IRS considering rule change that could impact Catholic schools

Thousands of low income families receiving aid may struggle to afford tuition if proposal affecting STO donors is enacted

By Dan Russo

Witness Editor

DUBUQUE — The Internal Revenue Service (IRS) is proposing a rule change that would impact about 30 percent of the student population in the Catholic Schools of the Archdiocese of Dubuque, as well as thousands of others attending nonpublic schools  in Iowa and other states.

The alteration being considered, which was announced publicly Aug. 23, would reduce School Tuition Organization (STOs) donation deductibility on federal tax returns for individuals who itemize their deductions. This could make it harder for STOs to raise charitable donations, which, in turn, could mean less tuition aid available for low income families.

“It’s a result of the new tax law,” explained Kim Hermsen, superintendent of schools for the Archdiocese of Dubuque. “There are some states trying to find work arounds. There’s really an unintended consequence.”

In 2017, Congress passed the Tax Cuts and Jobs Act, under which itemizers can deduct $10,000 in state income and property taxes. Although the law included an increase in child tax credits, the reduction in the state and local tax deduction (known as SALT) proved to be a disadvantage for some “high tax”  states. In response, these states reclassified some of their taxes as charitable donations, which provoked the proposed counter measure from the IRS, according to officials.

“It appears the IRS is trying to fix a loop hole in some states,” said Hermsen. “They were making it retroactive.”

This broad fix unfortunately included STO donations, which are now 100 percent deductible on federal tax returns.

“Essentially, (under the proposed rule change) deductibility is going down by 65 percent,” said Jeff Schneider, assistant development director for the archdiocese.

The period for official public comment to the IRS and Treasury Department closed Oct. 11, but the proposal would not actually go into effect until after a public hearing in November. As a result, school choice advocates, like Tom Chapman, executive director of  the Iowa Catholic Conference (ICC), are now urging citizens to contact their legislators in the hopes that lawmakers would push for an exception for STOS from the rule change.

“We are asking people to contact their members of Congress and are working with Iowa Alliance for Choice in Education (ACE) on personal contacts with the members of Congress and their staff members,” said Chapman.

Trish Wilger, Iowa ACE’s executive director expressed why her organization is joining the ICC in opposing the proposal.

“Decreasing the federal deductibility for an STO donation from 100 percent to 35 percent could cause donors to reduce their donation amount or not donate to an STO at all,” said Wilger. “If STOs can’t raise funds because of this regulation, they won’t be able to give out as much in tuition grants, and fewer children will be served. STOs were created to help lower-income and working-class families, not to circumvent the newly-enacted cap on SALT deductions.  If STOs are not excepted from this regulation it is children who will suffer; we can’t sit back and let that happen.”

History of STOs

STOs were enacted in Iowa about 10 years ago as a way for private donors to support nonpublic schools. The bipartisan legislation carved out state tax credits for the people and businesses that donate. Under existing IRS rules, STO donations are 100 percent deductible. Each STO  gets a limited amount of tax credits and must raise money by Dec. 31 each year. Donations are then distributed to students whose family income falls at or below 300 percent of the federal poverty line.  A total of 10,752 students in Iowa benefited from STO grants during the 17-18 school year. There are 12 STOs operating in the state.

In the Archdiocese of Dubuque, the STO has the ability to raise up to about $5.2 million dollars per year under current regulations.

“This (IRS rule change) has the potential to impact 3,200 kids just in our archdiocese,” said Jeff Henderson, director of development for the archdiocese. “That’s a lot of kids. And this is about helping those families being able to send their child to the school of their choice regardless of income.”   

The IRS change would affect the amount many could afford to give and how they may chose to give to make the most of their charity, according to Hermsen.

“People give to our STO first and foremost for the love of Catholic education,” said Hermsen. “But many people have limited charitable dollars.”

The Response

After hearing that the proposed rule change would be retroactive, and thus impact any donations given after a date in late August, Hermsen and other archdiocesan staff went into overdrive contacting hundreds of STO donors in a short time. Over just a few days, they received over $2 million for the STO.

“We decided we were going to send an e-blast to all STO donors from the past three years who had not given yet, and then we were going to try to call as many donors as we could,” said Schneider.

Hermsen also contacted elected officials and has received a response from some, including Iowa Senator Charles Grassley (R). He sent a letter to her Oct. 4.

“The proposed regulations treat the state tax credit provided to the tax payer as a thing of value provided in return for their contribution,” explained Grassley. “Thus the tax payer’s federal charitable deduction must generally be reduced by the state tax benefit received dollar-for-dollar.”

Grassley said he is supportive of school choice initiatives, but he also supports the proposed rule change.

“I believe that parents should have the ultimate say in what is best for their children and I generally support increased parental choice in education,” wrote Grassley. “At the same time, it is important that Treasury and the IRS put in place effective regulations to prohibit states from taking actions intended to undermine federal tax laws.”

The IRS is allowed to change certain rules without having to go to Congress to change legislation because of guidelines set forth in the Supreme Court’s 1984 Chev­ron U.S.A. v. NRDC decision. After the November public hearing, if the IRS decides to go ahead with the change, it could take effect soon, even before the end of the year. Archdiocesan officials are prepared to go forward with the STO’s mission regardless of what happens, but are asking for prayers and letters to be sent. Some advocates, like Wilger, remain optimistic an STO exception to the rule could be made.

“The IRS has heard great opposition from Iowa and other states with STO programs about this,” she said. “Hopefully they will see that the STO program should not be swept into this regulation meant to curtail questionable activity by other states.”

For guidance on how to contact legislators, Chapman recommended people ­visit: