• HB 2496 would extend the contribution deadline for tax-credits to school tuition organizations (STOs) from December 31 to April 15.
• HB 2664 would increase the contribution maximums by 50%–from $500 to $750 for individual tax filers, and from $1,000 to $1,500 for those filing a joint return. The JLBC notes that ”the Arizona Department of Revenue currently estimates the current tax liability of $1,181 per individual tax return filed for 2010.”
• HB 2660 would triple the contribution maximums–from $500 to $1,500 for individual tax filers, and from $1,000 to $3,000 for those filing a joint return.  Again, the JLBC notes that ”the Arizona Department of Revenue currently estimates the current tax liability of $1,181 per individual tax return filed for 2010.”

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The JLBC fiscal note provided to the committee for HB 2496 estimates the following impact to the state’s general fund (emphasis added):

The JLBC Staff estimates that the bill would decrease state General Fund revenues by approximately $(3.6) million in FY 2011.  If the bill results in the diversion of students from public to private schools, there would be an offsetting state savings from lower state K-12 costs.  Under the $(3.6) million estimate, approximately 670 students would have to be diverted from public schools in FY 2011 in order for the bill to have no net state fiscal impact for that year. A diversion of this magnitude seems plausible.

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House Ways & Means Committee vote detail for HB 2496 from 2/15/2010:

.*Note: Y=Yes, N=No, AB=Absent

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.The JLBC fiscal note provided to the committee on HB 2664 estimates the following impact to the state’s general fund (emphasis added):

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The bill is estimated to decrease state General Fund revenues by approximately $(15.9) million in FY 2011. If the bill results in the diversion of students from public to private schools, there would be an offsetting state savings from lower state K-12 costs.  Under the $(15.9) million estimate, approximately 2,900 students would have to be diverted from public schools in FY 2011 in order for the bill to have no net state fiscal impact for that year.

The Department of Revenue (DOR) estimates that the bill would reduce state General Fund revenues by roughly $30 million.  It also indicates that it would need an additional FTE Position in order to administer new regulations established by the bill.

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House Ways & Means Committee vote detail for HB 2664 from 2/8/2010:

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The JLBC fiscal note provided to the committee on HB 2660 estimates the following impact to the state’s general fund (emphasis added):

The bill is estimated to decrease state General Fund revenues by approximately $(25.7) million in FY 2011.  If the bill results in the diversion of students from public to private schools, there would be an offsetting state savings from lower state K-12 costs.  Under the $(25.7) million estimate, approximately 4,750 students would have to be diverted from public schools in FY 2011 in order for the bill to have no net state fiscal impact for that year.

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House Ways & Means Committee vote detail for HB 2660 from 2/15/2010:

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The committee also passed HB 2663, which makes a number of changes to regulations for School Tuition Organizations (STOs) that accept corporate income tax-credits. This legislation is based on the recommendation from the Ad Hoc Committee on Private School Tuition Tax-Credit Review that met in the fall. Specifically, the Ad Hoc Committee was formed as a response to growing concerns after two Arizona newspapers ran an investigative series on the state’s private school tax-credit program: Rigged Privilege, by the East Valley Tribune and The Tuition Tax Credit: Tuition-aid benefits wealthy families, raises worry, by the Arizona Republic.

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While these changes are strictly regulatory in nature, the JLBC fiscal note provided to the committee on HB 2663 states that there will be an impact to the Arizona Department of Revenue (emphasis added):

The bill is not expected to change the level of STO donations.  As a result, it would not be expected to affect the current level of STO tax credits.

The Department of Revenue (DOR) estimates that the bill would require an additional FTE Position to administer, which would cost them approximately $75,000.

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House Ways & Means Committee vote detail for HB 2663 from:

In June of 2009, Arizona Education Network published an article explaining how individual and corporate tax school tax credits worked.  (We encourage you to read this article first in order to understand the structure of the Arizona private school tax-credit program before continuing with this article.) Since then, investigative reports in the East Valley Tribune and the Arizona Republic have brought into question the efficacy of the program and the practices of the School Tuition Organizations, which act to pass through the tax credits to the private schools.  In the wake of the investigations, two house panels have held hearings into private school tax credits.

