Bill tightens rules on tuition tax credits - East Valley Tribune: East Valley Education News

Bill tightens rules on tuition tax credits

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Posted: Friday, February 5, 2010 1:55 pm

The office of the Arizona Scholarship Fund in Mesa. July 15, 2009.

The office of the Arizona Scholarship Fund in Mesa. July 15, 2009.

Arizona lawmakers have taken the first steps toward making the state's private school tuition tax credit law and the charities and parents who participate in the program more accountable.

 Rigged Privilege: A Tribune investigation

HB2664 was introduced this week by some of the legislators who conducted hearings late last year after the Tribune published Rigged Privilege, an investigation that found the tax credit program for individual taxpayers to be rife with abuse and lacking oversight. A separate corporate program is more strictly regulated.

The House Ways and Means Committee will hear HB2664 at 2 p.m. Monday. Calls to some of the bill's sponsors were not returned Thursday because they were in special session.

Other lawmakers, though, said the bill doesn't go far enough to correct problems. And they were especially irked by a provision in the legislation that would increase the tax credit for taxpayers, potentially decreasing funds destined for the already deprived state general fund.

"What I think we will try to do is amend it or kill it," said Rep. Tom Chabin, D-Flagstaff. Chabin sat on the Speaker-appointed committee that looked at the tax credit law. "Honestly, the bill itself fails in every fundamental way to address the abuse of tax dollars and the abuses of privileges that exist."

For more than a decade, Arizona law has allowed taxpayers to donate to School Tuition Organizations, known as STOs, nonprofit organizations that then give scholarships for students to attend private schools. Under the current $55 million annual program, taxpayers then receive a dollar-for-dollar state tax credit for their donations.

The bill to be heard Monday increases the individual tax credit limit from $500 a year to $750 a year. It also increases the limit for couples filing jointly from $1,000 a year to $1,500 a year.

Recommendations to increase the donation limits came during the last meeting of the committee looking into the tax credits last year. Some said they believe the tax credit saves the state money in education spending, so they wanted to make more tax credits available.

But members of the House legislative staff have said no audit has ever been conducted to see if the program indeed saves the state money.

The legislation "doesn't provide for regulation that's meaningful," Chabin said. "It does allow for some transparency. (But) it extends the tax credit. We cannot stand for that in this fiscal crisis we have, and it still allows for quasi-earmarking."

Last year, the Tribune found that at least one STO allows parents to set up an account to collect tax credit funds before a child even enters school. And parents said they were lining up enough "recommendations" from donors to cover their children's private school tuition by agreeing to recommend other parents' children in return.

State law currently allows donors to "recommend" students to receive the scholarships, what Chabin refers to as "quasi-earmarking," which has resulted in swapping donations among parents. But HB2664 would directly ban the swapping of recommendations, and it would prohibit STOs from using recommendations as a sole factor in scholarship awarding.

The Tribune investigation also found that some of the 55 known STOs were not giving out at least 90 percent of their donations as scholarships each year, as required by law. The bill to be heard next week would change the reporting time frame from annually to fiscally to give a more accurate picture of the percentage of donations STOs spend on scholarships.

The legislation also would require STOs to report more information to the state Department of Revenue, including the number of scholarships given to low-income families. And it would require STOs that collect at least $1 million annually to undergo a financial audit by a CPA. Those that collect less would undergo a CPA review. Currently, only STOs that collect corporate donations are required to undergo a review.

The bill also:

Prohibits public charter schools that operate some grades as "private schools" from receiving tax credit scholarship funds.

Changes the required nonprofit status for STOs from 501(c)3 charities to 501(a). Tax experts told the Tribune that donors who swap recommendations and then claim a federal tax deduction - and STOs encouraging that practice - were in violation of federal tax laws governing 501(c)3 charities. Donations to 501(a) nonprofits would not qualify for federal tax deductions.

The STOs will still be required to report each year the number of scholarships they give to schools, which schools receive them, and the total dollar amount awarded to schools.

Separate bills introduced by lawmakers would eliminate the tax credit all together, change the deadline to donate to STOs each year or triple the amount of tax credits taxpayers can receive.

Not all of them have been assigned a committee hearing.

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