As Tax Day Nears, Arizona Prepares To Tally Credits
"Taxpayers: Rescue your money from the state treasury!"
That's the message the Flagstaff Unified School District sent in 30,000 brochures mailed to every household in the northern Arizona district. The aim: to promote a state policy that offers a tax credit worth up to $200 for donations to public schools for extracurricular activities that require a fee.
The new policy also includes a $500 state tax credit for contributions to scholarship programs that help pay for private and religious school tuition.
The dollar-for-dollar credits will show up for the first time on state income-tax forms due this week to meet the April 15 filing deadline.
A final tally of how much the credits were worth last year won't be available for months, but the Arizona Department of Revenue estimates the public school credits could reach $10 million and those for private school scholarships up to $3 million. The total state general fund for this year is about $5.3 billion.
But most observers say the new policy is likely to have a much greater impact on the state treasury in the years to come. They say a lawsuit that challenged the private-scholarship credit--arguing that it violates federal and state constitutional prohibitions against government aid to religion--chilled fund-raising efforts last year among public schools and private-school-scholarship groups alike.
Although the Arizona Supreme Court eventually upheld the $500 credit for private donations, its January ruling came more than a year after the litigation began over the credits, which were adopted in 1997. ("Lawsuit Seeks To Overturn Arizona Tax-Credit Law," Oct. 8, 1997, and "Tax Credits Pass Muster in Arizona," Feb. 3, 1999.)
But some schools, like those in Flagstaff, went full steam ahead despite the pending lawsuit. Starting last summer, the 11,600-student district ran newspaper ads and encouraged parent-teacher groups to add the tax credit to their more traditional fund-raising pitches for such items as gift wrap.
The effort apparently paid off. Flagstaff schools raised some $200,000 in new money, which could help beef up drama offerings and launch a high school soccer program, district spokesman Gary Leatherman said.
Some schools that jumped on the tax-credit bandwagon even stayed open during the winter break to accommodate a flurry of residents dropping off checks to meet the Dec. 31 deadline to take a 1998 tax credit.
Some districts, like the 71,000-student Mesa system, are now releasing contributions they held in escrow pending resolution of the court case, even though the public school credit wasn't directly challenged.
Under the law, taxpayers can receive a credit--money subtracted directly from taxes owed to the government--of up to $200 for donating up to that amount to a public school for extracurricular activities.
If the allowable tax credit for a given year exceeds the taxes due, taxpayers can carry the credit for up to five years. To participate in the tax-credit program, schools must levy extracurricular fees.
In Mesa, the state's largest school district, officials instituted a $1 extracurricular fee for all students to enable the schools to collect an estimated $650,000 in tax-credit donations.
Arizona public schools are using the donations for everything from after-school tutoring and field trips to band uniforms and middle school sports that had been sacrificed to budget cuts in recent years.
In addition to a general extracurricular fund, some schools allowed taxpayers to donate to specific areas, such as a debate club or cheerleading.
Still, Penny Kotterman, the president of the Arizona Education Association, which challenged the tax-credit law along with the National Education Association, argues that the law raises serious equity and legal issues.
The two groups are considering appealing the state high court's decision to the U.S. Supreme Court.
Arizona's law also allows any taxpayer to claim a credit for a contribution up to $500 to a "school tuition organization," which then uses the money to offer grants or scholarships to help pay children's private school tuition.
Under the law, Arizona parents may not designate the credit to benefit their own children. And the nonprofit tuition organizations cannot designate the money to benefit students of only one school.
But critics of the law point out that it does not require the tuition groups to grant scholarship priority to poor children; does not cap the scholarship amounts in order to support the maximum number of children; and does not explicitly bar taxpayers from designating their contributions to benefit specific students who are not their own children.
Legislators are weighing changes to the law to address some such concerns.
Tuition Groups Gear Up
"The law clearly was intended as an opportunity for more kids to get to go to private schools" and to help parents struggling to keep children in private schools, said Tom Patterson, the chairman of the Arizona School Choice Trust and a former Republican legislative leader who helped win passage of the 1997 law.
The 6-year-old trust offers low-income families tuition aid for the private schools of their choice.
In light of the state supreme court ruling, the trust and several other scholarship groups sprouting up across the state have started to gear up for the next tax cycle.
Nonprofit groups such as the Arizona Christian School Tuition Organization are targeting donors interested in supporting scholarships to specific schools--in the ACSTO's case, evangelical Christian schools.
The Christian school tuition group--formed just last fall--raised nearly $539,000, second only to the Roman Catholic Diocese of Phoenix's tuition group, which raised slightly more than $837,000, according to the state revenue agency.
The group's mission, said its co-director, Steven B. Yarbrough, is clear: to provide tuition grants and scholarships to K-12 students attending Christian schools in Arizona.
Observers say such an approach is probably permissible, as long as tuition groups like ACSTO abide by the law's call for scholarships to allow children to attend "any qualified school of their parents' choice," whether that school fits the group's target market or not.
So far, Mr. Yarbrough said, his group has not had to face a situation where a scholarship applicant wanted to attend a non-Christian school.
"I don't know what we'll do when we see that," he said. "The people coming to us know who we are and that we're interested in giving scholarships to kids to go to these schools."
Vol. 18, Issue 31, Pages 17-18Published in Print: April 14, 1999, as As Tax Day Nears, Arizona Prepares To Tally Credits