State Sen. Brandt Hershman, R-Buck Creek, didn’t mince words during a public hearing on tax issues last month.
“I hate this credit,” he said bluntly.
He was talking about the state college contribution tax credit, which rewards Hoosiers who donate money to Indiana colleges and universities. Hershman authored Senate Bill 309, legislation that—as introduced—would have eliminated the credit, which costs the state $8.5 million a year in lost revenue but can save taxpayers up to $100 each or $200 per couple.
Statewide, more than 86,000 people claimed the credit in 2013, the last year for which numbers are available.
Hershman says the credit is just not worth the cost. To no surprise, university folks don’t agree.
John Grew, a former legislative staffer who now lobbies for Indiana University, told the Senate Tax and Fiscal Policy Committee (which Hershman chairs) that the credit encourages younger graduates and those with lower incomes to donate to their schools.
“Private giving is—as a source of revenue—increasingly important for Indiana University and its sister institutions,” Grew said. “For IU, it has helped maintain affordability by increasing financial aid.”
The credit allows Hoosiers to reduce their taxable liability—essentially the amount they have to pay—by half the amount they’ve given to colleges, up to that $100 per person limit. So a donor who gives $200 to his alma mater would get a tax credit worth $100. Because of the cap, a donor who gives $1,000 can also claim only $100.
That’s why Hershman doesn’t think the credit is particularly successful. The cap means the credit doesn’t encourage big donations, only smaller ones. Those who want to make a $10,000 donation aren’t likely to be moved by a $100 credit, he said.
But college officials say those big donors start as small ones. The credit “helps to develop a habit of giving among our alums,” said Mary Ellen Hamer, vice president of Independent Colleges of Indiana, a group that represents 31 private, not-for-profit schools.
The proposal to eliminate the college tax credit was part of a larger legislative effort to streamline the state’s system of tax incentives. A few years ago, the General Assembly ordered the Legislative Services Agency to analyze all the state’s tax credits and deductions on a rolling schedule with a goal of determining whether the incentives were effective.
LSA’s 2015 report included information about the college credit. Hershman pointed to that report as evidence the credit is not useful. But the report is actually far more nuanced.
“Research suggests that reducing the price of giving may encourage people to give more to charities,” the report says in its conclusion. “This suggests that the college credit could be encouraging donations that would not have otherwise occurred.”
In fact, the study found that more than 15,500 of the people who claimed the credit earned less than $50,000 a year. Another 25,000 or so who claimed the credit earned $50,000 to $100,000. That could back the university officials’ claims that the credit encourages early giving.
But the report’s conclusion also says the cap means the credit is “less likely to attract large donations to Indiana institutions of higher education.” In fact, it determined that a federal charitable tax deduction actually does far more to encourage big donations.
Consider this: A higher-income couple who donates $10,000 to a university would get a state tax credit of only $200 but a federal tax cut of $3,500, according to LSA.
For Hershman, that’s plenty of evidence the state credit isn’t necessary.
Still, eliminating any incentive for college giving is not a popular move at the Legislature. So it was no surprise when senators stripped SB 309 of the provision to eliminate the credit.
Sen. John Broden, D-South Bend, offered the amendment, saying the credit is “fortunately not a huge drain” on the state’s $30 billion, two-year budget, but “does provide for significant philanthropic” giving to colleges.
Hershman, who knew he was about to be out-voted, even encouraged senators to approve the amendment.
But Hershman isn’t going away—and neither is the issue.
“It’s never easy to do this,” he told his colleagues. But “you’re going to see me again on this subject next year.”•
Lesley Weidenbener covered the Statehouse for two decades. She is now IBJ’s managing editor.