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Arizona Education Network decided to take a closer look at the private school tax credit program and its history in order to understand the evolution of the program, the issues that have been raised and the potential changes in the future.  In order to respond to the many inquiries we have received (and make this easier on the layman), we will be using the Q & A format.

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Why is there so much interest in using public tax dollars for private schools?

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There are several arguments made:

• Some believe that in areas where schools are failing, all options, including private schools, must be looked at for the benefit of the children in these areas that are poorly served by their current public schools.  This argument is most prevalent in inner-cities where the vast majority of students are at, or near, the poverty level; and in fact, this is where voucher programs were first proposed.  Milwaukee and Cleveland were some of the first cities to offer vouchers, and it was a case from Ohio – Zelman vs. Simmons-Harris (2002) – which the supreme court upheld in the use of vouchers.
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• Another argument is that private schools provide competition for public schools and that this should be encouraged.
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• Some go even further, proposing privatizing all education through a voucher system: in essence dismantling the public school system.  The best known advocate of this argument is economist Milton Friedman.
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• Finally, some of those who attend private schools argue that it is their right to decide how to use their tax money to educate their children, regardless of the performance of their public schools or their income.

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What are vouchers?

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Vouchers are payment certificates directly issued by the government to parents to pay for private school.  They have been very controversial because, historically, they have run into problems with the Establishment Clause of the First Amendment of the U.S. Constitution.  The First Amendment states that: Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; and court cases regarding vouchers have centered on these clauses.

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How did vouchers wind up being upheld by the Supreme Court?

The path of vouchers in the legal system is very interesting and it all has to do with the changing interpretation of the Establishment Clause.  Here are some of the Supreme Court cases that determined the progress to federally approved vouchers.

