Arizona’s Private School Tuition Tax-Credit Program: How We Got Here and Where are We Going?

posted Feb 1, 2012, 1:18 AM by Bill Duncan
DNHPE Comment: This is probably the best overall explanation of Education Tax Credits and vouchers.



Arizona’s Private School Tuition Tax-Credit Program: How We Got Here and Where are We Going?.

In June of 2009, Arizona Education Network published an article explaining how individual and corporate tax school tax credits worked(We encourage you to read this article first in order to understand the structure of the Arizona private school tax-credit program before continuing with this article.) Since then, investigative reports in the East Valley Tribuneand the Arizona Republic have brought into question the efficacy of the program and the practices of the School Tuition Organizations, which act to pass through the tax credits to the private schools.  In the wake of the investigations, two house panels have held hearings into private school tax credits.

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Arizona Education Network decided to take a closer look at the private school tax credit program and its history in order to understand the evolution of the program, the issues that have been raised and the potential changes in the future.  In order to respond to the many inquiries we have received (and make this easier on the layman), we will be using the Q & A format.

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Why is there so much interest in using public tax dollars for private schools?

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There are several arguments made:

  • Some believe that in areas where schools are failing, all options, including private schools, must be looked at for the benefit of the children in these areas that are poorly served by their current public schools.  This argument is most prevalent in inner-cities where the vast majority of students are at, or near, the poverty level; and in fact, this is where voucher programs were first proposed.  Milwaukee and Cleveland were some of the first cities to offer vouchers, and it was a case from Ohio – Zelman vs. Simmons-Harris (2002) – which the supreme court upheld in the use of vouchers.
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  • Another argument is that private schools provide competition for public schools and that this should be encouraged.
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  • Some go even further, proposing privatizing all education through a voucher system: in essence dismantling the public school system.  The best known advocate of this argument is economist Milton Friedman.
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  • Finally, some of those who attend private schools argue that it is their right to decide how to use their tax money to educate their children, regardless of the performance of their public schools or their income.

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What are vouchers?

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Vouchers are payment certificates directly issued by the government to parents to pay for private school.  They have been very controversial because, historically, they have run into problems with the Establishment Clause of the First Amendment of the U.S. Constitution.  The First Amendment states that: Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; and court cases regarding vouchers have centered on these clauses.

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How did vouchers wind up being upheld by the Supreme Court?

The path of vouchers in the legal system is very interesting and it all has to do with the changing interpretation of the Establishment Clause.  Here are some of the Supreme Court cases that determined the progress to federally approved vouchers.

  • Everson v Board of Education (1947) – This case found that the a board of education could authorize the reimbursement of parents for fares paid for the transportation by public carrier of children attending public and Catholic school.  “In fact, the decision established the now-crucial distinction between aid provided directly to religious schools and aid provided to children or their parents…”(NeoVouchers, Kevin Wellner, p. 50).   However, Everson also held two important points; 1) “In the words of Jefferson, the clause against establishment of religion by law was intended to erect ‘a wall of separation between church and State.’” (Everson) and 2) “Prior to the adoption of the Fourteenth Amendment,  the First Amendment did not apply as a restraint against the states.” (Everson) However, Everson upheld the application of the Fourteenth Amendment’s due process clause, meaning the First Amendment applies to the states and is binding.
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  • Lemon v Kurtzman (1971) – While Everson permitted direct aid to parents for their children, Lemon established the rules.  Lemonstruck down “Rhode Island’s 1969 Salary Supplement Act provid[ing] for a 15% salary supplement to be paid to teachers in nonpublic schools at which the average per-pupil expenditure on secular education [was] below the average in public schools.”  And “Pennsylvania’s Nonpublic Elementary and Secondary Education Act, passed in 1968, authoriz[ing] the state Superintendent of Public Instruction to ‘purchase’ certain ‘secular educational services’ from nonpublic schools, directly reimbursing those schools solely for teachers’ salaries, textbooks, and instructional materials.” (Lemon)  Lemon found that “[b]oth statutes… involve[d]  excessive entanglement between government and religion.”  The Lemon decision laid out what came to be known as the “Lemon Test”. “A law, the court explained, violates the establishment clause if it fails any of the three parts of the following test: (1) the law must serve a secular purpose; (2) its principal or primary effect must neither advance nor inhibit religion; and (3) it must not foster an excessive entanglement with religion.” (NeoVouchers, Kevin Wellner, p.59)
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  • Mueller v Allen (1983) – The first shift came in Mueller v Allen.  The Supreme Court upheld “[a]  Minnesota statute (§ 290.09, subd. 22) [that] allow[ed] state taxpayers, in computing their state income tax, to deduct expenses incurred in providing ‘tuition, textbooks and transportation’ for their children attending an elementary or secondary school.” (Mueller v Allen).  This included parents whose children attended parochial schools.  The court ruled that the law met the “Lemon Test”.
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  • Aguilar v Felton (1985) – In this case the court held unconstitutional “New York City['s] use [of] federal funds received under the Title I program of the Elementary and Secondary Education Act of 1965 to pay the salaries of public school employees who teach in parochial schools in the city.” (Aguilar) The decision cited excessive entanglement under the “Lemon Test”.
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  • Agostini v Felton (1997) – Agostini reversed the Aguilar case; the court ruling that, “[t]he Aguilar Court erred in concluding that New York City’s Title I program resulted in an excessive entanglement between church and state.” (Agostini) “The key modification was that entanglement alone would not result in a finding of unconstitutionality.” (NeoVouchers, Kevin Wellner, p.60)
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  • Zobrest v Catalina Foothills School District (1993) – We cannot leave out Arizona’s own contribution to the evolution.  In Zobrest,the ”[p]etitioners, a deaf child and his parents, filed this suit after respondent school district refused to provide a sign language interpreter to accompany the child to classes at a Roman Catholic high school.”  The court ruled that, “Government programs that neutrally provide benefits to a broad class of citizens defined without reference to religion are not readily subject to an Establishment Clause challenge just because sectarian institutions may also receive an attenuated financial benefit.”(Zobrest)
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  • Zelman v Simmons-Harris (2002) -This brings us to the case that approved vouchers on the federal level. The Zelman case ruled on the legality of the Cleveland pilot program to provide vouchers to students in a public school district that was failing on a massive scale, necessitating federal intervention and a state takeover.  In the decision, the court affirmed that, “[t]here is no dispute that the program challenged here was enacted for the valid secular purpose of providing educational assistance to poor children in a demonstrably failing public school system.”  The decision went on to say, “[t]hree times we have confronted Establishment Clause challenges to neutral government programs that provide aid directly to a broad class of individuals, who, in turn, direct the aid to religious schools or institutions of their own choosing. Three times we have rejected such challenges.”  The key phrase here is “neutral” – the “Neutral Test” has replaced the “Lemon Test.  The Supreme Court reversed the appeals court ruling that, “ the Ohio program is entirely neutral with respect to religion. It provides benefits directly to a wide spectrum of individuals, defined only by financial need and residence in a particular school district. It permits such individuals to exercise genuine choice among options public and private, secular and religious. The program is therefore a program of true private choice. In keeping with an unbroken line of decisions rejecting challenges to similar programs, we hold that the program does not offend the Establishment Clause.”

