Republican proposes bill to rein in private school tax credits

But opponents of Senate Bill 1467 have expressed skepticism over provisions that would expand aspects of a program they say already siphons too much state money away from Arizona’s financially-strained public schools.

“This bill continues the trajectory of Arizona public policy diverting more and more public tax dollars to private schools,” said Dana Wolfe Naimark, president and CEO of the Children’s Action Alliance. “… It’s just disguised as a reform.”

$1 billion in scholarships

Arizona in 1997 was the first in the nation to create a tax credit for private education. 

Donors — both individuals and corporations — get a dollar-for-dollar credit on their taxes for giving to non-profit school-tuition organizations. The STOs then give out scholarships to students attending private schools, keeping up to 10 percent of the money for salaries and other administrative costs.

The STO program is separate from the state Empowerment Scholarship Account program, which allocates state funds directly from the Department of Education to qualifying students to be used for things like private-school tuition and other education expenses.

Students can’t participate in both programs at once.

The STO program’s cost has skyrocketed from the $4.5 million a year state officials estimated 21 years ago to $140 million in 2015.

Last year, in its 20th year, the program passed the $1 billion mark in the cumulative amount of scholarships allocated. 

Yarbrough’s plan

Arizona’s private-school tax-credit program consists of four separate credits, two for individuals and two for corporations.

One of the corporate credits goes to “low income” students, which it defines as a family of four earning less than about $83,000. The other is for students with special needs or who are, or were, in foster care. 

Currently, the corporate tax credit for low-income students is allowed to grow 20 percent each year. This year, the cap is $89.16 million. The corporate tax credit for students with special needs or in foster care is capped at $5 million and not allowed to grow.

The bill Yarbrough, R-Chandler, is proposing, would:

• Gradually cut the 20 percent growth on the low-income tax credit to 2.5 percent or the percentage of the annual increase in the metropolitan Phoenix consumer price index (CPI) by 2022.
• Increase by a similar rate annually the scholarship cap for students with special needs.
• Expand the tax credit for students with special needs to include students who are homeschooled, moved from out of state or who had in the past received Empowerment Scholarship Accounts. 
• Allow School Tuition Organizations to charge application fees for scholarships. Yarbrough said he plans to remove this from the bill as it advances. 

Win-win or lose-lose?

Yarbrough characterized his bill as a “win-win” for Republican, pro-school choice lawmakers who’ve supported the scholarships and for Democratic legislators who’ve long advocated for the program’s reduction.

The legislation would reduce the corporate low-income tax-credit cap by more than $180 million in five years, said Yarbrough, who in December retired as executive director of a school tuition organization.

An analysis by the Arizona Department of Revenue noted that the legislation would reduce the low-income corporate tax-credit cap by $3.7 million to $85.45 million this year, saving the state general fund that amount of money. 

The analysis also noted while the growth in the cap would be reduced, the overall credit amount available would still continue to grow, meaning less money overall for the state. 

Raising the cap of the credit for special-needs students would cost an estimated $125,000 more next year. 

“The only way this is going to pass is if we come together – it has to be a bipartisan vote,” Yarbrough told lawmakers. “Republicans can’t get there without Democrats. Democrats obviously can’t get there without Republicans.”

SB 1467 passed the Senate committee on a 4-3 vote along party lines. It is unclear whether the bill will have enough support moving forward. It would require approval from two-thirds of Arizona’s 90-member Legislature.

Sen. Rick Gray, R-Sun City, said he was “surprised” by the Senate panel’s “no” votes.

“I think sometimes we can have a knee-jerk reaction if we’re opposed to STOs,” Gray said. “… This is going to be a money saver in the long run.”

David Lujan, director of the Arizona Center for Economic Progress, said the legislation does not go far enough because it does not completely eliminate the automatic annual growth on private-school tax credits. 

Instead, Lujan said the bill keeps the annual growth at a rate “higher than the annual rate of growth applied to the formula for funding Arizona’s public schools.”

“Arizona cannot afford to fund two school systems, one public and one private,” Lujan said.

Sen. Steve Farley, D-Tucson, and other Democratic legislators disputed Yarbrough’s claim of savings he said his bill would produce. 

They pointed to a Joint Legislative Budget Committee report that predicted companies’ interest in donating to the tax credit isn’t expected to keep up with the growth of the cap anyway. 

“I think all the corporate tax reductions in recent years have had a massive effect on the amount of corporate taxes that are owed in general,” Farley said. “And that means there’s less of a market for them looking for tax credits to reduce their liability.”

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