Survey data incomplete on tuition tax credits - East Valley Tribune: News

Survey data incomplete on tuition tax credits

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Posted: Monday, November 16, 2009 6:39 pm | Updated: 1:24 am, Sat Oct 8, 2011.

Arizona charities that collect donations for private school scholarships say they distribute the majority of those funds to low-income students, according to a self-reported survey presented Monday to a state House committee.

Rigged Privilege: A Tribune investigation

Arizona charities that collect donations for private school scholarships say they distribute the majority of those funds to low-income students, according to a self-reported survey presented Monday to a state House committee.

But the survey results were riddled with holes that left more questions than answers as to whether most scholarships or dollars given out through Arizona's $55-million-a-year Private School Tuition Tax Credits program benefit disadvantaged children.

Rigged Privilege: A Tribune investigation

"I am overwhelmed by what these statistics don't tell us," said Rep. Tom Chabin, D-Flagstaff.

For instance, the survey results didn't identify which student tuition organizations, or STOs, use family income as a criteria for determining who gets a scholarship. Nor did the results include dollar amounts given out as scholarships or how many students got scholarships or multiple scholarships.

Those missing details are important because most tax credit donations are going every year to three STOs - the Arizona Christian School Tuition Organization (ACSTO) headed by Rep. Steve Yarbrough, R-Chandler, the Arizona Scholarship Fund (ASF), and the STO operated by the Catholic Diocese of Phoenix.

ACSTO and ASF allow donors to "recommend" students for scholarships regardless of family income. The Catholic Tuition Organization of the Diocese of Phoenix does not allow recommendations and uses income level as a primary factor in determining need.

Arizona's Private School Tuition Tax Credits program allows taxpayers to donate to STOs that in turn give scholarships to students to attend private schools. The taxpayer then gets a dollar-for-dollar tax credit on state taxes. When the program was established in 1997, it was touted as a way to expand education options to disadvantaged families.

But Rigged Privilege, a Tribune investigation published in August, found that the program is rife with abuse. While allowing some low-income children to attend private schools, it has failed overall to expand private education to disadvantaged families to any significant degree.

The House committee, chaired by Rep. Rick Murphy, R-Glendale, was created by House Speaker Kirk Adams, R-Mesa, following publication of Rigged Privilege and other media reports regarding the STOs and the tax credit program.

After the group's first meeting, Murphy sent letters to the known 53 STOs - the state Department of Revenue says there could be other STOs not known to the agency - asking them to respond to questions about how they determine who receives scholarships, how many students from low-income families receive scholarships and how much of their revenue is distributed in scholarships.

All but two responded, with 45 of the 51 saying they consider financial need when awarding scholarships.

The survey asked the STOs to determine how many of their scholarship recipients come from families whose income does not exceed 185 percent of the income limit required to qualify for the federal free and reduced-price school lunch program. Only 36 STOs reported those findings.

Among those 36 STOs, 28 percent said they award more than 90 percent of donations to low-income students, and 36 percent said they give 61 to 90 percent of donations to disadvantaged kids. Another 28 percent reported giving 31 to 60 percent of donations to low-income students, while 8 percent said they give up to 30 percent of donations to disadvantaged kids.

But the committee was not told which STOs answered that question.

The Tribune's investigation found that three of the top five STOs that give out the most scholarship dollars allow donor recommendations, with no financial need requirement.

And, research by the state revenue department has found that tax credit donors typically earn upward of $100,000 a year. Because most donors contribute for specific students, even some tax credit supporters have questioned whether the system is expanding access to private classrooms.

The Tribune also found that there is no state oversight of the program to determine if students receive more than one scholarship. One private school estimated as many as 30 percent of its students received aid from multiple STOs.

Chabin questioned the self-reporting of the STOs, but was shot down by a fellow committee member.

"It's insulted me that you accused STOs of lying on this survey," said Rep. Debbie Lesko, R-Glendale. "I hope you keep an open mind."

Chabin said he wants more information and intends to ask the STOs to provide a copy of their IRS 990 forms from the last five years. The forms, required by the federal government, provide information about officers, compensation, benefits and charitable purpose.

Two other presentations were made to the committee Monday: one by Jeffrey Hill, a Tucson tax practitioner, and one by Charles North, a professor of economics from Baylor University in Texas.

North said his analysis of the tax credit program found it saved Arizona anywhere from $99 million to $241 million last school year and has allowed Arizona to see an increase in private school enrollment while the national trend is a decline in private school enrollment.

To reach that conclusion, North analyzed the data two ways. He first estimated that all 28,321 scholarships awarded last year went to students who would otherwise be in public schools - resulting in a savings to the state of $241 million. He then also estimated only a portion of those scholarships awarded went to students who would otherwise be in public schools - resulting in a savings of $99 million.

But both methods assume that the scholarships went to 28,321 students. In fact, the state does not keep track of how many students receive scholarships, and students are allowed to receive multiple scholarships - so no one knows how many students actually received scholarships, only that 28,321 scholarships were given.

Hill spoke about the IRS's audit procedures and earmarking of donations for specific students. Tax experts told the Tribune that such earmarking would likely violate federal laws that govern STOs because they are 501(c)3 charities. But Hill maintained the earmarking could be allowed if the funds are not going to a taxpayer's dependent.

Chabin asked what would happen to a nonprofit if it lost its 501(c)3 status.

"Would that fund would be at risk?" Chabin said.

"If it was not given out already, I would assume the IRS has all kinds of ways to latch onto that if they have broken the law," Hill said.

Murphy said Chabin is making a lot of speculation and "what-ifs." Chabin disagreed and said more legislation can help protect the STOs and the donations.

Chabin said, "We could put into statute so these funds are not at risk ... to prohibit certain practices that have been reported and quite frankly we know have happened. We could do that to protect these tax dollars to children that want to go to a private school. I am the first to say that most of the actors involved are above the board, have a mission in place and deal with low-income people and have standards. I hope we get to a point where we start talking about best practices and let those be contrasted to those who have not employed them."

Lesko countered that if there are violators, the IRS should just be called to deal with them, rather than requiring additional work by state departments.

"If there is some specific violator, just call the IRS," she said.

During its next meeting, Murphy said the committee will discuss any recommended changes to the legislation.

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