Arizona Education Network

On July 13, 2009 Governor Jan Brewer signed new legislation to extend and expand the premium corporate tax credit for private schools.  This legislation was enthusiastically supported by some of the same legislative members who have been pushing for massive cuts to public education as a way to close our growing, $3.5 billion state budget deficit.

The language of this bill allows the amount of corporate tax credits that can be diverted to private schools to double every four years.  In addition to this substantial increase, your correspondents have found evidence that raises major ethical and fiscal concerns regarding this legislation:

HB2288 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 private company ‘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.

Does the Arizona Education Network support or oppose the Premium Tax Credit Bill?:  OPPOSE

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 and responsibility to the tax payers of this state.

Today our state is facing a massive deficit due in large part to the decline in our tax receipts…and the number of gaping loopholes in our tax structure.  Corporate tax receipts that are diverted to private institutions drain our general fund and further reduce our ability to maintain our basic state obligations.  With our current $3 billion + budget deficit, common sense would suggest that this is not the time to divert more public money into private institutions.

We are also unclear why ‘conservative’ legislators who are attempting to reduce state spending would allow a bill to pass with an unlimited financial cap. The 20% increase allowed by HB2288 effectively doubles the amount of private school tax credits every four years:

FY2007         $10    million
FY2008         $12   million
FY2009         $14.4 million
FY2010         $17.2 million
FY2011         $20.7 million
FY2012         $24.8 million (no end cap)

3.  We have received extensive documentation that 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 privately owned tax credit firms.

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. The transparency and accounting oversight of the private school tax credit system is so weak that even The legislature’s own fiscal analysis for this bill begins: “The General Fund impact of this bill can not be determined due to a lack of information on current STO credits.”

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:

 

House of Representatives version of the bill – HB2288

Senate version of the bill – SB1023

Additional $5 million in Corporate Tax Credits: Scholarships; disabled or displaced students – HB 2001

Arizona Department of Revenue – Corporate Income Tax Credit Contributions to School Tuition Organizations 2007

Rep. Steve Yarbrough’s STO:  ACSTO – Arizona Christian School Tuition Organization

 

Related articles:

Tucson Weekly, Ethics 101(May 28, 2009, Herreras)

Arizona Republic, Lawmakers Dual Role Drawing Fire(May 19, 2009 Pitzl)

Arizona Daily Star, Special session considers bad bill, wastes money, derails budget debate (May 23, 2009, Editorial)

Arizona Daily Star, Tucsonans see conflict in new tuition credit(May 19, 2009, Scarpinato)

Arizona Republic, Tax credit gets cool reception (May 7, 2009, Pitzl)

Who sponsored this bill?Steve Yarbrough (LD21),  Judy Burges (LD4), Rick Murphy (LD9), Nancy Barto (LD7),  Doris Goodale (LD3), John McComish (LD20),  Warde Nichols (LD21), Carl Seel (LD6), Andy Biggs (LD22), John Kavanagh (LD8), Frank Antenori (LD30), David Gowan (LD30), Laurin Hendrix (LD22), Nancy McLain (LD3), Frank Pratt (LD23),  Tom Boone (LD4), Lucy Mason (LD1),  Cecil Ash (LD18), Sam Crump (LD6), Debbie Lesko (LD9),  Steve Montenegro (LD12), Michele Reagan (LD8), Andrew Tobin (LD1),  David Stevens (LD25)

Votes cast in committee for this bill:

Paula Aboud –NO

Amanda Aguirre – NO

Carolyn S. Allen – NO

Sylvia Allen – YES

Manuel V. “Manny” Alvarez – NO

Meg Burton Cahill – NO

Ken Cheuvront – NO

Jorge Luis Garcia  - NO

Pamela Gorman – YES

Ron Gould – YES

Chuck Gray – YES

Linda Gray – YES

Albert Hale – NO

Jack W. Harper – YES

John Huppenthal – YES

Leah Landrum Taylor – NO

Barbara Leff – YES

Linda Lopez – NO

Debbie McCune Davis – No Vote

Al Melvin – YES

Richard Miranda – NO

John Nelson – YES

Jonathan Paton – No Vote

Russell Pearce – YES

Steve Pierce – YES

Rebecca Rios – NO

Jay Tibshraeny – YES

Thayer Verschoor  - YES

Jim Waring – YES

Robert “Bob” Burns  – YES