BILL ANALYSIS Ó
AB 943
Page A
Date of Hearing: January 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 943 (Nestande) - As Amended: January 6, 2014
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Corporation Tax Law: credits: K-12 education
programs and scholarships
SUMMARY : Enacts the Education Investment Incentives Act.
Specifically, this bill :
1)Contains the following legislative findings:
a) Providing tax incentives to encourage private
investments for the common good is sound public policy.
b) Expanding educational opportunities and improving the
quality and access of educational services within the state
are valid public purposes that the Legislature may promote
using its sovereign power to determine tax policy.
c) Creative tax policy can inspire greater charitable
contributions and public-private partnerships that ensure
additional resources for the education of all children in
California.
d) Encouraging voluntary support for education, without
prejudice for or against any state-sanctioned educational
enterprise, promotes the state's interest and common good
in providing the highest quality education to all children
in the state.
e) At a time when fiscal realities challenging California
school communities demand innovative ways to deliver vital
education services to public and private pupils in
Kindergarten and Grades 1 to 12, inclusive, charitable
giving for educational purposes should be stimulated.
2)Allows, for taxable years beginning on or after January 1,
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2015, and before January 1, 2020, a credit under the
Corporation Tax (CT) Law (the "scholarship tax credit") equal
to 50% of a taxpayer's monetary contribution to a nonprofit
organization that is either:
a) An "education improvement organization" for purposes of
funding a "qualified grant" for a "K-12 education
innovative program" for pupils attending private, public,
or charter schools; or,
b) An "education scholarship organization" for purposes of
funding qualified "K-12 education scholarships" for a
specified pupil to attend private school or partial or full
payments of fees associated with the general costs of
transportation to attend a private, public, or charter
school.
3)Provides that the credit amount may not exceed 50% of the
taxpayer's "tax," as defined, for a taxable year.
4)Defines "nonprofit" as an organization that meets all of the
following requirements:
a) Is formed as any of the following:
i) A nonprofit public benefit corporation described in
Corporations Code (CC) Section 5110 et seq.;
ii) A nonprofit religious corporation described in CC
Section 9110 et seq.;
iii) Any other charitable corporation, as defined by
Government Code Section 12582.1; or,
iv) A duly authorized foreign nonprofit corporation that
has complied with all registration requirements in the
CC, as specified; and,
b) Is an organization exempt from federal income tax as an
organization described in Internal Revenue Code Section
501(c)(3).
5)Defines an "education improvement organization" or "EIO" as a
charitable institution in this state organized and operated as
an art museum, science center, institution of higher
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education, districtwide educational enrichment program, or any
other organization, with the primary purpose to provide
monetary support to a K-12 education innovative program, that
meets all of the following requirements:
a) Contributes at least 80% of the qualified grants to a
California public or private school for funding K-12
education innovative programs;
b) Does not have a person who has been convicted of any sex
offense, as defined, supervising or assisting a pupil
participating in a K-12 education innovative program;
c) Requires each employee or volunteer, whether prospective
or current, who will directly and personally supervise or
assist any pupil to comply with the provisions of Education
Code Section 44237 to ascertain whether the employee or
volunteer has been convicted of any sex offense, as
defined; and,
d) Applied to receive a qualified grant with the Franchise
Tax Board (FTB).
6)Defines a "qualified grant" as a grant that meets all of the
following requirements:
a) Includes guidelines that detail what specific programs
may be funded by the grant moneys;
b) Limits the amount of grant moneys that may be used for
administration or overhead costs; and,
c) Is included on a list created by the State Department of
Education, as specified.
7)Provides that a "qualified grant" may include cash payments to
a California private, public, or charter school to carry on a
K-12 education innovative program or may include costs
incurred by an EIO in providing a program to, or in
conjunction with, a California private, public, or charter
school.
8)Defines a "K-12 education innovative program" as instruction,
programs, or other activities in science, technology,
engineering, and math learning, or the visual and performing
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arts for a private, public, or charter school with a
Kindergarten or any Grades 1 to 12, inclusive, as provided.
9)Defines an "education scholarship organization" or ESO as a
charitable institution in this state that meets all of the
following requirements:
a) Is organized and operated with the primary purpose of
providing qualified K-12 education scholarships to pupils
attending a private school in California.
b) Allocates at least 80% of contributions for which a
credit is claimed for qualified K-12 education scholarships
for ESOs with three or more years of audits.
c) Allocates at least 90% of contributions for which a
credit is claimed for qualified K-12 education scholarships
for ESOs with less than three years of audits.
d) Makes qualified K-12 education scholarships available
for pupils from more than one school.
e) Retains data on the progress of the pupils participating
in qualified K-12 education scholarships on nationally
available norm-referenced tests to evaluate the program's
efficacy.
f) Submits to the State Department of Education quarterly
reports on the number of qualified K-12 education
scholarship recipients and the schools that the recipients
attend.
g) Submits to the FTB financial and compliance audit
reports performed by a certified public accountant.
h) Applies to participate in this credit program with the
FTB.