• Everson v Board of Education (1947) – This case found that the a board of education could authorize the reimbursement of parents for fares paid for the transportation by public carrier of children attending public and Catholic school.  “In fact, the decision established the now-crucial distinction between aid provided directly to religious schools and aid provided to children or their parents…”(NeoVouchers, Kevin Wellner, p. 50).   However, Everson also held two important points; 1) “In the words of Jefferson, the clause against establishment of religion by law was intended to erect ‘a wall of separation between church and State.’” (Everson) and 2) “Prior to the adoption of the Fourteenth Amendment,  the First Amendment did not apply as a restraint against the states.” (Everson) However, Everson upheld the application of the Fourteenth Amendment’s due process clause, meaning the First Amendment applies to the states and is binding.
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• Lemon v Kurtzman (1971) – While Everson permitted direct aid to parents for their children, Lemon established the rules.  Lemon struck down “Rhode Island’s 1969 Salary Supplement Act provid[ing] for a 15% salary supplement to be paid to teachers in nonpublic schools at which the average per-pupil expenditure on secular education [was] below the average in public schools.”  And “Pennsylvania’s Nonpublic Elementary and Secondary Education Act, passed in 1968, authoriz[ing] the state Superintendent of Public Instruction to ‘purchase’ certain ‘secular educational services’ from nonpublic schools, directly reimbursing those schools solely for teachers’ salaries, textbooks, and instructional materials.” (Lemon)  Lemon found that “[b]oth statutes… involve[d]  excessive entanglement between government and religion.”  The Lemon decision laid out what came to be known as the “Lemon Test”. “A law, the court explained, violates the establishment clause if it fails any of the three parts of the following test: (1) the law must serve a secular purpose; (2) its principal or primary effect must neither advance nor inhibit religion; and (3) it must not foster an excessive entanglement with religion.” (NeoVouchers, Kevin Wellner, p.59)
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• Mueller v Allen (1983) – The first shift came in Mueller v Allen.  The Supreme Court upheld “[a]  Minnesota statute (§ 290.09, subd. 22) [that] allow[ed] state taxpayers, in computing their state income tax, to deduct expenses incurred in providing ‘tuition, textbooks and transportation’ for their children attending an elementary or secondary school.” (Mueller v Allen).  This included parents whose children attended parochial schools.  The court ruled that the law met the “Lemon Test”.
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• Aguilar v Felton (1985) – In this case the court held unconstitutional “New York City['s] use [of] federal funds received under the Title I program of the Elementary and Secondary Education Act of 1965 to pay the salaries of public school employees who teach in parochial schools in the city.” (Aguilar) The decision cited excessive entanglement under the “Lemon Test”.
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• Agostini v Felton (1997) – Agostini reversed the Aguilar case; the court ruling that, “[t]he Aguilar Court erred in concluding that New York City’s Title I program resulted in an excessive entanglement between church and state.” (Agostini) “The key modification was that entanglement alone would not result in a finding of unconstitutionality.” (NeoVouchers, Kevin Wellner, p.60)
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• Zobrest v Catalina Foothills School District (1993) – We cannot leave out Arizona’s own contribution to the evolution.  In Zobrest, the ”[p]etitioners, a deaf child and his parents, filed this suit after respondent school district refused to provide a sign language interpreter to accompany the child to classes at a Roman Catholic high school.”  The court ruled that, “Government programs that neutrally provide benefits to a broad class of citizens defined without reference to religion are not readily subject to an Establishment Clause challenge just because sectarian institutions may also receive an attenuated financial benefit.”(Zobrest)
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• Zelman v Simmons-Harris (2002) - This brings us to the case that approved vouchers on the federal level. The Zelman case ruled on the legality of the Cleveland pilot program to provide vouchers to students in a public school district that was failing on a massive scale, necessitating federal intervention and a state takeover.  In the decision, the court affirmed that, “[t]here is no dispute that the program challenged here was enacted for the valid secular purpose of providing educational assistance to poor children in a demonstrably failing public school system.”  The decision went on to say, “[t]hree times we have confronted Establishment Clause challenges to neutral government programs that provide aid directly to a broad class of individuals, who, in turn, direct the aid to religious schools or institutions of their own choosing. Three times we have rejected such challenges.”  The key phrase here is “neutral” – the “Neutral Test” has replaced the “Lemon Test“.  The Supreme Court reversed the appeals court ruling that, “ the Ohio program is entirely neutral with respect to religion. It provides benefits directly to a wide spectrum of individuals, defined only by financial need and residence in a particular school district. It permits such individuals to exercise genuine choice among options public and private, secular and religious. The program is therefore a program of true private choice. In keeping with an unbroken line of decisions rejecting challenges to similar programs, we hold that the program does not offend the Establishment Clause.”

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Why doesn’t Arizona use vouchers?

Even though federal law now permits vouchers, the use of vouchers is not permitted under the Arizona state constitution.  This is because the Arizona constitution contains a “Blaine Amendment Clause“.  The Blaine amendment was a constitutional amendment proposed by then Congressman James Blaine in 1875 to ban the use of  revenue raised by taxation for private schools; specifically religious schools. While the amendment to the constitution failed, many states (including Arizona) adopted a version of the amendment into the state constitution. The Arizona constitution article IX, Section 10.  reads:

“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.”

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Thus, Arizona lawmakers needed sought to find another way to to fund private school: tax-credits.

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How do tax-credits avoid the “Blaine Amendment” prohibition?

Tax-credits are not refunds; they are “credits.” The funds never make their way into the state general fund, but they come back as a credit OUT of the state’s general fund. The tax-credit money must be paid to a middle-man, a school tuition organization (STO), which then distributes the funds to students through “tax-credit scholarships”.   Because the funds are not received by the state directly and are not paid out by the state, they are not subject to the Blaine Amendment.

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Was the private tuition tax-credit challenged in court?