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Why doesn’t Arizona use vouchers?

Even though federal law now permits vouchers, the use of vouchers is not permitted under the Arizona state constitution.  This is because the Arizona constitution contains a “Blaine Amendment Clause“.  The Blaine amendment was a constitutional amendment proposed by then Congressman James Blaine in 1875 to ban the use of  revenue raised by taxation for private schools; specifically religious schoolsWhile the amendment to the constitution failed, many states (including Arizona) adopted a version of the amendment into the state constitution. The Arizona constitution article IX, Section 10.  reads:

“No tax shall be laid or appropriation of public money made in aid of any church, or private or sectarian school, or any public service corporation.”

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Thus, Arizona lawmakers needed to find another way to to fund private school: tax-credits.

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How do tax-credits avoid the “Blaine Amendment” prohibition?

Tax-credits are not refunds; they are “credits.” The funds never make their way into the state general fund, but they come back as a credit OUT of the state’s general fund. The tax-credit money must be paid to a middle-man, a school tuition organization (STO), which then distributes the funds to students through “tax-credit scholarships”.   Because the funds are not received by the state directly and are not paid out by the state, they are not subject to the Blaine Amendment.

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Was the private tuition tax-credit challenged in court?

Yes, it was challenged in Kotterman v Killian (1999) and went to the  Arizona State Supreme Court.
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The State Supreme Court found that, “
schools are no more than indirect recipients of taxpayer contributions, with the final destination of these funds being determined by individual parents.” (Kotterman).  The final conclusion affirmed that, ”[w]e hold that the tuition tax credit is a neutral adjustment mechanism for equalizing tax burdens and encouraging educational expenditures.” (Kotterman).  The Supreme Court declined to hear an appeal of the case.

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It is interesting that in the decision, the Arizona Supreme Court brings up the religious discrimination issue as it pertains to the “Blaine Amendment”.   The opinion states that, “[t]he Blaine amendment was a clear manifestation of religious bigotry, part of a crusade manufactured by the contemporary Protestant establishment to counter what was perceived as a growing ‘Catholic menace’.”  It goes on to find that while there is “… no recorded history directly linking the amendment with Arizona’s constitutional convention…we would be hard pressed to divorce the amendment’s language from the insidious discriminatory intent that prompted it.” (Kotterman) Some in the pro-voucher movement have suggested that there may be a potential federal case in the offing challenging the states which have a “Blaine Amendment” on discrimination grounds.  It is debatable as to whether such a case would succeed. However, if it did and the Blaine Amendment was thrown out, Arizona would be free to offer vouchers.

