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Committee hears bill to remove statutory claim that EFA payments are non‑taxable
Summary
Supporters and tax experts told the House Ways and Means Committee on HB 402 that a sentence in RSA 194‑F may mislead families about federal tax obligations for Education Freedom Account payments and recommended repealing it to avoid potential harm or lawsuits.
Representative David Luno, sponsor of House Bill 402, opened a public hearing saying the bill would repeal the sentence in RSA 194‑F:2(6) that reads, “Funds deposited in an EFA shall not constitute taxable income to the parent or the EFA student.” He told the committee the statute could mislead families about possible federal tax liabilities and that the state should not give the appearance of providing federal tax advice.
The bill matters because New Hampshire’s Education Freedom Account (EFA) program has grown beyond its original, narrowly targeted population and now covers thousands of students. Repealing the sentence would, supporters said, remove a statutory assertion about taxability that the state cannot make under federal tax law.
Tax practitioners and a tax attorney who testified told the committee federal rules are determinative. Steven Matthew of LFS Tax Group cited IRS Publication 970 on scholarships and fellowships and said his practice never treats typical scholarship‑type payments as taxable, but also warned that some EFA‑eligible expenditures could be taxable depending on how the funds are used. Attorney Bill Arbinger (Rath, Young & Pignatelli) walked the committee through 26 U.S.C. §117 and IRS guidance and said only payments used for “tuition and fees” to an educational organization are clearly tax‑exempt under federal law; many line items eligible under New Hampshire’s EFA rules (tutoring, educational software, incidental expenses) could be taxable.
Retired state representative Packy Campbell urged the committee to vote ITL (inexpedient to legislate), arguing a repeal would function as a tax on recipients and could harm self‑employed families who pay business taxes. Representative Luno and witnesses disagreed: several speakers emphasized the bill does not change federal tax law or impose a state tax on EFAs, it merely removes a statutory statement that may mislead recipients about federal filing obligations.
Committee members pressed witnesses on practical consequences. Arbinger warned that as the EFA program has expanded to higher‑income families (he cited the program size at roughly 5,700 students), more recipients file federal returns and could be exposed if they rely on a misleading state statute when completing their federal returns. Several members asked whether the state has been sued over the provision; witnesses said they knew of no cases.
The public testimony included discussion of administrative burdens: Steven Matthew estimated the cost of preparing and issuing 1099‑type forms to many recipients could be significant for the scholarship administrator and for tax preparers. Witnesses also described a Department of Education monitoring exercise of 50 EFA accounts that found problems in a nontrivial share of files and stated the Children’s Scholarship Fund made some restitutions.
The hearing record contains a mix of technical tax analysis, policy disagreement about voucher programs, and questions about administrative burden and legal risk. No formal committee action was recorded at the public hearing; the committee will consider testimony as it moves the bill through the process.
