This article has been retrieved
times since August 1, 2000
This article has been retrieved
| ||
Volume 8 Number 38 |
August 1, 2000 |
ISSN 1068-2341 |
|
Editor: Gene V Glass, College of Education Arizona State University
Copyright 2000, the
EDUCATION POLICY ANALYSIS ARCHIVES. Articles appearing in EPAA are abstracted in the Current Index to Journals in Education by the ERIC Clearinghouse on Assessment and Evaluation and are permanently archived in Resources in Education. |
Effects on Funding Equity of the Arizona Tax Credit Law
Glen Y. Wilson |
|
Abstract
This article examines the results from the first year (1998) of the Arizona Education Tax Credit program. The tax credit law allows individuals a dollar- for-dollar tax credit of $500 for donations to private schools and a dollar-for-dollar tax credit of $200 for donations to public schools. Although one justification for this statute was that it would help lower income students, the primary beneficiaries of this program tend to be the relatively well off. The author concludes that Arizona's tax credit law increases educational funding inequity in Arizona. Data for 1999, only recently made available, show a 159.1 percent increase in total contributions and an exacerbation of the trends noted here. This article is one of four on the Arizona Tax Credit Law: |
IntroductionEducation tax credits are a relatively new mechanism intended to promote and fund school choice by means of the tax system. In Arizona's first regular legislative session in 1997, House Bill 2074 was passed and on April 7, 1997 was signed into law by Arizona Governor Fife Symington as A.R.S. § 43-1089. Beginning with the 1998 tax year, A.R.S. § 43-1089 created a private school tuition organization individual income tax credit and a public school extracurricular activity fee individual income tax credit.With the private school tax credit, Arizona taxpayers were granted a full and direct credit against state income taxes for contributions up to $500 to school tuition organizations (STOs). STOs then provide grants to students to attend private schools. A.R.S. § 43-1089 contains very few restrictions as to how the proceeds from this tax credit are to be used. The major restrictions are: that taxpayers claiming this credit may not earmark their donation to their own dependents, that STOs allocate at least 90 percent of their annual revenue for "educational scholarships" or "tuition grants," and that STOs provide scholarships or grants without limiting availability to only students of one school (A.R.S. § 43-1089). A similar $200 tax credit is also available for contributions to public schools; however, these contributions may only be used for extracurricular activities that require a student fee. Examples provided in the statute include: band uniforms, equipment or uniforms for varsity athletic activities and scientific laboratory materials (A.R.S. § 43-1089.01). Originally, contributions to public schools did not qualify for this credit because the legislative bill restricted the tax credit to "a nongovernmental primary or secondary school" of the "parents' choice" [A.R.S. § 43-1089 (E) (1), (2)]. As a compromise with opponents of the legislative bill, the law as finally enacted included a $200 tax credit for contributions to K-12 public schools. To tax professionals, provisions such as tax credits and tax deductions are known as tax expenditures. Tax expenditures are special preferences embedded in the tax code that are intended to benefit particular activities or groups. Tax expenditures cause a loss of tax revenue and thus, are functionally equivalent to government spending programs. Surrey and McDaniel (1985) stated the following about tax expenditures: Whatever their form, these departures from the normative tax structure represent government spending for favored activities or groups, effected through the tax system rather than through direct grants, loans, or other forms of governmental assistance….These tax expenditures in effect represent monetary assistance provided by the government (p. 3).It should be noted that unlike tax deductions allowed for general charitable giving, Arizona's education tax credit provides a full reimbursement to those who contribute. Thus, the tax credit plan does not function as a stimulus to charitable