CASE Giving Arizona Children STUDY Better Opportunities NUMBER 18 March 2014 in Education: A Case Study of the Nation’s Oldest Tax Credit Scholarship Program By Jonathan Butcher

INTRODUCTION me’ moments when the toilets at Brophy just ‘know’ when to flush.” Gabe Alba-Rivera used pieces of brick that fell from the ceiling of Gabe attended Brophy using his school in León, Guanajuato, a scholarship from the Brophy Mexico, and drew squares to play Community Foundation, one hopscotch at recess.1 At the time, of Arizona’s 57 school tuition he did not think it was unusual to organizations (STOs).2 Individuals play with broken bricks, and he and corporations receive a dollar- did not find it unusual that he had for-dollar credit on their taxes for to carry a bucket of water as his donations to STOs. The STOs use bathroom pass. The water was to the donations to award scholarships flush the toilet. for K-12 students. Since 1998, Arizona STOs have awarded more After Gabe and his mom moved to than $500 million in scholarships.3 Phoenix, Ariz., he realized that U.S. schools had running water unlike For 16 years, the awards have given his school in Mexico. In his senior thousands of Arizona students speech last spring at Brophy College more choices. This case study will Preparatory, an all-boys Catholic highlight research demonstrating school, Gabe said, “I still get ‘pinch that the scholarships give families

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across the state, including low-income among legislators and advocacy families, access to private schools. organizations on academic transparency that have prevented lawmakers from This study will outline Arizona’s three adding testing requirements to state law. tax credit scholarship laws, one of which contains provisions for the nation’s oldest This study will also summarize the such program: lawsuits that the Arizona teachers’ union and other interest groups have filed, • All children in the state are eligible one against scholarships that individual for scholarships funded through contributions fund and the other against contributions from individuals and scholarships that corporate donations married couples; fund. Courts settled both suits in favor of • Students from low-income families and the scholarships. active-duty military families are eligible Lawmakers have revised Arizona’s for scholarships that donations from scholarship law over time to meet public businesses and corporations fund; and legislative demands for more financial • And special needs children are eligible transparency. As a result, the law contains for scholarships that businesses fund. several provisions that serve as a model for other states to follow and provide valuable Next, this paper will provide descriptive lessons for lawmakers around the country. data on contributions to STOs and the number of scholarships awarded. This paper Tax credit scholarships, along with will summarize research on the cost-savings education savings accounts, charter that the scholarships provide to taxpayers. schools, and school vouchers, are The cost-savings estimates vary, but if all changing the way parents think about scholarship students left private schools to their children’s future. School assignment attend public schools, taxpayers would have is being replaced by flexibility, innovation, to pay approximately $226 million more and multiple options. Arizona’s tax credit Since 1998, per year in taxes to pay for these students.4 scholarships are a model for other states Arizona STOs By comparison, Arizona’s tax credits resulted as lawmakers look for ways to give all in $71 million in foregone revenue to the children the chance at a great education. 5 have awarded state in fiscal year 2012. Thus, a reasonable The purpose of this case study is to help more than estimate of the annual cost-savings to state parents and lawmakers understand how taxpayers is $155 million. $500 million in Arizona’s tax credit scholarships work and However, as explained later, this estimate how children and families benefit from the scholarships. is based on certain assumptions due to educational choices the scholarships offer. incomplete data that STOs provide to the Arizona Department of Revenue. Because ARIZONA’S TAX CREDIT STOs do not report how many students SCHOLARSHIP LAWS they award scholarships to each year, lawmakers and taxpayers cannot calculate Individual Donations a precise figure for the savings. In 1997, Arizona Gov. Fife Symington III signed legislation enacting the Empirical research on student nation’s first K-12 private school achievement is also absent. This paper will scholarships funded through explain the longstanding disagreements

2 Number 18 I March 2014 contributions to scholarship organizations.6 Individuals FIGURE 1: Total Arizona Tax Credit Scholarship Awards Funded and married couples received by Contributions from Individuals/Married Couples, CY 1998-FY 2012 a dollar-for-dollar tax credit for donations worth up to $500 to scholarship-granting organizations, which in turn used the contributions to award K-12 private school scholarships to students. Since 1997, the scholarship law has been expanded so that married couples filing jointly can contribute more than individuals. Legislators also increased the limit on tax credit awards for donations. Today, individuals receive a tax credit for donations worth up to $1,000, and STOs can use the first $500 to provide Source: Arizona Department of Revenue. “Private School Tuition Organization Income Tax Credits in Arizona: A Summary of Activity FY 2012.” P. 3. View online here: http://www.azdor. scholarships to any student gov/Portals/0/Reports/FY2012%20private%20schl%20tuition%20org%20crdt%20rept.pdf. Note who meets organizations’ that Arizona Department of Revenue Data for fiscal year 2011 is incomplete, so this data point award guidelines, including assumes no change from calendar year 2010. students already attending a private school. The next STOs must use at least 90 percent of $500 that an individual contributes in their revenue for scholarship awards.8 If all scholarship a given year must be used for students STOs that receive contributions from students left switching from a public school to a businesses (described in the following private school.7 section) also operate under this private schools requirement. In 2012, STOs awarded Married couples receive a credit on their nearly $46 million in scholarships that to attend taxes for donations worth up to $2,000, contributions from individuals/married public schools, and, again, STOs can use the first half couples funded (Figure 1).9 of the donation for any student, while taxpayers would STOs must use any contribution over STOs are not required to use these $1,000 for students switching from contributions for low-income have to pay public to private school. students, but Arizona law says STOs approximately “shall consider the financial need of As explained later, some STOs’ applicants” in evaluating applications.10 $226 million guidelines include an emphasis on However, a Hispanic Council for more per year in helping students from families that Reform and Educational Options cannot afford private school to attend a report finds that four of the largest taxes to pay for private school of their choice. STOs are giving at least 70 percent of their scholarships to students from these students.

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TABLE 1: STOs that Awarded at Least $200,000 in Scholarships Funded by Individual/Married Couple Donations and Gave More than 70 Percent of their Scholarship Awards to Low-Income Students

Scholarship Percent of Scholarships STO Dollars Awarded for Poor Students Arizona School Choice Trust $1.2 million 73 Brophy Community Foundation $1.1 million 90 BEST Student Fund $233,361 94 100 Pappas Kids Schoolhouse Foundation $222,352

Source: Hispanic Council for Reform and Educational Options, “2nd Annual Grading Arizona’s Scholarship Organizations,” July 2013. View online here: http://www.hcreo.com/Portals/115649/docs/STO_REPORT.pdf.

low-income families (Table 1).11 More for high school students.15 These amounts Tax credit information on how STOs are helping increase by $100 annually. scholarships, low-income students is provided in the “Arizona Tax Credit Scholarship The law governing corporate donations along with Research” section. originally included a provision requiring that students take a national norm- education Corporate Donations referenced achievement test every year. However, near the end of the 2012 savings accounts, In 2006, Arizona lawmakers added a legislative session, lawmakers removed scholarship program that awards tax charter schools, this provision.16 Because the scholarship credits to businesses and corporations laws governing individual contributions and school that donate to STOs.12 STOs must use and Lexie’s Law (see below) do not have the contributions for students from vouchers, are any academic transparency provisions, no families with household incomes that do academic data on scholarship students are changing the not exceed 185 percent of the income available. Arizona Lawmakers, researchers, limit for students eligible for the federal and advocacy organizations disagree way parents reduced-priced lunch program. Children about the level of academic transparency of active duty military members stationed think about to require in the scholarships. More in Arizona are also eligible.13 New information is available in the “Academic their children’s scholarship recipients must have attended Transparency” section. future. School a public school in the prior school year. The program was limited to $10 million In 2012, STOs awarded $11.4 assignment is in total tax credit awards annually when million in scholarships that corporate being replaced first enacted, but this cap increases by 20 donations funded (Figure 2).17 percent annually. The cap now stands at by flexibility, approximately $35.8 million.14 Lexie’s Law innovation, and The scholarship awards are restricted to In 2009, the Arizona Supreme Court ruled $4,900 for students in elementary and that a state voucher program for special multiple options. middle school grades (K-8) and $6,200 needs children and children in the state foster care system was unconstitutional.19

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Student Testimonial: Joseph Joseph, a fourth grader at Bethany Christian “His parents are thrilled with the skills that he School, benefits from the corporate tax credit is learning,” says the STO’s feature on Joseph, scholarship program.18 Arizona School Choice and his parents “are confident that he is being Trust awarded Joseph’s scholarship and reports that equipped for success no matter what his eventual his favorite subject is math and he “loves learning.” career path.”

After the decision, lawmakers convened Scholarship awards are restricted to the lesser for a special session and enacted “Lexie’s of 90 percent of the state aid that would Law.” This law provides corporate tax credit have funded the scholarship student in a scholarship awards for students who were public school or the cost of tuition.22 receiving vouchers.20 The law was named for Lexie Weck, a 7-year-old girl diagnosed As Figure 3 indicates, Lexie’s Law is the Today, with multiple needs, including autism.21 smallest of Arizona’s three scholarship individuals Lexie “relied on the voucher program” to programs, both in terms of the amount of attend a private school that was designed to funds STOs have raised and the number receive a tax help students with autism. of scholarships awarded. In fiscal year credit for

FIGURE 2: Arizona Tax Credit Scholarship Awards donations worth That Corporate Contributions Funded, CY 2006-FY 2012 up to $1,000, and STOs can use the first $500 to provide scholarships to any student who meets organizations’ award guidelines, including students already attending a

Source: Arizona Department of Revenue. “Private School Tuition Organization Income Tax Credits in Arizona: private school. A Summary of Activity FY 2012.” P. 3. View online here: http://www.azdor.gov/Portals/0/Reports/FY2012%20 private%20schl%20tuition%20org%20crdt%20rept.pdf. Note that Arizona Department of Revenue Data for fiscal year 2011 is incomplete, so this data point assumes no change from calendar year 2010.

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FIGURE 3: Lexie’s Law Awards Funded by Corporate Contributions, Years

Source: Arizona Department of Revenue. “Private School Tuition Organization Income Tax Credits in Arizona: A Summary of Activity FY 2012.” P. 3. View online here: http://www.azdor.gov/Portals/0/Reports/FY2012%20private%20schl%20tuition%20org%20crdt%20rept.pdf. Note that Arizona Department of Revenue Data for fiscal year 2011 is incomplete, so this data point assumes no change from calendar year 2010. STOs are 2012, STOs awarded nearly $600,000 in on participating private schools (see scholarships to special needs students. Table 2 for quick facts about Arizona’s not required Tax Credit Scholarships). In 2011, Lexie was featured in an Arizona to use these Republic editorial where Lexie’s mom, According to Goldwater Institute data contributions Andrea, reported, “She is thriving. There from 2005, the average scholarship are not enough wonderful things I can say awards for the individual tax credit and for low-income about where she is now.”23 corporate tax credit programs are less than the state’s average private school students, but 25 ARIZONA TAX CREDIT tuition. The Institute’s private school Arizona law SCHOLARSHIP RESEARCH survey found that private schools’ average tuition was $3,700 for schools serving says STOs “shall Arizona Department of Revenue grades K-8 and $5,500 for high schools. consider the Since 2007, the Arizona Department Eighty-nine percent of the private of Revenue has produced an schools surveyed in 2005 offered financial need 24 annual scholarship summary. The financial aid, helping parents make of applicants” department’s report includes data on up the difference between scholarship in evaluating how much money STOs raise and awards and tuition levels. Arizona’s award in scholarships, the number of scholarship laws also allow for students applications. scholarships awarded, and information to use more than one scholarship

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TABLE 2: Arizona Tax Credit Scholarships: FY 2012 Quick Facts

Total Number of STOs in Arizona 57 Total Contributions Collected $71.4 million Total Amount of Scholarships Awarded $57.7 million Total Number of Scholarships Awarded 29,914 (23,959 funded by individual donations; 5,836 from corporate contributions for low-income students; and 119 scholarships for special needs students) Average Scholarship Award Amounts Individual: $1,900 Corporate: $1,949 Lexie’s Law: $4,921 Number of Private Schools Receiving 347 Scholarship Students Funded by Donations from Individuals/Married Couples Number of Private Schools Receiving 206 Scholarship Students Funded by Corporate Donations Number of Private Schools Receiving 38 Scholarship Students Under Lexie’s Law

Source: Arizona Department of Revenue, “Private School Tuition Organization Income Tax Credits in Arizona: A Summary of Activity, FY 2012.” View online here: http://www.azdor.gov/Portals/0/Reports/FY2012%20private%20schl%20tuition%20org%20crdt%20rept.pdf. award. This statutory provision makes it no single STO awarded scholarships of In 2011, Lexie impossible to track precisely the number this size, though one STO awarded 34 of students using scholarships (see scholarships under Lexie’s Law at an was featured “Economic Impact Studies”) but helps average award of nearly $11,000. in an Arizona families to cover tuition costs that would otherwise be out of reach. Economic Impact Studies Republic Since 2009, three studies have analyzed Schools designed to serve students with editorial Arizona’s scholarships to determine the special needs, the children benefitting cost or cost-savings to state taxpayers. where Lexie’s from Lexie’s Law, have higher tuition All of the studies are based on certain mom, Andrea, levels. These schools offer more assumptions because key details are comprehensive, and expensive, services. reported, “She is missing in the available data. For example, Lauren’s Institute for thriving. There Education enrolls students with First, The Arizona Republic released a series developmental disabilities and of articles in 2009 that were critical of are not enough charges $26,000 per year.26 Pieceful STOs and Arizona’s scholarship laws.28 The wonderful Solutions helps children diagnosed Republic reported that “Arizona officials things I can say with autism and has set tuition at have no way of knowing how many $23,000 annually.27 As Table 3 shows, students receive tax-credit scholarships about where she is now.”

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TABLE 3: Arizona Department of Revenue FY 2012 Statistics for STOs Participating in Lexie’s Law

Number of Total Scholarship Average School Tuition Organizations Scholarships Awards Scholarship Arizona School Choice Trust 8 $45,085 $5,635.63 Financial Aid for Independent Schools 22 $78,368 $3,562 Institute for Better Education 48 $68,955 $1,436.56 School Choice Arizona 7 $32,961 $4,708.71 Tuition Organization for Private Schools 34 $360,203 $10,594.21

Source: Arizona Department of Revenue. “Private School Tuition Organization Income Tax Credits in Arizona: A Summary of Activity, FY 2012.” P. 18. View online here: http://www.azdor.gov/Portals/0/Reports/FY2012%20private%20schl%20tuition%20org%20crdt%20rept.pdf.

