Release: Individuals, Not Corporations, Pick Up the Tax Tab for EITC Scholarships, New Analysis Finds

HARRISBURG, PA (June 26, 2012) — A state program billed as providing corporate contributions to private and religious school scholarships receives $9 out of every $10 from state taxpayers, according to a new analysis from the Pennsylvania Budget and Policy Center.

Pennsylvania’s Educational Improvement Tax Credit (EITC) allows businesses to recover 75 percent to 90 percent of the cost of contributing to approved scholarship organizations while also claiming state and federal charitable tax deductions on the donation. Altogether, it amounts to a triple dip tax break for corporations that substantially reduces, or in some cases erases, the cost of contributions.

This shifts more of the costs of public education and other services onto individual taxpayers at a time when resources are already stretched thin.

“The EITC is being sold as a corporate contribution program, but participating businesses have little skin in the game,” said Sharon Ward, director of the Pennsylvania Budget and Policy Center. “It diverts taxpayer funds from public schools with predictable results — class sizes increase, full-day kindergarten programs end and our economy suffers.”

The EITC program provides a tax credit to corporations that donate to organizations giving scholarships to private and religious schools and pre-kindergarten programs and to non-profit organizations that offer programs to public school students.

A company giving the maximum $300,000 annual EITC contribution for two years pays $20 per year out of pocket, PBPC researchers found. Corporations that contribute to qualified pre-kindergarten scholarships (which come with a higher tax credit) can actually receive money back from the taxpayers after all deductions are taken.

State lawmakers are considering a plan as part of the final budget that would increase spending on the EITC scholarship program by $25 million and create the Educational Improvement Scholarship Program (EISC) at an additional cost of $200 million by 2014-15. The proposal will also make tax credits available on business contributions of up to $750,000 by 2013-14 – more than double the current $300,000 cap.

The EITC was established to provide an alternative to public schools for students in poor and low performing districts, but income requirements have risen over time so families with earnings up to $72,000 a year (or more in some cases) are eligible. Concern that the EITC no longer serves its primary mission has prompted lawmakers to propose the EISC.

PBPC researchers found there is a lack of public accountability in the EITC program. A 2005 state law prevents the state from collecting anything but minimum information on the scholarships and does not require scholarship organizations to provide expenditure or outcomes data.

A Legislative Budget and Finance Committee study in 2009 found that some organizations receiving funds through the EITC for “Educational Innovation Programs” did not meet the law’s requirements.

Additionally, current law only requires EITC organizations to spend 80 percent of donations on program activities, allowing up to 20 percent to be spent on administration. Similar programs in Arizona, Florida, and Georgia cap administrative costs at 3 percent to 10 percent.

Before agreeing to any expansion of the program, PBPC recommends that lawmakers:

  • Reduce the credit amount from 75% or 90% to 50% to reduce the burden on the taxpayer and ensure contributing companies have some skin in the game;
  • Make the program accountable and transparent by reporting data on companies receiving the credits, and monitoring the outcomes of students receiving scholarships; and
  • Fix the flaws in the EITC program, better targeting funds to low-income students in low performing schools, rather than creating a second, duplicative scholarship program.

“The Legislature should not direct more tax dollars to private and religious schools at a time when public school funding is being cut, or without first making needed reforms to this scholarship program,” Ward said.

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