10)Defines a "qualified K-12 education scholarship" as either of
the following:
a) Financial assistance for a "specified pupil" to
partially or fully pay for the fees associated with the
general costs of transportation to attend a private,
public, or charter school.
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b) An award of tuition assistance amounting to at least 65%
of the basic state per-pupil funding, or a private school's
actual tuition and fees, whichever is less, that meets all
of the following requirements:
i) Initially, must be awarded to a specified pupil who
attended a public or charter school the previous year or
is entering transitional Kindergarten through Grade 1.
ii) May be renewed at the request of the specified pupil
for each school year until graduation from high school.
iii) Shall be portable and follow the specified pupil
from one school to another.
iv) Shall be provided to a private school of the
specified pupil's choosing under the following
conditions:
(1) Each ESO shall establish a criteria for
granting scholarships that meet the specified
requirements.
(2) The pupil receiving the assistance shall
remain a "specified pupil."
(3) The specified pupil shall attend a private
school.
(4) The specified pupil shall remain enrolled and
in attendance at the private school throughout the
school year unless excused by the applicable program
for illness or other good cause.
(5) The specified pupil and a parent or legal
guardian of the specified pupil shall comply with all
applicable policies of the private school.
(6) A parent or legal guardian of the specified
pupil shall ensure that the pupil has reliable
transportation to and from the applicable program.
11)Defines a "specified pupil" as a minor who has applied for a
K-12 education scholarship and who meets either of the
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following requirements:
a) Is a pupil with special needs who has been identified by
a school district as having a disability under the federal
Individuals with Disabilities Education Act (20 U.S.C.
Section 1400 et seq.).
b) Is a pupil within foster care who has been placed in a
foster care system within the State of California at any
time prior to graduating high school. A specified pupil is
not required to be previously enrolled in a public school
or charter school to participate and shall remain eligible
for a scholarship until he or she graduates from high
school or leaves the foster care program.
12)Defines a "private school" as a person, firm, association,
partnership, or corporation offering or conducting private
school instruction in the State of California on the
elementary or high school level, that meets all of the
following requirements:
a) Is accredited by the Western Association of Schools and
Colleges or an affiliated organization.
b) Has filed a current private school affidavit with the
State Department of Education in accordance with the
Education Code Section 33190.
c) Complies with applicable provisions of the Fair
Employment and Housing Act (Part 2.8 (commencing with
Section 12900) of Division 3 of Title 2 of the Government
Code).
d) Utilizes background checks in connection with hiring all
school employees, consistent with the standards set forth
in Education Code Section 44237(a).
13)Provides that, for purposes of the tax credit for a monetary
contribution to a nonprofit ESO, the definition of a "private
school" also includes all of the following conditions:
a) The instruction must be conducted on the elementary or
high school level.
b) A specified pupil must be required by the school to take
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a nationally available norm-referenced test.
c) The school has obtained, if it has been in operation for
less than three years, a surety bond or letter of credit in
an amount equal to the value of the education scholarship
payments for one quarter.
14)Defines a "public school" as any California day or evening
elementary, middle, junior high, or high school established by
statute or by municipal or district authority that is located
in an eligible school attendance area, as defined in Section
1113 of the federal Elementary and Secondary Education Act (20
U.S.C. Section 6301 et seq.).
15)Defines a "charter school" as a California school established
pursuant to Part 26.8 (commencing with Section 47600) of
Division 4 of Title 2 of the Education Code providing
elementary or high school education that is located in an
eligible school attendance area, as defined in Section 1113 of
the federal Elementary and Secondary Education Act (20 U.S.C.
Sec. 6301 et seq.).
16)Limits the aggregate amount of the tax credits allowed under
this bill to $50 million for each calendar year but authorizes
the Legislature to increase this amount.
17)Provides that the allocation of credits be made on a
first-come, first-serve basis.
18)Requires the FTB and the State Department of Education to
administer the credit. Specifically:
a) Requires the FTB to perform all of the following duties:
i) Promulgate rules and regulations as necessary or
appropriate to implement this credit;
ii) Establish application forms and procedures;
iii) Track credits claimed;
iv) Post aggregate totals of the credits claimed on the
Internet Web site of the FTB;
v) Determine when the aggregate total of credits
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reaches $50 million; and,
vi) Certify that the contributions meet the requirements
of this bill.
b) Requires the State Department of Education to do all of
the following:
i) Adopt rules necessary to determine whether an EIO, a
private school and a contribution meet the requirements
of this bill; and,
ii) Submit a list of eligible ESOs that comply with the
requirements of this bill to the FTB annually by March
15.
