Vermont Legislature SmartTranscripts:

[Seth Bongartz (Chair)]: It's like a war. Yeah. We're live. Yep. We're kinda live. It's not okay. Good. So I'll do it quickly again just for people in case that we're our audience or could be made by our own audience I don't know right then but provision in the in the federal budget act that allows states to set up one and more nonprofits sanctions I believe they have to be sanctioned by the governor and we can clarify that For the purpose of making scholarships to kids for things that take place within the confines of school systems, it actually has the potential for the purposes to be very broad and some of which we may not want to engage in and so we've narrowed, we meaning me, narrowed at least the starting point for discussion to be focused on underprivileged kids and opportunities for after school summer tutoring etc. What makes this different than the normal nonprofit which you know saying all set up nonprofit be no big deal because there's thousands, the difference here is that if people contribute to it, gain a tax credit as opposed to a deduction. And the difference between those two being effectively if it's a tax credit, you get your money back because you get to take it off your taxes the next due to the whole amount that you donate. So, as opposed to getting, depending on your bracket, a 20% deduction, even if you qualify, by the way, here you simply get a tax credit. So the potential that the, I think the thinking at the time has passed, Congress was this nationwide was going to be billions of dollars, and I'm doing, I want to make sure that if that's the case Vermont is accessing some of those billions of dollars. And has it could be a walk through this but it has pretty high income eligibility you can gain access to these funds with family income up to like 300% of median or something like that.

[Kirby (Legislative Counsel)]: That's correct.

[Seth Bongartz (Chair)]: So, which is fairly high. But so the thinking is that you very often think as one person, one educator put it to me when I was talking to the man down at Bennington a couple of years ago, you know, the goal for us as a state or with education is to provide true middle class opportunities to underprivilege kids, whether through the entirety of the school system. And so that's what I had in mind as we put this together because kids have, the kids of middle class and upper class families have, know, much more access to things like summer programs in schools, after school and tutoring opportunities. And the goal is to put this thing together in a way to allow the creation of a nonprofit, one or more across the state, that would help those kids have access to the same kinds of some of the things that middle class kids have access to. And we don't have to figure out the entirety of the confines of this, that would be up to the nonprofit to develop their own mission, but it would have to be consistent with what's here in the legislation. It cannot be used, And the intent, frankly, the federal level, may have been initially to make it easier for even families with means to send their kids to private schools. That's that's out here. We narrow this way in so that we're talking about our publicly to to funded kids having access and and access to things that every other kid has access to. So, that's kind of the thinking here and you know, proportionally, if they were right when they do in the federal budget estimate is this is hundreds of millions of dollars that we could potentially use for the benefit of underprivileged kids in Vermont if we gain our share of it through setting up systems that are effective for doing it. I don't know if you have an immediate question to Wilson to court me first to answer. Well, quick question. It doesn't sound like it's going cost us any tax. It doesn't cost us anything and the way that, you know, way to think about it is that any of us sitting in this room let's assume we're all middle class people for the sake of discussion here. The question for us would be would you rather give your $1,700 a year by the way that's the amount would you rather get your $1,700 a year to the federal government would you rather give it to a system that's going to help for the improvements kids in the model because it doesn't cost you, in the end, it doesn't cost you, you don't have your money for six months until you get it back through the tax win after the back.

[Unidentified Committee Member]: So is it gonna be, you know, first of all, is federal income tax that you're

[Seth Bongartz (Chair)]: gonna get the credit on? It's federal. Yeah. It's federal. And then

[Unidentified Committee Member]: a member of the marijuana tax discussion about the poison pill where it had to go to nonprofits after school. And if they they didn't want to channel through the LEAs. And if that if it if it did, legislature could have changed that, but then there was a pause of pill. I

[Seth Bongartz (Chair)]: don't think there's any connection to that here. So will this be channeled through the LEAs? No, it's a channeled through a nonprofit. It would have to be created for this purpose by the way. Can't be 90 It percent of the effort of the nonprofit has to be to distributing funds to kids for these programs. Then you could theoretically set it up as another nonprofit hanging under an existing nonprofit. And I had thought about that on a statewide basis in a plain form. So there's a question about whether, wait, wait, we'll go through too many questions here. Looks like walked through it, that we can make sure that we understand it. So, Kirby, you're on.

