A proposal to provide tax credits equal to 100% of charitable contributions to certain nonprofit organizations that distribute donations in the form of vouchers or reduced tuition fees for private K-12 schools would create a capital gains tax shelter for the wealthy, according to a tax policy researcher.
The ECCA.
The proposal is reflected in companion bills proposed by House and Senate Republicans late January, titled the Educational Choice for Children Act (ECCA). The House bill was introduced by Representative Adrian Smith (R-NE), and Senator Bill Cassidy (R-LA) introduced its Senate counterpart.
As explained by the Institute on Taxation and Economic Policy (ITEP) Research Director Carl Davis in a March 18 report providing revenue estimates for the ECCA, the bill would provide “full reimbursement” in the form of tax credits to individuals and corporations making contributions to Scholarship Granting Organizations (SGOs).
The credits would not be refundable but individuals could carry them forward for five years. ECCA credit claims cannot be combined with the Code Sec. 170 charitable deduction. For individuals, the credit limit is the greater of $5,000 or 10% of adjusted gross income, while tax credits claimed by corporations could not exceed 5% of taxable income
Revenue estimates.
The bill would create a pool of $10 billion in credits available on a first-come, first-served basis. This amount would increase annually by 5%. Because of this yearly increase to the program, ITEP estimated that “these credits would reduce federal tax revenues by $10 billion in 2026 and by $125.8 billion over the next 10 years,” Davis reported.
While most of the revenue losses come directly from the annual cost of the program itself, “donors would also be able to reduce their taxes further by avoiding capital gains tax on contributions of appreciated stock,” explained Davis. ITEP determined that “this form of tax avoidance would reduce federal revenues by an additional $469 million in 2026 and by $8.2 billion over the next 10 years.”
Davis expects the incentive would “be a highly sought-after tax shelter” easily accessible to wealthy individuals, which would be the “the primary driver of donor interest.”
Tax shelter for the wealthy.
In a separate ITEP report released the same day, Davis discussed the capital gains implications of the bill. Under the ECCA, a donor could make contributions using “marketable securities” like corporate stock.
The report used an example of an individual with a $4 million profit from an increase to the value of purchased stock. In the example, the taxpayer bought the stock at $6 million and it is now valued at $10 million. Instead of selling the stock at the long-term capital gains tax rate of 23.8%, Davis said an advisor would recommend contributing the stock to an SGO.
“Claiming an ECCA tax credit would result in the same pre-tax return as selling the stock (receipt of a $10 million tax credit rather than a $10 million cash payout),” according to Davis. “But it would not incur [a] $1.14 million income tax bill,” he added. “This taxpayer therefore sees a higher after-tax return, or profit, from choosing to give away their stock under ECCA rather than sell their stock.”
Davis described the proposal as a “classic example” of a tax shelter. He said the bill would use the opportunity for “tax avoidance to motivate wealthy families to act as middlemen in moving public funds into private schools.”
Organizations weigh in.
On February 3, a group of organizations led by the American Federation for Children and the Invest in Education Coalition sent a joint letter to congressional party leaders. The letter had asked for the ECCA to be included in a fiscal 2025 budget reconciliation bill.
“Importantly, the ECCA is a tax bill that does not require any new federal money and does not reduce any current appropriations for K-12 education,” the letter read. “Taxpayers cannot profit from these voluntary contributions and their net income does not change, as they are merely directing part of their tax liability to help families choose the best school fit for their children.”
Another group, the Consortium for Constituents with Disabilities (CCD) Education Task Force, opposed the ECCA’s inclusion in “any legislative package,” according to a letter sent March 10 to party leaders of the House Education and Workforce Committee.
The CCD task force said the bill diverts tax dollars “directly to private and religious schools and away from local school districts.” Private schools “are not required to adhere to federal education and civil rights laws,” and the tax system should not “fund scholarships (aka vouchers),” the group said.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
