New York’s Proposed Education Investment Tax Credit – And What It Means For Yeshiva Parents

With just two weeks before budget negotiations in Albany are slated to end, many in our community are waiting anxiously to see if the Education Investment Tax Credit (“EITC”) will be enacted as law. The bill was introduced by State Senators Marty Golden and Simcha Felder, among others, and promoted extensively by several Jewish advocacy groups. Since traditional vouchers are presumed to be unconstitutional in New York, the bill is designed to allocate state income tax credits to those entities and/or individuals that provide scholarships for use at private schools. While different versions of the EITC have been proposed, most of the details in this article come from the New York State Senate version of the bill, which the Senate passed in January; the bill has not yet passed in the Assembly. Also, while other states have similar programs, New York’s proposed law has some unique elements that have significant implications for yeshivas; I will address some of those differences here. The bill benefits public schools and private schools – and parents at each – and even parents who homeschool their children. For simplicity, I will focus here on the Educational Scholarship Organization (“ESO”) aspect of the bill, as the ESO is the primary vehicle through which yeshivas, and by extension, yeshiva parents and students, would benefit from the proposed tax credit. ESOs: A New Kind of Middleman According to the Senate bill, the state will allocate, for non-public schools, $75 million in tax credits for qualified contributions to Educational Scholarship Organizations in 2016. But individuals will not be allowed to donate directly to yeshivas and private schools. Rather, donors must donate to independent Education Scholarship Organizations. Under the current proposal, an Educational Scholarship Organization must be a not-for-profit organization that distributes at least 90% of the scholarship contributions it receives. In other words, the organization itself can retain up to 10% of the contributions it receives, potentially spawning an entire industry. The scholarships must be granted to qualified students at no fewer than three qualifi ed schools. All scholarships will be sent to the schools directly. But the bill does not require that each school associated with an ESO benefi t equally; rather, an ESO may determine within its charter how it distributes its funds. This is in contrast to Florida’s program which grants scholarships to students directly and allows them to decide at which school they will use it. ESOs must also apply to the Board of Regents to be authorized to grant donors a receipt necessary for obtaining the EITC credit. As part of the application process, they will have to present their criteria for granting scholarships. There are certain parameters: The legislation requires that students receiving scholarships reside in the state, and have household incomes under $500,000 ($250,000 under Governor Cuomo’s proposal, both adjusted for family size). All schools where scholarships are allocated must be not for profit and serve students at any level from pre-K through high school. Individual ESOs are free to create their own criteria regarding household income, student grades, etc., as long they satisfy these requirements. The grant awarded is entirely up to each ESO as well, except that it cannot exceed the school’s regular tuition minus other scholarships that have already been granted. Donors interested in receiving the credits must file a contribution certifi cate with the Department of Tax and Finance by January 31, 2016. The certificate includes the prospective donor’s name, intended contribution, and the ESO recipient. These certifi cates essentially function as an application from the donor, allowing the state to ensure that contributions under the program don’t exceed the $75 million credit allocation. In February of 2016, the Department of Tax and Finance will issue confi rmation letters in response to the contribution certifi cates, and donors can then contribute accordingly. If the sum of contribution certificates exceeds the allocated amount of credits, each certifi cate submission will be granted on a pro rata basis of the original request. The proposal seeks to create a New York State income tax credit equal to 90% (or in the case of Cuomo’s proposal, 75%) of an individual’s or corporation’s qualifying contributions to an ESO up to one million dollars. Although the tax is not refundable, it can be carried forward fi ve years. New York’s credit is unique in that it allows even individuals to take advantage of it and apply it against their state income tax; in other states such as Florida and Pennsylvania, for the most part, only corporations can benefi t. The implications of this distinction may play a signifi cant role in how the EITC impacts yeshivas (discussed below). Funding Yeshivas Through ESOs The formation requirements for an ESO will play a critical role in determining which yeshivas ultimately benefit from the credit and to what degree. To illustrate the possibilities, let me offer two models of how ESOs may ultimately operate. The first scenario is an ESO which provides scholarships benefi ting students