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State and Local Tax

Kentucky Supreme Court Affirms Educational Opportunity Credit is Unconstitutional

· 5 minute read

· 5 minute read

by Teresa Callahan

The Kentucky Supreme Court affirmed the lower court’s determination that the Educational Opportunity Account (EOA) credit is unconstitutional in violation of Kentucky Constitution §184, which prohibits the raising or collecting of any sum for education “other than in common [public] schools” unless the taxation question is submitted to and approved by the voters. (Commonwealth ex rel. Cameron v. Johnson, KY S.Ct., Dkt. No. 2021-SC-0518-TG, 12/15/2022.)

Educational Opportunity Act.

The EOA Program established by L. 2021, H563 (c. 167) codified as Ky. Rev. Stat. Ann. §141.522 authorized a private school tax credit program for contributions made to private school educational institutions called account granting organizations (AGOs) for the purpose of providing funding for qualifying educational expenses of eligible students who participate in the EOA Program. An EOA is an account to which funds are allocated by an AGO to the parent of an EOA student in order to pay for private school expenses. The credit could then be claimed against the individual income tax, corporation income tax, and limited liability entity tax. The Kentucky Department of Revenue suspended the program after the circuit court ruled the legislation establishing the program was unconstitutional, pending further judicial action.

Kentucky Supreme Court.

The Kentucky Supreme Court ruled that whether substantial tax credits eliminating or dramatically reducing a taxpayer’s debt to the state should be available to fund nonpublic schools is clearly a “question of taxation” under the language of §184. The income tax credit raises money for nonpublic education and its characterization as a tax credit rather than an appropriation is immaterial. Every dollar raised under the EOA program to fund the AGOs is raised by tax credits which diminish the tax revenue received to defray the necessary expenses of government, including public schools. The statute creates a system whereby any Kentucky taxpayers who want to fund EOAs can send their money up to $1 million to an AGO for use at nonpublic schools instead of paying a comparable amount, which they owe in Kentucky income taxes. While the Commonwealth may not be sending tax revenues directly to fund nonpublic school tuition (or other nonpublic school costs), under the EOA legislative scheme, it is raising a “sum… for education other than in common schools” by forgiving a taxpayer’s tax liability to the Commonwealth to the extent the taxpayer has contributed a preapproved amount to an AGO to fund an EOA account. Taxpayers, whether individuals or business entities, who otherwise owe state income tax can instead send that money to nonpublic schools via an AGO, reducing their tax liability and the state coffers by a corresponding amount. This diversion of owed tax liability monies is made possible by the significant amount of state resources employed to create and operate the EOA program. In the language of §184, the EOA program causes “sum[s]” to be “raised” for “education other than in common schools” and those sums are being raised through an elaborate structure, constructed and administered by Department of Revenue employees paid with tax dollars. Consequently, the court concluded that the EOA Act is unconstitutional.


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