because the law doesn’t require tuition North’s report said that if all students groups to report the number.” Because using scholarships funded through lawmakers and taxpayers do not know how individual/married couple donations many students are served, it is impossible to attended public schools, the cost to determine the exact cost or cost-savings to Arizona taxpayers would have been Eighty-nine the state. $241.5 million in 2008. North arrived at this figure using Arizona Joint Legislative percent of the The Republic’s analysis of tax credit Budget Committee data that reported scholarships that donations from private schools the average per student expenditure from individuals/married couples fund state, county, and local governments in surveyed in estimated that the scholarships saved Arizona was $8,528. North assumed that taxpayers $8.3 million between 1999 29 all 28,321 scholarships awarded in 2008 2005 offered and 2007. The paper’s cost-savings went to unique students. He multiplied financial aid, figure is based on the assumption that the average per-student spending figure 7,530 students—the total growth in the by the number of scholarships. helping parents Arizona private school population during this period—would return to public Using North’s analytical methods and make up the schools without the scholarships. updating the per-student funding difference figures and scholarship awards to fiscal In response to the Republic’s reports, year 2012, the current cost to state between lawmakers convened a special committee taxpayers if all scholarship students scholarship to review the individual/married couple tax returned to public schools would credit scholarship law. In November 2009, be $226 million per year. Arizona awards and Baylor University Professor Charles M. Department of Revenue data show that North, Ph.D., presented his analysis of the the tax credit awards to donors, which tuition levels. economic impact of the scholarships before are forgone state revenue, only totaled the ad hoc legislative committee (similar $71 million last year. to the Republic’s analysis, North did not review the impact of scholarships funded North also estimated the savings through corporate donations to STOs).30 to Arizona taxpayers under the

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The scholarships have provided the two brothers Student Testimonial: with excellent opportunities inside and outside of Jaime and Hector the classroom. Jaime plays football, and Brenda says, “I can see his self-esteem improving and he’s Brenda Portillo, mother of Jaime (age 12) and growing up so much through activities like these.” Hector (age 8), says, “Without the support of the scholarships, we just couldn’t afford St. Matthew’s On Tuesdays and Thursdays, students from Brophy Catholic School.”31 Brenda was concerned about Prep visit St. Matthew’s to tutor Hector and his her sons’ safety at their local traditional school, and classmates. she says, “Kids in the local school, they already have “I come from a big family,” Brenda says, “and issues with drugs, using and selling.” She explains education is a gift that no one can take away from that the scholarships allow her to use more of her own you. We feel like a family at St. Matthew’s.” income each month to cover bills and other expenses. assumption that certain students On the heels of the ad hoc legislative would not be able to afford private committee, Vicki E. Murray, Ph.D., school tuition without a scholarship. found that Arizona’s scholarships that According to data from 14 STOs that individual donations fund (again, the emphasize “financial need” in their law does not require these scholarships North’s report scholarship awards, North said that be awarded to low-income students) more than 11,000 students would were helping low-income students.33 said that if all return to public schools without the Murray surveyed Arizona’s STOs and students using scholarships, costing taxpayers collected data representing 80 percent $99.8 million.32 of scholarship recipients. She found that scholarships scholarship recipients’ median income Central to the debate between was nearly $5,000 below the U.S. Census funded through the Republic and North are the Bureau’s statewide median income level. individual/ assumptions on how many different Murray also reported that recipients’ scholarships a single child uses and median income was approximately $5,000 married couple how many students would return to lower than the median income in the donations public schools without a scholarship. students’ neighborhoods. Her findings The Arizona Department of Revenue indicate that families that would otherwise attended public only reports the total number of be unable to send their children to private schools, the scholarships awarded, not the total schools without the scholarships are number of students served, so North’s benefitting from scholarships. cost to Arizona findings have a margin of error that is difficult to calculate. Likewise, the This study also found that 67 percent of taxpayers Republic’s analysis does not account students using scholarships that individuals/ would have for unobserved changes to Arizona’s married couples fund would meet the private school population, such as income qualifications for scholarships that been $241.5 student transfers between public corporate donations fund. Murray’s findings and private schools. Both North’s refuted the Republic’s claim that Arizona million in report and the Republic’s estimates are scholarships are disproportionately awarded 2008. limited due to limited data (see Table to students from wealthy families. 4 for comparison.)

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TABLE 4: Competing Estimates on Taxpayers’ Cost-Savings from Tax Credit Scholarships Funded with Donations from Individuals/Married Couples

Number of Estimated Per Student Cost-Savings Scholarship Students Average Funding Calculation Baylor University 28,321 $8,528 28,321 x $8,528 = $241,521,488 Prof. Charles North

Arizona Republic 7,530 • $4,868 from the general fund, 1) $4,868 x 7,530 = $37 million saved $3,674 from local taxpayers; from the general fund because of • $56 million in state revenue student transfers forgone because of tax credits 2) $56 million - $37 million = $19 in 2009 million cost to the general fund 3) $3,674 x 7,530 = $27.6 million saved by local taxpayers 4) $27.6 million - $19 million = $8 million (approx.) net saved by state taxpayers

Source: Hansen, Ronald J., “Private-school tax credits save $8.3 million.” The Arizona Republic, October 20, 2009. View online here: http:// www.azcentral.com/news/articles/2009/10/20/20091020taxcredits1020.html#protected; and North, Charles M., Ph.D., J.D. “Estimating the Savings to Arizona Taxpayers of the Private School Tuition Tax Credit,” white paper. View online here: http://acsto.org/_media/uploaded/ e/0e1832055_estimating-the-savings.pdf.