Yes, it was challenged in Kotterman v Killian (1999) and went to the  Arizona State Supreme Court.
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The State Supreme Court found that, “schools are no more than indirect recipients of taxpayer contributions, with the final destination of these funds being determined by individual parents.” (Kotterman).  The final conclusion affirmed that, ”[w]e hold that the tuition tax credit is a neutral adjustment mechanism for equalizing tax burdens and encouraging educational expenditures.” (Kotterman).  The Supreme Court declined to hear an appeal of the case.

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It is interesting that in the decision, the Arizona Supreme Court brings up the religious discrimination issue as it pertains to the “Blaine Amendment”.   The opinion states that, “[t]he Blaine amendment was a clear manifestation of religious bigotry, part of a crusade manufactured by the contemporary Protestant establishment to counter what was perceived as a growing ‘Catholic menace’.”  It goes on to find that while there is “… no recorded history directly linking the amendment with Arizona’s constitutional convention…we would be hard pressed to divorce the amendment’s language from the insidious discriminatory intent that prompted it.” (Kotterman) Some in the pro-voucher movement have suggested that there may be a potential federal case in the offing challenging the states which have a “Blaine Amendment” on discrimination grounds.  It is debatable as to whether such a case would succeed. However, if it did and the Blaine Amendment was thrown out, Arizona would be free to offer vouchers.

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Are there any other cases that may affect tax-credits in the future?

There is currently a case working its way through the federal appeals court. On October 21, 2009,  the full 9th U.S. Circuit Court of Appeals affirmed its April 2009 decision that the Arizona School Tuition Organizations Program for private schools is unconstitutional.

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In the case of Winn v Arizona Christian School Tuition Organization, the court supported  “Plaintiffs argue[ment], however, that Section 1089 violates the Establishment Clause precisely choices available under the program serve to restrict parents’ opportunities to select secular educational options for their school-age children, skewing parents’ incentives to send their children to religious schools. As such, the program is not ‘neutral in all respects toward religion’ and, concomitantly, is not a ‘program of true private choice.’”  This returns the argument to the Establishment Clause and the Zellman case’s neutrality test.  It will be interesting to see how the Supreme court applies these issues to tax-credits vs. vouchers.

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Interestingly, “[a]n analysis of 2008 scholarships by The Arizona Republic showed religious schools received 93 percent of the $54 million given to school-tuition organizations that year.  The Republic went on to report that, “If the U.S. Supreme Court decides not to review the case, it will go back to the Arizona’s U.S. District Court for a full hearing. If the Supreme Court decides to review the case, the justices would ask for further legal and oral arguments from attorneys on both sides. The court could reverse the Appeals Court decision and end the case or uphold the Appeals Court decision to send the case to a lower court for a full trial.”

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How does Arizona’s tax-credit specifics compare to those of other states?

Arizona pioneered the use of tax-credits to circumnavigate the restrictions of the “Blaine Amendment”.  Several other states have implemented tax-credit programs following the Arizona model.  Click here to see a chart that compares Arizona tax-credits to those available in Pennsylvania, Florida, Iowa, Rhode Island and Georgia.

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In Order to adopt best tax-credit practices, which state should Arizona emulate?

Arizona’s individual tuition tax-credit plan should adopt that same standards as Arizona’s corporate tuition tax credit plan.

• While the individual tuition tax-credit program is not means tested, the corporate tuition tax-credit plan is limited to families with 185% of the income required to receive free & reduced lunch
• While the individual tuition tax-credit program allows earmarking of donation if not for a dependent, the corporate tuition tax-credit plan allows no earmarking at all
• While the individual tuition tax-credit program has no restrictions requiring prior public school attendance, the corporate tuition tax-credit plan mandates that students must start off in public school or be in Kindergarten to apply
• Although the individual program has no cap, the corporate plan is capped at $17.3 million (although that is permitted to grow at 20% per year)

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Do tax-credits save the state money?

