A bill beginning its journey through the Legislature would create more scholarships for private schools that insurance companies fund in exchange for a tax break.
The legislation would raise the maximum annual tax credit for insurance companies from $3.5 million to $5 million. Businesses get state tax breaks in exchange for donations to a private school scholarship program for low-income students, which lawmakers authorized in 2016.
“It’s an attempt to give parents a choice in how they educate their children,” said Sen. Jim Stalzer, R-Sioux Falls. “We are at a point where we need to raise the amount or create a waiting list.”
The bill was approved by the Senate Tax Committee by a 6-1 vote on Friday, concluding the first week of the 38-day legislative session at the Capitol in Pierre. It now heads to the full Senate.
Critics of the scholarships have called it a “backdoor school voucher program.” Traditional school voucher programs — which South Dakota did not allow — allow state funding to follow students to private schools.
On Friday, opponents said the program diverts potential tax revenue to private, sometimes religious, schools rather than public schools.
“This body is responsible for providing a free, public education to all children in the state,” testified Rob Munson, executive director of the South Dakota School Superintendents. “If parents decide they don’t want to be in this field, that’s their choice.”
Munson said if the committee wants to do something to help low-income students, there are other options.
“If we’re looking at low socioeconomic families and children, this body could put that money toward property tax abatement, which would help more families who are struggling, versus just a few families who would apply for it,” he said. Unemployment benefits. This voucher and go to a private school.
Diana Miller, a lobbyist for large public school districts and a former teacher, also described the program as a back-door school voucher initiative. Much of the potential tax revenue is diverted, she said.
“It impacts the budget and will continue into the future,” Miller said. “They get an incentive to not pay the full amount of their insurance tax.”
The program gives participating insurers credits on the state insurance premium tax.
Private companies can fund the private school program out of generosity, “and they can do so without an incentive,” Miller said.
The program initially made $2 million in tax credits available to insurance companies, which was increased to $3.5 million in 2022.
“When do we stop increasing this?” Miller asked.
That concern resonated with Sen. Herman Otten, R-T., who made a motion to send the bill to the Budget Committee for review. This motion failed 5-2. Otten later cast the lone “no” vote against sending the bill to the Senate floor.
When he started the program in 2016, “I made sure it wouldn’t be more than a few hundred thousand dollars” in tax breaks, Otten said.
“The program continues to expand,” Otten said. “It’s become a dangerous number now.”
“It’s not state money, because the state has never touched it,” Stalzer responded.
But Stalzer also said, “For every $2,000 scholarship we give, there’s at least $5,000 that we don’t spend. Every one of those kids that goes to a private school and gets a scholarship puts roughly $3,000 in our budget.”
“This is money our state is not spending because our state aid depends on school enrollment,” he said.
Munson later told South Dakota Searchlight that he didn’t know where Stalzer got his numbers, and added that for the program to save the state money, it would have to mean students leaving public schools to attend private schools. If the state provides money for education, this means that public school districts lose out on state aid.
The program has grown from about 250 students in 2016 to 1,500 students today, and future projections call for a $1.5 million increase in tax credits, Stalzer said.
The bill creating the scholarship program was passed in 2016 under then-Governor Dennis Daugaard.
To be eligible, student families must meet low-income requirements to qualify for free or reduced-price school lunch.
Once signed into law, insurers became eligible for an 80% tax credit for total contributions to the program. At that time, total annual appropriations were set at $2 million.
After the passage of the 2019 bill, insurance companies became eligible for a 100% tax deduction on total contributions. That quickly reached the $2 million tax credit limit, Stalzer said. In 2022, lawmakers raised the tax credit cap to $3.5 million.
Another supporter of the program, Sen. Lee Schoenbeck, R-Watertown, testified Friday that for opponents, “the best way to end this program is to remove the reasons people want to find somewhere else to educate their children.”
“Give them an environment where their children are safe to receive education,” he said.
Rob Munson, who has spent his life in public education, said this was news to him.
“I think our schools in South Dakota are very safe institutions and a great place for our kids to go to school,” Munson said. “We are doing everything we can to keep those schools safe.”
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