Our view: State tax dollars are being wasted while manipulative Student Tuition Organizations undermine the noble intent of the school-choice movement. The Legislature must step in before even more damage is done.
Rep. Trent Franks' vision has gone horribly wrong.
In the mid-1990s, this leading school-choice advocate wanted to use the state tax code to encourage individual Arizonans to donate money to scholarship charities. In turn, these charities would help students of modest means to attend quality private schools that their families otherwise could never afford. The outcome of Franks' dream was the Arizona Private School Tuition Tax Credits program, which essentially uses tax dollars to reimburse people who donate up to $500 a year, or $1,000 for a married couple.
In last week's Tribune investigative series "Rigged Privilege," Tribune writers Ryan Gabrielson and Michelle Reese have documented how the tax credit program has fallen far short of its goals. We know most private schools are doing an excellent job of preparing their students for college and future careers. But too many people are working to divert tax dollars for their personal benefit instead of expanding opportunities for more students to also have access to that quality education.
Unlike opponents of school choice, we see no reason to abolish individual tuition tax credits. In fact, a model for reform already exists in a companion program created three years ago for businesses to receive state tax credits for similar donations to Student Tuition Organizations. At the insistence of then-Gov. Janet Napolitano, the corporation tuition tax credit program has a number of effective safeguards, including:
Scholarships must go to students whose families make up to 185 percent of the income limit for free or reduced lunches at public schools. Wealthy families are automatically ineligible.
Tuition scholarships are limited to no more than $4,200 for kindergarten through eighth grade, and $5,500 for high school. Gabrielson and Reese reported many private schools rapidly inflated tuitions over the past decade because no similar limits exist for the individual tax credit scholarships.
Corporations are forbidden from assigning or "recommending" that their donations go to any specific students. Individuals are only prevented from assigning personal donations to their own children. So there's a widespread practice of parents trading donations with other families, and soliciting additional contributions from relatives and friends, to cover the cost of tuition payments.
One flaw with both individual and corporation tax credits is the Legislature requires school tuition organizations to be established as federally recognized charities and limits administrative expenses to a maximum 10 percent of donations. Lawmakers assumed the IRS would prevent scholarship administrators from lining their pockets.
However, Gabrielson and Reese reported Friday that federal tax auditors have failed to stop two of the state's largest STOs from funneling excessive salaries and other perks to their top managers. Lawmakers should empower the Arizona Department of Revenue to enforce federal charity rules and demand that STOs explain more clearly to the public what they do with donations.
STOs object to additional government regulation, as one expectation for tuition tax credits is that relying on the free market would be a more effective policy. However, tuition tax credits always have been a circumscribed substitute for what the free market really needs: Unfettered power for families to decide for themselves where to spend state education dollars, such as with a universal voucher program. Unfortunately, a state Supreme Court ruling earlier this year means the state constitution will have to be changed before that can occur.
In the meantime, state tax dollars are being wasted while manipulative STOs undermine the noble intent of the school-choice movement. The Legislature must step in before even more damage is done.