Proponents of tax-credits argue that tax-credits issued on behalf of students attending private school save the state money because the tax-credit is less than the per-pupil funding level allocated by the state for a student in public school.   However, the state saves money only if the benefitted students start out in public school.  When tax credits support students who are already in private school and would have chosen private school anyway, there is no savings to the general fund.  The Arizona Republic article points out that out of the 50,000 private school students, only 7,530 students have been added since the tax-credit program started. Moreover, if public school students switch from public to private schools they only receive a partial subsidy of their private school tuition, leaving the families to make up the difference between the subsidy and the full cost of private school tuition.  Therefore, there is a cost-shift from public payment for education to private, individual payment for education.  Is that the best way to build an educated work force?  How will low income students be able to afford to subsidize their education?

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Why publicly financed education?

Parents have the choice of sending their children to a public school or a private school at their own expense.  More importantly, choice is now available under the public school umbrella; among traditional public schools and charter schools.
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Universal public education in the United States is a cornerstone of our democracy.  While citizens of the United States pay taxes for a variety of services, none has had a greater economic impact on the United States than the investment in public education.
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Reforms in public education are moving to outcome-based models.  By shifting tax funds to private schools, lawmakers risk sending funds to institutions with no accountability for how funds are spent or any test of outcome of their education model.  In a time of tight budgets and cuts to public education, allowing tax-credits to private schools, without any accountability for spending or assessment of success does not appear to be a sound public policy decision.

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MaryLee Moulton, Arizona Education Network

MaryLee Moulton can be contacted at marylee@arizonaeducationnetwork.com

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Referenced articles:

Tax credit sponsor’s vision unrealized, East Valley Tribune, June 15, 2010

Researcher: Tax credits cost state millions, Livewire Blog, AZ Central.com, February 8, 2010

Tax Credits & STOs: Overview, Arizona Education Network, June 6, 2009

Rigged Privileged, East Valley Tribune, August 1, 2009

‘Republic’ analysis: Tuition tax credits drain state money, Arizona Republic, October 14, 2009

Public Schools: Make Them Private, Milton Friedman, Cato Institute, June 23, 1995

Attorneys to ask high court to review Ariz. tuition tax credits, Arizona Republic, October 22, 2009

Referenced Book:

Wellman, Kevin, G., NeoVouchers, New York: Rowman & Littlefield , 2008.

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Ariz. tuition-credit practices may violate federal tax laws, Arizona Republic, Dec. 27, 2009

A bi-partisan task force met in the House today for a second hearing covering investigations of  School Tuition Organizations (STOs) and reform of the private-school tax credit program.  STOs currently take in donations to give to private school students.  According to recent investigative reporting by both the Arizona Republic and the East Valley Tribune, some STOs fail to meet the spirit of the legislation to help poor to medium income families send their children to private schools.  A representative from the Attorney General’s office, Susan Meyers, was also at hand to give testimony regarding the lack of regulation and oversight that the AGs office has found. In addition, concerned citizens gave testimony ranging from distress over lack of oversight to the financial effects of private-school tax credits on the general fund in a time of large budget deficits.

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Attorney General’s Findings:

AG-Consumer Protection Section, Private School Tax Credits Program

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Financial Ramifications:

testimony on means testing private-school tax credit program

Corresponding Documentation:

JLBC Report, October 22, 2009

The Equity Impact of Arizona’s Education Tax Credit Program: A Review of the First Three Years

School Enrollment Growth in Arizona

Citizens Financial Review Commission – An Examination of Personal Income Tax Credits

Schooling Tax Credit Scrutiny Often Lags in Arizona, Arizona Republic

‘Republic’ Analysis: Tuition Tax Credits Drain State Money, Arizona Republic

Tuition Aid Benefits Wealthy Families. Raises Worries, Arizona Republic

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Media Links:

Tax credit sponsor’s vision unrealized, East Valley Tribune, June 15, 2010

Survey data incomplete on tuition tax credits, East Valley Tribune, November 16, 2009
Professor puts saving for state at up to $186M, Speculative figures given, Republic found $8M, Arizona Republic, November 17, 2009
Hearing on student tuition tax credits gets testy, Arizona Guardian, November 16, 2009

