Low rates threaten tuition tax credit
Analysis: Firms taking months to claim offset
The Arizona Legislature has cut taxes to the point that corporations no longer owe enough to pay for future increases to private-school scholarships funded by state tax credits, according to a nonpartisan state analysis.
The decline in tax owed by Arizona corporations is expected to curb the growth of school-tuition-organization tax credits for low-income students. Meanwhile, the law allows the amount of tax that corporations can write off to increase by 20 percent a year.
Donors to school tuition organizations (STOs) receive a dollar-for-dollar credit on their taxes. STOs then distribute scholarships to students at private schools, while keeping up to 10 percent of the money for salaries and other administrative costs.
The dwindling impact of the tax credits was highlighted in a recent report by the Joint Legislative Budget Committee. And it is prompting school-choice advocates to weigh their options to find other tax credits or funding sources that would replace the corporate tax credits so privateschool scholarships can continue to grow.
STO scholarships totaled $74.3 million this fiscal year and could jump to $89.2 million next year.
The news comes amid widespread criticism of Arizona lawmakers for favoring programs that siphon money from public education to benefit private schools. An overwhelming majority of Arizona’s K-12 students attend public schools.
Chris Kotterman, lobbyist for the Arizona School Boards Association, said the situation is the consequence of state leaders cutting nearly $500
million in corporate taxes since 2011.
“We are hitting the bottom of the barrel in terms of the available revenue that’s coming to the states from corporate income taxes,” Kotterman said. “There is a reason why we have teachers near the bottom of the pay scale in education and the government simply does not have the resources to make that problem any better in the short term — because they’ve given it all away.”
In its analysis of legislation to alter the program, the JLBC noted it took six months this year for all of the low-income tax credits to be claimed by corporations. In previous years, the credits have been taken in the first few weeks of the year. That indicates waning demand for the credits, the JLBC said.
“By (fiscal year) 2020, the full tax impact of previously enacted multi-year reductions in corporate income tax rates, will likely have been realized,” the JLBC said. “For this reason, businesses may not have sufficient tax liability to fully utilize the increased credit-eligible donation limits provided under current law after (fiscal year) 2019.”
The upshot is that STO tax credits — a pet program of school-choice supporters — might not be able to increase as they have. The result could be fewer students tapping the program than if lawmakers hadn’t cut corporate tax bills.
‘We need to expand the pool’
Cathi Herrod, an influential voice among conservative Republicans weighing school-choice legislation, alluded to lower corporate taxes as crimping STO scholarships during a conference call last winter with her private school allies.
A recording of that call, in which Herrod is heard speaking about schoolchoice in starker terms than she uses publicly, was obtained by The Arizona Republic.
“There is a little bit of a concern that as our corporate tax rates go down that you can plot out at what point there’s not much left on corporate income tax and so we need to expand the pool of taxes available for the corporate scholarship tax credit,” Herrod said during the call. “So those discussions are under way but I don’t know that anything will happen on that this year.”
Lawmakers who support school choice did not introduce legislation to tackle that issue last year.
But this year Senate President Steve Yarbrough introduced Senate Bill 1467, which would cap growth of the corporate taxes credits but expand the number of children who can use STOs and empowerment scholarship accounts, another state program that allows public money to be used for private school tuition.
The bill would require support of a two-thirds majority of the Legislature to pass.
Yarbrough initially sought a “grand bargain” with Democrats to cap STO low-income tax credits. Democrats balked, in part, because the bill would increase the pool of children who are eligible for STOs and ESAs, which give money that would otherwise go to a child’s public school district to parents to use for private school tuition or other educational services. Yarbrough did not respond to The Republic‘s request for comment.
‘Don’t need to reduce their taxes’
Chuck Essigs, director of government relations for the Arizona Association of School Business Officials, said the STO predicament reflects the Legislature’s priorities.
“We’ve neglected funding and teacher salaries and the Great Recession exacerbated that problem,” said Essigs, who has worked in education for decades. But instead of focusing on fixing the problems in public schools, “you have people who are spending all their time and effort to help the private sector and private schools,” he said.
Sen. Steve Farley, D-Tucson, said Democrats read the JLBC analysis and realized caps aren’t needed on low-income tax credits because corporations don’t pay enough taxes to use them anyway.
“They don’t need to reduce their taxes because there’s not enough taxes to take the tax credit. So the cap becomes irrelevant,” he said.
Rep. T.J. Shope, R-Coolidge, said he was skeptical of any plan that would expand STO scholarships using other funding sources, as Herrod suggested in the conference call.
But Sen. Steve Smith, R-Maricopa, said he doesn’t expect the STO scholarships will stop growing. “I believe personally that the cap will continue to be met in the future as it has been met in recent years,” Smith said.
Kevin McCarthy, president of the Arizona Tax Research Association, said he disagreed with JLBC’s estimates that dwindling corporate tax liability would limit the tax credits. He said even though corporate tax rates have fallen the amount the state brings in may not fall in tandem because of increased economic activity.
The state received $575 million in corporate taxes in fiscal 2014, $663 million in 2015, $570 million in 2016 and $368 million in 2017, according to JLBC. The nonpartisan budget group estimated nearly $475 million in corporate taxes has been forgone by tax cuts since 2011.
Yarbrough, in remarks to the Senate Finance committee, said his bill has been mischaracterized. But he revised it to eliminate language that would have changed the cap on the low-income tax credits for corporations.
The bill still would change the ESA program by eliminating, for some students, the requirement that they first attend public school before receiving an ESA. The legislation would eliminate that requirement for students who use certain school-tuition-organization scholarships.