[Kirby (Legislative Counsel)]: Okay. Great. Yeah. So I thought I'd start by going through the federal law and letting you know what that's about and then getting into the Vermont bill we have here. That sounds good. So as the chair mentioned, there's a just to tell you where it is in the federal tax code, there's a new section 25 big F that we're talking about that creates a new non refundable tax credit at the federal level. A state has to voluntarily opt into making this, we'll call it a program, this tax credit program available for their state. And that really goes to whether it's available for contributions to what's called scholarship granting organizations or SGOs within that state. But the basics of it is that there's a nonrefundable credit for qualified contributions to SGOs made by an individual, and a qualified contribution is a charitable contribution that's made in cash, as in you can't donate your car or something like that. And the the SGO uses that contribution to fund scholarships for eligible students, and we'll get into what that means. And scholarships have to be solely for students within that state. So any Vermont SGO would have to be for Vermont students. So for a contribution made by a taxpayer to an SGO in a state to be a qualified contribution for the credit, the state must have voluntarily participated, as I said. The amount of credit as the chair went over is $1,700 in contributions for each year. And the credits allowed to be carried forward at the federal level for up to five years as well. Now the SGOs at the federal level also have to follow several requirements. And the the way this works is that the governor would identify what those SGOs are in Vermont, and they would have to meet all the requirements of the federal program, as well as whatever additional requirements you want to include, which there are some limitations added by the Vermont bill here. But under the federal level, the SGO has to be a five zero one(three). It has to prevent commingling of qualified contributions with other amounts. That is they have to have an account set aside just for scholarships. There's There is a lot of requirements about how the scholarships are done. For instance, the organization must provide scholarships to 10 or more students who do not all attend the same school. The organization cannot spend less than 90% of its income on scholarships for eligible students. I think the chair mentioned that one. The organization cannot provide scholarships for any expenses other than qualified expenses. Then this references another part of federal law, but I'll tell you what some of the qualified expenses are. Tuition fees, tutoring, room and board, computer technology and computer equipment. And then within that supplementary items and services qualify and a supplementary service for instance could be an after school program to give you an idea what that is. The organization must also provide scholarships to eligible students with a priority for students awarded a scholarship the previous school year. So, I guess that is to encourage the continuation of a scholarship student. So they're, you know, supported every year that they need. And also a priority for any eligible students who have a sibling who was awarded a scholarship from such organization. So I guess that's to help households provide the same education level for all of their for all their students. There's at least one more requirement here. The SCO has to be included on the list submitted by the state. So that's the only requirement which we've covered. Another requirement is that the organization cannot earmark or set aside contributions for scholarships on behalf of any particular student. And the organization must verify the annual household income and family size of eligible students who apply for scholarships to ensure such students meet the area median gross income requirement. The area median gross income requirement under the federal law is 300% of the area median gross income, which means that a student from a household that the Vermont average area median gross income is about 234,000. So a household of, you know, this is going to be based on on county by county, but but on average, a student wouldn't be eligible if their household income was more than about $235,000 The organization must also limit the awarding of scholarship to eligible students who are members of a household for which the income does not exceed the amount established. I'm not sure why the IRS put that in there twice, but there you go. And then there's this provision about disqualified persons, relates to that's something the IRS has to still figure out, but it's if someone's making a lot of contributions to the SGO, the SGO can then in turn provide scholarships to that person. So that's kind of a niche thing there. So, as I mentioned before, there's also this thing about the state lists, which is what this bill gets at. The way this scheme is kind of set up is that each year, the governor or some other entity that the state establishes it doesn't have to be the governor, by the way you could in this bill appoint some other entity but the entity has to provide to the US government every year, not later than January 1, a list of the scholarship granting organizations that it has vetted and has deemed eligible for this program. Basically, if a state does not allow this to happen, then the state can't provide a list and there would not be any SGOs in that state that could participate. One more thing to note would be that the IRS has to still put out regulations and guidance about this. They're in that process now. They're gathering comments for their regulations. Some of the things that I've seen that they're gathering information about and that they can provide further detail on is the 90% of income spent by the SGO rule that I mentioned a moment ago, they're going to have to dive into that more deeply. They're going to have to figure out what how to deal with multistate organisations. So, SGOs that span multiple states. This is so that the SCO takes contributions from Vermont, and then SCO has to spend them on Vermont. So, do they do about multistate loans? And then the reporting and record keeping, the sort of compliance side of this has to be blushed out a bit more by the IRS. And any of this other stuff could also be included in future regulations, but I think those things in particular are definitely going to be hashed out more. So if you have any, I'll stop now and ask if you have any questions about the federal law and then get into the state proposal here.

