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Editorial: SC shouldn't entice more people to divert SC taxes to special interests

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The S.C. Legislature doesn't need to make it more enticing for taxpayers to divert their state income taxes away from general services to an unaccountable program to pay for private school. File/AP

South Carolina’s program to send special-needs children to private schools on the public dime was the camel’s nose under the tent.

The original idea was a convoluted plan to subsidize nearly all children whose parents wanted to flee the public schools, without stepping on a state constitutional provision that might prohibit vouchers.

Fortunately, lawmakers recognized that the primary beneficiary of such a program would be middlemen who created the “scholarship granting organizations” that it relied on and fly-by-night private schools it would invite into our state. So after years of failed efforts to sell their plan, supporters scaled back and settled for a much smaller program targeted at special-needs kids and with a limited budget — with the stated intention of one day expanding it to their dream program.

But after just two years, the Legislature had to shut down the private scholarship-granting organizations, at least one of which was playing fast and loose with the rules, and replace them with one controlled by the state, Exceptional SC.

Now less than five years later, the new program has run into financial problems, so it’s asking the Legislature to loosen the rules under which it operates. That’s a bad idea.

Before we explain why, we should explain how the program works. The people who run Exceptional SC call themselves fundraisers, but that’s a misnomer. What they run is a 100% legal money laundering operation. They convince people to “donate” money to the scholarship program in return for 100% tax credits. Not tax deductions, which allow you to recoup say 20% of your spending, but credits: If you donate $10,000 to the program, you can subtract $10,000 from your tax bill.

So the effect of the program is to allow people to divert their income tax payments away from public schools and the judicial system and the prisons and DHEC and other general programs that benefit the whole state and instead funnel the money straight into private schools that aren’t accountable to the public for their results.

And as The Post and Courier’s David Slade discovered in 2014, people who pay the federal alternative minimum tax don’t just break even off the deal. In addition to getting all of their “donation” back in a state income tax credit, they also get to deduct it from federal taxable income. And since South Carolina uses federal taxable income as a starting point, they reduce their S.C. taxes even more. So they can actually make money by “donating” to a program that is designed to entice parents to abandon the public schools.

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That alone is reason enough to dismantle the program, but unfortunately the Legislature never has seen fit to do that.

The good news is that fewer people are participating in the program, apparently as a result of Exceptional SC sticking to legal fundraising efforts and the Trump-era income tax cuts that made donations less attractive for all but the richest. Tax diversions are down so much that Exceptional SC exceeded its 2% statutory cap on allowable administrative costs, and had to lay off its director.

The bad news is that state lawmakers want to change a situation we ought to be celebrating. The House Ways and Means Committee voted 19-1 last month to liberalize the rules for the tax credits program: letting “donors” use their tax credits to wipe out 75% of their state income tax liability, up from 60% today, and letting them use their tax credits over four years instead of one.

H.3899 also would remove the Department of Revenue’s oversight of the program, eliminate a requirement that schools provide the Education Oversight Committee with test scores for students receiving scholarships and allow Exceptional SC to more than double, from 2% to 5%, the portion of revenue it can spend on administrative costs rather than scholarships.

Even if it made sense to encourage more people to divert their income tax payments away from programs that serve all South Carolinians, we can’t find any justification for reducing the already inadequate testing requirements (unlike public schools, which must administer specific state tests, schools receiving scholarship funds get to choose which tests to administer), for eliminating oversight from the state Revenue Department or for allowing the program — whose job is simply to hand out scholarships, on a first-come first-served basis — to divert even more money from those scholarships to overhead.

As Rep. Gilda Cobb-Hunter told us: “There have been so many challenges with this program. I don’t know how long we’re going to continue this experiment.”

Given the lopsided vote in the Ways and Means Committee, we don’t have a lot of hope that the House will decide it’s time to end the experiment.

But we hope senators will at least refuse to go along with reducing what little state oversight we have and making it more enticing for people to direct their taxes away from the public schools that will always have the responsibility for educating the overwhelming majority of South Carolina’s children.

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