at a number of schools regardless of their religious or any other affi liation. Such a fund would most likely court New York corporations which are incentivized by the credit and would prefer to subsidize private school education rather than give the money to the state. Such groups are indifferent to what schools or families benefit from their donations. ESOs like these were formed in Florida and Pennsylvania where similar incentives exist (albeit just for corporations). These ESOs have developed standard scholarship criteria in which Jewish schools have benefi ted regardless of where the funding originated. In this scenario, parents in our community may receive a tuition grant if they meet the criteria of one of these ESOs regardless of their current tuition arrangement and whether or not their particular community contributes to such a fund. The alternative scenario is an ESO which caters to a very defi ned constituency and is funded almost exclusively by the community it serves. Since each ESO is required to provide scholarships to a minimum of only three schools, ESOs may elect to align themselves with the minimum required – all serving the same community. The reason for this is twofold. Although donations cannot be directed to benefit students at a specifi c school, an ESO which provides scholarships to only three schools would benefit any one of those three more than an ESO which provided scholarships to students at a greater number of schools (also remember ESOs have the ability to distribute to schools disproportionately). In exchange, schools that have benefactors who are seeking to take advantage of the EITC would be incentivized to direct their benefactors to those ESOs of which the particular school would be a predominant beneficiary. Community Impact: A Boon or a Boomerang? To meet their costs, almost all Jewish schools rely signifi cantly on general donations, many of which come from ordinary individuals who have a finite amount of charity to disperse each year. Undoubtedly, many of those donations will be re-channeled through ESOs where every dollar donated would not only subsidize the cost of Jewish education but simultaneously reduce the donors’ tax liabilities, thereby allowing them to give more without effecting their net disbursements. While the exact implication of any credit varies based on a taxpayer’s unique circumstances, for illustration purposes, consider the following: Let’s assume I anticipate a New York State tax liability of approximately $10,000. Also, due to my steadfast commitment to Jewish education, I make a donation of $5,000 to a specific yeshiva of which I am particularly fond. The aggregate effect of satisfying my tax liability and my donation is to skim $15,000 off my bottom line (the $10,000 tax plus the $5,000 donation).

In contrast, once the proposed Tax Education Credit is enacted, the effect of an $11,100 donation to an ESO (assuming a 90% credit) would result in a near complete satisfaction of my state tax liability (90% credit of $11,100 is about $10,000) as well as a 122% increase in my support of Jewish education (from $5,000 to $11,100), all while shaving nearly $4,000 off my bottom line. It’s similar to participating in a matching campaign. Consequentially, this will compel schools to provide opportunities to their benefactors seeking the EITC, by aligning themselves with an ESO before another institution does. That’s all good – but the creation of ESOs that exclusively benefi t local yeshivas may have unintended implications for the Jewish community. For one, institutions like synagogues, kollels, and beis medrash programs may fi nd it harder to secure donations since their donors won’t benefi t from the EITC – these institutions will likely not qualify under the program. For schools that currently serve affl uent communities and rarely grant tuition assistance, another problem may arise. Since ESOs can only make distributions to supplement a student’s tuition, schools that currently grant minimal scholarships may be unable to tap into ESOs that were generously funded to benefit them. Assuming that schools will re-direct expected donations to affi liated ESOs, it is highly unlikely that an ESO collaborating with a school in this context would implement a scholarship criterion that allows students currently paying full tuition to obtain scholarships. Unfortunately, the alternative is for schools to raise tuition across the board enabling an affi liated ESO to then allocate scholarships to some of those who were previously paying full tuition. Since the bill allocates only $75 million in credits toward ESOs throughout the state for all ESOs in the first year, the portion of that directed to the Jewish community only will likely be too insignifi cant to result in the concerns discussed above. If the program grows, however, these could become real issues for both parents and institutions that don’t qualify for scholarships from ESOs. But as with anything else, where there is reward, there is also risk. While this bill’s immediate effect on our community may be uncertain, the precedent set by its passage would be monumental and could help create solutions that bring signifi cant tuition relief going forward. The community should strongly support the passage of this bill.