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 ADVANCING LIBERTY WITH RESPONSIBILITY BY PROMOTING MARKET SOLUTIONS FOR MISSOURI PUBLIC POLICY CASE STUDY I SHOW-ME INSTITUTE 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. 3 CASE STUDY I SHOW-ME INSTITUTE 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.