As tax credits grow, so does the waitlist

A growing number of companies cannot take advantage of one of Pennsylvania’s most popular tax-credit programs.

  • That is one of the findings of a new report on the state’s Educational Tax Credit program, or ETC, which offers millions of dollars in corporate tax credits per year.
  • The report is from the Independent Fiscal Office, a state budgeting agency, which also raised other concerns about the ETC program.
  • Under the program, which was created in 2001, companies donate money to private schools and educational nonprofits, which use the funding to offer scholarships to students.

What’s the problem: The waitlist for credits grew by 70% over the last five years, according to the 47-page report from the fiscal office.

  • The list got longer even as more credits were available: $280 million in the most recent fiscal year, up from $150 million in the 2015-2016 fiscal year.
  • Among the reasons: an early application period that allows donor companies to renew their commitments before the program opens to other potential donors.
  • “Because credits are awarded on a first-come, first-served basis, new firms are effectively excluded from the program and current participants are the primary beneficiaries when credit allocations increase,” according to the fiscal office.
  • In addition, fewer businesses are getting credits. More than 3,150 businesses made the cut-off in 2015-16. By 2019-20, the number was just under 2,700.
  • The biggest drop came in the Educational Opportunity Scholarship Tax Credit, a portion of the program designed to help low-income students in poorly performing school districts.
  • The number of donor companies fell from 831 in 2015-16 to 487 in 2019-20.

Is there a solution: The office recommended ending the early application period but also suggested taking a closer look at the value of the tax credits.

  • Under current law, for example, companies can deduct 90% of their contributions if they commit to two years of funding under a portion of the program known as the Educational Improvement Tax Credit, or EITC.
  • The deduction is 75% for a one-year commitment.
  • “Would the same amount of contributions occur if the credit were awarded at a rate of 80%, 75% or 60% of contributions?” the fiscal office asked.

Are there other concerns: Yes. They center on whether the tax credits assist students who need the most help.

  • In Pennsylvania, for example, scholarships are available to families earning 500% of the federal poverty level for a family of four.
  • In other states with similar programs, the income threshold is lower, according to the fiscal office
  • The office also noted Pennsylvania’s more generous set-aside. Schools and nonprofits can keep 20% of their EITC donations for administrative purposes. 
  • In other states, the limit is 5% to 10%. 

What’s the remedy: The fiscal office urged more accountability and more data collection to gauge the program’s effectiveness.

  • The report noted that the law does not allow for collection of data on student performance and demographics.
  • “Across states, Pennsylvania has one of the largest tax credits, but collects and publishes the least amount of outcome data,” the fiscal office wrote.
  • In addition, the office called for eliminating caps on scholarships offered through the Educational Opportunity Scholarship Tax Credit.

What’s next: The only significant changes to the program over the last two decades have involved raising the limit on tax credits.

  • In fact, efforts are afoot in the state legislature to automatically bump up the credit limit under certain conditions.
  • Under a bill moving through the state Senate, the limit would jump 25% if at least 90% of credits had been claimed in the prior year.
  • Nonetheless, the Wolf administration plans to introduce legislation next month that would boost accountability for the ETC program and ensure scholarship organizations use more of their donations for students, according to administration spokesperson Elizabeth Rementer.

-by Joel Berg, editor of biznewsPA


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