Lawmakers call for school tax credit probe - East Valley Tribune: News

Lawmakers call for school tax credit probe

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Posted: Tuesday, August 11, 2009 11:17 am | Updated: 1:14 am, Sat Oct 8, 2011.

Democratic leaders in the state House of Representatives on Tuesday called for state and federal investigations into Arizona’s Private School Tuition Tax Credits program and the scholarship charities that operate the tax subsidy.

The lawmakers said the proposed actions come in response to the Tribune’s investigation, Rigged Privilege, of the private school tax credits.

Democratic leaders in the state House of Representatives on Tuesday called for state and federal investigations into Arizona's Private School Tuition Tax Credits program and the scholarship charities that operate the tax subsidy.

Some Republican lawmakers joined in the requests to review tax credits and, if there's cause, to reform them.

"There are some things to look at," Rep. Bill Konopnicki, R-Safford, said. "I don't think investigation is the right word, but certainly a review."

The Democratic caucus in the House also announced the creation of a task force to examine possible changes for the tax credits. The lawmakers sent a letter to the Internal Revenue Service and U.S. Attorney's Office in Phoenix requesting federal inquiries; they sent a similar appeal to the Arizona Attorney General's Office.

Legislative changes might include reducing the amount of donations scholarship charities can spend on administration, as well as a new provision making it a violation of state law for private school parents to trade tax credit donations - such transactions already break federal tax law.

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The lawmakers said the proposed actions come in response to the Tribune's investigation of the private school tax credits, which published as a three-part series last week.

Under the program, taxpayers give money to nonprofit charities called school tuition organizations, or STOs for short. STOs give scholarships to children for private school tuition, and the state provides donors a dollar-for-dollar tax credit in exchange for their contribution.

As the state Legislature established the tax credit, in 1997, and repeatedly expanded it, proponents have argued that low-income students are the program's primary beneficiaries.

That has not been the case, the Tribune discovered.

"Unfortunately, the STO industry has drifted from the intent of the law," said Rep. Tom Chabin, D-Flagstaff.

The Tribune investigation found the tax credit system is rife with abuses and has failed to increase low-income and minority students' access to private schools.

Further, many STOs, schools and parents use the tax credit in ways that violate federal tax laws. And executives at two of the largest scholarship charities have used state income tax donations to enrich themselves.

"If in fact people have been abusing the system, I think it should be investigated," said Rep. Vic Williams, R-Tucson.

A number of these problems have been an open secret within the STO industry, said Tom LaVoie, a Tucson accountant and executive director of the Christian Scholarship Fund of Arizona.

Many scholarship charities accept earmarked donations - which they term "recommendations" - and track how much specific students or schools have received in donations.

"This credit has migrated to the richest schools because those attending those schools can afford to make the contribution and pay income tax," LaVoie said.

It is still unknown which law enforcement agencies might undertake investigations into the private school tax credits. The state Attorney General's Office has begun reviewing the matter, said Anne Hilby, a spokeswoman for the agency.

"Attorney General (Terry) Goddard was troubled by the East Valley Tribune's article," Hilby wrote Tuesday in response to the newspaper's questions. "The Office is looking into a number of the allegations it raised."

Per its usual policy, the Internal Revenue Service largely declined to comment.

"The Internal Revenue Service does not confirm, or deny, an ongoing investigation or audit," said Bill Brunson, an IRS spokesman in Phoenix.

Future legislative action remains equally unclear, particularly what, if any role, Republican lawmakers will play in the new task force.

"We are hoping this will be a bipartisan task force," said Rep. David Lujan, D-Phoenix.

However, the Democrats did not seek out Republican support for the task force in advance of announcing its creation.

House Speaker Kirk Adams, R-Mesa, told reporters at the state Capitol on Tuesday he would not endorse a task force that examines only the private school tax credits.

Adams said he had not read the Tribune series and would not comment about how the scholarship programs are run. He did say the ability of donors to designate where their money goes - and earmark the cash for a specific student - be "something that we need to look into if that is the case."

Even Rep. Steve Yarbrough, R-Chandler, who runs the Arizona Christian School Tuition Organization, said a review of some elements of the law might be appropriate.

"I don't have a problem with looking at that, examining it, considering it," he said.

Gov. Jan Brewer did not respond to requests for comment Tuesday. Brewer has publicly supported the tax subsidy and signed expansions of the program.

For its 12 years of existence, private school tax credit spending has gone unregulated.

Scholarship charities must use 90 percent of their income tax donations to pay for private school tuition. That limits how much the STOs can spend on themselves, at least theoretically.

During the past six years, nearly two-thirds of STOs spent less than 90 percent on scholarships, according to records from the Arizona Department of Revenue.

Sen. John Huppenthal, R-Chandler, told the Tribune on Monday that he would support reducing how much new STOs can spend on administrative costs, from 10 percent to 7 percent. Such a change would not impact the existing 55 scholarship charities.

"I'd be willing to put some enforcement mechanisms into it," Huppenthal said. "I would have to think about it for a while, what the full implications are."

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