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Tuition aid not just to the needy,  Arizona Republic, November 15, 2009
AG office advises changes to tax credit law, East Valley Tribune, November 15, 2009

Arizona may sue tuition groups holding donations, Arizona Republic, November 13, 2009
Interview with Task Force Chairman David Chapira, Arizona Guardian, November 12, 2009
Lawmaker questions unspent tuition dollars, East Valley Tribune, November 12, 2009
Capital Censorship, The Arizona Guardian, November 12, 2009.
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Speeches presented to the Task Force:

STOs–Possible Solutions
Mildred Norman speech
Task-Force-Comments Darland

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On Wednesday 10/21/09,  the full 9th U.S. Circuit Court of Appeals affirmed its April 2009 decision that the Arizona School Tuition Organizations Program for private schools is unconstitutional. .

Why do these investigations matter?
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HB 2288 was signed by Governor Brewer on July 13, 2009. This bill allows the maximum corporate tax credit limit to grow 20% into perpetuity. The 20% increase provision effectively doubles the amount of private school tax credits every four years.
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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)
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This is money that is redirected away from the general fund and into private and often religious organizations. Read AEN’s earlier analysis of HB2288 and the cost to Arizonans, “Brewer & Legislature Send More Tax Dollars to Private Schools”.

In light of this bill and various other bills which cut funding to public education, these investigations hold a light to those elected representatives — current and former — who have ties to and appear to benefit from these tax credit programs thanks to their influence in the legislature. While it doesn’t appear illegal, there is little doubt that upholding their constitutional obligation to public education has fallen second to funding private interests.

The Arizona Republic Investigation by Pat Kossan & Ronald J. Hansen

Tuition-aid program benefits wealthy families, raises worry
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Expenses hart to track for tax-credit groups
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Tax-credit work raises ethical questions

Schools under scrutiny for financing private schools with taypayer dollars.

October 19, 2009: One of the most prevalent arguments in support of Arizona’s private-school-tuition tax credits is that they save the state money by shifting students from public to private schools.  An Arizona Republic analysis, however, found that rather than saving the state money, the credits likely resulted in a net loss for the state budget. Tuition tax credits drain state money:

October 20, 2009: Lawmaker has questions for tuition groups

October 14, 2009: GOP-led panel hears testimony on STO program, Az Capital Times

October 24,2009: Private school tax credits ruled illegal

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The East Valley Tribune Investigation by Ryan Gabrielson and Michelle Reese **UPDATED**
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Rigged Privilege: A 3-part investigation into Arizona’s private school tax credits program
The East Valley Tribune will cover this story in three parts:
Part one: Private school tax credits rife with abuse and School tuition organizations unaccountable ~ August 1, 2009
Part two: Schools teach parents how to skirt the law and Charity survived indictments to help poor ~ August 4, 2009
Part three: Some charities most generous to executives and Tax credit sponsor’s vision unrealized
A live chat with the reporters was held on Monday, August 3rd, Wednesday, August 5th, and Friday August 7th.

Tax credit sponsor’s vision unrealized, East Valley Tribune, June 15, 2010

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Horizon Interviews Pulitzer Prize Winner Investigative Reporter Ryan Gabrielson

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Related AEN Posts & News Articles:
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Tax Credits & STOs: Overview
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Related news articles on tax credits & STOs
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Public Education and our Arizona Constitution
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Public Education, The Arizona Constitution & The NO TAX Pledge!
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Income Tax Credit
Click for a copy of the Private Tax Statute or the Public School Tax Statute.

