The proposal seeks to create a New York State income tax credit equal to 90% (or in the case of Cuomo’s proposal, 75%) of an individual’s or corporation’s qualifying contributions to an ESO up to one million dollars. Although the tax is not refundable, it can be carried forward five years. New York’s credit is unique in that it allows even individuals to take advantage of it and apply it against their state income tax; in other states such as Florida and Pennsylvania, for the most part, only corporations can benefit. The implications of this distinction may play a significant role in how the EITC impacts yeshivas (discussed below).
Funding Yeshivas Through ESOs
The formation requirements for an ESO will play a critical role in determining which yeshivas ultimately benefit from the credit and to what degree. To illustrate the possibilities, let me offer two models of how ESOs may ultimately operate.
The first scenario is an ESO which provides scholarships benefiting students at a number of schools regardless of their religious or any other affiliation. Such a fund would most likely court New York corporations which are incentivized by the credit and would prefer to subsidize private school education rather than give the money to the state. Such groups are indifferent to what schools or families benefit from their donations. ESOs like these were formed in Florida and Pennsylvania where similar incentives exist (albeit just for corporations). These ESOs have developed standard scholarship criteria in which Jewish schools have benefited regardless of where the funding originated.
In this scenario, parents in our community may receive a tuition grant if they meet the criteria of one of these ESOs regardless of their current tuition arrangement and whether or not their particular community contributes to such a fund.
The alternative scenario is an ESO which caters to a very defined constituency and is funded almost exclusively by the community it serves. Since each ESO is required to provide scholarships to a minimum of only three schools, ESOs may elect to align themselves with the minimum required – all serving the same community. The reason for this is twofold. Although donations cannot be directed to benefit students at a specific school, an ESO which provides scholarships to only three schools would benefit any one of those three more than an ESO which provided scholarships to students at a greater number of schools (also remember ESOs have the ability to distribute to schools disproportionately).
In exchange, schools that have benefactors who are seeking to take advantage of the EITC would be incentivized to direct their benefactors to those ESOs of which the particular school would be a predominant beneficiary.
Community Impact: A Boon or a Boomerang?
To meet their costs, almost all Jewish schools rely significantly on general donations, many of which come from ordinary individuals who have a finite amount of charity to disperse each year. Undoubtedly, many of those donations will be re-channeled through ESOs where every dollar donated would not only subsidize the cost of Jewish education but simultaneously reduce the donors’ tax liabilities, thereby allowing them to give more without effecting their net disbursements.
While the exact implication of any credit varies based on a taxpayer’s unique circumstances, for illustration purposes, consider the following: Let’s assume I anticipate a New York State tax liability of approximately $10,000. Also, due to my steadfast commitment to Jewish education, I make a donation of $5,000 to a specific yeshiva of which I am particularly fond. The aggregate effect of satisfying my tax liability and my donation is to skim $15,000 off my bottom line (the $10,000 tax plus the $5,000 donation).