Education tax credit balloons; max is high compared to other credits

A significantly more girthy tax credit for education will be in the mix in Montana courtesy of the 2021 Legislature and likely Gov. Greg Gianforte.

Some 16 other tax credits will be wiped off the books, according to a fiscal review.

Sen. Greg Hertz, R-Polson, said Montana has had far too many tax credits, and his Senate Bill 399 eliminates a series of them. For example, a Montana Department of Revenue report notes just 21 people claimed an alternative fuel credit and 14 claimed dependent care credit in 2019.

“How many people are really using these?” Hertz said. “So we decided to keep those more popular credits.”

The same Department of Revenue report counted 29 tax credits in the Treasure State compared to 25 in North Dakota and 16 in Idaho. (The report notes Wyoming and South Dakota have none, but they don’t have income tax either.)

The ballooning of the education tax credit took heat this session.

It’s going from a maximum of $150 to $200,000, arguably one of the biggest wins for proponents of “school choice.” Supporters of private schools said it was hard to raise money for student scholarships at $150 a pop, but opponents pointed out only the richest people and corporations could take advantage of the increase.

The credit goes to two separate programs, private scholarships and innovative programs in public schools. Both are offered at 100 percent, so every dollar a taxpayer donates is one less dollar that person has to pay to the state in owed taxes.

“I just think long term, it’s going to have challenges,” said Sen. Janet Ellis, D-Helena, in a committee hearing.

Ellis had requested a look at other tax credits from the Department of Revenue to see how the one for education compares. A memo the DOR provided notes nine other credits are offered at 100 percent.

Their maximums are much lower than $200,000. A couple of the credits offered at 100 percent are limited to $1,000, such as for an elderly homeowner/renter tax and also for adoption. Two max out at $1,500, including for alternative energy systems. The biggest dollar-for-dollar tax credit currently on the books is a $20,000 one for mineral exploration.

Sen. Jill Cohenour, D-East Helena, earlier argued that even though a single credit might not be widely used, it may be meaningful to people who do use it, such as the adoption tax credit, which is helpful to the child and to families. The DOR noted 138 claims in 2019 of that credit.

Pat Barkey, with the Bureau of Business and Economic Research at the University of Montana, said of all the levers the state offers, the one-for-one tax credit is turbocharged because it’s a straight reduction of money owed.

Generally, he said credits complicate the tax system. However, they allow policymakers to fiscally support their priorities via a “tax expenditure.” So the credits do cost the state revenue.

“But you are not exactly writing a check from the state for money,” Barkey said.

Whether a tax credit is good policy depends on a person’s opinion of how it’s used, he said: “Is the money put to more productive use for what the credit is incenting versus what it would be doing in supporting the general activities of state government?”

According to a legislative fiscal review of Hertz’s bill, the credits slated to go away include ones for adoption, college, dependent care, and alternative energy, among others. In addition to ensuring credits are used well, Hertz said his philosophy is that they should be designed to encourage or change behavior.

“And once that behavior is changed, then it’s time to repeal that tax credit,” he said.

Hertz also said it’s important to look at the tax credits the federal government offers. If the feds offer a tax credit that’s much bigger than the one the state offers for the same thing, he said, the state credit isn’t actually creating an incentive. He puts alternative energy in that category.

With its cap and escalator clause, the credit for education will cost the state $2 million in 2022, $4 million the following year, and $4.8 million in 2024, if contributions hit their maximums for both programs, public and private. The increase on the credit limit came out of House Bill 279, which the governor is expected to sign.

Although he believes the state has had too many tax credits, Hertz said the larger amount for the education credit makes sense to him because it helps disadvantaged students.

“If there’s generous taxpayers out there who really want to help our young students and our public schools, why not allow them to give a large amount of money to help our schools?” Hertz said. “To me, it just makes sense.”

According to the Department of Revenue, a donor can’t just choose to give money to any nonprofit. Donors wanting to support public programs give money to the Office of Public Instruction. Those wanting to support private scholarships give money to a charitable organization that, according to the bill, puts not less than 90 percent of its donation revenue to scholarships.