Central to the Data limitations prevent a precise cost- language from the corporate tax credit savings analysis to Arizona taxpayers. scholarship law in 2012. debate between However, these studies conducted in the wake of the Republic’s investigation The Goldwater Institute contends that the Republic agree that Arizona’s scholarships academic transparency in the scholarships and North are are less expensive than the cost of as well as in the state’s other private school choice option, education savings accounts, traditional public schools. Research 35 the assumptions also demonstrates that the scholarships will benefit students and taxpayers. on how many are helping low-income students select Today, lawmakers and taxpayers still do private schools. not know how Arizona scholarships affect different student achievement. Students and parents benefit from regular assessments because ACADEMIC TRANSPARENCY scholarships a test results help students and their families 36 single child uses The Arizona Republic’s series was also know how well a child is learning. and how many critical of the state’s scholarship laws Opponents of academic transparency because the individual tax credit say that parents hold private schools students would scholarship law does not require accountable for student achievement return to public students to take either the state test through their choice to enroll their child used for state and federal accountability or choose a different school. “Private purposes or a national norm-referenced schools without a 34 schools are accountable to parents and test. As mentioned previously, when parents have true school choice, scholarship. lawmakers would remove testing good schools will succeed and bad schools

10 Number 18 I March 2014 will fail,” says the Center for Arizona analysis of student achievement would not Policy, a state-based research institute.37 force the majority of private schools to The Center says the potential for change classroom activities. “government interference” in private school operations if there was a required testing Academic reporting does not have to provision threatens private schools’ ability threaten private schools’ independence. to direct their instructional practices. Transparency measures should be used Murray also to give the public more information on Yet the Republic’s series is evidence that a student performance and help lawmakers reported that dearth of available data causes observers adjust legislation as necessary in order to recipients’ to question scholarships’ effectiveness, better serve students. regardless of whether parents can show median their approval or disapproval through LEGAL VICTORIES income was school selection. Without test scores, advocates of the scholarship laws could Shortly after Gov. Symington’s signature approximately not use test results to assure the public in 1997, the National Education that students are succeeding. As a result, Association, a teachers’ union, and its $5,000 lower critics can point to certain activities among local affiliate, the Arizona Education than the median STOs that, at best, give the appearance of Association (AEA), sued to shut not following the law and, at worst, are down the individual-contribution tax income in breaking the law.38 Opponents then cast credit law. Opponents argued that the the students’ doubt on whether the scholarships help scholarships unconstitutionally promote students, and advocates have no evidence religious practices because parents neighborhoods. to use in order to refute them. can send their children to religious Her findings schools.39 The scholarship opponents’ Academic transparency laws can be position cited what is commonly known indicate that designed to protect private school as Arizona’s “Blaine Amendment,” autonomy while still providing regular discriminatory language also found in 37 families that reports on student progress. States other state constitutions.40 would otherwise could construct policies modeled after Florida’s provision, which requires a These amendments were added to state be unable to third-party researcher to collect student constitutions at the turn of the 20th test scores and produce a report. State century to prevent Catholic families send their agencies do not have to intrude on from starting their own public schools. children to private school activities in order to fulfill Public schools, at the time, still reflected this requirement. Private schools must non-denominational Protestant beliefs private schools cooperate with the researcher’s data- in their teaching practices. Catholic without the gathering activities, but the researcher’s families had little recourse, and U.S. Sen. responsibility will be to document James Blaine limited their options even scholarships are student progress and report findings apart further by using his influence with state benefitting from from any state agency’s operation. In leaders to amend state constitutions. the private school survey the Goldwater The amendments prevent public money scholarships. Institute conducted in 2005, 93 percent from being used for sectarian or private of Arizona private schools reported that purposes under certain conditions. they annually administer standardized tests. With so many schools testing their The Arizona Supreme Court rejected the students, a state law that requires an argument and upheld the law in 1999.

