13-02-2025
Debate ensues about EFA state law on taxability
Feb. 12—A leading House Democrat on school finance called for repealing a state law that deems all taxpayer-subsidized education freedom account (EFA) scholarships to eligible parents as tax exempt payments.
State Rep. David Luneau, D-Hopkinton, said his bill (HB 402) would not impose a new levy on New Hampshire residents, but instead it would correct a mistake lawmakers made in creating EFAs in 2021.
"We should not be providing misleading or incorrect information about someone's federal tax liabilities," Luneau told the House Ways and Means Committee Wednesday.
"The clause in state law reads, 'Funds deposited in an Education Freedom Account should not constitute taxable income to a parent or to a student.'"
A pair of tax experts disagreed over whether someone can owe federal taxes for getting an EFA that eligible families receive to offset some of the cost of sending their child to a private, religious, alternative public or home school program.
About 5,700 families now receive EFAs that average just over $5,000 for each student.
Bill Ardinger is a Concord lawyer/lobbyist and former House member who has helped write many state tax laws on the books, including the Business Enterprise Tax (BET) created in 1993.
Ardinger backed Luneau's bill and said EFA spending can be federally taxable if the money isn't spent on tuition, books or fees for an educational program.
Room and board, optional equipment or spending to support home schooling would be taxable, said Ardinger, who also worked as a tax expert on Capitol Hill.
{span style="font-size: 20px;"}"The state of New Hampshire should not put what should be viewed as tax advice into a statute that could be wrong," Ardinger said.{/span}
He said he paid no attention to this clause when EFAs were first created because they were limited to low-income families that fail to make enough money to have to file a tax return.
In recent years, lawmakers expanded eligibility for EFAs to families making up to 350% of the federal poverty level, which is more than $109,000 for a family of four.
But Stephen Matthieu, who owns Legacy Financial Solutions of Manchester, said the federal tax code exempts scholarships from taxable income and he's never included them for any of his 1,200 clients.
"I don't know anybody who considers this to be taxable income," Matthieu said in opposing the bill. "We are setting this up as potential for the taxation of low- or moderate-income people."
Rep. Fred Doucette, R-Salem, questioned the need for the bill since federal law supersedes state law.
"The IRS has a robust compliance and auditing system that they follow so if there is an issue, it is their horse to chase," Doucette said.
House Ways and Means Chairman John Janigian, R-Salem, said a compromise could be to change the bill to make it clear EFAs are not taxable under state law.
Ardinger agreed that any parent getting an EFA that owned a business would not have to claim the scholarship as income under the BET or the state's Business Profits Tax.
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