J. Michael Smith, Esq. President Michael P. Farris, Esq. Chairman

Basic Information

As parents become increasingly dissatisfied with the performance of public schools, alternatives in the form of private, religious, charter, or homeschools are growing in interest. However, the method of education funding remains a big obstacle between students and the quality education parents seek for their children. Most parents already pay for their child’s public education through taxes. When parents choose to educate their child privately, they are effectively paying twice for education—once for a public education they do not use and once for a private or homeschool education they do use.

In response to this problem, lawmakers at both the state and federal level have proposed varying forms of education tax credits and education tax deductions. They are designed to rectify the discrepancy by allowing parents to be reimbursed, at least partially, for tuition and other expenses for non-public education. A tax credit can be claimed (subtracted) against the amount of tax owed whereas a tax deduction is subtracted from a taxpayer’s gross income, lowering the total amount of earnings on which the final tax is paid. Typically, a credit or deduction will be equal to the amount of actual education expenses.

For example, someone owing $3,000, eligible for a $500 credit, would ultimately owe the government $2,500. The credit eases the financial burden for parents who choose to educate their children through private or homeschool. In this way, parents not using public education do not have to pay the full amount for a service they do not use or from which they do not benefit.

While many opponents of the education tax credit say that it will detrimentally affect the public school system by taking away funding from necessary programs, supporters realize that giving parents more freedom will encourage healthy rivalry between schools and that this competition will promote improved performance.

A credit or deduction could be helpful for homeschoolers. However, HSLDA opposes any tax break legislation that comes with governmental regulations. Homeschoolers have fought far too long and much too hard to throw off the chains of government regulation that hinder effective education and interfere with liberty. It would be inconsistent and foolhardy to accept government tax incentives in exchange for government regulation. However, HSLDA will support tax credits that promote educational choice without threatening any regulation of homeschoolers.

There are many different education tax credit models currently being proposed and discussed. Some include an actual tax credit for personally incurred educational expenses for one’s own child; others set up a middleman (usually called a scholarship tuition organization, STO) where any individual or corporation can give to the STO and receive a credit for the gifts. Usually, the STO is required to distribute at least 90% of all funds received to schools or students for educational expenses. Regardless of the education tax credit model, HSLDA continues to support and fight for education tax credits at the local, state and federal levels in order to eliminate the “double” taxation of private and homeschool parents.

Below are a list of education tax credit laws already on the books and information about key education tax credit legislation being offered by state and federal lawmakers.

Current Education Tax Credit Laws

Since 1987, Iowa, Minnesota, Arizona, and Illinois have each enacted education tax credit laws geared toward helping low income families, combating poor quality of public education, and helping students with learning disabilities. These credits are available for individuals, while Florida, Indiana, and Pennsylvania have also STOs to which only businesses may contribute. A summary of each tax credit law is below, but the statute should be consulted for full details and restrictions.

Iowa’s Tuition Credit

Iowa was the first state to pass legislation providing for a tuition credit. In 1987, the Iowa General Assembly added to Iowa Code § 422.12 a credit “equal to twenty-five percent of the first one thousand dollars which the taxpayer has paid to others for each dependent in grades kindergarten through twelve, for tuition and textbooks of each dependent in attending an elementary or secondary school situated in Iowa, which school is accredited or approved under section 256.11.” However, because competent private instruction (CPI) does not constitute a school that “is accredited or approved under section 256.11,” most homeschool families will not be able to claim this credit.

Arizona’s Scholarship Tuition Organization

Ten years later, Arizona followed in Iowa’s steps with a credit applicable when cash contributions are made to a 501(c)(3) scholarship tuition organization (STO). The STO, in turn, grants scholarships to individual students for their private or public education. An individual can receive up to a $500 deduction for contributions to a qualified STO. Corporations and joint filers can receive up to a $1,000 deduction as outlined in section 43-1089 of the Arizona Revised Statutes.

Minnesota’s Education Tax Credit

Minnesota’s tax credit is similar to the Iowa statute, but it allows for 75 percent of education-related expenses instead of 25 percent, and up to $1000 per qualified child. The maximum credit is reduced for families with a household income over $33,500. “Education-related expenses for a qualifying child in kindergarten through grade 12” are covered in the credit. Minnesota Statutes § 290.0674 was added in 1998 and specifies qualifying expenses as tuition, textbooks, up to $200 for personal computer hardware, and transportation, but with more detailed specifications for each category.