19)Requires the taxpayer, in order to claim the scholarship tax
credit, to do all of the following:
a) Receive a certification from the FTB that the taxpayer's
monetary contribution meets the necessary requirements;
b) Apply with the FTB to receive the credit; and,
c) Claim the credit on a timely filed original return.
20)Allows taxpayers to carry forward the scholarship tax credit
to reduce the tax, as defined, in the following year, and
succeeding five years, if necessary, until the credit is
exhausted.
21)Provides that the scholarship tax credit shall be in lieu of
any other credit or deduction that the taxpayer may otherwise
claim pursuant to the CT law for the same monetary
contribution, as specified.
22)Takes effect immediately as a tax levy.
EXISTING STATE LAW :
1)Provides various tax credits designed to provide tax relief to
taxpayers who incur certain expenses (e.g., child adoption) or
to influence behavior, i.e. to provide incentives for
taxpayers to perform various activities that they may not
otherwise undertake.
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2)Allows individual and corporate taxpayers to deduct certain
expenses as itemized deductions.
3)Allows deductions for monetary charitable contributions,
gifts, or property to qualified organizations formed for
religious, charitable, educational, scientific, or literary
purposes. A charitable contribution is defined as a
contribution or gift made exclusively for public purposes.
Individual taxpayers can claim charitable contributions as an
itemized deduction and can deduct the greater of the standard
deduction or itemized deductions from their adjusted gross
income (AGI) when computing taxable income. Corporate
taxpayers can claim charitable contributions up to 10% of the
corporation's taxable income, without regard to the amount of
charitable contribution, but the amount in excess of the 10%
limitation may be carried over for five years.
4)Imposes limitations on the amount of deduction for individual
charitable contributions, depending on the individual's AGI
and the amount of contributions, the types of organizations
that receive the donations, and the type of property donated.
FISCAL EFFECT : Unknown.
COMMENTS :
1)Author's Statement . The author states that:
Creating tax incentives to encourage private investments in
our school children is sound public policy. AB 943 would
provide corporate tax credits for cash contributions to
educational improvement organizations which support
innovative programs in STEM learning and/or the arts for
K-12 school children.
Furthermore, AB 943 would also allow corporations to claim
tax credits for charitable contributions to non-profit
organizations?. The scholarships would provide tuition
assistance and/or transportation assistance for children
with special needs and children in foster care to attend
the schools that best fit their learning needs.
2)Arguments in Support . The proponents of this bill argue that
"creating tax incentives to encourage private investments for
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the common good is sound public policy." They believe that AB
943 "would inspire greater philanthropic contributions, and
public-private partnerships, to ensure new resources that
deliver vital education services to K-12 public and private
school students alike." Furthermore, the proponents assert
that those charitable contributions "would help close the
achievement gap among children from low-income families with
expanded opportunities for STEM learning, and/or arts
education"; would "support students with special needs to
learn and thrive"; and would help students in foster care "to
perform better academically and complete more years of
education." Finally, the proponents contend that with
projected "surpluses totaling some $30 billion over the course
of the coming five years," "it is prudent that ? lawmakers use
a small fraction of that amount in a manner designed to induce
the investment of two dollars of private funds for every
dollar of revenue forgone by the state."
3)Arguments in Opposition . The opponents state that AB 943
"would create a tuition tax credit program, which would
require the state to forgo money that could be spent on the
public schools to instead be funneled to private school
tuition." They argue that "there is no meaningful difference
between tax credits and direct government reimbursement of
private and religious schools - tuition tax credits are
backdoor vouchers" and essentially constitute public funding.
The opponents assert that vouchers and tuition tax credits are
"ineffective, permit taxpayer funded discrimination, lack
accountability, and use taxpayer money to fund religious
schools." The opponents cite multiple studies showing that
vouchers and tax credits do not improve student achievement or
resources and argue that vouchers and tax credits may
contribute to discrimination. Finally, the opponents conclude
that the effect of AB 943 is "to fund those education efforts
preferred by a segment of the population with the means to
contribute to school programs ? at cost to the public
education system."
