Lawmakers looking at Arizona's private school tuition tax credit program said Monday it may be time to require that scholarships go only to families who meet low-income requirements.
A panel created by the House Democratic caucus following the August publication of a Tribune investigation into the program met for the first time Monday.
Arizona law allows individual taxpayers to receive a state tax credit of up to $1,000 a year for a donation to a school tuition organization or STO, a 501(c)3 charity under federal tax law. STOs then give scholarships to students attending private schools or to students with special needs attending preschool programs.
The Tribune investigation, Rigged Privilege, found that the individual Private School Tuition Tax Credit program is rife with abuse, lacks oversight, and has failed to increase to any significant degree the access that disadvantaged children have to private schools.
In addition, lawmakers said Monday they've been contacted by constituents about STOs organizing tax credit swap parties, individuals loaning money to people they know to make a tax credit donation that benefits their own children, and a business CEO requiring employees to make a tax credit donation to benefit his child. All would be a violation of federal law governing donations to 501(c)3 charities.
The lawmakers heard from House staff economist Mark Bogart, representatives of the state Department of Revenue, and Northern Arizona University professor Larry Mohrewis, a certified public accountant who also is chairman and creator of the Flagstaff Scholarship Fund, an STO.
A number of the lawmakers questioned them about who is receiving the scholarships, the reporting requirements for the STOs that collect donations and give out scholarships, and federal law surrounding the nonprofit status of the groups.
Bogart, a longtime member of the House staff, presented lawmakers with the minutes and materials presented when the individual tax credit was approved 12 years ago. In the materials, he said, it clearly states that some lawmakers had the intention that the scholarships be given only to those with "low to moderate income," while others wanted them available to students of all means.
Whatever the intent, lawmakers noted, the fact is that today there is no means or financial test in the law for the individual tuition tax credit scholarships. A separate program that allows corporations to donate to STOs does have a financial need requirement. For instance, this year, a family of four cannot have an income exceeding $75,467.
Several of the lawmakers said they would like to see legislation that puts a financial-need requirement in place for students to receive a scholarship from the individual tax program.
Rep. Tom Chabin, D-Flagstaff, said "it's a shame" one wasn't in place before for the individual tax credit. "We probably wouldn't have our tail tied in knots."
Rep. David Schapira, D-Tempe, the chairman of the group, said members agreed upon six measures to explore during the hearings:
A possible means test, or financial requirement, for the individual tax credit scholarship recipients. Currently, only the corporate tax credit scholarships have such a requirement.
Recommendations, or earmarking, of donations for particular students and whether or not they comply with federal law.
Administrative costs to run STOs. Currently, state law requires STOs to use 90 percent of the donations they receive for scholarships. In reviewing reports filed with the Department of Revenue, the Tribune found as many as two-thirds of the organizations fail to meet that requirement each year.
Best practices of STOs in Arizona as well as some in other states.
Whether or not more oversight is needed for the STOs and what that may look like.
Federal tax law and whether or not STOs are compliant.
Following the meeting, Schapira told the Tribune it may also be time, given the economic situation in Arizona, to explore a cap on the individual tax credit program.
"The committee that discussed this (originally) thought this would be a much, much smaller cost. This is 11 times what the intent was and 11 times is clearly costing the state more than it intended," he said. "That might be something we need to consider."
Rep. Rich Crandall, R-Mesa, disagreed. If changes are made to the program to require financial need, a cap won't be necessary, he said.
Materials presented to the panel by Bogart indicate the Legislature dramatically underestimated how much the program would cost the state when the law was approved. At that time, the Joint Legislative Budget Committee noted the cost to the state's general fund would be about $4.5 million in fiscal year 1999.
Donations for 2008 totaled $55 million.
Legislative staff had predicted there would be a savings to the state as more children moved out of public schools and into private schools. But Bogart said no audit has ever been done by the state to determine if such savings really occurred.
Meanwhile, enrollment in Arizona's public schools has boomed since the tax credit took effect - 1.14 million students in 2007-08, compared with 867,135 in 1999.
Private school enrollment has grown from 44,710 in 1999 to 51,590 in 2007-08.
Absent from the meeting were Republican Reps. Doris Goodale and Steve Court, who were named as members of the panel in August.
Becky Blackburn, communications director for the House of Representatives, said Goodale decided not to continue as a member of the task force because it was not organized by House Speaker Kirk Adams, R-Mesa.
"She felt very strongly about the fact that Speaker needed to be involved in the formulation of such a committee. Rep. Goodale notified Rep. Schapira about her decision not to participate on the task force," Blackburn said in an e-mail.
A call to Court's office was not returned.
Adams announced last week the formation of the official Private School Tuition Tax Credit Review Committee.
While Schapira's panel was self-organized, the formal committee announced Thursday was appointed by Adams under House rules. Adams has assigned Rep. Rick Murphy, R-Glendale, as chairman of the committee. Other members include: Andy Biggs, R-Gilbert; Debbie Lesko, R-Glendale; Jack Brown, D-St. Johns; and Chabin, who also sits on Schapira's panel. The first meeting of the Private School Tuition Tax Credit Review Committee will be announced shortly, the release from Adams' office said.