Illinois’s Education Tax Credit

In 1999, the Illinois legislature passed an education tax credit that allows up to $500 in excess of expenses of $250 for tuition, book fees, and lab fees to be deducted from state income tax. This credit is available to any public or private school student. (Under Illinois law, homeschooled students have the same legal status as private school students.) This provision is covered in 35 ILCS 5/201. Each of these states offers tax credits for individuals, but Florida and Pennsylvania offer tax credits for businesses that make contributions to scholarship tuition organizations (STO).

Georgia Education Tax Credit

Georgia’s Act 773 amended the Official Code of Georgia in 2008 to allow up to $50 million in tax credits for donations to any qualifying STO. (See the Official Code of Georgia Annotated §20-2A-1 et seq. and §48-7-29.16.) The STO must use 90% of its annual revenue toward scholarships or tuition grants for students transitioning from public school to an accredited nonpublic school located in Georgia. While students in a home education program are not eligible for the scholarship awards, families may still receive a tax credit by donating to a qualifying STO. Taxpayers can receive a dollar-for-dollar tax credit on donations to an STO. Individual taxpayers can receive a tax credit up to $1,000, and married couples filing jointly can receive a tax credit up to $2,500. Corporations may receive a tax credit of either 100% of a donation amount to any qualifying STO or 75% of its taxes owed to the state (whichever is less).

Florida’s STO

In Florida, businesses can contribute up to 75 percent of the amount of tax they owe to scholarship-granted organizations and receive dollar-for-dollar credit. Under section 220.187 of Florida Statutes, in effect since 2002, organizations can receive this credit, but the state has limited the number of credits it grants to $118 million annually.

Pennsylvania’s STO

In 2001, Pennsylvania’s Act 4 amended the Public School Code to allow up to a $300,000 tax credit for businesses that contribute to scholarship organizations. (See 24 Pennsylvania Consolidated Statutes §§ 20-2001-B – 20-2008-B.) The credit received is 75 percent of the total amount they donate, up to the $300,000 cap. In 2004, the maximum amount of credits — $40 million — was exhausted by September. Currently, the maximum amount is $67 million. (See 24 PA. Cons. Stat. § 20-2006-B.)

Indiana’s STO

In 2009, Indiana passed The Indiana School Scholarship Tax Credit Program, which provides a 50 percent state tax credit for charitable contributions by corporations or individuals to qualified scholarship programs serving lower-income families. The state’s budget allows for up to $2.5 million in tax credits to be awarded. (See IC 6-3.1-30.5).

Federal Tax Credit Bills

As education choice is becoming more popular and vouchers—a direct governmental grant to private and charter schools—are gaining prevalence, education tax credit legislation is also increasing in volume on both a federal and a state level.

Senator David Vitter (LA) introduced The Home School Opportunities Make Education Sound Act (HOMES Act—S. 3076) in June 2008. The goal of the HOMES Act is to amend the Internal Revenue Code of 1986 to provide an optional tax deduction for parents who choose to homeschool their children. The legislation provides for a tax deduction of $500 per child (with an annual limit of $2,000) for education related expenses, including books, supplies, academic tutoring, special needs services, and computer equipment. Families who do not itemize their tax returns would still be eligible for a similar standard deduction. Furthermore, this legislation would apply to all homeschool programs, including those in states that only have a private school statute.

For the most up-to-date information on federal legislation, visit HSLDA’s Federal Relations legislation page.

State Tax Credit Bills

States periodically introduce education tax credit legislation, which HSLDA wholeheartedly supports. Unfortunately, of the many bills that have been introduced in recent years, very few have been passed into law. However, HSLDA continues to monitor and lobby for such measures. For information regarding bills currently being considered visit our state legislation page.

Constitutionality Issues

While these tax credits enable parents to keep their money and use it for education, some opponents raise questions concerning their constitutionality. In three states with existing education tax credit laws—Arizona¹ , Illinois² , and Minnesota³—suits have been brought against the tax credit laws. The suits were based on the Establishment Clause because these credits also apply to religious school tuition. Furthermore, opponents cite the Blaine Amendment, which prohibits appropriating funds to religious or sectarian schools.

All three court cases, however, have upheld the constitutionality of tax credits because government money is not being directly given to these schools. The courts ruled that state recognition of tax credits does not involve giving any government funds to institutions.

Endnotes

1. Kotterman v. Killian, 972 P.2d 606 Ariz. (1999).

2. Griffith v. Bower, 319 Ill. App. 3d 993 5 Dist. (2001).

3. Mueller v. Allen, 463 U.S. 388 (1983).