4)What Does this Bill Do ? As pointed out by the author of this
bill, in light of diminished resources and budget cuts, public
and private schools have been struggling to provide high
quality education to children in California. Many schools
were forced to eliminate or reduce their offerings of science
and math classes. AB 943 would create a tax incentive for
corporations to make monetary contributions to support
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science, technology, engineering, or math (STEM) and art
programs in public, private, and charter schools. This bill
would also provide a similar tax incentive for contributions
to pay for tuition of foster youth or special needs students
in a K-12 program. Specifically, AB 943 would allow a
corporation to claim a tax credit for monetary contributions
to a nonprofit organization that either provides grants to
schools to support qualified K-12 innovating art programs or
programs relating to STEM learning, or that gives scholarships
for foster youth or disabled children to attend public or
private schools.
The amount of credit is limited to 50% of the amount of the
monetary contribution and may not exceed 50% of the taxpayer's
tax for a particular tax year. Unlike many other tax
incentives, the proposed tax credit is capped and allocated.
It is effective only for five taxable years, from 2015 until
2020; and the annual aggregate amount of the credit may not
exceed $50 million (although this bill authorizes the
Legislature to increase this amount). The FTB is required to
allocate and certify the credit on the first-come, first-serve
basis, up to $50 million every taxable year. The credit is
not refundable and, in many respects, is similar to a grant
program.
5)Similar Tax Credit Programs in Other States . As of July 2013,
16 tuition tax credit programs existed in 13 states. These
programs, known as "scholarship tax credit" programs, allow
individuals and corporations to receive a tax credit for
certain contributions to private, nonprofit school tuition
organizations that issue scholarships to K-12 students.
For example, the School Tax Credit, which was enacted in Arizona
in 1997, created a $500 tax credit for contributions made by
individuals and corporate taxpayers to School Tuition
Organizations (STOs), third-party organizations that fund
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private and sectarian school scholarships.<1> Scholarship
funds from individual donations are available to any student,
including those already attending private school. Scholarship
funds received from corporate donations, however, must be
awarded to low-income students who are either starting
Kindergarten or who attended a public school the previous
year. The scholarships can only be used for private school
expenses. The State of Arizona also offers a corporate tax
credit for special needs and foster children that replaced a
previous voucher program.
Florida and Pennsylvania also have corporate tax credit
scholarship programs allowing corporations to receive a tax
credit for donations made to scholarship organizations. The
State of Florida allows corporations to apply for a tax credit
for donations to an "eligible nonprofit scholarship-funding
organization" and the credit amount is 100% of the donation
made. In 2011, Florida awarded $140 million in scholarship
tax credits. However, Florida's statewide limit is flexible,
meaning that, if the amount of corporate donations made
exceeds 90% of the tax credit limit ($140 million), it
automatically increases by 25%.<2> Scholarships must be
awarded to students who qualify for the free or reduced-price
lunch program and are either entering Kindergarten or first
grade, or who attended a public school the previous school
year.
In Pennsylvania, the total aggregated amount of credits
awarded may not exceed $44.7 million; the scholarships may be
awarded only to students with family incomes of $60,000 or
less ($12,000 allowance for each additional dependent).
Scholarship recipients may attend a public or private school
approved by the scholarship organization.
--------------------------
<1> "There are two separate programs with varying requirements.
The value of the credit is 100% of the donation made up to a
maximum of $500 for individuals and $1,000 for couples filing
jointly. There is no maximum credit for corporations, meaning if
they donate an amount equal to their entire corporate income tax
liability they will not owe any income tax. There is, however,
a cap on the total aggregate credits offered. In FY 2010, the
state offered a maximum of $17.28 million in tax credits given
on a first- come, first-served basis to corporations. That cap
increases by 20 percent each year." See ncsl.org, Scholarship
Tax Programs.
<2> Ibid.
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6)Do Scholarship Tax Credit Programs Provide Educational
Benefits ? The proposed scholarship tax credit program is
intended to encourage corporate contributions to support STEM
programs in public and private schools, as well as to fund
scholarships for children with special needs or in foster care
to attend private schools. It is presumed that the proposed
tax incentive will not only result in a significant increase
in the amount of private monetary support for the schools, but
also will lead to some substantial educational benefits to
students in both public and private schools. While it is
challenging to quantify the impact or effectiveness of a tax
incentive, several studies have attempted to do just that with
respect to scholarship and tuition tax credits.
One of these studies was conducted by the U.S. Department of
Education to determine the effectiveness of the District of
Columbia School Choice Incentive Act of 2003, passed by
Congress in January 2004. This Act established the first
federally funded, private school voucher program in the United
States - the DC Opportunity Scholarship Program (OSP).<3>
According to the U.S. Department of Education report, the
purpose of the new scholarship program was to provide
low-income residents, particularly those whose children attend
schools in need of improvement or corrective action under the
Elementary and Secondary Education Act, with expanded
opportunities to attend higher performing schools in the
District of Columbia. The scholarship, worth up to $7,500,
could be used to cover the costs of tuition, school fees, and
transportation to a participating private school. It should
be noted that, as part of this legislation, Congress mandated
a rigorous evaluation of the impacts of the Program.