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The American Civil Liberties Union POLICY RECOMMENDATIONS sued in 2000, this time in federal court. On April 4, 2011, the U.S. Supreme Arizona’s tax credit scholarship laws Court in Arizona Christian School give students more options than just an Tuition Organization v. Winn dismissed assigned traditional school—a lifeline the legal challenge.41 The 5-4 ruling for students assigned to failing public said that taxpayers do not have standing schools. Children in other states would to challenge tax credit programs benefit from Arizona’s provisions, but because private contributions, not the lawmakers should heed the lessons government, fund the scholarships. If from Arizona’s experience and design the parents of scholarship students use legislation accordingly. the money at religious schools, that • Eligibility. Every child should have action does not use public funds to 42 the chance at an excellent education. promote religious causes. Tax credit scholarships should not Data The U.S. Supreme Court victory be limited to certain student groups, arrived the year The Wall Street Journal otherwise lawmakers risk exacerbating limitations called “the Year of School Choice.”43 the achievement and opportunity gaps The Journal cited new or expanded between students from families with prevent a school voucher and scholarship laws in different income levels and academic or precise cost- North Carolina, Louisiana, Ohio, and physical needs. savings analysis Wisconsin, along with the first voucher • Tax credit amounts. Donors program enacted by a county school should receive a dollar-for-dollar tax to Arizona board in Douglas County, Colorado. credit for donations to scholarship taxpayers. “Unions defend the monopoly to protect organizations. Partial tax credits jobs for their members, but education will limit scholarship organizations’ However, should above all serve students and the ability to raise sufficient funds to help these studies larger goal of a society in which everyone parents cover the costs associated with has an opportunity to prosper,” wrote the private school tuition. If lawmakers conducted in Journal’s editors. set annual limits on the amount of tax credits given to taxpayers statewide, the wake of The ACLU of Arizona and the Arizona this cap should be set to automatically the Republic’s School Boards Association challenged increase each year. the scholarships that corporate investigation donations fund in 2006. Their argument • Academic transparency. Lawmakers was nearly identical to the position should require private schools to agree that outlined in the Kotterman lawsuit.44 report standardized test results Arizona’s Three years later, after the Arizona to an independent researcher. Court of Appeals upheld the program, Researchers should report on student scholarships are the Arizona Supreme Court refused to achievement at regular intervals. review the case, ending this challenge.45 Also, a state agency should conduct less expensive regular parent surveys to measure than the cost Fortunately for students, there is strong satisfaction levels. The results will legal precedent from Arizona courts serve as indicators to taxpayers and of traditional and the U.S. Supreme Court that the lawmakers on how the scholarships public schools. scholarships do not violate Arizona’s benefit students. constitution or the U.S. Constitution.

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• Fiscal transparency. State agencies CONCLUSION such as departments of revenue and education should coordinate data Gabe Alba-Rivera, the student who In the private collection to count the number of appreciated the little things at Brophy children using scholarships. Precise Prep, like running water, enrolled at MIT school survey student counts will help researchers in September 2013. He has already been determine how much tax money is offered an internship with a company the Goldwater saved through the scholarships. that specializes in 3-D printers. “I’ve Institute done so much here already, and not just STOs should be required to award academically,” Gabe told the Brophy conducted in scholarships to students attending Community Foundation in October 2013. 2005, 93 percent at least two schools. This prevents Gabe’s story, like those of Joseph, Brenda of Arizona an STO and a private school from and Lexie, bring context to the nearly colluding in an effort to benefit one 30,000 scholarships that Arizona STOs private schools private institution. award each year. Their stories demonstrate reported that Arizona STOs are required to spend that the scholarships are helping students at least 90 percent of their revenue from disadvantaged backgrounds take they annually on scholarships. STOs do not have to advantage of opportunities that otherwise administer meet this specification each year, so would not be available to them. Arizona’s law is not as specific on this But the law still has its limitations. standardized issue as it should be. STOs should STOs are not required to report how tests. With so be required to spend, on average, at many students they serve each year, least 90 percent of their revenue on which prevents a precise determination many schools scholarships. A state agency such as of the cost-savings to Arizona taxpayers. testing their the department of revenue should Debate has simmered since 2009, but provide information on annual trends the research question is not resolved. students, a state for this statistic. In 2012, lawmakers struck the lone law that requires • Prevent “swapping.” Donors must testing requirement for students using not be allowed to specify the student scholarships that corporate donations an analysis that will benefit from a donation. fund. After 16 years, taxpayers and of student State law should require that STOs legislators do not know if scholarship determine criteria for scholarship students are realizing achievement gains. achievement awards and not allow contributors Still, Arizona’s laws have been models would not force to swap donations to benefit each for other states around the U.S. As of other’s children. Arizona STOs faced January 2013, 10 other states have passed the majority of intense public scrutiny for allowing scholarship tax credit laws. Arizona private schools to this practice until lawmakers STOs have awarded more than $500 abolished it in response to The million in scholarships since 1998 and change classroom Arizona Republic’s reports in 2009.46 given students like Gabe the chance at an activities. excellent education.

Jonathan Butcher is the education director at the Goldwater Institute.

