Arizona private-school families cash in on state's tax-credit program

• Arizona created the nation’s first private-school tuition tax credit program in 1997
• Legislative budget staff in 1997 estimated the program would cost $4.5 million a year; it now tops $120 million
• Data shows the program does not primarily serve poor and special-needs children, as was initially promised

Arizona created the nation’s first tax credit for private education 18 years ago in a move hailed by school-choice advocates and replicated across the country.

Its architects, who promised the program would primarily benefit special-needs and low-income students, have watched it grow far larger than they ever imagined.

A program that legislative budget staff in 1997 estimated would cost $4.5 million a year now tops $140 million. And that doesn’t include $50 million in tax credits handed out separately for public-school extracurricular activities.

“The impact has been substantial on the number of kids who are getting to go to the school of their parents’ choice,” said state Sen. Steve Yarbrough, R-Chandler.

Yarbrough is among the program’s biggest supporters and also executive director of one of the non-profit school-tuition organizations that under the law accept the tax-deductible donations and distribute the funds as scholarships to private K-12 students. Arizona now has four private-school tax credits, two for individuals and two for corporations.

“It’s been better and more successful than even those of us who were enthusiastic from the get-go imagined,” he said.

Despite its explosive growth, the program has failed to keep its promise of primarily aiding special-needs and low-income students, and of expanding school choice. Meanwhile, as it grows, critics say, it is further depleting funding for public schools.

In fiscal 2014, the most recent year available, Arizonans claimed $84 million in individual tax credits. Corporations claimed another $39 million.

Only about 3 percent of the money is designated specifically for special-needs students. And 32 percent of the scholarship money given through the individual tax-credit programs goes to children of “low income” families, defined as those earning 185 percent of the federal poverty level, or $44,862 for a family of four, according to data acquired by The Arizona Republic. The corporate tax credit for “low income” families has a more-generous definition — a family of four can earn as much as $82,996.

Data also show private-school enrollment has actually fallen since the program was implemented, while public-school attendance continues to grow.

That trend, in particular, concerns critics of the program, who say every dollar donated to a school-tuition organization is a dollar that an individual or a corporation does not pay into the state’s general fund, which pays for public education.

“They are literally shifting public money from public schools to private schools,” said Dana Wolfe Naimark, president and CEO of the advocacy group Children’s Action Alliance. “Think what we could do with that money in public schools.”

While money flowing to the tax credits is small relative to the state’s $3.9 billion education budget, it is not insignificant. State lawmakers in recent years have repeatedly cut school spending in the face of budget shortfalls. And the Legislature is still fighting a court order to pay schools an additional $320 million a year in unpaid inflation funding, arguing the state can’t afford it.

Gov. Doug Ducey in June acknowledged public schools need more money, and proposed temporarily boosting by about $300 million a year the amount of state land trust funds distributed to the schools.

Supporters argue the tax-credit program saves the state money, and that scholarships total less per student than the state would pay to educate that student in a public school.

“There is always criticism that it takes money away from public schools,” said Goldwater Institute Education Director Jonathan Butcher, whose organization has spearheaded school choice efforts in Arizona. “But I don’t think the numbers are there. It’s a math problem: There are 1.1 million Arizona public-school students and about 50,000 scholarships awarded. That’s not enough to have an impact.”

But the data do show a financial cost to the state.

The average tax-credit-funded scholarship, individual and corporate combined, was $2,453 in fiscal 2014. But many scholarships were far higher. The average individual tax credit scholarship for students of Tesseract School in Paradise Valley was $18,354. The average corporate tax credit scholarship for students at All Saints’ Episcopal Day School in Phoenix was $9,405.

The state that same year allocated $4,138 per student in public schools.

There is also nothing to stop parents from scholarship shopping, getting multiple scholarships for their child from multiple tuition organizations. The state doesn’t track how common that is.

Private schools and tax-credit organizations sell the program as a way for taxpayers to direct their money to the programs they think are best and to help students access the best school for their needs.

Without it, Lauren’s Institute for Education in Gilbert wouldn’t exist, and many of its 83 special-needs students would likely struggle in schools that aren’t equipped to help them.

Tuition at Lauren’s Institute is $35,000 a year, and covers therapists, specialized classrooms, very small class sizes and personal aides. The school last year was crowded into multiple buildings at a modern Gilbert strip-office complex. The teacher’s lounge doubled as storage space so more area could be reserved for the bright, open classrooms with enough room for the children and their aides to freely move around. Instead of desks, there are tables, and a variety of seating options to best meet each child’s needs. Smart boards in each classroom are combined with therapy tools.

This school year, the academy is moving into the vacated Rancho Solano school in Gilbert. It has more classroom space and nearly 10 acres.

Parents don’t pay a dime.

“We see how many kids we get, see what their scholarship funding is and then we fundraise,” said Carrie Reed, co-founder and president of Lauren’s Institute.