The evaluation study found that there "was no conclusive
evidence that the OSP affected student achievement."<4>
Specifically, "after at least four years students who were
offered (or used) scholarships had reading and math test
scores that were statistically similar to those who were not
---------------------------
<3> Wolf, Patrick, Babette Gutmann, Michael Puma, Brian Kisida,
Lou Rizzo, Nada Eissa, and Matthew Carr. Evaluation of the DC
Opportunity Scholarship Program: Final Report (NCEE 2010-4018).
Washington, DC: National Center for Education Evaluation and
Regional Assistance, Institute of Education Sciences, U.S.
Department of Education.
<4> Ibid., Executive Summary.
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offered scholarships."<5> At the same time, it was determined
that the OSP significantly improved students' chances of
graduating from high school. Thus, students graduated at
higher rates even though they may not have raised their test
scores in reading and math as a result of the OSP.<6>
Finally, the report concluded that the OSP raised parents' -
but not students' ratings - of school safety and
satisfaction.<7>
Another study reviewed the effectiveness of the Milwaukee
Parental Choice Program (MPCP).<8> The MPCP, which began in
1990, provides government-funded vouchers for low-income
children to attend private schools in the City of Milwaukee.
The maximum voucher amount in 2010-11 was $6,442, and 20,996
children used a voucher to attend either secular or religious
private schools. The MPCP is the oldest and largest urban
school voucher program in the United States.<9> The study
found that, for the 2010-11 school year, the students in the
MPCP sample exhibited larger growth (from the base year of
2006) in reading achievement than the students in the matched
--------------------------
<5> Ibid., "The same pattern of results holds for students who
applied from schools in need of improvement (SINI), the group
Congress designated as the highest priority for the Program.
Although some other subgroups of students appeared to have
higher levels of reading achievement if they were offered or
used a scholarship, those findings could be due to chance. They
should be interpreted with caution since the results were no
longer significant after applying a statistical test to account
for multiple comparisons of treatment and control group members
across the subgroups."
<6> Ibid., "The offer of an OSP scholarship raised students'
probability of completing high school by 12 percentage points
overall (figure ES-3)."
<7> Ibid., Parents were more satisfied and felt school was safer
if their child was offered or used an OSP scholarship. The
Program had no effect on students' reports on school conditions.
<8> Witte, Wolf, et al., MCPC Longitudinal Educational Growth
Study Third Year Report (April 2010).
<9> Ibid.
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Milwaukee Public Schools (MPS) sample.<10> However, the
authors of the study note that these results should be
interpreted with some caution because they "represent
differences that were not present in earlier years" and a
"significant program change took place in the final year."<11>
The report suggests that "there is some evidence that the
larger achievement growth of the MPCP students ? is
attributable to the introduction of the accountability
policy."
Furthermore, there is some evidence to suggest that voucher
and tuition tax credit programs do not necessarily offer
special needs students greater support programs. For example,
the U.S. Department of Education report showed that students
participating in the OSP were actually less likely than
students not participating in the program to have access to
programs such as English language learners, special needs
programs, tutors, counselors, etc.<12> As pointed out by the
opponents of this bill, reduced access to such programs by
--------------------------
<10> Ibid., "This is the first year such an achievement growth
advantage has been observed for either group in our study. Some
analyses indicate that the students in the MPCP sample also
exhibit larger growth in math achievement, but the results are
not conclusive."
<11> Ibid., Beginning with the 2010-11 school year, the MPCP
schools were subjected to a test-based accountability policy for
the first time, i.e. they were required to administer a test to
all voucher students in Grades 3-8 and 10 and publicly report
the results by named schools. "Because the test-based
accountability policy was introduced after we carefully matched
our sample of MPCP students to MPS students, this study is no
longer solely evaluating the effectiveness of the MPCP. Rather,
it is evaluating the effectiveness of both MPCP and the
accountability policy that was introduced in 2010-11."
<12> Wolf, Patrick, Babette Gutmann, Michael Puma, Brian Kisida,
Lou Rizzo, Nada Eissa, and Matthew Carr. Evaluation of the DC
Opportunity Scholarship Program: Final Report (NCEE 2010-4018).
Washington, DC: National Center for Education Evaluation and
Regional Assistance, Institute of Education Sciences, U.S.
Department of Education, pp. 56, 57, 60.
