With complaints of high property taxes in NY, Gov. David Paterson has proposed limiting property tax increases to 4 percent per year. However, the plan has some politicians and voters worried that schools will no longer receive adequate funding. Another bill recently introduced in the NY legislature is meant to help schools avoid cutting their budgets. The Educational TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Incentives Act would provide a partial tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for donations to public education entities – school districts, specific public schools, or local education foundations – or private scholarship foundations (donations are already deductible for those who itemize, but a credit would be available to all taxpayers).
The tax credit, available to individuals as well as businesses and corporations, is designed to encourage donations to schools. It sounds straightforward, but the credit has some interesting effects worth pondering. First, the credit is essentially a matching program. The NY government promises to fund schools to the extent of X percent of every dollar that you give. For example, assume the credit was worth 25 percent of donations. That means that if you donate $100 your taxes will be reduced by a $25 credit. From an accounting perspective the school receives $100, but you only really pay $75 (your $100 donation minus the $25 credit you receive in return), with the additional $25 coming from the government. In effect, the NY government has matched one dollar for every three that you donated to fund the school.
But of course this matching money comes from other taxpayers. Tax credits are basically spending programs administered through the tax code, and someone must pay for them. When you pay less in taxes because of your credit, someone else must pay more. By claiming the tax credit, you are forcing other taxpayers to “donate” to schools a portion of what you donated (the Tax Foundation has written before on subsidizing charitable giving at the federal level).
The credit also brings up strange public policy questions. Essentially, NY wants to give a tax break for voluntarily paying extra taxes. Apparently educating children is not important enough to New Yorkers to fully fund through taxes. They must be bribed into donating. Why don’t they make all taxes voluntary and give a partial credit for donating? If you value the government service, you can help fund it. Otherwise, don’t worry about it. Obviously, this system would have some problems.
In addition, the plan may increase education inequality. Taxpayers can give to the school of their choice, and the individuals most likely to donate significant amounts are probably wealthy taxpayers living in wealthy neighborhoods who will give to schools that are relatively well-off. Of course this effect may be offset as businesses and corporations looking to help communities in need (and looking for some good PR) increase donations to more needy schools. There is no definite way to know what the effects would be, but it is worth considering.
All in all, a credit for voluntarily funding government services seems a little backward.
More on NY property taxes.
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