Specifically, the school got $43,704 from individual tax-credit donations and $543,169 from corporate tax-credit donations. About two-thirds of the corporate money was from the tax credits designated for students with developmental disabilities and the other third was from the program for lower-income students.

Teresa Brooks’ son Brigham, 16, has Down syndrome and autism and is non-verbal. He has been at Lauren’s Institute for four years. They sought out the school after Brigham began to regress in public school.

“When I heard of the cost, I thought, ‘There’s no way we can do that. We have four children and I can’t work because of Brigham,’” she said. “They couldn’t run this school without the STO money, and we wouldn’t be here without it.”

Brooks and Reed said there is more need than money directed for children who need the kind of educational services offered at Lauren’s Institute.

“We have parents begging to get into our program,” Reed said. “It’s heartbreaking to turn families down.”

The biggest criticism of the tax breaks is that many of the scholarships are given to more-affluent families who would send their children to private school even without a tax credit.

The result, critics say, is money being drawn away from both the state-funded public schools and poor and special-needs students who need the money to attend a private school.

Even the corporate credit for “low income” students may not serve the population that many would assume. The law defines low income as students whose families are at 185 percent of the income required to qualify for reduced-price lunches, which is already set at 185 percent of the federal poverty level. In other words, Arizona’s definition of low-income for this tax credit is a family of four with an annual income of $82,996.

Butcher, of the Goldwater Institute, said the program has evolved and is intended to serve a broad cross section of students. It is serving a need, he said.

“The eligibility is set up to help students no matter where they are in their life and where their family is,” he said. “The scholarships seem to be pretty modest, often around $2,000. Families can use the scholarships to get close to where tuition may be.”

Yarbrough concedes that the scholarships aren’t limited to truly low-income Arizona families.

“A more fair statement is low or modest income,” he said, but added that a higher percentage of individual tax credits are going to students in that category. There are no requirements that those scholarships be income-based.

Tuition at some private schools far exceeds the scholarship amounts, leaving parents to cover the rest. Critics say that cuts off truly low-income students.

“You’re allowing extremely wealthy people who can pay for it anyway to get a tax dodge for them and their friends and family, so the public pays for their kids at a private school,” said Sen. Steve Farley, D-Tucson. “Right now, it’s almost impossible for someone who is poor to benefit because even if they get a scholarship, they still have to come up with the rest of the tuition.”

Salpointe Catholic, for example, has an online brochure that says that “some Salpointe families fund their tuition expenses through the individual tax credit referral program.” Tuition there is $8,700 a year. It goes on to explain how to cover a student’s tuition using the credits and that the program “offers the taxpayer the option to help a local student receive a quality education rather than send tax dollars to the Arizona Department of Revenue.”

That, Farley said, is “how you strip a budget bare.”

An hour north of Phoenix and 3 miles down a bumpy dirt road, the scrubby high-desert hills hide the picturesque campus of the Orme School.

Amid cottonwoods, the boarding prep school is housed in the renovated buildings of a 90-year-old cattle ranch. The 63 students, in grades 8-12, come from around the world for the school’s “Southwestern experience.”

The school’s $45,000-a-year tuition belies its rustic setting and hands-on training. Students wander between class buildings in boots and dusty jeans. They do their own laundry, help with dinner and work in the garden. In addition to more-traditional classes, they can learn blacksmithing and horsemanship.

Seven Orme students from Arizona this year received a combined $144,939 in individual tax-credit donations. Scholarships averaged $15,195 each according to records acquired by The Republic. Families paid the difference.

“Those kids are by no stretch wealthy kids or even upper-middle-class kids,” headmaster Bruce Sanborn said.

He said the money the private schools get pales in comparison to the public money going to charter schools, many of which are run by for-profit institutions and some of which are criticized as being borderline parochial.

“We’re a non-profit,” he said. “We’re not taking anything away from the public.”

Tristan Tollas, 18, of Mayer, has been attending the Orme School since middle school. He grew up nearby.

“Without the scholarship, I wouldn’t be able to come here,” he said.

He plays football and soccer and loves the school’s focus on sustainability.

“To be here, you have to have some kind of joy for outside, for being in the country,” said Tollas, who is considering a career in environmental engineering. “It’s a big change for people who come from the city.”

Donors likely give little thought to the hole their donation leaves in the state budget, and what that may mean for their neighborhood public school. And in some cases, schools and tuition organizations are actively telling parents the program has no down side.

“The Private School Tuition Tax Credit Program allows Arizona Income Taxpayers to become directly involved in improving education in Arizona,” the Arizona Tuition Organization website says.

House Minority Leader Eric Meyer, D-Paradise Valley, said there is a cost.

“When you give to a private-school tax credit, it’s taking over $100 million out of the general fund to pay for your neighborhood school,” he said.

