Tuition Tax Credit Reform

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State Representatives Rick Murphy and David Schapira debate legislation to reform Arizona’s private school tuition tax credit law.

Ted Simons: Last summer, a series of investigative reports by the "East Valley Tribune" and "The Arizona Republic" revealed widespread abuses of the state's private school tuition-tax credit law. The law gives individual taxpayers a dollar-for-dollar state income tax credit of up to $500 when they donate to a school tuition organization. STOs are charities that must use at least 90% of their revenue for grants and scholarships to help kids attend private schools, but the newspapers revealed a lack of oversight and accountability. And, as David Majure reports, an enormous loophole that lawmakers are now trying to close.

After the "East Valley Tribune" released an investigative series on Arizona's private tuition-tax credit law, "Horizon" spoke with one of the reporters who worked on it.

Blatant, out of control, law breaking which is what we actually found. The law breaking has become the norm in many cases.

Ryan Gabrielson who has since left the tribune talked about school organizations and their mission to put charitable contributions to help kids attend private schools.

Under federal tax law they're called 501(c)(3) carriers. When you make a donation to these organizations, that donation is supposed to be tax deductible. It's supposed to be a charitable, serve a charitable service. These were supposed to help a charitable class, usually areas that don't have private schools.

He said it was to help poor kids attend a private school. Congressman Trent Franks said that's why he wrote the law back when he served in the State Legislature.

We want to simply empower those who don't have the option. Right now rich parents can send their kids to any school they want. The poor cannot. The original intent in this legislation and it's gone a long way toward this end was to encourage those wealthier in society to fund an alternative and to fund scholarships so children that weren't doing well in their existing school to be able to access something that would give them a better chance to walk on higher road and sunnier road of life.

But quite often according to the tribune STOs were not charitable in nature. They were earmarked for a particular child. Taxpayers to contribute to an STO can claim a tax credit if their donation was for the direct benefit of their dependents. STOs and parents found a loophole.

Most of the time parents just casually trade. I'll do one for your kid, you do one for mine. In addition to grandma, grandpa, uncle, aunt, friends from church or work donate their contributions, using that money to go for somebody's private school education. Instead of calling these earmarks or designated donations, they call them recommendations. We found from actually going out and talking to parents and schools and reading the surprisingly blunt details schools published on their own website describing how these work, these are not recommendations. They're designations. They changed the wording thinking it would allow them to be within what the law allows. State law doesn't even address this.

But now state lawmakers are trying to address the problem. House Bill 2664 requires the state to certify school tuition organizations. To become certified, an STO must not allow donors to designate student beneficiaries as a condition of any contribution. However, donors can recommend student beneficiaries as long as scholarships are not awarded solely on the basis of those recommendations. The bill requires STOs to require tax exempt status under section 501(a) of the federal tax code. It increases the tax amount from 500 to $750, increasing annually to cover inflation. And it includes provisions for added oversight and accountability.

Ted Simons: Joining me now is Glendale Republican, representative Rick Murphy, who chaired a committee that reviewed Arizona's tuition-tax credit law. That committee's recommendations are contained in the House Bill 2664 which representative Murphy is sponsoring. Also joining us is representative David Schapira, a Tempe democrat who serves on the House Education Committee and who also chaired a separate review of private school tuition-tax credits.Good to have you both on "Horizon."

Ted Simons: Reform, why is the reform necessary?

Rick Murphy: Well, first of all, Arizona was one of the pioneers in school choice and with tax credit packages in the first place. And so, being that we were a trailblazer, it's not surprising that as other states moved into the same area and started having their own tuition-tax credit laws, that they found ways to improve the wheels, so to speak, and that now we need to go ahead and pick all the best of those and incorporate those into what we do.

Ted Simons: Are the best of those being incorporated in this bill?

David Schapira: I don't think so. I think we're taking steps in the right direction on each of the areas that I think Rick and I share concern about when it comes to these STOs. The problem is, we're not going far enough. We still have a way where donors can specifically designate a student regardless of that student's income. Unfortunately there are other abuses in the system that we're not going to fix with this bill.

Ted Simons: Why not expressly prohibit designation, taxpayer designation for students?

Rick Murphy: Actually, Ted, the bill does prohibit designation. What it allows to do is a recommendation. I don't think there's conflict in that. A recommendation simply means we would like for a scholarship to go for this donation to go to this student, but the STO is free to do something different.

Ted Simons: Why not get rid of the recommendation? If it's for a charity, a scholarship and there's a big bowl of kids out there with a big bowl of money, why not donate, let the organizations figure out where that money is going to go?

Rick Murphy: I think keeping the recommendation process available is appropriate and it's not going to cause any harm. There are clear prohibitions in the bill, in current statute, but also strengthened in the bill that that would disallow any earmarking or designations or I'll only give if you give it to this kid.