[Seth Bongartz (Chair)]: Could we do with any idea when the guidance might be forthcoming?

[Kirby (Legislative Counsel)]: They started early December that they were going to do guidance and they're collecting comments now. I know that. I've seen that the stuff's publicly available, and I've seen that they've received some comments, some of the comments I saw related to the eligible expenses and what kinds of programs, after school programs and summer programs, things like that are going to be included. I just just guessing, you know, the rulemaking process could take six months or so, so maybe summertime. But maybe earlier, or at least a proposed rule may come out earlier, not the not the, you know, final version. Okay.

[Seth Bongartz (Chair)]: So let's just do it again. Quick walk through then.

[Kirby (Legislative Counsel)]: Alright. Let's do it. Would you like me to share screen?

[Seth Bongartz (Chair)]: I don't peed on YouTube. We had copies. Okay. Just tell us which section we're in.

[Kirby (Legislative Counsel)]: Okay. So section one creates a new statutory section in the title for the governor. In this case, we would be giving this power to the governor to create a list. So it says annually on December 1, that's giving a monthly time before the January 1 submission to the US government. The governor or designee may elect to provide a list of organizations that satisfy the conditions of subsection B, which we'll get into, of course, of this section to the US Secretary of Treasury for purposes of making the federal qualified elementary and secondary education scholarship tax credit available for Vermont taxpayers. And it also adds that it shall be presumed that an organization listed in the previous year will be listed in the subsequent year unless the Governor finds the organisation has failed to meet the requirements of this section. That provision is intended to give some stability to these organisations so that they know, and their donors know, I think more specifically, that, hey. My my contribution could if I contribute to this SGO, it's been recognized in the past, so there's a good chance that it'll be recognized next time, and I'll be able to to use that contribution towards the $1,700 tax credit. That is why that provision exists. Subsection B here on page two. As the Chair mentioned before, this bill further limits the requirements beyond the federal ones that we were talking about. So it says an organization shall not be listed unless the organization meets the following criteria. Number one, it qualifies as a scholarship granting organization. That is a given because that is one of the federal requirements. Two, it is a nonprofit organization. Again, nonprofit organization is a federal requirement, but it further elaborates and says with a core mission of providing educational opportunities to economically underprivileged students through after school, summer tutoring and similar programs.

[Seth Bongartz (Chair)]: Kirby, before we forget this, there should be a comment after summer Because it's after school programs, summer programs, and tutoring. Not summer tutoring. I didn't pick up on that before but just so we don't forget. I didn't pick up on that the first time. So anyway,

[Kirby (Legislative Counsel)]: Yeah. Yeah. I I think, yeah, when we were putting this together, I thought you meant specifically Hooter and Dole for the summer. Nope. But okay. And then three, all grants and scholarships provided by the organization are to students attending a public school or an independent school that is also capable of completing public tuition. I do want to note that we don't define economically underprivileged here, so that's going to end up being at the discretion of the Governor, essentially. And it could just be that it looks like each organisation, when it's formed, is going to have some kind of mission statement. How I imagine this will be administered in the real world is you look at that mission statement for the organisation and you see whether it says something to the effect of serving other privileged students. And then subsection C says that the the governor may audit an organization, which is the government would do anyway, but it's sort of just a little bit of a guardrail provision added there. And that's it. The gist of it is that Vermont will participate in this tax credit program. It will be the governor that provides the list. And the governor, recognizing SGOs in Vermont, will have to go a little farther than the federal requirements by focusing on the core mission of the organization.