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special needs students and foster youth "is especially
problematic, given that the intention of AB 943 is to benefit
special needs children and children in foster care
programs."<13> Students attending public schools are
protected under the Individuals with Disabilities Act and it
is unclear whether they would continue receiving those
protections and services once they accept a scholarship and
transfer to a private school.
7)Costs versus Benefits to the State . The tuition tax credit
program proposed by this bill would provide scholarships to
certain specified students and their parents to pay for their
school of choice. By providing scholarships to students from
various backgrounds, the program will, potentially, increase
diversity in private schools. And, by moving some students
out of public schools, this program would, arguably, eliminate
the per-pupil expenditure for those students and would foster
competition between public and private schools. Furthermore,
other contemplated benefits of the proposed tax incentive
include an increase in the amount of funding for STEM and art
programs in public schools and potential savings to the
state.<14> However, all of those benefits are estimated to
come at a great price to the state. Specifically:
i) A 1999 study of Cleveland's voucher program showed
that the public schools from which students left for
private voucher schools were unable to reduce
administrative costs or eliminate teaching positions.
Even though the public school district was unable to cut
overall operating expenses, it lost its state funding.
[KPMG, LLP, Cleveland Scholarship and Tutoring Program:
Final Management Study (Sept. 1999).] The National
Education Association also points out that moving
-------------------------
<13> Americans United for Separation of Church and State, Letter
in Opposition to AB 943, signed by Carol Velarde, President,
Sacramento Chapter, January 8, 2014.
<14> A nonpartisan analysis of the Florida Tax Credit
Scholarship Program showed that for every $1 spent on the tax
credit program, Florida taxpayers saved an estimated $1.49.
However, the report notes that the state's savings is dependent
on a proper balance between the cap on the tax credit and the
number of qualified students participating in the program. In
other words, if the cap is too high, and not enough students
participate, the lost tax revenue will be higher than the
savings in education funding.
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students from public to private schools does not result
in any savings to school districts because districts
cannot reduce their fixed costs - maintenance, utilities,
debt service, transportation, etc. - in proportion to the
number of students who leave. (Subsidizing Private
Education - At Taxpayer Expense, an NEA policy brief, NEA
Education Policy and Practice Department.)
ii) Giving tax credits to unrelated businesses has the
unintended consequence of making private schools
dependent on scholarship-granting entities, rather than
parents, for funding. The scholarship-granting entities
will have to compete for a finite amount of contributions
from corporations and then decide which schools they will
support. Whose interest are those organizations going to
serve - the interests of parents and students or those of
the contributors and schools they help to finance? The
proposed tax credit gives parents no additional authority
over how schools allocate their spending but,
potentially, subjects them to the dictates of scholarship
organizations.
iii) This bill uses the tax system as a convenient means
of delivering a specific subsidy to those companies that
contribute to schools. The Committee may wish to examine
the rationale of using General Fund moneys to pay for
contributions, in the form of a tax credit, instead of
using that money to support STEM and art programs
directly.
iv) This bill proposes to treat donations to specified
nonprofit organizations more generously than donations to
other charitable organizations. Under existing law,
charitable donations entitle the donor only to a tax
deduction, instead of a tax credit.
8)Federal Tax Incentives for K-12 Education . Federal tax law
allows parents to create tax-free education savings accounts
by investing up to $2,000 annually. The funds from those
accounts may be used tax-free for K-12 or college expenses.
The Coverdell Education Savings Account (ESA), formerly known
as an Education IRA, is an investment trust account
specifically designated for qualified education costs, which
include both K-12 expenses and higher education expenses, such
as tuition and fees, books, and room and board for students
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enrolled at least part-time. Interest earned on the deposits
is not taxed, and withdrawals for education expenses are
tax-free.
9)Tax Credits Versus Vouchers . In recent years, certain
education analysts have advocated for nonrefundable education
tax credits as a means of promoting "educational freedom."
Some researchers view such tax credits as a more viable
alternative to school vouchers. In a report published by the
Cato Institute, Adam B. Schaeffer argues that "tax credits
enjoy practical, legal, and political advantages over school
vouchers." (The Public Education Tax Credit, Adam B.
Schaeffer, Cato Institute, Policy Analysis, No. 605, December
5, 2007, p. 1.) Specifically, Schaeffer maintains that "the
pursuit of highly regulated and targeted voucher programs
impedes the rise of a competitive education industry and
creates unnecessary political disadvantages for school choice
supporters." (Id. at 2.) Moreover, Schaeffer points out that
tax credits are "more popular with the public and politicians,
less likely to be challenged in court, and more likely to
survive most court challenges." (Id.) Finally, Schaeffer
argues that "tax credits are a viable option in many states
where effective voucher programs are likely to be struck down
on state constitutional grounds." (Id. at 3.)
