Bill would bump cap on tax credit from $150 to $200K

Does credit support ‘educational freedom’? Or create a ‘tax shelter’?

By: - February 9, 2021 5:26 pm

(Illustration by Getty Images)

The cap on a couple of tax credits for donations to education would make a big jump – from $150 to $200,000 with a one-to-one credit for the donor – if a “school choice” bill passes muster with the Montana Legislature. 

“School choice” programs use public support for a variety of private education. Scheduled for a hearing Wednesday, House Bill 279 would push up the cap for tax credits for student scholarships toward private schools and also for “supplemental funding to public schools for innovative educational programs and technology deficiencies.”

Supporters of “school choice” argue public money should follow students whether a family seeks public or private education. Detractors argue the programs chip away at the general fund, and as such, at public K-12 education. House Bill 279 fits squarely in the ongoing national debate about school choice and public education.

In Montana, such proposals were expected.

Last summer, the U.S. Supreme Court’s decision in Espinoza v. Montana Department of Revenue opened the door to such legislation. Montana Family Foundation President Jeff Laszloffy could not be reached for this story, but he predicted the outcome for the state last year.

“We expect that, as a result of today’s decision, many more school choice bills will be introduced in the next session of the Montana Legislature,” wrote Laszloffy in June 2020. “When options in education become numerous, kids win, parents win and taxpayers win.”

But the hit to state coffers — and general fund taxpayers — could be significant. At the $150 cap, the credit for the scholarship has cost Montana $31,829 a year at most since it began in 2016, according to a report from the Montana Department of Revenue. With the raised cap and an escalator clause that pushes up the total possible credits for all donors, the credit at maximum capacity could cost $22 million over the course of five years for the scholarship program alone, the Montana Budget and Policy Center confirmed — possibly $44 million if both programs hit capacity every year before they terminate in 2026.

(The Montana Budget and Policy Center noted the totals for each year will vary because credits can carry forward. Sponsor Rep. Seth Berglee, R-Joliet, did not return requests for comment on the bill, and a fiscal note has been requested but had not been posted as of Tuesday afternoon.)

Amanda Curtis, president of the Montana Federation of Public Employees, said legislators indeed are bringing not just one “school choice” bill but an entire package of such legislation. Together, she said, the bills could have deep consequences for children and for Montana’s responsibility to provide for their education.

“When you look at that whole mess of bills, they are absolutely defunding public education and diverting the dollars to private, religious and home schools,” Curtis said. “And there’s no argument against it. That is failing to meet their constitutional obligation to fund a quality education for every Montana kid. And it’s setting up tax havens for rich people like (Gov. Greg) Gianforte.”


A bill in 2015 launched the school tax credit programs in Montana. When Kalispell parent Kendra Espinoza couldn’t access the scholarship program to send her children to a private religious school, she took the Department of Revenue to court.

The Montana Supreme Court ruled the state’s tax credit program was unconstitutional because the DOR excluded religious schools. It shut down the program. The U.S. Supreme Court, however, said states don’t have to support private education, but if they do, they can’t exclude religious schools.

“… The Court’s ruling doesn’t end this battle (for school choice); it simply marks the beginning of a new stage in the fight for the right of all parents to choose the most appropriate education for their children,” wrote Espinoza in a Dec. 2020 toolkit about how to design these credits. “Now that the case stands as the law of the land, it’s up to state leaders — governors and legislators alike — from across the country to take advantage of this historic legal decision by enacting legislation that makes religious liberty and school choice a reality for millions of families like mine.”

As a U.S. representative prior to being elected governor in November 2020, Gianforte had signed an amicus brief in support of Espinoza. 

The bill appears to check all the boxes for supporters of school choice. Jason Bedrick, director of policy for EdChoice and previous analyst for the Cato Institute’s Center for Educational Freedom, produced the toolkit for designing tax credit scholarship policies. Among other recommendations, the “Earning Full Credit” toolkit calls for as close to a 100 percent credit on contributions as possible; in other words, if a donor makes a $100 contribution, EdChoice recommends the donor get a $100 tax credit, as HB279 proposes. It also calls for an “escalator clause” that automatically raises the cap on the total credits allowed by the state. (In Montana, according to the bill draft, the total for each program would be $3 million the first year, and if the aggregate amount hits at least 80 percent of $3 million in a year, the cap would bump up by 20 percent the following year; the formula would repeat until the program sunsets, with a value of as much as $6.22 million in the final year.)

The toolkit also calls for the avoidance of single, standardized tests. As drafted, HB279 would remove a requirement that participating schools administer standardized tests; it also would eliminate a requirement that, for 8th-graders and 11th-graders, results be made public.

Martin Lueken, director of fiscal research and education center for EdChoice, said taxpayers end up saving money because state expenditures on K-12 end up going down. EdChoice has a mission to “advance educational freedom” in the tradition of Milton Friedman. 

