KSDE briefing outlines tax-credit scholarship rules, limits and verification gaps

Dr. Frank Harwood, a Kansas State Department of Education official, told the State Board of Education on Oct. 14 that the state''s tax-credit scholarship program gives donors a credit against Kansas tax liability but does not create a direct stream of state-appropriated funds. "The tax credit for low income student scholarship program provides a 75% nonrefundable tax credit for up to $500,000 of donations annually," Harwood said during a presentation to the board.

Harwood summarized how the program works and where KSDE and the State Board have responsibilities: eligible taxpayers donate to a scholarship-granting organization (SGO), the SGO distributes scholarships to eligible students at participating qualified schools, and the Department certifies SGOs, collects annual audit reports from them and notifies the Kansas Director of Taxation about compliance. Harwood said SGOs must distribute 90% of contributions within 36 months and must submit an annual CPA audit.

The program''s statutory eligibility and limits have changed several times since its 2014 start. Harwood said the tax credit rate was increased from 70% to 75% in 2021. For tax year 2024 he said SGOs reported about $7.8 million in contributions that generated roughly $5.5 million in tax credits. A statutory cap on credits is currently set higher than amounts being used; Harwood said lawmakers had considered higher ceilings but the full cap has not been reached.

KSDE staff outlined the three parties in the flow of funds: taxpayers, SGOs and participating schools. Harwood said SGOs receive donations, are required to certify they will follow program rules, and then award scholarships directly to participating schools on behalf of eligible students. He said some SGOs give away nearly 100% of donations, while others retain up to 10% for administrative costs that the statute allows. Harwood said KSDE requires an external CPA audit and an annual report from each SGO.

Board members pressed KSDE staff on verification and audit steps. Harwood said KSDE verifies whether a student met the program''s eligibility rules using an application the SGO completes for each student. But he confirmed KSDE does not independently audit household income reported by families: "We would have no way to verify whether or not that was actually their income," he told the board. He also said KSDE verifies public-school attendance for older students but does not verify every family''s income documentation.

Eligibility rules Harwood described: students must be Kansas residents and meet an income threshold (currently 250% of the federal poverty level), or meet other statutory conditions (such as recent public-school attendance or age exceptions for children not yet required to attend school). Harwood said scholarship awards vary widely, from $1 to the statutory $8,000 maximum per student, and KSDE does not set the scholarship amount; SGOs do.

Board members and staff discussed transparency and the limits of KSDE authority. Harwood said KSDE must certify SGOs to the Department of Revenue, monitor the SGO distribution requirement and notify the Director of Taxation if an SGO falls out of compliance. He said KSDE reports annually to the legislature on SGO activity and scholarship distributions. Several board members asked whether SGOs that operate nationally could be taking donations that do not qualify for a Kansas credit; Harwood said only donations connected to Kansas tax liability and Kansas-qualified schools are eligible for the Kansas credit.

The presentation included examples of program evolution and questions that have recurred in board meetings: whether the scholarship funds are "state funds" (Harwood said the state never receives donation dollars but forgoes tax revenue when it approves credits), how many taxpayers participate (KSDE receives aggregated contribution totals but does not always receive donor-level counts), and whether SGOs can work with expelled-student programs (Harwood said a student at an eligible private school could be eligible if statutory criteria are met).

The board did not take formal action on the briefing. KSDE staff said they would continue to provide the board with annual lists of certified SGOs and participating schools and that the agency provides a public listing of certified SGOs on its website.