Senate Bill Updates – More Tax Money for Private Schools June 19, 2009

The Senate heard several education bills in the Committee as a Whole (COW).  We have provided an analysis for one specific bill – SB1023 – which would allow for an increase in Premium Tax Credits to private schools.  A list of other education-related Senate bill actions from June 18, 2009 can be found at the end of this post.


Arizona Education Network Bill Analysis – SB1023 “Premium Tax Credit; STO Contribution”


What is it? The “Premium Tax Credit; STO Contribution” bill allows insurers to take a credit against their insurance premium tax liability for donations to a private School Tuition Organization (STO). The original corporate tax credit legislation passed in 2006 was capped at $10 million in corporate tax credit contributions per year, with a 20% increase beginning in FY2007-2008 ($12 million), a 20% increase in FY2008-2009 ($14.4 billion) and a 20% increase in FY2009-2010 ($17.3 million).  The original corporate tax credit legislation was written to expire in June 2011 – the current bill is written to extend it indefinitely and will continue to allow for a 20% increase in private school tuition tax credit allocations each fiscal year.

What are STOs? School Tuition Organizations (STOs) were originally created when the first private school tax credit legislation was passed in 1997.  Unlike other Arizona tax credits, the legislature designed the private tax credit system to be administered by a corporate ‘middle man’ or STO.  Their function is to process the tax credits and then distribute them to private schools.  STOs are largely unregulated and are able to claim up to 10% of tax dollars for their administrative fees.  For more on STOs & tax credits, click here.

Is the Arizona Education Network for or against the Premium Tax Credit Bill?AGAINST

Why? Our Southern Arizona parent organizations are united in opposition to any increase in private school tax credit programs.

Our chief concerns are as follows:

1.   First and foremost, existing School Tuition Organizations appear to already have millions in un-allocated tax dollars sitting in their bank accounts. Why do we need to divert additional tax money to private schools–especially in light of the state’s current fiscal crisis?

Arizona’s current corporate private school tax credit legislation allows up to $14.4 million in corporate tax receipts to be allocated to private school STOs in the 2008-2009 school year.  This amount is already set to increase by 20% (to $17.2 million) next year.  A brief examination of the most recent Arizona Department of Revenue tax credit reports shows that corporate STOs ended 2007 with over $9.6 million in unspent tax dollars in their tuition accounts.

Eighteen STOs received corporate tax credits totaling $14,258,000 in 2007…these same STOs, however, only awarded $4,621,290 in scholarship money during the same year. While we recognize that some of those dollars may have been allocated for future scholarships or for payments made in the latter half of the school year, we question why anyone would be seeking to divert more of our tax dollars into private corporate accounts–especially in light of our current $4 billion dollar budget deficit.

2. The proposed bill will effectively draw funds away from services that extend to the majority of both children and corporations in our state.

The move to divert additional public tax dollars into private schools runs counter to the fact that some of the same legislators have been promoting deep cuts to DES (Department of Economic Security) and the Public K-12 Schools which provide services to the majority of children in our state.  We feel that the ideological desire to promote ‘school choice’ has clearly gotten in the way of common sense in this instance.

Corporate tax receipts, which are allocated to private school STOs, are tax dollars which cannot fund our existing public obligations.  Today our state is facing a massive deficit due in large part to the decline in our tax receipts…again, common sense would suggest that this is not the time to divert more public money into private institutions.

3.  We have received extensive documentation which raises serious ethical concerns about the structure of the STO programs.

Rep. Steve Yarbrough (Chandler, LD21) has been the primary proponent for expanding the private school tax credit program and for increasing the dollars sent through the tax credit firms.  (For more articles depicting this conflict:

While Rep. Yarbrough has claimed not to have a financial connection to the corporate STOs, School Choice Arizona – the largest corporate tax credit recipient in 2007 – just happens to share the same office space, an almost identical board of directors–and even a fax number with Rep. Yarbrough, ACSTO and his legal firm.  School Choice Arizona took in just nine corporate donations in 2007, but they totaled a very generous $3.2 million dollars – or an average of over $355,000 per donor. This same STO reported scholarships of only $792,223 for that year; which would have left $2.4 million in carry over into 2008.