Farley said the impact is enormous.

“We’re undercutting one of the basic foundations that grew America to become the greatest economy in the world: a huge middle class that had access to education,” he said. “There is nothing conservative about that at all, and certainly nothing patriotic.”

Yarbrough admits many of the scholarship recipients likely would go to private school without the financial help. But there are also broader benefits, he said.

“It is disingenuous at best to argue it’s not positive for Arizona taxpayers,” he said. “Look at the educational outcomes. Taxpayers win.”

Sally Cooper, Tucson’s Salpointe Catholic High School’s corporate tax-credit liaison, said there are real economic benefits. Part of her job is to encourage more corporations to participate in the program.

“Their cry is, ‘We do not have enough educated, talented workforce staying in Tucson,’” she said. “This is the solution. It does not cost you a thing to direct those dollars right here in your community and designate them to the school of your choice to help those who could not otherwise afford a college-prep education. It’s a win-win for everyone involved.”

Program supporters, including Phoenix’s Brophy College Preparatory Principal Bob Ryan, have also said the program’s promotion of school choice supports private schools. And the more students in private school means the fewer students the state is paying to educate.

“The fact is, we do have 1,350 boys,” he said. “That’s 1,350 fewer boys the state has to educate. And these are boys with lots of potential who are going to do great things for the state.”

But Arizona’s private-school enrollment in 2012, the most recent year available, was nearly 2,000 students lower than it had been since before the tax-credit program was started. Public and charter schools in Arizona during that same period have grown by more than 400,000 children.

“The trends do not back up the supposed goals,” Wolfe Naimark said.

The Arizona Legislature and then-Gov. Fife Symington, a Republican, established the tax-credit program for private schools in 1997. The law offered individuals up to a $500-per-year dollar-for-dollar state tax credit for donating to a non-profit school tuition organization.

“Some kids, especially low-income kids, who are stuck in schools that are not working for them, will get to go to a better situation,” said then-Rep. Mark Anderson, R-Mesa, the bill’s sponsor, in 1997.

The Arizona Education Association at the time warned it would become “a tax loophole for rich people.”

Over the past 18 years, the program has been expanded repeatedly. It now consists of four credits with varying rules and restrictions.

Fourteen other states followed Arizona in establishing private-school tax-credit programs. Unlike Arizona, most require that all scholarships go to lower-income students. Many cap the overall annual cost of the program at less than $10 million.

There’s no way to know exactly how much Arizona’s program will grow over the next decade. The Joint Legislative Budget Committee staff, which provides data projections on a myriad of other items as the Legislature develops a budget, has no projections available for the program’s individual tax credits.

The “low income” corporate tax credit alone is expected by 2025 to grow to more than $250 million a year.

Arizona voters in recent polling suggested they were seriously concerned about the direction of Arizona’s education system.

Gov. Doug Ducey has begun talking about school-funding methods. He hosted a summit with national education experts advocating that money should follow the child, whether the child chose to attend a district, charter, private or other educational institution.

But so far, the tuition organization program is not part of that conversation. Some say there’s more to be done to assure the program serves the state’s neediest students, as intended.

Brooks said more of the money should be designated for schools like Lauren’s Institute that serve special-needs students. Now, the vast majority of the money goes to parochial schools.

“Those students go to parochial schools by choice,” he said. “This is a necessity. Public schools have failed our kids.”

The vast majority of the money does go to parochial schools, particularly Christian schools.

Brophy is among the top recipients of tax credits. Its students got $2.4 million in scholarships in fiscal 2014. Salpointe got $3.1 million. Northwest Christian School got $2.5 million. Pusch Ridge Christian Academy got $2.1 million. Tucson Hebrew Academy got $876,274.

Attempts by Democratic lawmakers to require more of the scholarship money go to low-income students have gone nowhere.

Some associated with the state’s largest parochial schools agree that changes are needed, and they’re doing it themselves.

Brophy has among the highest tuition rates in the state, topping $14,000 a year. The Brophy Community Foundation, the school tax organization that allocates more than half of the scholarships Brophy students receive, doesn’t allow parents to recommend recipients. All of its scholarships are need-based.

Genny Matteucci, executive director of the foundation, said her organization would support changing the law to no longer allow donors to recommend their money go to specific students.

“That way there would be much more of an opportunity for those with a need, and less of an opportunity for misuse,” she said.

Ryan, the principal, said he’d also like to see the program require all scholarships be need-based.

“We believe firmly that tax credits should be earmarked and limited to students with financial needs,” he said. “We think all the tax credits should be reserved for kids who would not be able to afford private schools.”

Butcher opposes efforts to limit scholarships to low-income students.

“Every child deserves a chance at a great education — your child, my child, a lawmaker’s child,” he said.

Yarbrough said he sees no need for changes at this point.

“Middle and upper-income individuals pay taxes, too,” he said.