giving, but instead functions to allow self-selected taxpayers to redirect funds, that would otherwise flow into state accounts, to private entities of their own choosing. A major justification for school choice programs has been to offer additional educational alternatives to low-income families. The Arizona tax credit law was promoted with a similar justification. The Arizona Republic, in a recent story on the tax credit program reported that "Supporters of the credit for private school scholarships, including Rep. Mark Anderson, R-Mesa, who sponsored the legislation, touted it as a way to send kids to private school who otherwise couldn't afford to go" (Bland, 2000). Arizona Supreme Court Chief Justice Thomas B. Zlaket offered similar reasoning in the opinion upholding the school tax credit law. Zlaket wrote: "Until now, low-income parents may have been coerced into accepting public education…Arizona's tax credit achieves a higher degree of parity by making private schools more accessible and providing alternatives to public education" [Kotterman v. Killian, No. CV-97-0412-SA (1999)]. If such published accounts were accurate, it would appear that the primary intended beneficiaries of the law could be construed as low-income students and their families with a primary intended effect of increased educational choice (increased access to private schooling). For public schools, the justification appears to be to assist parents in paying for public school extracurricular activities. To extend the justification for the private school tax credit to the extracurricular public school tax credit would logically mean that the primary beneficiaries of the public school tax credit should be students and families that face hardship in paying extracurricular fees. However, to opponents, education tax credits are poor public policy and a dangerous road on which to travel. In addition to fundamental constitutional questions of separation of church and state, many critics believe that tax expenditures, such as tax credits, tend to be highly inequitable. Wealthy individuals may be much more likely to take advantage of them than lower-income individuals, who may not even earn enough income to participate in the program. For example, Weinberg (1987) calculated that for FY 1985, at least 50 percent of the total benefits provided by tax expenditures through the U.S. individual income taxation system went to the top 20 percent of families (in terms of income). The poorest 40 percent of families (by income) received less than 20 percent of the total benefits offered through tax expenditures. Under Arizona's plan, those participating receive a full reimbursement of their contribution and thus, do not actually incur any costs at all. Therefore, Arizona's plan appears to allow higher-income individuals to direct a portion of state tax revenue to public or private schools while possibly denying lower-income individuals an equal real opportunity to do the same. Another objection to the use of tax credits relates to the distributional pattern that critics believe will occur. Critics have charged that under this plan, resources will not flow to where needs are the greatest—that in the end, this plan will be just another subsidy for the middle-class. |
Research DesignThe purpose of the quantitative analysis reported here is to describe the distribution of tax credit contributions in terms of student poverty/wealth, contributor poverty/wealth, enrollment and student achievement. Since the data in hand constitute a full census of the education tax credit records for the 1998 tax year, no questions of statistical inference arise. Rather, the purpose of the data analysis will be to show the different levels of contributions in terms of different factors.Data Collection and PreparationComplete records of all Calendar Year 1998 contributions (as of March 26, 1999) under the education tax credit law were obtained from the Arizona Department of Revenue (ADOR). Approximately 60,000 contributions were documented, accounting for about $7.7 million dollars. The number of contributions and the total amount contributed to the recipient school were provided; no taxpayer identification (neither personal identity, location nor income level) was included. The data contained listings for 1,144 K-12 public