[Seth Bongartz (Chair)]: Yes.

[Unidentified Committee Member]: Could Visa play a role in this

[Seth Bongartz (Chair)]: or are they, is there a designation different than it's intended there? I don't know. It would have to be, they would have to hang another nonprofit underneath it to meet the technical requirements of this one. So one of the questions I was working, I actually met with the secretary about this as well, putting this together over the summer, And one of the questions to be considered over time with this is, do you do it regionally? Do you do one statewide? There's pros and cons to each. They tend to get more locally than they do originally. On the other hand, if you do it regionally, some of the areas in the state that they, you know, the most might have less access. So it's a good, there's something we have to think through as we put this together and we're not going to dictate anyway the government in a way the government will have to but we'd like, you know, it's possible that out of the box, we want to think about how to set the up to voting on a statewide basis. I don't know.

[Kirby (Legislative Counsel)]: One thing I would add there is that the federal requirement is that it'd a five zero one c three organization and

[Seth Bongartz (Chair)]: Yes.

[Kirby (Legislative Counsel)]: Government entities are not recognized as five zero one c threes.

[Seth Bongartz (Chair)]: But Oh, yeah. Okay.

[Kirby (Legislative Counsel)]: Yeah.

[Seth Bongartz (Chair)]: Yeah. So and Kirby, as a realistically, are we going to have to should we need to let this bill sit until the regulations come out or the guidance comes out or or not?

[Kirby (Legislative Counsel)]: At this point I I I don't think you necessarily have to do that. I think the, you know, the regulations could change some things. I think that it's most likely going to change how it's implemented, not around what you need to do. In fact, there was a different IRS notice, which I probably should have mentioned, that they're planning to put out guidance on how states can opt in early. This program is supposed to start 01/01/2027. But some states are so interested that they want to opt in before 2027. And the IRS is trying to create a way for them to do that. So, you know, based off of that, I would say that the IRS doesn't consider it too early to to act out.

[Seth Bongartz (Chair)]: Questions? As we know, the bill will try to

[Unidentified Committee Member]: change a little bit as we get it all together.

[Seth Bongartz (Chair)]: I said it at the beginning, but just to say it again, think, you know, the federal program is out here. We narrowed it in to really trying to focus on our full bridge cancer and provide opportunities they otherwise wouldn't have. So Kirby when we talk about and again I wasn't clear with you so you didn't understand so when I was thinking about summer programs. Does a summer program, if that's what we were trying to use the money for in part, have to be a program operated by the school or or is it just for students who who meet the requirements of being Vermont students?

[Kirby (Legislative Counsel)]: That's that's one area where the IRS regulations are probably going to have to clarify some things. The way it is written in the federal statute is that it references something called Coverdell education savings account and what expenses are allowed under that. And my understanding is that currently there are after school and summer tutoring type programs that are allowed to be used. That is sometimes limited to a program run by a school, but not always. I guess my answer to your question is I'm not sure. It's kind of an open question. I think there are organizations interested in having IRS answer that. I think that doesn't prohibit you from moving forward. It just might be that these IRS regulations end up not allowing some of the users you would hope to allow for. But, you know And

[Seth Bongartz (Chair)]: the same would actually be true for after school. Like like, question's almost the same, right?

[Kirby (Legislative Counsel)]: Yeah. I mean, after school, I think, is more an after school program run by the school is definitely part of that cover day allowed expenses. It's it's summer, and then it's and then it's, like, what kind of other organizations can run can run programs. But I I know that I know that that there's some lobbying to the IRS right now to to allow that to be expansive under this program, including having even for profit after school programs and things like that count.

[Seth Bongartz (Chair)]: Okay. Good. Can you think of anything or anybody we should Well, I'll talk to you later. We'll, we'll think about, you gotta think about if we take more testimony and speak to the Secretary in particular. Yeah, okay. Any other questions? Okay, thank you Kirby. Sure. So thanks. Sorry to get you I don't know if we got you out of bed or not, but, anyway,

[Kirby (Legislative Counsel)]: Have a good day.