I THOUGHT I had figured out all the angles on the throw-tax-dollars-at-private-schools schemes that our legislators are afraid to oppose.
At the top, the big spenders from other states who have been buying up our legislators hope to slash the size of government the nation over. Whether they’re motivated by libertarian beliefs or the desire to cut their own tax bills or a combination of the two really doesn’t matter; their goal is to slash government far beyond what any reasonable person would consider reasonable. Think of how libertarian high priest Grover Norquist loves to quote himself as saying he wants to cut government in half and cut it in half and cut it in half again until it’s small enough to drown in a bathtub.
Since public education traditionally has received the bulk of state spending, that’s where they focus their state-level attacks. They clothe their efforts in the language of helping poor children “escape” failing public schools, but the legislation they actually push belies that claim: Rather than asking the Legislature to improve the public schools, or to subsidize poor children’s education, they propose Rube Goldberg contraptions that funnel donations through “scholarship-granting organizations” that dole them out to students of their choosing; the fuel that drives these donations is dollar-for-dollar tax credits on the donors’ state income taxes, which allow them to make the donations instead of paying their taxes.
Beneath the big spenders are the lobbyists who not only get paid for lobbying but also can spin their efforts into jobs running the scholarship-granting organizations, which sprout up in response to the law and are allowed to spend up to 5 percent of the money on overhead.
On the next level are the private schools that hope to increase their enrollment by taking in students whose tuition is paid through these laundered tax dollars, with practically no strings attached. (And yes, I know that supporters say the schools have to meet lots of state requirements. That’s like saying lots of millionaires shop at Wal-Mart: It depends on a pretty forgiving interpretation of the word “lots.”)
And on the bottom level of the pyramid are the parents who show up at rallies to support the legislation. Many of them honestly believe their children need to attend private schools and honestly don’t understand why they should have to pay for those private schools themselves, since they (like those of us who don’t have children) are already paying for the public schools. Many of them would benefit modestly if at all from the bills that have been proposed in our Legislature, but they have faith that whatever comes first is just a first step.
But I had completely overlooked the most direct angle — at least in the scaled-down scholarship program that our Legislature passed last year, on a technically temporary basis, and reauthorized this year: South Carolina’s tax-diversion program is actually a money-making scheme.
For this understanding, I must thank David Slade, a business and personal finance columnist for Charleston’s Post and Courier, who explained the way it works in a piece titled “ S.C. tax rule creates a way to profit by funding private school scholarships.”
If Mr. Slade has a position on whether our state ought to be subsidizing private schools, he doesn’t let it show. The only opinion he gives about the tax law is that it’s “a bit complicated, and fiscally inefficient.” To which he adds, “But we taxpayers don’t make the rules; we just need to know what the tax rules are so we can make informed financial decisions.” (At least one scholarship-granting organization is promoting his column on its website.)
By Mr. Slade’s calculation, people can cut their tax bill by up to $1.42 for every dollar they donate to a scholarship-granting organization. Yes, you read that right: This law that was sold as a way to help needy children — in this case, children with special needs — gives investors a 42 percent return on investment. Here’s how he explains it:
A “donation to a qualifying scholarship funding organization is matched by a dollar-for-dollar South Carolina tax credit, but that donation is also a federally tax-deductible charitable contribution (even though you get all of the money back, as a state tax credit). Then, the federal tax deduction reduces your income that’s subject to South Carolina income tax, because the state’s income tax is based upon your federal tax return.
“So, every dollar donated reduces the donor’s South Carolina income tax bill by $1.07, assuming they are taxed at the state’s top rate. …
“Someone subjected to the (Alternative Minimum Tax) would save another 28 cents for every dollar donated, because the donation reduces the income to which the AMT would apply. And if that person is in what’s known as the AMT exemption phaseout, then the savings climb by another 7 cents on the dollar.”
By my reading, some donors could get even more than $1.42 back for every $1 they donate, because Mr. Slade notes that donations can be made with stocks, “which also can help some donors avoid federal capital gains tax.”
Not everyone gets that full benefit. But Mr. Slade reports one donor contributed $1.52 million last year, which he calculates netted a nice profit of between $100,000 and $638,000.
It is true, as many fiscal conservatives are quick to point out, that the government isn’t actually giving such people any money. It is simply reducing what it charges them.
Of course, what governments charge people for is the cost of living in a free society, with a carefully regulated monetary system that allows us to trade our work for money and our money for products, rather than having to deal with a barter system, and with police to protect us from having our cars stolen and courts to protect us from having our ideas stolen and highways to drive on and, yes, schools to educate all those children who otherwise would turn into hoodlums and kill us for our kidneys.
It’s also true that when someone’s tax bill is reduced, one of two things happens: Either the rest of us pay higher taxes to compensate, or else we all receive fewer services from the government than we otherwise would have.
So one way of looking at this is to say that $1 given to a scholarship-granting organization doesn’t just reduce the money available to pay for the public schools by $1; it can reduce it by up to $1.42.
Another way of looking at it is that giving someone a tax break has the same effect on the rest of us as giving someone food stamps or Medicaid services or any other welfare payments. In that sense, this profit-from-your-donations law is sort of like collecting food stamps for dead people — except that it’s perfectly legal.
Ms. Scoppe can be reached at email@example.com or at (803) 771-8571. Follow her on Twitter @CindiScoppe.