schools. Data on public schools participating in the federal free/reduced meal program (F/R meal) were obtained from the Arizona Department of Education (ADE). The number of students eligible for the F/R meal program as well as the total school enrollment were contained in the data from ADE. After combining the two data records, there were 929 public schools (81.2% of the total) for which there was data on both measures (tax credit contributions and F/R meal program). Schools for which there was no tax credit contribution listing and/or no free/reduced meal program data were not included in the analysis. For the public schools with data on the two elements of interest, information as to the school's 1997-98 student performance on the state-mandated Stanford-9 Achievement Test was added for each school. For elementary schools, the 4th grade reading and math individual percentile ranks were used; for middle/junior high schools, 7th grade reading and math individual percentile ranks were employed; and for high schools, 9th grade reading and math individual percentile ranks were used. If the particular score for a school was missing, the closest available score was used. For example, if the 4th grade reading or math score was missing for an elementary school, then the closest available score such as the 3rd grade score for that particular school was used. The reading and math individual percentile ranks were summed and divided by 2 to provide a combined score for each school. The 929 public schools in the dataset were placed into quarters based on the percentage of a school's students eligible for F/R meal program. In this dataset, these percentages ranged from 1 to 100 percent of schools' enrollment.The data on tax credit claimants (Tables 4 – 7) are based on ADOR's review of individual tax returns. As of September 23, 1999, approximately 25,000 individual tax returns have been reviewed. ADOR estimates that nearly 17,000 tax returns filed prior to September 1, 1999 have yet to be reviewed. Any tax returns filed after September 1, 1999 and before the end of calendar year 1999 will also require review in order to have complete first year results. The data concerning private schools and School Tuition Organizations (table 8) were obtained from ADOR, the Center for Market-based Education, and telephone calls to individual STOs. Findings: Public SchoolsAfter the ADOR tax credit and ADE F/R Meal Program data records were combined, there were 929 public schools enrolling 672,211 students, for which there was data on both measures of interest (contributions under the tax credit program and F/R meal program). Stanford Achievement Test data were then added to the dataset and schools were arranged into quarters on the basis of relative poverty/wealth. Summary tables were developed for several items of interest (school characteristics, school basis contribution data and student basis contribution data). Characteristics of the schools in the dataset are shown in Table 1.Table 1
|
| All Schools | Poorest Quarter | Second Poorest Quarter | Second Wealthiest Quarter | Wealthiest Quarter | |
| Number of Schools | 929 | 232 | 232 | 233 | 232 |
| School Enrollment | 672,211 | 142,760 | 164,087 | 168,025 | 197,339 |
| Percent of Total School Enrollment | 100.0% | 21.2% | 24.4% | 25.0% | 29.4% |
| Mean School Enrollment | 723.6 | 615.3 | 707.3 | 721.1 | 850.6 |
| Mean Percentage of Students Eligible for F/R Meal Program | 51.2% | 87.1% | 63.3% | 40.5% | 14.0% |
| Mean Combined Reading/Math SAT-9 Percentile Rank Score | 48.7 | 30.4 | 43.3 | 53.5 | 66.6 |
| All Schools | Poorest Quarter | Second Poorest Quarter | Second Wealthiest Quarter | Wealthiest Quarter | |
| Amount Donated | $5,925,436 | $663,272 | $782,417 | $1,359,790 | $3,119,958 |
| Percent of Total Amount Donated | 100.0% | 11.2% | 13.2% | 22.9% | 52.7% |
| Number of Donations | 53,294 | 4,097 | 6,218 | 13,223 | 29,756 |
| Percent of Total Donations | 100.0% | 7.7% | 11.7% | 24.8% | 55.8% |
| Per School Donation | $6,378.29 | $2,858.93 | $3,372.49 | $5,836.01 | $13,448.09 |
| All Schools | Poorest Quarter | Second Poorest Quarter | Second Wealthiest Quarter | Wealthiest Quarter | |
| Per Student Donation | $8.81 | $4.65 | $4.77 | $8.09 | $15.81 |
| Number of Students Per Each Donation | 12.6 | 34.8 | 26.4 | 12.7 | 6.6 |