• Income tax credits are funds contributed to private and/or public schools.
• Contribution maximums are dependent upon how taxes are filed. For example:

o    Private school tax credit:

• Maximum for individual: $500
• Maximum for joint/married or family: $1000

o    Public school tax credit:

• Maximum for individual: $200
• Maximum for joint/married or family: $400
• Regardless of whether tax credits are given to private or public schools, income tax credit reduces a contributor’s tax liability to zero. Any balance may be carried over by the state for up to five (5) years.

o    If an individual or couple owes money at the end of the year, the state deducts their tax liability from their credit.
o    If an individual or couple does not owe money, the balance may be carried over by the state for up to five (5) years.

• Note: These funds are not refunds! They are “credits.” The funds have never made their way IN to the state, but they are coming back as a credit OUT of the state’s general fund.
• At private schools, tax credits are generally directed towards a specific child’s tuition, but can be put towards a general scholarship fund. These funds are collected and processed by School Tuition Organizations or STOs (see below).
• At public schools, tax credits stay at the site school where the credit is submitted and are typically used to fund programs such as art, P.E., and music courses that would otherwise be cut due to budget shortfalls.

Corporate Tax Credits:
Click for a copy of the Corporate Tax Statute

• Corporate tax credits are funds corporations contribute for the purpose of providing scholarships to middle-low and lower income children.
• Corporations notify a school tuition organization (STO) of the amount of their tax credit contribution.
• The STO submits an application to the Arizona Department of Revenue identifying:

o    the contributing corporation
o    the amount the corporation will contribute as a tax credit

• Corporate tax credits are available for private schools only.
• Unlike income tax credits, corporate tax credits cannot be directed to a specific student and/or private school.

• Like with income tax credits, corporate tax credits can reduce a corporation’s tax liabilities to zero.

o    Note: These are “credits.” The money never made its way IN to the state, but the funds are coming OUT of the state’s general fund.

• Corporations can elect to leave their credit and/or balance on the state’s books for up to five (5) years.
• A combined maximum corporate tax credit ceiling (meaning a maximum corporate tax credit dollar amount allowed for the entire state and those corporations that participate)

is $14.4 million dollars for FY 2009, and increases 20% in FY 2010, to $17.28 million dollars.

• Unlike credits given to private schools, corporate tax credits cannot be directed towards a specific school and/or child.
• The corporate tax credit program in the state of Arizona was established in 2006 as a means to answer the demand for vouchers, which have been ruled unconstitutional.
• HB 2288 allows for corporate tax credits will continue to increase 20% per year into perpetuity with no option and/or provision for public school participation.
• By state law, all corporate tax credits must be processed through a School Tuition Organization (STO).

“What are School Tuition Organizations (STOs)?”

• School Tuition Organizations or STOs are identified by the IRS as 501(c)(3) nonprofit organizations that allocates 90% of its revenue towards scholarships or grants to students at more than one school.
• STOs are not certified by the Arizona Department of Revenue.
• As of 2008, the Arizona Department of Revenue reported 55 STOs operating in the state.

“How do they work?”

• STOs collect tax credits or funds from either individuals and/or corporations to be used for the purpose of scholarships or grants for private tuition costs.
• STOs process said credits by depositing funds into a bank account, issue a receipt to the contributor for tax purposes, and later allocates funds in the form of scholarship awards or tuition payments for students who attend private schools.
• Some STOs have board members who evaluate applications and award according to need.
• Some STOs are operated by large churches, such as Catholic Diocese. Other STOs are run by CPAs, and some by attorneys.
• STOs are allowed to keep 10% of tax credit contributions meant for grant allocations/donations for organizational expenses.

For information on Income Tax Credits and STOs as provided by the Arizona Department of Revenue, visit:  http://www.azdor.gov/brochure/707.pdf

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Click Here for a Downloadable Version

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Ethics 101 Tucson Weekly 5/28/09

Lawmaker’s Dual Roles Drawing Fire Arizona Republic 5/19/09

Anti-Yarbrough Amendment Fails Arizona Republic, Political Insider

Tax credit sponsor’s vision unrealized, East Valley Tribune, June 15, 2010 .

For more information on how Tax Credits and STOs work, click here.
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