Here’s a key basic fact about education choice programs: the average per-student public cost to support educational choice programs is about $5,000 compared to $14,000 for public K–12 in states where choice programs operate,” Lueken wrote in an email. “This funding gap is like a 60% markdown for states to educate its students via choice programs. Because of that gap, savings accrue to taxpayers and school districts when students leave the public school system to participate in a choice program.”

Generally, he argued it costs less to educate fewer students in the public schools.

“To the extent that revenue for those leaving students do not decline by the full per-pupil amount, then the district will end up with more resources for the fewer students who choose to remain in district schools,” he said.


But the bill has raised numerous concerns, general ones and ones specific to Montana.

Carl Davis, research director at the Institute on Taxation and Economic Policy, said the bill as designed could create a “tax shelter” for wealthy individuals and businesses. ITEP is a tax policy research organization that advances “prosperity for all.”

Typically, the way policymakers encourage people to contribute to a cause takes the form in tax policy of a charitable deduction, Davis said. Montana has one, he said, and donors earn a deduction worth up to 6.9 cents on the dollar; if they donate $1,000, they can deduct that amount from their taxable income and avoid paying $69 in tax on that portion of their income. A $1,000 donation saves them $69 in state tax.

This program is different.

“The difference here is when you donate a dollar, you’re getting a full dollar back in tax credits,” Davis said. So under the scholarship credit, the savings on a $1,000 donation would be $1,000 instead of $69. “… Ultimately, the real source of funds here is going to be the state budget.”

The tax shelter comes into play if people claim the credit in Montana, and then take advantage of the amount on their federal tax returns.

“If you manage to maneuver your way into an extra tax cut on your federal tax return, then you’ve turned a profit for yourself,” Davis said. (He said the extra federal tax cut typically had been a federal charitable donation, but the IRS brought an end to that practice. “Today, the extra federal tax cut might be capital gains tax avoidance or a business expense deduction.”)

To avoid the tax shelter scheme, he said the credit should be limited to 63 cents on the dollar; businesses would get back the full 63 from the state, and they’d get back 37 percent in a federal business expense deduction, but it would be much more difficult to flip a donation into a value higher than 100 percent.

“If the credit percentage was brought down under 63, that would largely deny a tax shelter opportunity for businesses in this case,” Davis said.

Donors can get tax credits for many other causes. Davis said there’s much variation, but conservation credits and other programs might hover around 50 percent or less of the amount donated. In Montana, he said there’s a 10 percent college contribution credit and a 40 percent credit on contributions to qualified endowments. 

“Those are generous incentives, but they’re not so large that they’ll drive aggressive tax avoidance,” Davis said. “If you contribute to one of those programs, you’ll actually see money come out of your own pocket. Put another way, you need to have some genuine interest in the cause.

“That’s not the case with the scholarship credit because the state is picking up the entire tab,” Davis said.

He pointed to the 20 percent escalator clause as problematic as well: “The budget overall isn’t growing at nearly that rate.”


The legislation raises issues that are particular to the Treasure State as well.

Curtis, with the Montana Federation of Public Employees, noted many of Montana’s schools are small, and it costs the same to teach a class of five children as it does 20. The teacher isn’t paid any less, she said, and the school still needs to turn on the lights and the heat.

“It really does stand to draw funding away from smaller schools in a way that is more harmful to them than maybe the bigger schools,” Curtis said.

In an analysis of tuition tax credits, the Montana Budget and Policy Center also pointed to rural communities as ones that don’t stand to gain should the bill be signed into law. 

“More than half of Montana’s 56 counties do not have any private schools, and two-thirds of the private schools in Montana are located in the seven counties with the largest population centers in the state,” said the report. “Similarly, private school options simply do not exist for most American Indian and Alaska Native students.”

The elimination of testing requirements is of particular concern in Montana as well, said Lance Melton, head of the Montana School Boards Association. Public schools must show they are spending public funds wisely, and he said Montana does well. Graduation rates are above the national average, for example, and Montana educates students at less cost, $1,742 less per student compared to the national average, or $266 million for 155,000 students every year. 

“We are tasked with proving the performance of our students over and over again,” Melton said. “And I don’t begrudge that … in fact, it’s something we embrace.”

So far, Melton said educators have been pleased with Gov. Gianforte’s priority on K-12 spending. Last month, Gianforte was sworn in as the first Republican governor in Montana in 16 years, and the Montana Legislature kicked off its 2021 session.

But Melton questioned the timing of HB279, a proposal to “exponentially increase this (credit)” even as lawmakers talk about reining in the costs of government.

He also questioned the premise of “school choice” legislation in general; he said such bills often start with “a misinformed perception that there’s something fundamentally wrong with our public schools.” As related bills percolate in the legislature, Melton said last week he anticipated testimony on both sides of the issue would gain steam.

“We’re going to turn to that debate rather soon.”

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Keila Szpaller
Keila Szpaller

Keila Szpaller is deputy editor of the Daily Montanan and covers education. Before joining States Newsroom Montana, she served as city editor of the Missoulian, the largest news outlet in western Montana.