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9 Arizona Department of Revenue. “Private 20 Forty-ninth Arizona Legislature, Second NOTES School Tuition Organization Income Tax Special Session, HB 2001. View online here: Credits in Arizona: A Summary of Activity FY http://www.azleg.gov/DocumentsForBill.asp?- 1 The Hispanic Council for Reform and Edu- 2012.” P. 3. Bill_Number=HB2001&Session_ID=90. cational Options featured Gabe’s story in the “2nd Annual Grading Arizona’s Scholarship 10 Arizona Revised Statutes, 43-1603 D. 2. 21 Institute for Justice. “Arizona Governor to Organizations: Private School Tuition Orga- View online here: http://www.azleg.gov/ Sign Lexie’s Law to Save Scholarships for nizations Changing Lives One Student at a FormatDocument.asp?inDoc=/ars/43/01603. Special Needs and Foster Children,” Press Time,” released in July 2013 (view online htm&Title=43&DocType=ARS. Release, May 29, 2009. View online here: here: http://www.hcreo.com/Portals/115649/ http://ij.org/lexies-law-saves-school-choice- docs/STO_REPORT.pdf). The author conduct- 11 Hispanic Council for Reform and Education- in-arizona. ed the original interview. al Options. “2nd Annual Grading Arizona’s Scholarship Organizations,” July 2013. View 22 Arizona Department of Revenue. “Private 2 Arizona Department of Revenue. “Private online here: http://www.hcreo.com/Por- School Tuition Organization Income Tax Cred- School Tuition Organization Income Tax tals/115649/docs/STO_REPORT.pdf. its in Arizona.” P. 18. Credits in Arizona: A Summary of Activity, FY 2012.” P. 3. View online here: http://www. 12 Forty-seventh Arizona Legislature, Second 23 Butcher, Jonathan. “Education savings azdor.gov/Portals/0/Reports/FY2012%20pri- Regular Session, SB 1499. View online here: accounts offer hope for special-needs vate%20schl%20tuition%20org%20crdt%20 http://www.azleg.gov//FormatDocument. kids.” The Arizona Republic, June 25, rept.pdf. asp?inDoc=/legtext/47leg/2r/laws/0014.htm&- 2011 View online here: http://www.azcen- Session_ID=83. tral.com/arizonarepublic/opinions/arti- 3 Arizona Department of Revenue. “Private cles/2011/06/25/20110625butcher25.html?n- School Tuition Organization Income Tax Cred- 13 Arizona Department of Revenue. “Manual click_check=1. its in Arizona: A Summary of Activity, FY for School Tuition Organizations.” P. 1-2. View 2012.” P. 3. online here: http://www.azdor.gov/LinkClick. 24 See Arizona Department of Revenue. “Pri- aspx?fileticket=7yB6sLip-0k%3d&tabid=240. vate School Tuition Organization Income Tax 4 Author calculations based on the number Credit Reports.” View online here: http://www. of scholarships awarded and the average 14 Arizona Department of Revenue. “Private azdor.gov/ReportsResearch/SchoolTaxCredit. per-student expenditure at Arizona public School Tuition Organization Income Tax Cred- aspx#private. schools. See Arizona Joint Legislative Budget its in Arizona.” P. 12. Committee, “All Funding,” August 30, 2013. 25 Murray, Vicki, Ph.D., and Ross Groen. “Sur- View online here: http://www.azleg.gov/jlbc/ 15 Arizona Department of Revenue. “Manual vey of Arizona Private Schools: Tuition, Test- allfunding.pdf. for School Tuition Organizations” P. 36-37. ing, and Curricula.” Goldwater Institute Policy Report No. 199, January 5, 2005. View online 5 Arizona Department of Revenue. “Private 16 Fiftieth Arizona Legislature, Second Regular here: http://goldwaterinstitute.org/sites/ School Tuition Organization Income Tax Cred- Session, SB 1047. View online here: http:// default/files/Survey%20of%20Arizona%20 its in Arizona: A Summary of Activity, FY www.azleg.gov//FormatDocument.asp?in- Private%20Schools_0.pdf. 2012.” P. 2. Doc=/legtext/50leg/2r/laws/0004.htm&Ses- sion_ID=107. 26 Lauren’s Institute for Education. “From the 6 Forty-third Arizona Legislature, First Regular Co-Founder.” View online here: http://lauren- Session, HB 2074. View online here: http:// 17 Arizona Department of Revenue. “Private sinstitute.org/academy/. www.azleg.gov//FormatDocument.asp?in- School Tuition Organization Income Tax Cred- Doc=/legtext/43leg/1r/bills/hb2074s.htm&Ses- its in Arizona.” P. 3. 27 Muñiz, Abel, Jr. “Mesa’s Pieceful Solutions sion_ID=50. aims to live up to its name in teaching autistic 18 Arizona School Choice Trust. “ASCT Student youth.” East Valley Tribune, February 3, 2013. 7 Butcher, Jonathan. “Tax Credit Scholar- Spotlight: Joseph.” View online here: http:// View online here: http://www.eastvalleytri- ships: Questions and Answers.” Goldwater www.asct.org/student-spotlight/. bune.com/local/education/article_59f3c956- Institute, March 6, 2012. View online here: 6c24-11e2-98c0-0019bb2963f4.html. http://goldwaterinstitute.org/scholarships. 19 See Supreme Court of Arizona, Cain v. Horne. View online here: http://www.az- 28 See Forty-ninth Arizona Legislature, First 8 See Arizona Department of Revenue. “Pri- courts.gov/Portals/23/pdf2009/CainOpinion- Regular Session, Ad Hoc Committee on vate School Tuition Organization Income Tax CV080189PR.pdf. Private School Tuition Tax Credit Review. Credits in Arizona.” P. 10. View online here: http://www.azleg.gov/ iminute/house/111609%20ad%20hoc%20