10)Potential Constitutional Challenges . By indirectly
channeling potential state revenues to private educational
institutions, this bill may be subject to challenge under both
the state and federal constitutions. The controversy
surrounding a similar tax credit in Arizona demonstrates this
fact. As discussed, for a number of years, Arizona law has
provided a credit for contributions made to school tuition
organizations (STOs). STOs, in turn, use these contributions
to provide scholarships to students attending private schools,
many of which are religiously affiliated. A group of Arizona
taxpayers filed suit challenging the state's tax credit as a
violation of the Establishment Clause under the First and
Fourteenth Amendments. After the Arizona Supreme Court
rejected their claims, these taxpayers sought relief from the
Federal Judiciary. Specifically, they argued that the Arizona
law allows STOs to use state tax revenues to pay for the
tuition of students at religious schools, some of which
discriminate on the basis of religion in selecting students.
In Arizona Christian School Tuition Org. v. Winn, (2011) 131
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S. Ct. 1436, 1440, a narrowly divided United States Supreme
Court held that the litigants challenging Arizona's law could
not take advantage of the limited exception to the general
rule against taxpayer standing. Thus, the taxpayers were
deemed to lack standing, and their suit was dismissed for lack
of jurisdiction. (Id.) In reaching its conclusion on
standing, the majority opinion did draw a distinction between
situations in which the government collects and spends
taxpayer money for religious purposes (where standing to bring
suit may be found), and the tax credit at issue.
Specifically, the Court noted that Arizona's tax credit system
"is implemented by private action and with no state
intervention." (Id. at 1448.) Nevertheless, the Court never
directly addressed the fundamental issue of the STO credit's
constitutionality. While the door may be effectively closed
to taxpayer suits challenging similar statutory schemes in
federal court, the constitutionality of such credits remains,
at best, unclear.
This bill's tax credit program could also be subject to
challenge under the state constitution. This fact is
demonstrated by a recent decision handed down by a New
Hampshire state court, which ruled that a tuition tax-credit
program violated the state constitution. The tax credit
program was challenged in court by Americans United for
Separation of Church and State, the New Hampshire Civil
Liberties Union, and the American Civil Liberties Union
(ACLU). According to a statement from the ACLU, the court
held that, "New Hampshire students, and their parents,
certainly have the right to choose a religious education.
However, the government is under no obligation to fund
'religious' education. Indeed, the government is expressly
forbidden from doing so by the very language of the New
Hampshire Constitution." (New Hampshire Court Strikes Down
Tax-Credit Aid to Religious Schools, ACLU, June 17, 2013,
p.1.)
The California Constitution, in turn, specifically prohibits
the state from helping "to support or sustain any school,
college, university, hospital, or other institution controlled
by any religious creed, church, or sectarian denomination
whatever." (California Constitution, Article XVI, Section 5.)
By establishing an indirect subsidy program for private
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schools, this bill may be challenged under this provision for
inappropriately using public funds to support private,
sectarian institutions.
11)Should the State Subsidize Educational Organizations that
Discriminate ? As noted above, this bill would provide a
generous tax credit for contributions made to organizations
that fund grants for STEM programs or scholarships to
specified students attending public, charter, or private
schools. While this bill requires any "private school" to
comply with applicable provisions of the Fair Employment and
Housing Act (which governs, among other things, employment
practices), its language does not appear to expressly require
that benefiting private schools not discriminate in their
enrollment practices. There are, for example, some private
schools that refuse to admit openly gay and lesbian students.
[See Doe v. California Lutheran High School Assn. (2009) 170
Cal.App.4th 828.] While such schools may be within their
First Amendment rights to discriminate in this fashion, it
does not necessarily follow that the state should financially
subsidize their operation. Moreover, as a general rule, the
government's refusal to subsidize the exercise of a First
Amendment right does not infringe that right: even outside
the educational context, there exists a long line of cases
holding that the government need not subsidize organizations
whose practices are deemed contrary to public policy. The
case of Evans v. City of Berkeley (2006) 38 Cal.4th 1 is
particularly instructive. In this case, the City of Berkeley
asked a volunteer youth group affiliated with the Boy Scouts
of America to provide written assurance that the group would
not discriminate against homosexuals or atheists as a
condition of the group's continued free use of berths in the
city's marina. (Id. at 5-6.) The city, finding the statement
the group provided both ambiguous and insufficient,
discontinued its subsidy. (Id. at 6.) Members of the group
sued, claiming that the city's actions violated their freedoms
of speech and association. (Id.) The trial court sustained
the city's demurrer, and the Court of Appeal affirmed. (Id.)