In addition to this questionable non-relationship, Rep. Yarbrough compensates himself generously for his role in ACSTO- the private tax credit organization in which he founded in 1998, after the legislature created the School Tuition Organization system.  Within just this single tuition tax credit processing company, Rep. Yarbrough’s share of tax credit dollars has grown to include:

  • Salary: $96,000/year
  • HY Processing: Rep. Yarbrough founded this processing company with his ACSTO co-founder, David Harowitz in October 2005.  Between 2006-2007, HY Processing charged ACSTO $790,515 in “administrative” fees.
  • Legal fees: Despite the fact that attorney Yarbrough is the acting director, ACSTO still paid over $171,000 in legal fees between 2001-2007.
  • Landlord fees: Yarbrough purchased a 1,150 sq ft office suite in 2005 for $275,504 and now charges ACSTO $44,981/year in rent.   He also spent just under 50% of the suite’s original value ($124,653) in leasehold improvements.  School Choice Arizona caught a better break and pays just $4,000 in rent each year.  It is also worth noting that Rep. Yarbrough’s law office is in the same suite…though what, if any, rent his legal firm is paying is not on public record.

Is this illegal?  Probably not.  Existing STO legislation allows private tax credit organizations to keep up to 10% of incoming tax dollars for administrative costs.  It does appear, however, that Rep. Yarbrough is finding ways to ensure that he is able to capture the full 10% of all incoming tax dollars for his personal enterprise.

Rep. Yarbrough’s conflict of interest aside, we feel that his example illustrates the need for reform in the current tax credit system. We strongly oppose legislation to increase the size or scope of any new or existing tax credit programs until reforms can be put into place. There is certainly a better way to fund education and to wisely manage our limited tax dollars.

To find out more about the current legislation, STOs and private school tax credits please visit:


Additional education bills discussed in the Senate this week:

  • SB 1997 Special Education Task Force – establishes a nine member special education task force to be appointed by the State Board of Education.  Task force will be charged with recommending best practices for the behavior management and discipline of special education students.  (passed)
  • SB 1375 Student information – Requires parents to submit a written request to obtain their child’s education records  (passed)
  • SB 1393 Student religious liberties – This bill would prohibit a public educational institution from discriminating against students or parents on the basis of a religious viewpoint or expression. It would also “Permits prayer, engagement in religious activities or expression to the same extent that nonreligious activities and expression are permitted”. (passed)
  • SB 1427 School instructional technology & fees – bill authorizes school district governing boards to assess reasonable fees and damage deposits for instructional technology issued to students (bill retained)

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3 Responses to “Senate Bill Updates – More Tax Money for Private Schools June 19, 2009”

  1. Ed J. says:

    Thanks for the great article. I’ve been reading a lot about these STOs and I can hardly understand how our legislators can justify them. The Arizona Supreme Court recently ruled that private school vouchers were unconstitutional. Article IX, Section 10 says that “No tax shall be laid or appropriation of public money made in aid of any church, or private or sectarian school, or any public service corporation.”
    …these private school tax credits are just an attempt to skirt the constitution!

  2. AZMama says:

    This article confirms what I’ve been reading in various state papers, as well as my suspicions that the Blaine Amendment in the Arizona state constitution, which prohibits the use of public funds for parochial schools, tends to be circumvented handily by the House and Senate leadership. Separation of church and state only applies if the government tries to keep you from carrying your gun to Sunday worship.

    As far as I can tell, the state constitution was not written with any “optional” provision to ANY mandate as prescribed in any article and/or amendment. Leave it to the majority party to find and root out all those helpful loopholes and back door key holes.

  3. […] for private schools, without exempting religious ones.  (For more articles on Tax Credits click here, and here and here.) […]

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