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F I S C A L I M P A C T R E P O R T

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

1/20/06

HB

SHORT TITLE Private School Scholarship Tax Credits

SB 238

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(5,000.0)

(10,000.0)

(10,000.0) Recurring General Fund

See narrative for detail

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Public Education Department (PED)

Educate NM (ENM)

Responses Received From

Taxation and Revenue Department (TRD)

Public Education Department (PED)

SUMMARY

Synopsis of Bill

Senate Bill 238 adds a section to the Income Tax Act to create a “school tuition tax credit.” This

credit allows a taxpayer to claim a credit up to $500 to an organization designated by the Internal

Revenue Service (IRS) as a charitable organization that allocates 90 percent of its annual revenue

for educational scholarships or grants for students to attend private elementary and secondary

schools in NM. The credit can be applied to either personal income tax or corporate income tax.

FISCAL IMPLICATIONS

TRD:

This estimate is an approximation because statistics that would allow an accurate estimate do

not appear to be available. Statistics on the National Center for Education Statistics web site

suggest 20.3 percent of American households made contributions to educational institutions

Senate Bill 238 – Page

2

in 1995 averaging $318 per contribution. This amount has probably grown substantially over

the past decade, but probably includes contributions to higher education institutions. Assum-

ing 20 percent of New Mexico's approximately 730,000 households (i.e.,140,000) make con-

tributions averaging $200 per household and claim the proposed credits suggest a total of ap-

proximately $30 million in credits would be provided by the proposed program. The New

Mexico Public Education Department web site lists a total of 215 non-public elementary and

secondary schools in New Mexico with a total enrollment of approximately 30,000 students.

If it is assumed that 15,000 households, or parents of half the total number of enrolled stu-

dents, claim credits averaging $500 the proposed program, the resulting credit total would be

$7.5 million. This figure is probably closer to the amount of credits that would be claimed

than the $30 million estimate. As a point of comparison, I.R.S. data on charitable contribu-

tions indicate that contributions to educational institutions comprise approximately 4% of to-

tal itemized deductions each year. Approximately $3 billion in total itemized deductions are

reported each year in New Mexico. 4% of this amount is $120 million. Thus, the estimate

assumes that a small proportion of total itemized deductions will be converted to credits un-

der the proposal.

According to testimony before the Revenue Stabilization and Tax Policy Interim Committee,

Educate New Mexico estimated that 7,000 children have applied to their organization for just

430 scholarships. Educate NM is currently the only non-profit organization that provides schol-

arships for private school assistance to low income families. Using their data on donations, the

FY06 impact is estimated to be $125 thousand and $250 thousand for FY07 and subsequent

years.

SIGNIFICANT ISSUES

There is considerable debate going on about whether governments (state, local, federal) should

use taxpayer money to support private educational institutions which compete with taxpayer fi-

nanced public education institutions. A credit against income tax is considered a tax expenditure

in that, while it is not a direct payment from the state to the taxpayer, the taxpayer reduces the

amount of tax paid to the state.

It should be noted that contributions to charitable organizations already are tax deductible under

federal and state income tax law.

Public Education Department:

Because the bill does not restrict the availability of the credit if the 501(c) (3) charitable or-

ganization primarily supports private religious schools, the state may find itself indirectly

supporting private religious schools by permitting corporate and individual taxpayers to take

this credit. This implicates the Establishment Clause (1st Amendment) of the federal Consti-

tution. There is a three-prong test for determining Establishment Clause violations which

were laid down by the Supreme Court in Lemon v. Kurtz, 403 U.S. 602 (1971). But see:

- Zelman v. Simmons-Harris, 536 U.S. 639 (2002) (The Supreme Court upheld an Estab-

lishment Clause challenge against an Ohio pilot scholarship program that sought to give aid

primarily to families below the poverty line with children an a failing school district so they

could choose to either attend another public or private school, receive tutorial assistance, en-

roll in a magnet school or receive a scholarship.)

Senate Bill 238 – Page

3

- Walz v. Tax Commission of the City of New York, 397 U.S. 664 (1970)(The Supreme

Court upheld the city’s granting of property tax exemptions to religious organizations for

properties used solely for religious worship, which was authorized by the state constitution

and the implementing statute providing for tax exemptions for property used exclusively for

religious, educational or charitable purposes.)

- Mueller v. Allen, 463 U.S. 388 (1983)(The Supreme Court upheld a Minnesota law that al-

lowed state taxpayers, in computing their state income tax, to deduct expenses incurred in

providing "tuition, textbooks and transportation" for their children attending an elementary or

secondary school and was challenged on the basis that it violated the Establishment Clause.)

- Committee for Public Education & Religious Liberty v. Nyquist, 413 U.S. 756 (1973)(“The

system of providing income tax benefits to parents of children attending New York's nonpub-

lic schools also violates the Establishment Clause because, like the tuition reimbursement

program, it is not sufficiently restricted to assure that it will not have the impermissible effect

of advancing the sectarian activities of religious schools.”)(emphasis added)

- Byrne v. Public Funds for Public Schools of New Jersey, 442 U.S. 907 (1979)(The Su-

preme Court summarily affirmed a lower federal court holding that a state tax deduction for

taxpayers with children attending nonpublic school violated the Establishment Clause.)

- Franchise Tax Board of California v. United Americans for Public Schools, 419 U.S. 890

(1974)(The Court summarily affirmed a lower federal court judgment that struck down a

state statute proving income-tax reduction for taxpayers sending children to nonpublic

schools.)

- Hibbs v. Winn, 542 U.S. 88, #02-1809 (2004)(Despite the federal Tax Injunction Act that

prohibits federal courts from restraining the implementation of state tax laws, the Supreme

Court here allowed Arizona taxpayers to proceed, on the basis of violation of the Establish-

ment Clause, in a suit seeking to enjoin the operation of an Arizona tax law that authorizes an

income tax credit for payments to nonprofit “state tuition organizations” that awards scholar-

ships to students in private elementary/secondary schools including those attending religious-

based schools.)

ADMINISTRATIVE IMPLICATIONS

If, as a condition of claiming the tax credit, verification of private school accreditation status is

required, the Public Education Department would experience administrative impact.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

Taxpayers who seek an income tax credit for contributing to a charitable organization that con-

tributes to scholarships to attend a private elementary or secondary school in New Mexico will

not be entitled to such income tax credit.

NF/nt:yr