Arizona’s School Tax Credit Mess

Arizona state flag
Arizona state flag

State spending on Arizona’s K-12 public school students has fallen 17.5 percent since 2008, the third-deepest rate of school budget cuts in the nation, according to a report by the Center on Budget and Policy Priorities. And a recent U.S. Census Bureau report showed that the state’s school spending rate fell for a third straight year in fiscal 2013, to $7,208 per student, about 33 percent below the national average of $10,700, and 49th out of the 50 states and the District of Columbia.

Furthermore, an Arizona court decision last fall found that the Republican-controlled legislature illegally diverted money generated by Proposition 301 that was intended for schools. Superior Court Judge Katherine Cooper issued a judgment requiring the state to increase funding to K-12 public schools by making an initial payment of $317 million as part of a total of $1.6 billion in payments over five years. But so far the legislature hasn’t sent a penny of this money to the schools.

While the legislature was busy cutting school spending it was also reducing the available tax revenue by cutting Arizona business taxes, which legislative budget analysts estimate will cost the state about $538 million in tax revenue by 2018.

To make matters even worse, the legislature has simultaneously increased income tax credit programs for school-related donations. This may sound like a good idea, but the donations are creating gross inequities between rich and poor school districts. The Arizona Department of Revenue (ADOR) estimated about $174 million in school tax credits were diverted from the state’s general fund in 2014, with about $123 million of that going to private schools, including religious schools.

Tax Credits Are Too Easy to Claim

But the situation might even be worse than that because of the way the ADOR tracks these school tax credits. Households that claim a tax credit by giving a donation to a public school to help fund extracurricular activities must complete and submit ADOR Form 322. But even though the school districts provide receipts to the people who make these donations, ADOR doesn’t require taxpayers to include copies of these receipts with their tax returns. And while Form 322 requires the taxpayer to name the school district that got their donation, there’s no easy was for ADOR to verify these claims because the district’s name is simply written or typed on the form, and not normalized with an ID code that could be cross-checked with a database. This same process, along with Form 323,  is used by taxpayers claiming donations to private school tuition organizations.

Subsequently, Arizona taxpayers can easily claim unverified credits that reduce their annual income tax obligation dollar for dollar. In regards to the public school tax credits, single taxpayers can claim up to a $200 annual credit, and married ones up to $400. Taxpayers claiming a credit for donations to private school tuition organizations can claim up to $528 for a single household, and up to $1056 for a married household. It’s difficult to believe there aren’t a lot of people claiming these credits that didn’t really make the donations – further reducing the public funds available to schools.

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