The Mind-Boggling Arizona Tuition Tax Credit Scandal

A few weeks ago I participated in a school choice debate over at the Fordham Insitute. The pro-voucher crowd had a lot of enthusiasm for school tax credits–basically, a shell game whereby Taxpayer (A) donates $X to Non-Profit Foundation (B), which then turns around and gives $X to Private School (C). Taxpayer (A) then gets a tax credit from the government equal to $X. My point during the debate was that it doesn’t say much for public acceptance of vouchers when proponents have  to disguise them inside the tax system. However, the point I wish I had made was that the current school tax credit system in Arizona has turned into a scandal of mammoth proportions.

Read all it about here at the East Valley Tribune’s Web site, where the whole thing has been layed out in great, investigative detail. It’s really unbelievable, just one bad deed and example of blatant law-breaking after another. This is just from the summary:

Under the program, taxpayers give money to nonprofit charities called school tuition organizations, or STOs for short. STOs give scholarships to children for private school tuition, and the state provides donors a dollar-for-dollar tax credit in exchange for their contribution. The tax credit law, signed by Gov. Fife Symington in 1997, is touted as a tool to make private education more accessible to families who could not otherwise afford it.

Instead, it has fostered a rigged system that keeps private education a privilege for the already privileged.

The Tribune reviewed thousands of pages of state and federal tax records and analyzed private school enrollment data from the past 12 years. Reporters interviewed dozens of parents, school administrators, school tuition organization executives, tax experts and government officials. The newspaper’s reporting provides the most complete account to date of whether tax credits have torn down the economic barriers that block underprivileged children from private classrooms, as lawmakers promised. The Tribune investigation found:

* An untold number of STOs, schools and parents are using the tax credits in ways that violate federal tax laws governing charitable donations.

* Nearly two-thirds of all STOs failed to spend 90 percent of their donations on scholarships – as required by state law – since 2003, the year the STOs began filing annual reports with the state Department of Revenue.

* Executives at two of the largest STOs have used tax credit donations to enrich themselves, buying luxury cars, real estate and funding their own outside for-profit businesses.

* A majority of tax credit donations are earmarked to give scholarships to students already enrolled in private schools, no matter how much money their parents earn. Just seven of the state’s 55 STOs use financial need as the primary factor in deciding who gets tuition money.

* Even as they took in millions of dollars in scholarships, the state’s private schools hiked tuition dramatically, pushing the cost of private education further from the grasp of middle- and low-income families.

* Tax credits have failed to increase minority students’ access to Arizona’s private schools. Students at the schools receiving the most scholarship money remained overwhelmingly white at a time when the state’s Hispanic population boomed.

Nearly everyone involved in this process acted with remarkable greed and/or lawlessness. Wealthy parents would “donate” money (at no cost, because they received a dollar-for-dollar tax credit) to the specially-created non-profit, along with a written “recommendation” that the non-profit give the money to a specific private school to benefit a specific student–either their own child (which is illegal) or another child whose parents would then “recommend” a similar donation for the original child in a matched-pair quid pro quo (also illegal). Schools then shred the paper records of the “recommendations” for “privacy” reasons. Flush with an influx of free government money–over $350 million over the life of the program, and this is in a state that provides rock-bottom social services and is broke half the time–private schools did the economically rational thing and started jacking up tuition at alarming rates, further pricing out low- and middle-income students. One school suggested that parents could “make money” on the whole process by illegally deducting their non-donations from their federal taxes.

Meanwhile, the legislators who passed the law in the first place set themselves up as the presidents of the non-profit middlemen organizations, the STOs. Those organizations then pay the legislators and ex-legislators hefty salaries, lease them luxury cars, purchase services from private companies the legislators own, hire their family members, rent office space from them in space that they bought with money “gifted” from the STO itself, at above-market rates, etc., etc. The National Education Association’s Arizona affiliate, the AEA, has more good information here.

Seriously, read the whole thing, it’s mind-boggling. If these allegations are true, people should be in prison.