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Are there any other cases that may affect tax-credits in the future?

There is currently a case working its way through the federal appeals court. On October 21, 2009,  the full 9th U.S. Circuit Court of Appeals affirmed its April 2009 decision that the Arizona School Tuition Organizations Program for private schools is unconstitutional.

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In the case of Winn v Arizona Christian School Tuition Organization, the court supported  “Plaintiffs argue[ment], however, that Section 1089 violates the Establishment Clause precisely choices available under the program serve to restrict parents’ opportunities to select secular educational options for their school-age children, skewing parents’ incentives to send their children to religious schools. As such, the program is not ‘neutral in all respects toward religion’ and, concomitantly, is not a ‘program of true private choice.’”  This returns the argument to the Establishment Clause and the Zellman case’s neutrality test.  It will be interesting to see how the Supreme court applies these issues to tax-credits vs. vouchers.

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Interestingly, “[a]n analysis of 2008 scholarships by The Arizona Republic showed religious schools received 93 percent of the $54 million given to school-tuition organizations that year.  The Republic went on to report that, “If the U.S. Supreme Court decides not to review the case, it will go back to the Arizona’s U.S. District Court for a full hearing. If the Supreme Court decides to review the case, the justices would ask for further legal and oral arguments from attorneys on both sides. The court could reverse the Appeals Court decision and end the case or uphold the Appeals Court decision to send the case to a lower court for a full trial.”

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How does Arizona’s tax-credit specifics compare to those of other states?

Arizona pioneered the use of tax-credits to circumnavigate the restrictions of the “Blaine Amendment”.  Several other states have implemented tax-credit programs following the Arizona model.  Click here to see a chart that compares Arizona tax-credits to those available in Pennsylvania, Florida, Iowa, Rhode Island and Georgia.

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In order to adopt best tax-credit practices, which state should Arizona emulate?

Arizona’s individual tuition tax-credit plan should adopt that same standards as Arizona’s corporate tuition tax credit plan.

  • While the individual tuition tax-credit program is not means tested, the corporate tuition tax-credit plan is limited to families with 185% of the income required to receive free & reduced lunch
  • While the individual tuition tax-credit program allows earmarking of donation if not for a dependent, the corporate tuition tax-credit plan allows no earmarking at all
  • While the individual tuition tax-credit program has no restrictions requiring prior public school attendance, the corporate tuition tax-credit plan mandates that students must start off in public school or be in Kindergarten to apply
  • Although the individual program has no cap, the corporate plan is capped at $17.3 million (although that is permitted to grow at 20% per year)

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Do tax-credits save the state money?

Proponents of tax-credits argue that tax-credits issued on behalf of students attending private school save the state money because the tax-credit is less than the per-pupil funding level allocated by the state for a student in public school.   However, the state saves moneyonly if the benefitted students start out in public school.  When tax credits support students who are already in private school and would have chosen private school anyway, there is no savings to the general fund.  The Arizona Republic article points out that out of the 50,000 private school students, only 7,530 students have been added since the tax-credit program started. Moreover, if public school students switch from public to private schools they only receive a partial subsidy of their private school tuition, leaving the families to make up the difference between the subsidy and the full cost of private school tuition.  Therefore, there is a cost-shift from public payment for education to private, individual payment for education.  Is that the best way to build an educated work force?  How will low income students be able to afford to subsidize their education?

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Why publicly financed education?

Parents have the choice of sending their children to a public school or a private school at their own expense.  More importantly, choice is now available under the public school umbrella; among traditional public schools and charter schools.
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Universal public education in the United States is a cornerstone of our democracy.  While citizens of the United States pay taxes for a variety of services, none has had a greater economic impact on the United States than the investment in public education.
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Reforms in public education are moving to outcome-based models.  By shifting tax funds to private schools, lawmakers risk sending funds to institutions with no accountability for how funds are spent or any test of outcome of their education model.  In a time of tight budgets and cuts to public education, allowing tax-credits to private schools, without any accountability for spending or assessment of success does not appear to be a sound public policy decision.

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MaryLee Moulton, Arizona Education Network

MaryLee Moulton can be contacted at marylee@arizonaeducationnetwork.com

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Referenced articles:

Tax credit sponsor’s vision unrealized, East Valley Tribune, June 15, 2010

Researcher: Tax credits cost state millions, Livewire Blog, AZ Central.com, February 8, 2010

Tax Credits & STOs: Overview, Arizona Education Network, June 6, 2009

Rigged Privileged, East Valley Tribune, August 1, 2009

‘Republic’ analysis: Tuition tax credits drain state money, Arizona Republic, October 14, 2009

Public Schools: Make Them Private, Milton Friedman, Cato Institute, June 23, 1995

Attorneys to ask high court to review Ariz. tuition tax credits, Arizona Republic, October 22, 2009

Referenced Book:

Wellman, Kevin, G., NeoVouchers, New York: Rowman & Littlefield , 2008.

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