| Total | $20,000 or less FAGI | $20,000 to $50,000 FAGI | $50,000 to $100,000 FAGI | $100,000 to $500,000 FAGI | Over $500,000 FAGI | |
| Number of donations | 16,930 | 389 | 3,999 | 8,322 | 4,100 | 120 |
| Percentage of Total Donations | 100.0% | 2.3% | 23.6% | 49.2% | 24.2% | 0.7% |
| Total Credits | $3,043,456 | $65,887 | $693,208 | $1,493,354 | $768,253 | $22,754 |
| Percentage of Total Credits | 100.0% | 2.2% | 22.8% | 49.1% | 25.2% | 0.7% |
| Average Size of Donation | $179.77 | $169.38 | $173.35 | $179.45 | $187.38 | $189.62 |
| Total STOs | Religious affiliated STOs | Nonreligious STOs | STOs No longer active or of Unknown status | |
| Number of STOs | 15 | 10 | 3 | 2 |
| Number of Donations | 4,246 | 4,045 | 132 | 69 |
| Amount Donated | $1,815,799 | $1,731,019 | $54,805 | $29,975 |
| Percentage of Total Amount Donated | 100.0% | 95.3% | 3.0% | 1.7% |
| Public Schools | Private Schools | |
| Per Student Donation | $8.81 | $40.09 |
| Number of Students Per Each Donation | 12.6 | 10.7 |
| STO | Number of Donations | Total Amount | Average Scholarship Amount |
| Arizona Scholarships and Tuition | 42 | $26,360 | $627.62 |
| Christian Scholarship Fund of Arizona | 163 | $68,235 | $418.62 |
| Higher Education for Lutherans Program | 116 | $31,380 | $270.52 |
| Northern Arizona Christian School Scholarship | 30 | $35,000 | $1,167.67 |
| St. Gregory/Green Fields Scholarship | 82 | $32,480 | $396.10 |
| Southern Arizona Foundation for Education | 56 | $22,250 | $397.32 |
| Total | 489 | $215,705 | $411.11 |
| Total | $20,000 or less FAGI | $20,000 to $50,000 FAGI | $50,000 to $100,000 FAGI | $100,000 to $500,000 FAGI | Over $500,000 FAGI | |
| Number of donations | 2,579 | 52 | 492 | 1,055 | 906 | 74 |
| Percentage of Total Donations | 100.0% | 2.0% | 19.1% | 40.9% | 35.1% | 2.9% |
| Total Credits | $1,133,636 | $14,311 | $187,130 | $472,345 | $424,500 | $35,350 |
| Percentage of Total Credits | 100.0% | 1.3% | 16.5% | 41.7% | 37.4% | 3.1% |
| Average Size of Donation | $439.56 | $275.21 | $380.35 | $447.72 | $468.54 | $477.70 |
Center for Market-based Education. (2000, March 15). Extra Credit: Arizona Tuition Tax Credits. [Online]. Available: http://www.cmbe.org/extracredit.htm. [August 1, 2000]
Kahne, J. (1996). Reframing educational policy: Democracy, community and the individual. New York: Teachers College Press.
MacRae, D., & Whittington, D. (1997). Expert advice for policy choice: Analysis & discourse. Washington DC: Georgetown University Press.
Meyer, G. & Smith, E. (1999, September 23). Arizona's individual income tax credits for schools. Phoenix: Arizona Department of Revenue.
Peterson, P. E. (1999). Top ten questions asked about school choice. In D. Ravitch (ed.), Brookings papers on education policy, 1999 . (pp. 371-418). Washington DC: Brookings Institution Press.
Peterson, P. E. (1998). School choice: A report card. In P. E. Peterson & B. C. Hassel (eds.), Learning from school choice. (pp. 3-32). Washington DC: Brookings Institution Press.
Surrey, S. S., & McDaniel, P. R.. (1985). Tax expenditures. Cambridge MA: Harvard University Press.
Walsh, M. (1999, February 3). Tax credits pass muster in Arizona. Edweek [Online]. Available: http://www.edweek.org/ew/vol-18/21ariz.h18 [August 1, 2000]
Weinberg, D. H. (1987). The distributional implications of tax expenditures and comprehensive income taxation. National Tax Journal, 40, 237-253.
B.S. Arizona State University 1985
M.B.A. Arizona State University 1986
Ed.M Harvard University 1998
Glen Wilson is a Ph.D. student in the Division of Educational Leadership and Policy Studies in the College of Education at Arizona State University. His interests include K-12 education policy with specific interests in the school choice movement as a reform strategy and in issues of fairness and equity related to high stakes testing and school finance.
Copyright 2000 by the Education Policy Analysis ArchivesThe World Wide Web address for the Education Policy Analysis Archives is epaa.asu.edu General questions about appropriateness of topics or particular articles may be addressed to the Editor, Gene V Glass, glass@asu.edu or reach him at College of Education, Arizona State University, Tempe, AZ 85287-0211. (602-965-9644). The Commentary Editor is Casey D. Cobb: casey.cobb@unh.edu . EPAA Editorial Board
|