Senate president sees tricky course to rein in tuition tax credit

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Altering a cap on corporate tax credits for private school scholarships will require a two-thirds majority vote in both chambers of the Arizona Legislature.

That’s no easy task for Senate President Steve Yarbrough, who in his last year in office has decided to tackle an issue that will require him to garner support from both school choice advocates and opponents who claim those scholarships siphon valuable dollars from public schools.

An aggregate cap on how much Arizona businesses can claim credit for donating to school tuition organizations, which award students scholarships to help attend private schools, has been growing by 20 percent each year since 2008.

Initially capped at $10 million in 2007, the cap has steadily grown since then, and left in place, the 20 percent escalator would spiral the cap out of control, some fear. By 2020, the cap will exceed $100 million, and would soon approach the totality of income taxes the state collects from corporations – $368 million in fiscal 2017, according to state budget analysts.

“I’m a pretty pragmatic person, and I can see that the escalator is going to, in not very long, virtually exceed the totality of the corporate tax obligation,” said Yarbrough, a Chandler Republican. “That’s no cap at all.”

The solution, then, is for Yarbrough to guide through the Legislature a bill to substantially reduce the cap. If anyone has a chance of accomplishing that, it is Yarbrough, who is the reason the 20 percent escalator is there in the first place. It was Yarbrough who negotiated the escalator with Gov. Janet Napolitano in 2006.

“Time has run its course,” Yarbrough said. “We’ve reached a different place, and in my mind, reducing the escalator is actually keeping faith with the deal.”

Yarbrough said he’s still working out the minute details of a bill, but essentially, he’s proposing a phasing down of the escalator, perhaps over a span of three to four years, with the goal of reducing it to about 2.5 percent. That would keep the corporate tax credit more in line with inflators for other private school tax credits, like the individual tax credit limits.

Such a measure could easily gather support from Democrats, who in recent years have targeted private school scholarships as a drain on state resources. Each dollar claim via the private school tax credits is a dollar not spent on students attending Arizona public schools, they say.

They have particularly targeted the acceleration of the tax credits. There is no aggregate cap on individuals from claiming credits. But the lowest-hanging fruit is the 20 percent escalator for corporate income tax credits. Groups like Children’s Action Alliance and its sister organization, the Arizona Center for Economic Progress, have called attention to the corporate tax credit for years. Stopping the 20 percent escalator is one of the groups’ legislative goals for 2018.

Some Republicans, like Reps. Heather Carter, R-Cave Creek, and Doug Coleman, R-Apache Junction, have targeted the corporate credit as ripe for change.

“It’s a really good move,” Carter said. “This is a great time to be having these conversations when we’re looking to put as many additional dollars that we can find into education.”

But Yarbrough knows he is wading into a potentially tough negotiation with much of his own caucus. Many Republicans aren’t keen on reducing the inflator, a move that when proposed in the past has been seen as anti-school choice, Yarbrough acknowledged.

Coleman sponsored a bill in 2017 that would have reduced the escalator to either the consumer price index of the Phoenix metro area or 2 percent, whichever is greater. The bill was assigned to two committees and got no hearing in either.

Yarbrough’s bill will also trigger Proposition 108, which amended the Arizona Constitution to state that any net increases in state revenues require a supermajority for approval. That includes “a reduction or elimination of a tax deduction, exemption, exclusion, credit or other tax exemption feature in computing tax liability.”

Yarbrough said he has checked with legislative counsel, and they agreed that lowering the escalator on the corporate tax credit for STOs is a reduction of a tax credit, and therefore triggers Prop. 108. He acknowledged Prop. 108 makes the prospect of lowering the escalator “more dicey, yessir. So it’s going to have to be a compromise that I can bring enough of my own colleagues on.”

And given the way past efforts to do so have been labeled as anti-school choice, “it’s probably going to be easier to get Democrats on than Republicans,” Yarbrough said.

Yarbrough might not have as much trouble with Republicans as he suspects. He’s got the blessing of House Speaker J.D. Mesnard, a fellow Chandler Republican, who supports the idea of reducing the escalator.

“I think that’s a conversation that we probably need to have,” Mesnard said. “There isn’t anyone that knows more about the issue than President Yarbrough obviously and I respect his judgment on this greatly.”

Rep. Paul Boyer, chairman of the House Education Committee, acknowledged that getting a two-thirds majority vote can be tricky. But despite past reluctance by most Republicans to tackle changes to the tax credits, the Phoenix Republican said deference to Yarbrough will help garner support from GOP lawmakers.

“This is President Yarbrough’s original bill, and so anytime a member wants to alter something that is your issue, usually the common courtesy is to talk to the original sponsor. And so the fact that he’s running it, there will be much more support than there’s been before,” Boyer said.

For any skeptics, Yarbrough is preparing to add some “sweeteners” to seal the deal for the pro-school choice crowd.

That includes an amendment to allow students who attended school outside of Arizona the previous year to take advantage of scholarships. The current “switcher” rules mean the scholarships are limited to students who attended an Arizona public school for at least 90 days in the previous year.

“The fact that (a student’s) coming from Oklahoma shouldn’t make him ineligible. He shouldn’t have to go to an Arizona public school for (90) days before he’s eligible,” Yarbrough said.

The Senate president also wants to allow homeschooled students to qualify for the switcher scholarship, and provide an exemption for disabled students to the scholarship cap applied to scholarships through the corporate income tax credit. There is already a tax credit solely for disabled or displaced students, but there is a hard cap of $5 million, and that’s not enough for students, Yarbrough said.

Yarbrough characterized the amendments as improvements to the system that won’t substantially change the way STOs operate, but will benefit students.

“No matter whether you’re a fan or an enemy of a school choice, you can say if we got it, we might as well make it work as best we can,” he said.

Yarbrough has already drawn a line in the sand on some issues related to private school scholarships, and warned that he won’t tolerate certain amendments as part of a compromise, and promised to pull the plug on negotiations if lawmakers insist on them.

That includes efforts to reduce the administrative fee that STOs keep to pay for operations. STOs – like the one Yarbrough ran until last week – may keep up to 10 percent of contributions from corporations claiming tax credits to pay for staff and other expenses. Yarbrough retired December 29 from his post at the Arizona Christian School Tuition Organization, one of the oldest STOs in the state.

Reducing that amount would increase the amount required to go toward scholarships for students, which is currently 90 percent of contributions. That measure was part of Coleman’s 2017 bill to reduce the escalator. Yarbrough said it’s a non-starter.

Yarbrough also doesn’t want to change anything about the two individual tax credits available for STOs.

“If people want to throw those into the mix, this is probably all dead, because I’m happy with the status quo,” Yarbrough said, adding that he’d recruit the necessary 11 votes to hold the line and block any efforts to add those changes.