On review, the Supreme Court of California determined that the
plaintiffs' complaint failed to establish a violation of
constitutionally protected rights and affirmed the lower
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court's judgment. (Id.) More specifically, the Court held
that a government entity may constitutionally require a
subsidy recipient to provide written, unambiguous assurances
of compliance with a generally applicable nondiscrimination
policy. (Id. at 10.) In reaching this conclusion, the Court
noted:
In order to meet the city's mandate of nondiscriminatory
participation policies, the Sea Scouts were required
neither to espouse nor to denounce any particular viewpoint
nor to form or break any association or affiliation, but
only to assure Berkeley of their adherence to the city's
policies in connection with subsidized use of Berkeley's
facilities.
(Id. at 11.)
The Court also observed that Berkeley, in requiring that its
subsidy not be used in a discriminatory manner, did not demand
adherence to the underlying viewpoint that motivated the
city's nondiscrimination law. (Id. at 14.)
Thus, the Committee may wish to consider an amendment to this
bill explicitly providing that a private school may only
receive tax-subsidized grants if they do not discriminate on
the basis of gender identity, race, sexual orientation,
nationality, religion, or religious affiliation.
12)The Not-so-Dormant Commerce Clause : The credits this bill
proposes apply only in connection with California-based
schools. By limiting the credits to in-state activity, this
bill could arguably be susceptible to challenge under the
dormant commerce clause of the U.S. Constitution.
The U.S. Constitution authorizes Congress to regulate commerce
with foreign nations, and among the several states. (U.S.
Constitution, Article I, Section 8, Clause 3.) While the
commerce clause is phrased as a positive grant of regulatory
power, it "has long been seen as a limitation on state
regulatory powers, as well as an affirmative grant of
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congressional authority." [Fulton Corp. v. Faulkner (1996)
516 U.S. 325, 330.] This negative aspect, commonly referred
to as the dormant commerce clause, prohibits economic
protectionism in the form of state regulation that benefits
"instate economic interests by burdening out-of-state
competitors." (Ibid.)
Both the U.S. Supreme Court and the California courts have
addressed challenges to various state tax provisions on
dormant commerce clause grounds. Most recently, the Court of
Appeal struck down a California statute that allowed taxpayers
a deferral for income received from the sale of stock in
corporations maintaining assets and payroll in California,
while providing no such deferral for income from the sale of
stock in corporations maintaining assets and payroll
elsewhere. [Cutler v. Franchise Tax Board (2012) 208
Cal.App.4th 1247, 1250.] Specifically, the court held that
"the deferral provision discriminates on its face on the basis
of an interstate element in violation of the commerce clause."
(Ibid.)
Thus, while no court decision has yet invalidated, as a
general matter, a state income tax credit that provides an
incentive for in-state activity, such credits may be subject
to constitutional challenge. Any potential constitutional
infirmity could be remedied by expanding this bill's
definition of public, private, and charter schools to include
schools located outside of California. While such a proposal
would be geographically neutral, it is hard to argue that
California should subsidize contributions that end up
benefiting schools located in other states.
13)Similar Legislation .
a) AB 2582 (Nestande), of the 2012 Legislative Session,
would have provided a tax credit for contributions to
public school co-curricular activities, to an educational
improvement organization that supports innovative programs
in public schools, as specified, or to an educational
scholarship organization. AB 2582 was never heard by this
Committee.
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b) SB 1542 (Negrete-McLeod), of the the 2011-12 Legislative
Session, would have created an income tax credit for
contributions made to a local educational advancement
program organization. SB 1542 was never by this Committee.
c) AB 279 (Duvall), of the 2009-10 Legislative Session,
would have allowed a tax credit for taxable years beginning
on and after January 1, 2010, equal to the amount of the
total contribution made by a qualified taxpayer to a
scholarship granting organization during the taxable year.
AB 279 was held under submission in this Committee.
d) AB 2605 (Nakanishi), of the 2007-08 Legislative Session,
would have allowed a personal income tax credit to
qualified taxpayers for each dependent attending a
nonpublic school. AB 2605 was held under submission by
this Committee.
e) AB 2561 (Niello), of the 2007-08 Legislative Session,
would have provided an income tax credit for costs paid or
incurred for private school tuition. AB 2561 was held
under submission in this Committee.
f) SB 1768 (Hollingsworth), of the 2005-06 Legislative
Session, would have provided an income tax credit for
contributions made to a school tuition organization or a
public school. SB 1768 died in the Senate Revenue and
Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Catholic Conference, Inc.
California Association of Private School Organizations
Opposition
Americans United for Separation of Church and State
California Tax Reform Association
Analysis Prepared by : Oksana Jaffe & M. David Ruff / REV. &
TAX. / (916) 319-2098
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