EDUCATION

Arizona lawmakers might slow private school tax credit growth

Lily Altavena
The Republic | azcentral.com
State Sen. J.D. Mesnard, R-Chandler. Mesnard introduced Senate Bill 1485, which still awaits final consideration in the House

A Republican lawmaker's proposal to curb the costs of Arizona's soaring corporate-funded private school tax credit program might just make it to the governor's desk this year.  

Arizona's School Tuition Organization program is a dollar-for-dollar tax credit for donations to school tuition organizations, which give scholarships to students for private school.

The program has a few different arms: Some allow individuals to donate money toward scholarships and others allow corporations to donate.

The corporate program for low-income students is currently allowed to grow by 20% every year. This year's credit is capped at $89.2 million. Without the Legislature's intervention, it could grow to $222 million by 2024, impacting the amount in the general fund that pays for everything from public district and charter schools to roads and prisons. 

"We've reached a point where (the tax credit) has grown much more substantially," Sen. J.D. Mesnard, R- Chandler, said. "North of $10 or $15 million in a year, and that is much further beyond what I think what people envisioned at the time this was set up." 

Mesnard introduced Senate Bill 1485, which would gradually decrease the rate the tax credit's cap is allowed to grow from 20% to 2% or the rate of inflation by 2024. It has passed the Senate but still awaits final consideration in the House. 

Slowing the growth 

Arizona has four separate private school tax credits, two for corporations and two for individuals.

Mesnard's plan affects the corporate tax credit for scholarships for low-income students. The credit defines low income as a family of four earning less than $85,905. Corporations must get pre-approval from the state to qualify for this credit. 

Mesnard's plan wouldn't immediately or completely halt the cap on annual growth, but would slow the growth.

Here's how it would work: 

  • In fiscal year 2021: The tax credit's cap can increase by 15% from the previous year. 
  • In fiscal year 2022: The tax credit's cap can increase by 10% from the previous year. 
  • In fiscal year 2023: The tax credit's cap can increase by 5% from the previous year. 
  • In fiscal year 2024 and every year after: The maximum tax credit cap can increase by either 2% or the inflation rate — whichever is greater. 

Mesnard said his proposal attempts to "strike the right balance" between allowing for school choice while acknowledging that the state needs revenue. 

"We need to be sensitive to the revenue needs we have and how much of our corporate income tax is potentially being used by it," he said. 

More:How do Arizona school tax-credit programs work?

This isn't the first proposal to contain costs. Former Arizona Senate President Steve Yarbrough, who ran a private school tax credit organization of his own, tried to slow the corporate credit's growth in 2018.

Yarbrough's bill died last year after passing the Senate and the House rules committee. 

Arizona Senate President Steve Yarbrough, who for years ran a private-school tax-credit organization of his own, pushed legislation that he says will rein in the cost of the state's ballooning tax-credit program.

His bill would have gradually cut the 20% growth on the corporate low-income tax credit to 2.5% or the percentage of the annual increase in the metropolitan Phoenix consumer price index (CPI) by 2022.

David Lujan, executive director of the Arizona Center for Economic Progress, supports Mesnard's plan, though he said he'd rather see the annual growth percentage, what he calls an "escalator," completely phased out this year.

The former Democratic state lawmaker said legislators are considering it in a "bipartisan fashion." 

"If lawmakers were able to eliminate that 20% escalator that would free up some additional revenues that can be directed to other priorities," he said. 

Less demand for the tax credit?

A 2018 report from the Joint Legislative Budget Committee noted that the demand from corporations to use the credit might be slowing.  

While corporate donations reached the cap within just a few weeks during fiscal years 2013 to 2017, the donations didn't hit 2018's cap for six months, according to the committee. 

Mesnard said he appreciates the bipartisan support the bill has received. 

"I feel like this is about the best middle ground you can come up with and so I'm hoping to see it get to the finish line," he said. 

Reach the reporter at Lily.Altavena@ArizonaRepublic.com or follow her on Twitter @LilyAlta.

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