14 Number 18 I March 2014 sto.doc.htm; Hansen, Ronald J. “Schooling regular assessments, see Walberg, Herbert J. Defend School Choice from Education tax-credit scrutiny often lags in Arizona.” The Tests, Testing, and Genuine School Reform Establishment’s Third Legal Attack,” Litigation Arizona Republic, September 21, 2009. View (Stanford: Hoover Institution Press, 2011). Backgrounder. View online here: http:// online here: http://www.azcentral.com/news/ www.ij.org/arizona-corporate-tax-credit- articles/2009/09/21/20090921sto-others0920. 37 Center for Arizona Policy. “School Choice,” scholarships-background. html; and Hansen, Ronald J., and Pat Kossan. The Policy Pages. View online here: http:// “Tuition-aid program benefits wealthy fami- www.azpolicypages.com/marriage-family/ 45 Institute for Justice. “Arizona’s Corporate lies, raises concerns.” The Arizona Republic, school-choice/. Tuition Tax Credit is Constitutional,” Press August 1, 2009. View online here: http:// Release, October 28, 2009. View online here: www.azcentral.com/arizonarepublic/news/ 38 The Republic was especially critical of http://www.ij.org/arizonaacanacs-corporate- articles/2009/08/01/20090801sto-whobene- STOs’ practice of “swapping,” where donors tuition-tax-credit-is-constitutional. fits0801.html. and parents would specify the child whose scholarship would be funded by a specific 46 Kossan, Pat and Ronald J. Hansen. “Arizona 29 Hansen, Ronald J., and Pat Kossan. “Pro- donation. In some cases, two families would tuition-credit practices may violate federal fessor puts savings for state at up to $186 agree to donate to an STO if their contribu- tax laws.” The Arizona Republic, December 27, million.” The Arizona Republic, November 17, tions would be used for a scholarship for 2009. View online here: http://www.azcentral. 2009. View online here: http://www.azcentral. the other family’s child. See Kossan, Pat, and com/news/articles/2009/12/27/20091227sto- com/news/articles/2009/11/17/20091117sto-go- Ronald J. Hansen. “Ariz. tuition-credit practic- irs1227.html. pmeeting1117.html. es may violate federal tax laws.” The Arizona Republic, December 27, 2009. View online 30 North, Charles M., Ph.D., J.D. “Estimating here: http://www.azcentral.com/news/arti- the Savings to Arizona Taxpayers of the Private cles/2009/12/27/20091227sto-irs1227.html. School Tuition Tax Credit,” white paper. View online here: http://acsto.org/_media/upload- 39 See Americans United. “Kotterman v. ed/e/0e1832055_estimating-the-savings.pdf. Killian,” October 24, 2011. View online here: https://www.au.org/our-work/legal/lawsuits/ 31 Brenda Portillo’s story was also featured in kotterman-v-killian; and Supreme Court of Hispanic Council for Reform and Education- Arizona, Kotterman v. Killian, No. CV-97-0412- al Options, “2nd Annual Grading Arizona’s SA. View online here: http://www.supreme. Scholarship Organizations.” The author con- state.az.us/opin/pdf1999/cv970412.pdf. ducted the interview. 40 See U.S. Commission on Civil Rights. 32 North, “Estimating the Savings to Arizona “School Choice: The Blaine Amendments Taxpayers,” P. 3. and Anti-Catholicism,” June 1, 2007. View online here: http://www.usccr.gov/pubs/ 33 Murray, Vicki E. “An Analysis of Arizona BlaineReport.pdf. Individual Income Tax-credit Scholarship Recipients’ Family Income, 2009-10 School 41 Institute for Justice. “U.S. Supreme Court Year,” Program on Education Policy and Gov- Dismisses Legal Challenge to Arizona School ernance Working Paper, Harvard University. Choice Program,” Press Release, April 4, 2011. View online here: http://www.hks.harvard. View online here: http://www.ij.org/arizona- edu/pepg/PDF/Papers/PEPG10-18_Murray.pdf. school-choice-release-4-4-11.

34 Hansen. “Schooling tax-credit scrutiny of- 42 U.S. Supreme Court, Arizona Christian ten lags in Arizona.” School Tuition Organization v. Winn, decided April 4, 2011. View online here: http://www. 35 Butcher, Jonathan. “Education Savings Ac- supremecourt.gov/opinions/10pdf/09-987.pdf. counts and Student Testing – We Can’t Afford to Look the Other Way.” Goldwater Institute, 43 The Wall Street Journal. “The Year of December 6, 2012. View online here: http:// School Choice,” July 5, 2011. View online here: goldwaterinstitute.org/blog/education-sav- http://online.wsj.com/article/SB100014240527 ings-accounts-and-student-testing-we-cant- 02304450604576420330972531442.html. afford-look-other-way. 36 For more information on the benefits of 44 Institute for Justice. “Arizona Parents

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