A proposed federal rule could discourage donations to two highly popular Georgia tax credit programs that support struggling rural hospitals and parents who want to send their children to private schools.
The proposed rule by the U.S. Treasury Department and Internal Revenue Service would limit or eliminate the federal tax break donors get for giving to such state programs.
The rule comes at a crucial time for the two Georgia programs.
The General Assembly this year raised the annual tax credit limit for donors to the private school scholarship program from $58 million to $100 million. And advocates for rural hospitals were planning to push the General Assembly in 2019 to increase the dollar-for-dollar state tax credit for donating to their program from $60 million a year to $100 million.
“It’s a big deal for us,” said Jimmy Lewis, the CEO of HomeTown Health, which advocates for rural hospitals. “The rule is designed to stop states from circumventing limits on state and local tax deductions. We are part of the unintended consequences, but it’s a real unintended consequence.”
New York Gov. Andrew Cuomo has already threatened legal action against the proposal, according to The New York Times.
The proposed rule is a response to how states reacted to a provision in last year’s tax law that set a $10,000-a-year cap on how much Americans can deduct on their federal return for state and local taxes they paid.
Some high-tax states, such as New York, passed laws setting up charitable funds for state services and awarded tax credits for donations to those funds. The move was aimed at preserving a higher federal tax deduction for residents of those states because a charitable deduction is not subject to the cap.
A tax credit directly reduces the taxes someone owes the state.
The proposed rule would largely exclude donations that are essentially refunded with state tax credits from being deducted on federal tax returns as a charitable contribution.
“You have some states that are trying to game the system by getting money for state services by calling it a donation,” said state Rep. Chuck Martin, R-Alpharetta, a director with the tax services business Ryan. “What they have done is broken the system for rural hospital tax credits.”
The change will have no impact on many Georgians because they don’t itemize their deductions when they file their tax returns.
“For about 90 percent of people who are just claiming the standard deduction, this (rule) isn’t going to have any impact at all,” said Carl Davis, the research director with the Institute on Taxation and Economic Policy in Washington.
Davis co-wrote a paper last year that said high-income earners were using tax credit programs such as Georgia’s to turn a “profit.” They reduced their federal tax burden by taking a charitable deduction for the money they contributed, which they got back on their state taxes through the credit. It’s something taxpayers using the standard deduction can’t do, he said.
If the rule goes into effect, only those who are willing to contribute without getting ahead financially will continue doing so, he said. “It’s going to weed out the opportunists.”
Martin said most people aren’t giving to things such as the rural hospital program or student scholarship organizations to get a tax break. They believe in the cause, and many if not most will give, whether they get the federal tax break or not, he said.
But the American Federation for Children, which advocates for vouchers and other “school choice” initiatives, opposes the proposed rule, saying it will “harm” tax credit scholarship programs.
“This will reduce charitable contributions to scholarship granting organizations,” John Schilling, the organization’s president, said in a statement.
He predicted accountants would tell their clients to stop donating to these groups “because of a reduced tax benefit,” reducing the number of scholarships available.
EdChoice, another school choice group, likened the IRS action to taking “a sledgehammer to a nail, overreaching in a way that will hurt children.”
Georgia is among a dozen states where taxpayers receive a full federal charitable deduction when they also get a state credit for donations to private schools, said the National Coalition for Public Education, which sees the proposed rule as a good thing. The advocacy group called the federal deduction a “subsidy for private schools that comes at the expense of public schools.”
The Georgia Supreme Court disagrees, ruling last year in a unanimous decision that said, in effect, that tax credits do not equate to an expenditure of public funds.
The General Assembly increased the amount of tax credits going to the private school scholarship programs during the 2018 session after several years during which the tax credits were spoken for on the first day they were made available. The same thing happened with the tax credits for rural hospitals this year.
Supporters of the rural hospital tax credit say there is a cause and effect when it comes to the amount of benefit donors receive. Two years ago, donors could get a state tax credit worth 70 percent of what they donated to the program. Because few contributed, lawmakers changed it to 90 percent, but the program didn’t hit the $60 million cap until legislators offered a dollar-for-dollar credit on taxes for money donated to the program.
“The only reason the rural hospital tax credit reached the statewide maximum this year is because the (federal) tax plan created a need for big wage earners to find a new deduction vehicle,” Howard Holman, a member of the foundation for Vidalia’s Meadows Regional Medical Center, wrote in an email to The Atlanta Journal-Constitution.
He said a chunk of the donations may dry up without the federal tax break.
Davis, the researcher director in Washington, said the proposed rule will likely see some changes after going through a 45-day comment period. He predicted that will happen around the beginning of tax season next year. Taxpayers who contributed earlier this year will be unaffected, he said, but federal officials sent a strong signal with this proposed change that “this loophole that has actually been described by some accountants as too good to be true may not be around much longer.”