Hamill: Congress hands the budget keys to taxpayers

The 2025 tax legislation was passed through a process known as reconciliation. That allowed the bill to pass the Senate with a simple majority.

The bill passed the Senate by a 51-50 vote, a simple majority, but it required the vice president to break a tie.

This shows how close the passage of this bill was. In the face of massive budget deficits, 2017 tax cuts continued with a few more added.

One of the new cuts is an interesting one from a policy perspective. It provides tax-favored treatment for contributions to scholarship-granting organizations (SGOs).

Congress has, over the years, provided incentives for supporting education. Most have not been budget busters.

Reconciliation involves passing tax legislation that reconciles with a previously passed budget. This is why the 2001, 2017 and 2025 tax bills had specified tax cut limits.

In the face of needing to hit targeted revenue and cost figures, estimates of the effects of a bill are essential.

The 2025 legislation created a new provision that creates a huge burden for those responsible for estimating costs.

Beginning in 2027, a taxpayer will be able to claim a credit against their federal tax liability for a contribution to a state-approved SGO.

The maximum credit is $1,700 per taxpayer. The credit is a dollar-for-dollar reduction in the tax liability.

Essentially, this means that a taxpayer can simply direct $1,700 to an SGO at no cost to the taxpayer. The entire cost is borne by the federal government.

We each then take over the federal budget to the tune of $1,700 each year, provided we are willing to direct the government to spend on scholarships.

The annual cost of this new tax credit has been estimated to range between $2.5 billion and $51 billion.

The Joint Committee on Taxation (JCT), a nonpartisan group that advises Congress, estimates the 10-year cost at $25.9 billion.

If the credit is claimed for the maximum $1,700, the JCT estimate is that about 1.5 million people will claim the credit each year.

Note that the maximum can be claimed by anyone with a federal liability of $1,700 or more. You don’t need any money for the contribution.

If your 2027 tax liability is, say, $8,000, and you paid in $9,000, you are generally entitled to a $1,000 refund.

If you claim a $1,700 credit, your liability is reduced to $6,300. Your refund is still $1,000 because the $1,700 must be directed to the SGO.

But claiming the credit has no effect on what you owe the government, or the size of your refund.

You are basically directing the federal government to spend $1,700 as you see fit, providing your interest is supporting SGOs.

Those who estimate a $51 billion annual cost would be assuming that about 30 million people would direct the government to fund an SGO.

So, what will the cost be? No one knows. But it is interesting that the government is now at the mercy of the taxpayers to set the cost of the program.

The state must elect to participate and then provide the federal government with a list of eligible SGOs within that state.

The SGO must be a Section 501(c)(3) organization that provides support to 10 or more students, not all attending the same school.

The financial support must be for students in elementary or secondary school whose family income does not exceed 300% of the area median income.

The SGO must have procedures to verify student eligibility for the support. It must also maintain a separate fund for the program contributions.

This will not be easy for many SGOs. Some of these organizations already exist, but they have never needed to test student eligibility.

The Treasury has already created a way for states to elect early to the program. Early adopters need not provide a list of SGOs yet.

About half the states have already elected to participate. New Mexico is not one of them.

Advocates of this program say that a state has nothing to lose from participating. This is not clear. There is still time to elect to participate.

New Mexico, like several other states, has said it wants to see more details about the program before it makes a final decision.

The Treasury will need to issue regulations that interpret specifics of the credit, and it is not unreasonable for a state to want to see what these details are.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.