School Choice Facts

Education Tax Credits and Deductions

Educational vouchers involve payments that parents may use to select schools for their children. Voucher programs exist in Milwaukee, Cleveland, Florida, Maine, and Vermont.

As described below, educational tax credits and tax deductions reduce taxes for parents who have incurred educational expenses.

Educational tax credits are a direct reduction in tax liability for educational expenditures such as tutoring, books, computers, and, in some states, private school tuition. State legislation determines the amount of credit and which educational expenses qualify. In some states, families with no tax liability may receive a refund for some or all of the amount spent on qualifying educational expenses.

Educational tax deductions allow for certain educational expenses to be deducted from taxable income prior to the calculation of tax liability. A tax deduction offsets a portion of the cost of qualifying educational expenses, depending on the percentage tax bracket an individual is in. A family with no tax liability will receive no benefits from this type of program.

Various education tax credits or deductions exist in Minnesota, Illinois, Iowa, Arizona, Florida, and Pennsylvania. The programs in Minnesota, Illinois, and Iowa offset parental education expenses for their own children. The Arizona program provides a tax credit for donations to a school tuition organization and for contributing to public schools for extracurricular activities. Florida offers state tax credits for contributions to nonprofit scholarship funding organizations, but these contributions must be made by corporations, not individuals. Likewise, Pennsylvania awards tax credits to businesses that make contributions to scholarship organizations or educational improvement organizations.

ARIZONA

Since 1998, Arizona taxpayers who donate to a school tuition organization (STO) of their choice receive a dollar-for-dollar tax credit up to a maximum of $625. STOs are nonprofit organizations required by law to allocate at least 90 percent of their revenue to scholarships or grants for students to attend private schools. STOs are permitted to choose the schools for which they provide scholarships and are free to decide which students receive scholarships and in what amounts. Parents, in turn, choose the STO to which they will apply to for assistance, based on the schools the STO serves. Because the STOs set their own parameters, the size of scholarships varies. Arizona taxpayers may also claim up to $200 (matched dollar-for-dollar by the state) for donations to public schools.

Arizona’s tuition tax credit program is governed by Title 43-1089 and 43-1089.01 of the Arizona Statutes.

FLORIDA

The Florida Corporate Income Tax Credit Scholarship Program has been in effect since January 2002. It provides dollar-for-dollar Florida corporate income tax credits to businesses that make contributions to nonprofit organizations that give scholarships of up to $3,500 to low-income students. Corporations may contribute up to 75 percent of the amount of their tax due. Contributions are capped at $5 million to any single scholarship funding organization and there is now an $88 million overall annual cap.

The Florida Corporate Income Tax Credit Scholarship Program is governed by Section 220.187 of the Florida Statutes.

ILLINOIS

The Illinois tuition tax credit program, enacted in 1999, gives families a maximum tax break of $500 to cover education expenses from any private or public school. Families get a 25 percent credit for education expenses that exceed $250, but a family must spend $2,250 to get the $500 maximum credit.

The Illinois tuition tax credit program is governed by Chapter 35 Section 201(m) of the Illinois Compiled Statutes.

IOWA

In Iowa, parents may count up to 25 percent of the first $1,000 of tuition and book expenses toward a tax credit or an itemized deduction of up to $250. Some form of tax credit has been in effect in the state since 1987.

The Iowa tax credit is governed by Section 422.12 of the Iowa Code.

MINNESOTA

Minnesota’s income tax features both an education tax credit and a deduction program. The deduction has been in effect since 1955 and allows parents earning more than $37,500 to subtract from their taxable income up to $1,625 per qualifying child in grades K-6, and $2,500 for a qualifying child in grades 7-12. The education tax credit, which first took effect in 1998, is available to families earning less than $37,500 and is worth up to $1,000 per child and $2,000 per family. The credit is limited to 75 percent of the taxpayer’s qualifying expenses. This means that for each dollar spent on a qualifying educational expense for a qualifying child, taxpayers receive 75 cents as a tax credit on their income tax return. While the deduction lowers taxable income, the education credit reduces state income tax liability or increases a taxpayer’s refund.

The Minnesota education credit is governed by the Minnesota Statutes, section 290.0674.

PENNSYLVANIA

Pennsylvania established the Educational Improvement Tax Credits (EITC) in 2001. The EITC gives tax credits to businesses that contribute to scholarship organizations or towards educational improvement organization in public schools. Pennsylvania’s tax credit is for 75% of a corporation’s contribution of up to $200,000, or 90% of their contribution, if they contribute for more than one year. Total tax credits authorized for both the scholarship and educational improvement programs credits are limited annually to $40 million — $26.7 million for the scholarship program and $13.3 million for educational improvement. Credits are awarded to participating businesses on a first come, first served basis until the cap is hit.

Act 4 of the 2001 amended the Pennsylvania Public School Code to provide for the establishment of the EITC.

CONSTITUTIONALITY

A variety of state and federal courts have sustained the constitutionality of educational tax credit and deductions programs.

Arizona — In Kotterman v. Killlian, 972 P.2d 606 (Ariz.), cert. denied, 528 U.S. 921 (1999), the Arizona Supreme Court upheld as constitutional Arizona’s state income tax credit for donations made to scholarship-granting organizations. The Court held that the credit violated neither the federal Establishment Clause nor the state constitution’s Blaine Amendment prohibiting appropriations to sectarian institutions. The U.S. Supreme court declined to review the decision.

Illinois — In Griffith v. Bower, 319 Ill. App. 3d 993 (5th Dist.), app. denied, 195 Ill. 2d 577 (2001), and Toney v. Bower, 318 Ill. App. 3d 1194 (4th Dist.), app. denied, 195 Ill. 2d 573 (2001), two different panels of the Illinois court of appeals upheld the constitutionality of Illinois state income tax credit for educational expenses, and the Illinois Supreme Court declined to review the decisions. Opponents of the credits challenged them as violating the federal Establishment Clause and the state constitution’s Blaine Amendment prohibiting appropriations to religious schools, as well as its language prohibiting compelled support for churches and religious institutions.

Minnesota — In Mueller v. Allen, 463 U.S. 388 (1983), the U.S. Supreme Court upheld as constitutional Minnesota’s state income tax deduction for educational expenses, including tuition for private schools. The statute was challenged as violating the federal Establishment Clause because the deductions could be used for tuition paid to religious schools as well as non-religious schools.

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