Tax Credits for Gifts That Support Private-School Scholarships Raise Eyebrows

Step Up for Students is barely over a decade old, but the Florida provider of scholarships to private schools is already rapidly becoming one of the top fundraising organizations in America.

The charity raised $191-million in its fiscal year ending June 2011—putting it at No. 108 on The Chronicle’s Philanthropy 400. By June 2013, the charity expects its private support to grow by 50 percent more, to $286-million.

It’s not a crack team of fundraisers responsible for the charity’s meteoric rise but rather the Florida legislature. The state allows businesses to offset a portion of the state tax they owe by offering a 100-percent credit for every dollar they give to the charity.

Ten other states offer similar tax credits for supporting private-school scholarships, and it is by far the most popular type of charitable tax credit that states offer. In the 2011-12 academic year, $343-million of state tax revenue was diverted to pay for scholarships for nearly 129,000 students, according to the Alliance for School Choice, an advocacy group.

Two other states—Arizona and Georgia—also offer 100-percent tax credits to individuals and businesses that give to scholarship-granting nonprofits. The remaining states with similar programs—Indiana, Iowa, Louisiana, New Hampshire, Oklahoma, Pennsylvania, Rhode Island, and Virginia—have credits worth 50 to 95 percent.

Florida limits its pool of tax credits, but the amount is among the biggest in the country, and in any year in which donors use more than 90 percent of the available credits, the pool of credits automatically expands by 25 percent the next year.

This year’s pool, $229-million, has already been exhausted, which means the total will rise to $286-million next year. The state’s policy is fueling the growth of Step Up for Students, the only Florida nonprofit that offers the tax-credit scholarships, which are given to students from low-income families.

Malcom Glenn, a spokesman for the Alliance for School Choice, which advocates for private-school tax-credit programs, says Florida businesses are seeking out the credits because of data that shows that the state is saving money and also expanding private-school enrollment.

“Once people begin to recognize the value of these programs, they continue to give to them,” Mr. Glenn says.

A 2008 analysis by the research arm of the Florida legislature found that taxpayers saved nearly $1.50 in public-school spending for every dollar lost to the corporate tax credits. And a 2010 Northwestern University study showed that the new competition that resulted from the tax-credit program in 2002 led to improvements on test scores at public schools.

But Kevin Welner, an education professor at the University of Colorado and the author of NeoVouchers: The Emergence of Tuition Tax Credits for Private Schooling, says broader research about whether increased competition improves public-school performance is inconclusive.

He also argues that most states don’t really know if they are saving money, since few have closely tracked how many students receiving scholarships would have gone to private schools without them.

Mr. Welner says wealthy taxpayers are commandeering spending authority from legislatures and directing funds to the private schools of their choice.

“I don’t doubt that it can feel charitable to do that,” Mr. Welner says. “But is it really charity if it doesn’t cost anything?”

Diverting Funds

The tax-credit programs are expected to keep growing because they have survived legal challenges by critics who say the states are channeling government funds to religious schools. A challenge to Arizona’s tax credit reached the U.S. Supreme Court. In 2010, Justice Anthony Kennedy wrote that Arizona donors “spend their own money”—not the state’s money—in a ruling that threw out the lawsuit.

Timothy Hogan, executive director of the Arizona Center for Law in the Public Interest, says advocates of the tax-credit program like to talk about enhancing “choice” for students and families, but he says Arizona taxpayers were left with no choice about the diversion of $20-million in tax funds to private schools during 2011.

“If we are just generating money to transfer it to private schools, I’d prefer lower tax rates instead,” he says.

Some advocacy groups for nonprofits also worry that the rapid growth in giving to scholarship-granting groups could hurt other types of charities.

North Carolina’s Legislature considered a bill this year that would have created a 100-percent tax credit for businesses that support private-school scholarships. Mr. Glenn thinks the bill could pass in 2013.

David Heinen, director of public policy and advocacy at the N.C. Center for Nonprofits, says he worries that passage of the law could hinder giving to other charities in the state. “It does create a greater incentive to give to the scholarship organizations,” he says.

But Marina Pavlov, head of the Florida Association of Nonprofit Organizations, says she hasn’t heard any complaints that the growth of the Florida tax-credit program is making it more difficult for charities to raise money from corporations.

“Hopefully it’s increasing giving overall,” she says.