GOP Tax Loophole Allows Donors To Make A Profit From Their Donations

President Donald Trump signs the "Tax Cuts and Jobs Act" into law.Screengrab/Washington Post/YouTube

The loophole isn't new, but the Republican tax bill provides incentive for more wealthy people to take advantage of it.

An old loophole is getting renewed attention after the passing of the Republican tax bill. The scheme involves states that have implemented a "tax credit scholarship" or a "neovoucher" system, which allows individuals to donate to a special scholarship fund used for helping to pay tuition for private religious schools.

These systems were devised largely in response to the fact that regular state-sponsored vouchers could not be used toward religious schools and are currently implemented in 10 states.

One of the changes, according to the Institute on Taxation & Economic Policy, which advocates for a "fair and sustainable" tax system, allows far more wealthy donors in 10 states to turn a profit through "donations" to private school scholarships.

Yes, you read that right. If your income is high enough, you can actually make money by giving away money to support scholarships to private schools. The states affected by this provision are Alabama, Arizona, Georgia, Kansas, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina and Virginia.

How is this possible?

People who put money into those funds wouldn't just get a state tax deduction, which is usual for charitable contributions. They would get a state tax credit. For 65, 70, even 100 cents on the dollar. If it's 100 percent, that means every dollar you put into these scholarship funds is taken off your state tax bill.

Donors can then turn around and claim a federal charitable tax exemption on the same donation.

The new top federal income tax bracket is 37 percent. That means, in total, [a] donor could get back $1.37 million in exchange for $1 million, ITEP calculates. That is a better risk-free return on investment than you're likely to find anywhere.

NPR notes that although this loophole is not new, the tax bill creates new incentives for people to take advantage of it.

[T]he tax bill makes it bigger and more appealing to more people. That is because it puts a $10,000 cap on the state and local tax deduction, or SALT, from federal income taxes. The details are complicated, but basically, people whose state tax liability is higher than that $10,000 cap ... now has an incentive to donate to a scholarship fund if one exists in their state.

In the end, it could be public schools that pay the price:

If there is a rush to exploit this, and if nothing changes in the law, state budgets, including the money for public schools, could decline by as much as $40 million next year, says Davis. That money would go to private school tuition instead.