Editorial: ‘Scholarship’ program is a scam, should be terminated

WE NEVER THOUGHT it was a good idea for the state to give dollar-for-dollar tax credits to people who donate money to “scholarship-granting organizations” that dole the money out to students of their choosing.

Although supporters like to say this allows private donations, the fact is that a tax credit allows donors to give money to their favorite cause instead of paying their taxes. That means the rest of us either pay higher taxes or (as is the case in South Carolina) receive less in government services. And that means taxpayers absolutely are paying for these “scholarships.”

It always seemed to us that if legislators really wanted to help children “escape” from failing public schools, as the “scholarships” organizations claimed they wanted to do, they ought to … improve those public schools And if lawmakers insisted on paying parents to take their children out of the public schools — which they should not do — at least they should do it directly, by subsidizing the private education of poor children.

But the defund-the-public-schools people who have been at work in our state for more than a decade insisted on these Rube Goldberg contraptions, and since they got a toe in the door in 2013 with “scholarships” for special-needs children, we’ve come to understand why.

First, we learned that wealthy donors can actually make money by donating to “scholarship-granting organizations.” The Post and Courier reported back in 2014 that on top of the dollar-for-dollar tax credit on their S.C. taxes, donors get a federal tax deduction for the donations, which lowers their federal taxes, and that federal tax deduction lowers their S.C. taxable income even more. So donors in the right income tax brackets who know the tricks can get $1.42 back in tax relief for every $1 they donate to one of these organizations. Seriously.

That same year, The State’s Jamie Self discovered that the largest “scholarship-granting organization” in South Carolina, Palmetto Kids First Scholarship Program, was encouraging parents of special-needs children to donate to its scholarship program with the implied promise that they would receive scholarships. Since parents would receive tax credits for their donations, they might be able to make even more money off of the deal, because they would receive a scholarship equal to their donation, and also be able to claim a state tax credit and a federal tax deduction for that donation.

Fortunately, although the wealthy-donors scheme is still alive and well, the state Revenue Department has worked to shut down the scheme to let parents receive a tax credit for participating in what is essentially a money-laundering operation.

As Ms. Self reported earlier this month, a Revenue Department audit found that all 60 parents who donated to Palmetto Kids First in 2014 and requested a scholarship received one. The agency determined that this arrangement constituted a quid pro quo and violated state law, so it refused to give tax credits to the parents who received a scholarship from the organization to which they had donated. And for that, we applaud the agency.

Unfortunately, rather than kicking Palmetto Kids First out of the scholarship program, as it could have, the agency worked out an agreement whereby the group essentially promised to stop breaking the law — without, of course, admitting that it ever broke the law.

The Revenue Department’s audit comes as Palmetto Kids First and its allies in the defund-the-public-schools movement argue that the Legislature needs to expand the program from $12 million a year in tax credits to $25 million. That is, they want the taxpayers to double the amount of money we provide for them to launder.

Seriously.

The Legislature needs to reject attempts to expand the program, at least until it can be operated for a few years without gross abuse of the sort that the Revenue Department uncovered.

Better still, the Legislature ought to shut down this program and make sure children can get the education they need in the public schools — as the state constitution requires. If lawmakers decide it’s more efficient to pay for private education for certain special-needs children, they need to provide scholarships directly, without the middlemen who take their 5 percent cut, and without inviting the money-making scheme the program provides for the savviest “donors.”

This story was originally published April 27, 2016 at 1:29 PM with the headline "Editorial: ‘Scholarship’ program is a scam, should be terminated."