EITC: A Tax Scam in Sheep’s Clothing

greedypersonIn 2001, the Pennsylvania legislature created the Educational Improvement Tax Credit Program (EITC) in order to encourage companies to donate money to private schools. This program – little known and even less understood – expanded over the years to the point where it has distorted an act of charitable generosity into a accounting trick stealing money from the public treasury and actually paying schools only a fraction of the money lost.

While Pennsylvania’s legislature is unable to agree on a budget, EITC has grown into a bonanza for those willing to game the tax system. Here is how it works: A profitable company or a group of high-income tax payers have a total annual income of $22 million. Normally, Pennsylvania would tax this income at a rate of 3.07%, yielding $675,000 per year to help fund all the needs of our commonwealth including the most underfunded public schools.

However, under this law, the company could commit itself (over the next two years) to “generously” donate $750,000 per year to their favorite education school or scholarship fund. They are then able to use 90% of the value of their donation (i.e. $675,000) as a credit against their obligations to support the needs of our tax. This completely offsets their state obligation!

If we stopped our calculations at this point it would be bad enough. The group or company would be taking $675,000 from the coffers of the state at a net cost of only $75,000 to themselves. This money wouldn’t necessarily go to meet the state’s educational priorities with a public school system plagued with crumbling infrastructure. Instead it would go to whatever elite private institution was lucky enough to have benefactors with such large tax bills which they need to offset, and the tax/legal-savvy to form the fictive corporations necessary to exploit this fiscal loophole.

Yes, we should give more money to schools, but money should go to schools according to their need, not according to the luck of the draw and the whims of the elite. This credit is only available to the wealthiest citizens and corporations. Accordingly, low-income Pennsylvanians pay the full 3.08% state income tax while their high-income counterparts can offset all or most of their tax obligation.

The government should strive to make the best use of its revenue. Call your State Representative and State Senator and tell them to end this insane system of Orwellian accounting which rewards self-interested manipulation in the name of so-called charity.

Full disclosure: I personally benefit from EITC with my donations to Jewish schools. While I oppose the concept, it is currently legal though capped at $75 million. I rationalize my participation in this program arguing that the money will go to an elite school to the benefit of some high-income taxpayer whether I participate or not, so why not me and the schools I support. Meanwhile, I am calling for an end to EITC in Pennsylvania.