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A future drain on state revenues has likely been averted after lawmakers were able to reach an elusive agreement to cap a program that provides tax credits to companies that fund scholarships for students to attend private schools.
After years of partisan battles over a program that provides income tax credits to corporations that give money for private school scholarships, Democrats and Republicans joined forces for a unanimous vote to limit its growth. Gov. Doug Ducey has until the end of the week to sign or veto it.
Individuals and corporations can contribute to school tuition organizations, commonly referred to as STOs, which use the money to provide scholarships for low-income or disabled students to attend private schools. In exchange, the individuals and corporations receive the money back in the form of dollar-for-dollar credits against their income taxes.
In 2006, then-Rep. Steve Yarbrough, an STO operator, successfully pushed legislation that increased the annual cap on corporate STO credits by 20 percent each year. The $10-million program ballooned, with the limit reaching $89.2 million for the current fiscal year. According to the Arizona Department of Revenue, about 77,000 students received scholarships in fiscal year 2017, the last year for which the agency had numbers available.
According to the Joint Legislative Budget Committee, the program would have swelled to nearly $222 million in the 2024 fiscal year. Now, the cap in 2023 will be $145 million.
In fiscal year 2018, the state collected $373 million in corporate income taxes.
Democrats have long opposed the STO program over its use of tax dollars for private, oftentimes religious schools, and for diverting state revenue that could otherwise go to public schools. Their calls for reforms have traditionally fallen on deaf ears. But as the STO cap grew substantially each year, Republicans have come to support new limits.
That bipartisan support culminated with Senate Bill 1485, which passed unanimously in both the House of Representatives and the Senate. The bill ratchets down the annual growth in the cap by 5 percent each year until 2023. At that point, growth will be limited to either 2 percent or the annual increase in the U.S. Bureau of Labor Statistics’ Consumer Price Index, whichever is greater.
Sen. J.D. Mesnard, who sponsored SB1485, said everyone understood that growth in the STO program needed to be curtailed.
“Obviously, we’d reached a point now where it was growing by quite a bit. We had to be sensitive to our revenue needs. I think those who support school choice, including myself, would acknowledge that,” said Mesnard, R-Chandler.
Yarbrough unsuccessfully sought to reform the program last year, which was his last in the legislature. His proposal would have gradually phased down the cap until 2021, when it would stay at whichever was greater between 2.5 percent and inflation. But it also would have expanded eligibility for scholarships, and would have allowed STOs to charge application fees to students.
Democrats unanimously opposed the plan over those provisions. After his bill narrowly passed out of the Senate, Yarbrough pulled it from consideration vote in the House of Representatives, where he says it was lacking support.
Though he said he preferred his proposal from 2018, Yarbrough was supportive of the recently passed bill. Yarbrough, who historically been skeptical of STO reform efforts, said he came to believe that the program had grown sufficiently and it was time to limit it.
“That’s always what I wanted to do, to raise the cap significantly. I felt like that was accomplished by the time I offered the bill in 2018,” Yarbrough said. “So, the more the better. But there still comes a point in time where the number is a big number. I recognized that.”
According to legislative number-crunchers, the cap may be outpacing demand. An analysis of Yarbrough’s bill by nonpartisan budget analysts noted that, in fiscal year 2018, it took six months for corporate donations to hit the cap, compared to just a few weeks in each of the five previous fiscal years. Once prior tax cuts went fully into effect by 2020, businesses might not have enough tax liability to take full advantage of the increased cap.
Though Democrats voted for SB1485, they found the bill to be far from perfect. Some pushed for an immediate end to the 20-percent escalator, as the annual increase is often known, rather than the phased-out approach in the legislation. And many criticized Arizona’s prolific use of tax credits as a drain on state revenue that’s needed for public education.
Rep. Mitzi Epstein, D-Tempe, said the big difference between the 2018 and 2019 bills was that last year’s legislation included “side deals” that legislative Democrats opposed. Though she said she’s not that pleased with the final bill, Epstein said the fact that SB1485 had a “clean cap” made a big difference.
“That’s what should’ve been done years ago,” she said.
Rep. Reginald Bolding, D-Phoenix said there was another big difference between last year and this year – Yarbrough’s absence.
“When you have very influential senators and representatives who have a direct stake in legislation, I think it makes it much more difficult,” Bolding said.
Yarbrough runs the Arizona Christian School Tuition Organization, one of the largest STOs in the state. Despite frequent accusations that he had a conflict of interest, Yarbrough often legislation to expand STOs throughout his 16-year legislative career.
While the amount of tax credits corporations could get through the STO program grew, the total income taxes they paid dropped steeply thanks to a 2011 tax cut package that reduced the corporate income tax rate from 6.968 percent to 4.9 percent. The $373 million in corporate income taxes the state collected in fiscal year 2018 was sharply down from the $662 million collected in fiscal year 2013, the last full fiscal year before the corporate income tax cuts started phasing in.
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