Ted Simons: What's wrong with recommending if it's not an express designation?

David Schapira: There's no difference from the system now and when this bill comes to be. Right now both "The Arizona Republic" and the "East Valley Tribune" investigation showed that we're really not doing what this program was intended to do. We're not giving these scholarships to students with financial need who would not have otherwise gone to private schools. We're giving them to kids who are already there and that's the problem with the recommendations. These STOs are giving the tax credit scholarships to students who would have been at the schools anyway.

Ted Simons: The tribune report mentioned that it seems that the program, by their numbers, not making private schools for accessible, not giving scholarship to the underprivileged. We had Trent Franks on the program saying his original intent for underprivileged kids an opportunity to have a choice to go to private schools doesn't seem to be happening. Do the reforms change that?

Rick Murphy: First of all, it is already happening. all of the data to analyze that was not available from every STO because it wasn't required or kept by every STO from before. From the ones who did have the data to figure that out, that already determined that 2/3 of all of the scholarship dollars go to students that need the free and reduced lunch criteria, financial need category. So I believe that once the rest of that data comes in after we require it to be collected, that that figure will go up even more. And so financial need will be required to be a consideration. And furthermore, a lot of those students were already being served and I think that will increase as the bill takes place.

Ted Simons:2/3, not 3/3. Is 2/3 good enough for you?

David Schapira: The way the bill is written, it doesn't change anything. There's a fundamental flaw. As long as the donor can recommend a specific student, the system isn't going to work because the STOs are always going to give to those students. If they don't, the donor will never recommend again. They won't donate again if it's not given to the one student they want it to. As Mr. Murphy mentioned, there are no reporting requirements right now. Fortunately one good thing in the bill, the STOs will be required to report. As far as considering financial need, the STO could say 1% of our decision was based on financial need and the other 99% was on financial recommendation.

Ted Simons: What about those who say it's nice the intent was there and in certain ways the law requests that but everything seems relatively vague right now. It's nice for the underprivileged. Why not for everyone? Why shouldn't every kid have that choice?

David Schapira: People make the argument that the purpose of having these tax credits is to have dollars follow the students and to make sure that we're actually saving the state money because it cost less to educate these kids in private schools than public schools. The fact of the matter is, the kids getting these tax credits would have been there anyway. So the fact of the matter is, it's not money following students. It's just money given to these private businesses to educate these kids, money that would not have been taken out of state taxpayer dollars otherwise.

Ted Simons: How do you respond to that?

Rick Murphy: There's a number of fallacies in that long statement to address. With regard to congressman Franks and his original intent. I like and respect congressman Franks, but the sponsor's original intent to the bill doesn't mean that was the original intent of all the legislators that voted on the bill. In other words, the bill would not have been expanded to allow other students to receive it unless those voting for the bill wanted it that way, because he wouldn't have needed to --

David Schapira: What we heard from Mark Anderson who spoke to representative Murphy and I a few weeks ago is the intent of congressman Frank and Mark Anderson was to go to kids with financial need. In order to get enough Republican votes in the chamber at that time, they had to say rich kids could get these scholarships as well. That was the deal that was cut.

Ted Simons: Is that your understanding?

Rick Murphy: I wasn't in the legislature at that time. Obviously the bill had to be expanded in order to get the votes. That means the legislative intent is encompassing of all those voting yes wanted to do.

Ted Simons: If we have a program that needs reform, most folks thought it definitely needed some kind of reform, the question is what kind. Something that needs that kind of reform, why increase the dollar-for-dollar tax incentive, why increase the bill?

Rick Murphy: I think a lot of the concerns that were raised were blown out of proportion. There definitely are issues that need to be addressed, as I said, and those are being addressed rather strongly in the bill. The ultimate consequence for STOs that don't comply is they can lose their ability to be an STO. I don't know how much stronger of a consequence you could have. Furthermore, if, in fact, it stays state money, which I believe it does, why wouldn't you want to expand it in time of crisis like this?

Ted Simons: Saves the state money, state oversight, accountability, what's the difference?

David Schapira: It's a tradeoff to get just a couple of reforms that really aren't doing the job. We have to expand the program so drastically that the dollar amount that is being proposed to expand these tax credits to actually exceeds the average tax debt the average Arizonan has to the state of Arizona. Most Arizonans if they give these contributions would have no debt to the state. We would have no money coming into the state coffers.

Ted Simons: Do you think that's a great comparison?

Rick Murphy: No, I think it's a ridiculous comparison. There's no way all fuels was going stay state money. The reality is, even if only 1/3 or 35% or so of the scholarships go to students who would otherwise be in public schools, at that point it's a wash. Any percentage above that saves the state money. The math is pretty simple.

Ted Simons: We'll stop it right there. Gentlemen, thank you very much. We appreciate it.

Rick Murphy:State Representative;David Schapira" State Representative;

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