Arizona's tuition tax credits are being badly misused and abused, at taxpayer expense. The situation will only grow worse unless the laws governing the tax credits are rewritten and strictly enforced, or the system is abolished entirely.
As things stand, tuition tax credit laws let the well-to-do send their children to private schools tuition-free while many of the companies that disburse the scholarship money are used as personal ATM machines by the people who run them.
As I've written here before, I'm against the entire system that allows people to give $500 in tax credits ($1,000 for a couple) to be used as scholarships for private school tuition. It doesn't cost donors a dime, since the state refunds 100 percent of their money when they pay income taxes. In essence, the state is paying for children's private school educations out of the general fund. That makes it a voucher system, something I, like the majority of people in this country, oppose. But lately, even voucher supporters are crying foul.
The East Valley Tribune has written a series of excellent investigative articles ("Rigged Privilege," http://www.eastvalleytribune.com/page/taxcredits">http://www.eastvalleytribune.com/page/taxcredits) exposing the ways the original spirit of the tax credits has been violated, often breaking IRS laws in the process. The violators should face stiff fines, if not jail time, for their actions, and some of the school tuition organizations should be shut down permanently.
One Tribune article tells about a couple who are personal injury lawyers and own a half-million dollar home in Maricopa County. They send their two children to private schools tuition free. The $20,000 is picked up by tuition tax credit dollars.
Another article itemizes the many ways Rep. Steve Yarbrough (R-Chandler) profits from the school tuition organization he runs. (STOs collect tuition tax credits, then give out the money as scholarships.) He draws a $96,000 salary as executive director and receives a $12,000 retainer for legal services. The data entry company he owns charges the STO a wildly inflated $400,000 a year for its services. He also rents office space to the STO. And he drives a $44,000 company car.
Sad to say, these aren't isolated instances of misuse and corruption. They're business as usual in the unregulated, Wild West world of tuition tax credits.
This isn't how the credits were sold to Arizonans in 1997. Legislators claimed the law would allow poor and middle class children to attend private schools just like children from affluent families. But by design or due to poorly written legislation, the tax credits haven't increased economic or racial diversity in private schools. Instead, parents who have children at private schools, often-affluent parents, have tuition covered by tax credits.
Here's how it works. Mr. and Ms. Smith recruit family and friends to give tuition tax credit dollars to an STO and "recommend" the money go to little Jimmy. Since many STOs honor the recommendations automatically, all the Smiths have to do is find enough couples willing to give $1,000 apiece – remember, this doesn't cost the couples a cent since they get their money back from the state at tax time – and Jimmy's tuition is covered in full. The law doesn't include means testing, so if the Smiths are millionaires, that's perfectly OK.
Meanwhile, STOs that disburse the money are allowed to keep 10 percent of what they collect for overhead. As non-profit organizations, STOs are supposed to follow strict rules governing expenses. But since no one is paying attention, many of their directors game the system, finding ways to pay money to themselves, relatives and friends, often illegally charging more than fair market value for the services provided.
I hope the legislature and the IRS tax auditors have been following the Tribune's investigative reporting and taking careful notes. We're throwing away state money we can't afford on a wasteful, corrupt system. The legislation needs to be rewritten in the next session, and those who have been breaking the law should be brought to justice.
Dave Safier is a regular contributor to Blog for Arizona.