After veto, tax-credit backers hope for compromise

Stacy Wescoe//June 20, 2019

After veto, tax-credit backers hope for compromise

Stacy Wescoe//June 20, 2019

Pennsylvania Capitol Building (File photo) –

State lawmakers are pushing to expand a program giving tax breaks to companies that donate to nonprofit educational and scholarship organizations, including private schools.

But the governor is pushing back. This month he vetoed a bill that would have expanded the popular program, known as the Educational Improvement Tax Credit program, arguing that the state couldn’t afford the loss of revenue when it was struggling to fund the basics for public school education.

The bill would have expanded the amount of credits per year from $110 million to $210 million, and usher in future increases. Gov. Tom Wolf estimated that the bill would have cost the state $650 million over the next five years.

Loss for a ‘win-win’

Many Pennsylvania companies tap into the tax-credit program, often known by the acronym EITC. It was enacted under former Gov. Tom Ridge.

Under the program, companies donate to nonprofit programs that provide scholarships or to educational improvement organizations, which include private and parochial schools.

Businesses apply for credits, which reduce their state taxes, and the applications are approved as they come in until the limit is reached. That means not all applications are approved.

A business can donate up to $750,000 per year under the program – but only if there are enough credits available.

Still, supporters call the program a “win-win” for corporate donors and the recipients of their donations, and say they hope elected officials can reach a compromise so the program can grow.

Kevin Schmidt, president and CEO of Neffs National Bank in North Whitehall Township, said donations made through the EITC program can help pick up where public education falls short.

“A lot of things just aren’t getting funded by the state budget,” he said. “There are educational foundations out there that are looking for additional funding.”

While there are nuances to how the tax-credit program works, the most common application is for a two-year commitment to donate to a program.

At that level a company get a 90 percent tax credit on the value its donation.

New Tripoli Bank, for example, has made two-year commitments to make $100,000 annual contributions to the Northwestern Lehigh Educational Foundation for the past 10 years.

“The foundation comes to us with ideas and projects outside the normal district programing,” said David Hunsicker, CEO of New Tripoli Bank in New Tripoli.

One recent projects involved buying computers and establishing an IT lab for the school district.

The bank, in turn, earns a $90,000 tax credit on its state tax bill.

So there is an advantage to a business, but at the same time Hunsicker noted, the $100,000 donation represents money the school district didn’t have to find in its own budget.

“I think any dollar you spend on education is well spent,” he said.

Donation decline?

The role of the tax credit in spurring donations is unclear.

Anthony Deutsch, a CPA and shareholder at Concannon Miller in Bethlehem, said he was unsure how many businesses would forgo education-related donations in the absence of the tax credit.

Some might still give, while others may give to different charities or to charities in states with more generous incentives.

Regardless, he said, it also boosts the efforts of companies that already are giving.

“It does give us a bigger bang for our buck when we’re donating to these organizations,” Deutsch said.

Nonetheless, he said, the bang is not quite as big as it used to be as a result of the 2017 Tax Cuts and Jobs Act. The law changed the way companies can claim donations.

Under previous law, Deutsch said, a company making a $10,000 donation would get a $9,000 credit on its Pennsylvania taxes, but it could claim the entire $10,000 as a charitable donation deduction on its federal return.

Now on its federal return, a company can only claim the $1,000 it didn’t get as a Pennsylvania deduction.

Still, even without the added federal benefit, Deutsch said most of his clients who had been participating in the EITC program have continued to do so.

But, he said the program benefits businesses and an expansion would allow more businesses to participate.

Deutsch believes there are enough companies and educational organizations interested in the program to justify an increase.

Hunsicker said New Tripoli Bank is looking at expanding its participation in the EITC program. It has opened a branch in the East Penn School District and would like to make donations there like it has done in Northwestern Lehigh.

What’s next?

The fate of the proposed expansion could be decided during negotiations over a budget for the next fiscal year, which starts July 1. The legislature does not have a two-thirds majority to override Wolf’s veto so it would have to work with the governor to get a bill signed.

Two of Wolf’s main sticking points – besides the cost of the program – were the income limits on scholarship recipients and the program’s accountability.

The bill would have raised the household income limit for scholarship recipients from $85,000 to $95,000. Wolf said that would further distance the program from the low-income children for whom it was designed.

He said he also wants more information provided to the state on where the money is going and the outcomes.

“The EITC lacks proper accountability and oversight, and little is known about the educational outcomes of students participating in the program due to a reporting loophole in the current law,” Wolf said in a statement accompanying his veto. “Even less is known about the scholarship organizations that retain up to 20 percent of each dollar that is supposed to pass through them.”