceptable education expenses, which includes public school extracurricular activities. Before the revisions, families whose net income was more than $45,000 were ineligible to receive the deduction. The revisions removed the $45,000 ceiling. See Iowa Code § 422.12 for more information.
In 2006, the Iowa General Assembly created an individual income tax credit for contributions made to a school tuition organization. Under this provision, school tuition organizations must allocate at least 90 percent of their annual revenue in tuition grants for low-income children attend a qualified nonpublic school of their parents choice. The contributions may not be claimed as a deduction from Iowa's income tax. Tax credits are equal to 65 percent of the contribution and are limited to a total of $2.5 million for tax year 2006 and $5 million for succeeding tax years. This bill is effective June 2, 2006 and applies retroactively to January 1, 2006. See SF 2409 for more information.
In 1992, the U.S. District Court ruled that the Iowa tax deduction and tax credit programs do not violate the federal constitution's ban on government establishment of religion.
See Section I.C. 422.12 for more information.
Minnesota
Minnesota became the fist state in 1955 to enact legislation targeted at allowing parents to claim a tax deduction for tuition and other school expenses. A tax deduction is permitted up to $1,625 for elementary school expenses and $2,500 for secondary school expenses. The tax deduction covers tuition, textbooks, transportation, academic summer camps, summer school and up to $200 of the cost of a personal computer and education software. Parents who do not itemize deductions on their federal income tax forms are eligible for this deduction. See Minn. Stat § 290.0674 for more information.
In 1997, the Minnesota Legislature enacted a law that gives parents a tax credit equal to 75 percent of the amount paid for education-related expenses for a qualifying child in kindergarten through grade 12. Education-related expenses include fees, textbooks, transportation, tuition, tutoring and $200 for computer and associated software. The credit does not cover the cost of tuition. The credit is worth $1,000 per student or $2,000 per family for families whose incomes fall under $33,500. The maximum credit is reduced by $1 for each $4 of the household income over $33,500. No credit is available for families whose income is greater than $37,500.
In 2005, the Legislature removed the $2,000 per family cap on the education tax credit. The new maximum credit for families with an income not greater than $33,500 is $1,000 multiplied by the number of qualifying children in kindergarten through grade 12. The maximum credit for families with one qualifying child in kindergarten though grade 12 is reduced by $1for each $4 household income exceeds $33, 500, and the maximum credit for families with two or more qualifying children in kindergarten through grade 12 is reduced by $2 for each $4 of household income over $33,500, but in no case is the credit less than zero. See Minn. Stat § 290.0674 for more information.
The Minnesota tax credit program was challenged and upheld in court in 1983. See Mueller v. Allen (1983) for more information.
Pennsylvania
Pennsylvania established the Educational Improvement Tax Credits (EITC) in 2001. This law makes available credits to corporations that donate money to educational improvement organizations or scholarship organizations. Pennsylvania's tax credit is available for 75 percent of a corporation's contribution up to $100,000 or 90 percent of its contribution, if it contributes for more than one year. Educational improvement organizations must distribute at least 80 percent of their annual receipts as grants to the public schools for innovative educational programs. Scholarship organizations must contribute at least 80 percent of their annual receipts for distribution in the form of scholarships to public and non-public school children to attend a school of their choice. See 24 P.S. § 20-2002-B for more information.
In 2005, the Pennsylvania General Assembly expanded the Educational Improvement Tax Credit Program (EITC) by $4 million to allow businesses to donate up to $44 million annually to educational improvement organizations ($14.7 million) and scholarship organizations ($29.3 million). Previously, the EITC program was authorized to provide up to $40 million in state tax credits to businesses that make donations through the EITC program. See HB 628 for more information.
In 2006, the Pennsylvania General Assembly expanded the Education Improvement Tax Credit Program (EITC) by $10 million to allow businesses to donate up to $54 million annually to educational improvement organizations ($36 million) and scholarship organizations ($18 million). See HB 185 for more information.
Rhode Island
In 2006, the Rhode Island General Assembly enacted a corporate tax credit for contributions to scholarship organizations that provide tuition assistance grants to send students, whose household income is not more than 250% of the federal poverty guidelines, to a qualified private school. Businesses are eligible to contribute up to $100,000 to a scholarship organization annually. Contributions are made on a first-come-first-serve basis and the total aggregate amount of the tax credits shall not exceed $1 million in a fiscal year. The program is effective January 1, 2007. See HB 7120 for more information.
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