How the New Tax Law Could Remake K-12 Philanthropy—And Speed Privatization of Schools

photo:  rSnapshotPhotos/shutterstock

photo:  rSnapshotPhotos/shutterstock

Around the United States, local schools are mainly funded by state and local property taxes. In some places, especially affluent suburbs, property taxes are the main funding source for public schools. These local school levies can be extraordinarily high—over $20,000 for many homeowners in states like New York and New Jersey.

Yet as of January 1, taxpayers will only be able to deduct $10,000 in state and local taxes. Upper-middle households will take a major hit thanks to this change and, over time, the higher tax burden imposed by the new law is likely to exert downward pressure on state and local education spending.

But according to a recent New York Times article, some experts believe that the charitable tax break could offer a way to reduce the harm inflicted by the new tax law. “Kirk Stark, a law professor at the University of California, Los Angeles, has suggested that states encourage residents to donate money to their state governments, then let the governments credit those donations against their state income taxes. Such donations would qualify as charitable donations, which are still fully deductible on federal taxes.” In theory, the same strategy could be used at the local level.

There are a lot of questions about how Stark’s proposal might work and whether it would be legal. But the basic idea is hardly far-fetched, especially at the local level. Already, many public schools are supported by private education foundations that raise billions of dollars from residents and businesses. In the city where I live, Santa Monica, the local education foundation channeled $3.2 million to public schools in a recent year. This money mainly funded art and music programs, as well as teachers’ aides—the kind of things that have become perks in many school systems.

Contributions to the local education foundation in Santa Monica are voluntary, but all parents face pressure to contribute a suggested amount every year. There are nearly 700 local education foundations in California, and probably over 5,000 nationwide, although reliable numbers are hard to come by.

In other words, a robust infrastructure already exists in many places to take in charitable contributions to fund local public schools and then to use that money to pay for teachers, supplies and other needs. Education foundations have long drawn criticism for creating new inequities between school districts and representing a creeping privatization of K-12 systems.

But it may be that we haven't seen anything yet, and that these private charitable institutions could explode in size, reach and influence in coming years. There are big incentives for residents in high-tax communities to finance more local school costs through tax-deductible contributions to these foundations while reducing reliance on non-deductible property taxes.

It’s hard to say exactly how such a privatization of school spending would work, since charitable contributions are voluntary. But you can bet that a lot of state and local leaders will be focusing on this challenge, along with how to fund other government services through charitable gifts.

You can imagine a scenario whereby places like Scarsdale, New York, have municipal foundations that fund schools, parks, and other services. Residents who contribute would have full access to everything as “supporters.” Those who don’t would have sharply restricted access to the town’s public goods.

Already, many suburbs resemble private clubs in that you need to be able to afford a single-family home and high property taxes to enjoy such amenities as good schools and lush parks. It’s conceivable that the new tax law could really turn these places into private nonprofit clubs.