Editor’s note: An earlier version of the story stated that none of the state’s scholarship providers work with public districts. Two of the seven will, with one sending students to two Alabama public schools in the previous school year.

With changes made by the federal tax overhaul, high-income taxpayers have been on a search for ways to make up the major decrease in deductions that can be claimed. The Alabama Accountability Act appears to be one answer.

Passed into law in 2013, legislators set a cap of $30 million, up from the $25 million for two years, that can be donated under the AAA. In 2017, the cap wasn’t hit until the last day of the year and in the previous years, the cap wasn’t hit at all.

But in 2018, that cap was hit by March 1, six times faster than the year before. Warren Callaway, executive director of Scholarships for Kids, one of the largest AAA scholarship providers serving Alabama, and Frank Miles of the Department of Revenue said this was because of the federal overhaul.

Similarly, in Arizona, the $89.16 million cap on the its tuition tax credit program was met in a matter of minutes, according to the Jewish Tuition Organization of Greater Phoenix, one of the state’s scholarship providers.

Ads promoting lucrative tax benefits of donating under the act have been circulated throughout the state, as well as in many of the 17 other states with similar tuition tax credit programs, said Carl Davis, research director of the Institute on Taxation and Economic Policy, a non-profit, non-partisan research organization.

The price tag for such programs has been more than $1 billion of state tax dollars throughout the country being directed to private schools each year, rather than to public schools and other services. And, with the changes by the overhaul in December 2017, the tax cut for donors to the AAA are even greater — a fact that scholarship granting organizations funded through those tax credits are actively sharing and promoting to donors.

President Donald Trump displays the $1.5 trillion tax overhaul package he had just signed in the Oval Office of the White House in Washington on Dec. 22, 2017.(Photo: Evan Vucci, AP)

For example, the Alabama Opportunity Scholarship Fund, one of the state’s seven Scholarship Granting Organizations, writes on its website’s donor page that with the new tax laws, “… news and research organizations as diverse as The New York Times, The Washington Post and the Tax Foundation point out that taxpayers now have even more incentive to donate to a qualified scholarship-granting organization such as the Alabama Opportunity Scholarship Fund.”

In other states, the advertisements have been even bolder. Pay It Forward Scholarships, which accepted roughly $1.4 million in donations in Georgia in 2017, explains to donors: “You will end with more money than when you started, and you will be helping students receive a good education.”

The graphic shows the difference between a charitable tax deduction and a tax credit like a donor receives through the Alabama Accountability Act.(Photo: Contributed by the AASA, The School Superintendents Association and ITEP)

The particular change that is impacting these programs is the cap on state and local tax deductions, known as SALT deductions. Previously, there was no limit on the amount of SALT that taxpayers could claim as a federal tax deduction. With the overhaul, they now can claim just $10,000.

To make up for that loss, taxpayers are scrambling for other means to boost their deductions. With a donation to the AAA, taxpayers gain a dollar-for-dollar tax credit on their SALT, up to $50,000, and can then claim their donation as a federal tax deduction as well. The result is a tax cut greater than the actual donation.

“Accountants and private schools in Alabama and around the country have really embraced these tax credits as a federal tax shelter,” Davis said, adding that, “It is a savvy financial decision, but it has little to do with actual charity.”

The process of these tuition tax credit programs, Davis said, is strange because, “You almost never see charitable donation incentives this large outside of the private school realm.”

The graphic shows how the donations to the Alabama Accountability Act benefit donors.(Photo: Contributed by the AASA, The School Superintendents Association and ITEP)

Generally, he said, charitable deductions only offset part of the cost of donating. A high-income person making a $100 donation to a nonprofit might get $37 back on their federal forms and $5 back on their state forms and the other $58 would come out of the donor’s pocket. While under the AAA, a donor’s full donation is subtracted from his/her state income tax liability, leaving the state to “foot the bill in its entirety, in the form of reduced revenue collections.” And if the taxpayer receives a federal deduction as well, a $100 donation under the AAA can lead to more than $100 in tax cuts.

Like Alabama, most of the tuition tax credit programs allow taxpayers to receive both a state and federal deduction for their donations, thus receiving a higher deduction than the donation itself. Florida and Illinois are exceptions, where lawmakers have taken steps to prevent this.

Referring to the act as a loophole, U.S. Rep. Terri A. Sewell (D-Selma) has introduced a bill, known as the Public Funds for Public Schools Act, that would prevent taxpayers from “double dipping.”

“Especially when you have a crunch on public education funding, by allowing this kind of money to be diverted, then allowing wealthy donors to double dip like this, is putting the wrong incentive in place,” Sewell said.

The chances of the bill making it to the president’s desk, however, are slim.

Davis said the IRS has claimed that it will propose regulations this summer in relation to state charitable tax credits, because of new credits in New York and elsewhere that it views as problematic. It is unclear if or how those regulations could impact tuition tax credits, he said, adding that if the IRS plans to make changes in New York, it should also look at Alabama.

Regulation changes will be important to Alabama taxpayers, he said, because if the IRS makes them this summer, it will impact how the donations are treated at filing time.

According to the IRS, there were 3,180 households in Alabama that earned more than $1 million in income in 2015. The average income for these 3,180 households was $2,572,059.

Based on Davis' calculations, if nothing is changed, the “worst-case scenario” is that donations totaling $30 million under the AAA could trigger $41 million in combined state and federal tax cuts. This means that, rather than making a financial sacrifice, donors would walk away with an $11 million gain for themselves.

“Unless the IRS does something about this," Davis said, "this is really just free money to anyone who has a high enough income and is getting good tax advice.”

Call Montgomery Advertiser reporter Krista Johnson at 334-303-9019 or email her at kjohnson3@gannett.com. You can also follow her on Twitter here.