Most individuals believe that state tax credits result in the state losing money. Since tax credits reduce the tax liability of taxpayers, they reduce the amount of revenue the state collects for the general fund.
In fact, opponents of Arizona’s private-school tuition organization tax credit argue that the tax credit is detrimental to the fiscal viability of the State. They argue that at a time when public schools are failing and students are not learning as much as they should, more funds are needed to ensure that public schools are able to provide an adequate education for Arizona’s children.
Opponents of the tax credit assert that the credit essentially deprives the State of much-needed funds that it could spend on educating Arizona’s children.
Most truths in life are complex; very rarely will a superficial understanding or perspective prove to actually be true. The Arizona tax credit is an example. On the surface, it seems like opponents of the tax credit are correct: more tax credits result in less money going to the State’s general fund, which in turn diminishes the amount of money the State can use on public education. However, this superficial perspective is simply not true.
Several weeks ago, the Arizona legislature convened the Joint Legislative Income Tax Credit Review Committee to review several Arizona tax credits, including the tax credit for contributions made to a recognized Student Tuition Organization (STO). Under the law, an STO must disburse at least 90% of its tax-credit-eligible funds in the form of scholarships for students to attend non-governmental schools. The remaining 10% may be used for administrative costs. Currently, Arizona taxpayers can receive a tax credit of $1,003 for single filers and $2,006 for joint filers. The purpose of convening the committee was to review the current tax credits and make recommendations for future legislation.
In preparation for the committee meeting, the Joint Legislative Budget Committee (JLBC) submitted a memorandum to the legislators prepared by Hans Olofsson, the Chief Economist of the JLBC. The memorandum considers the revenue impact of the private-school tuition tax credit. It states that in 2010, Arizona taxpayers claimed a total of $43.2 million in credits under the private-school tuition organization tax credit, thereby suggesting that the State “lost” $43.2 million in tax revenue. The memorandum makes the salient point that it is inaccurate to consider only the amount of money the State “lost” in tax credits but not consider the State’s costs if the tax credit did not exist.
While it is true that the State would have $43.2 million more in the general fund if the tax credit for private-school tuition organizations did not exist, the State would also have an increased enrollment of several thousand students in the public school system. The increase in public school enrollment and the cost of educating those students in the public school system would place a significant financial burden on the State.
Consider the numbers. The JLBC memorandum states that Arizona’s average cost per student in public school is $5,300. If the tax credit did not exist, then any student who would enroll in public school without the scholarship provided by the tax credit would cost the state an additional $5,300.
The tax credit saves the state money if at least 8,150 students would have attended public school if not for receiving a scholarship made possible through the credit ($43.2 million in credits ÷ $5,300 = approximately 8,150 students). The Arizona Department of Revenue estimates that in 2010, approximately 23,800 students received scholarships under this tax credit program.
If the tax credit did not exist, and at least 8,150 of the 23,800 students would therefore attend public school, it would cost the State more money to educate these students than the state would gain in tax revenue.
Admittedly, it is impossible to know how many students would enroll in public schools if the tax credit did not exist. Nevertheless, it is safe to assume that if not for the scholarships provided through tax credits, at least 8,150 out of the 23,800 students receiving scholarships would enroll in public schools out of financial necessity.
If this is true, then the State of Arizona saves money by offering its taxpayers the private-school tuition organization tax credit. Although Arizona is receiving less money in tax revenue as a result of the credit, it is saving more money because the State is not burdened with the cost of educating the students who enroll in private schools. Indeed, sometimes less is more.
Rabbi Rob Glazer is the Arizona Director of Agudath Israel of America and the Executive Director of Ahavas Torah: The Scottsdale Torah Center.