Arizona Tax Credit Program Offers Lessons for Other States

Published October 23, 2009

When two Arizona newspapers this summer investigated the student tuition organizations (STOs) that distribute funds to needy students to attend private schools in the state, they opened the state’s school choice efforts up to attack.

The list of groups and individuals that would like to see Arizona’s programs shut down is lengthy–the programs have been besieged since their inception in 1997. The following is a short history of the legal challenges school choice in Arizona has weathered thus far.

Arizona was the first state to adopt a tax credit scholarship program allowing individuals to make tax-deductible contributions to nonprofit organizations awarding private school scholarships. By 2008 the landmark program had distributed more than 28,321 scholarships, despite being a favorite legal target of anti-school choice groups since its inception.

Constitutionality Affirmed

In 1997 the Arizona Education Association filed a lawsuit (Kotterman v. Killian) charging the scholarship program was unconstitutional–an argument the Arizona Supreme Court found without merit in 1999. The U.S. Supreme Court allowed the state court’s ruling to stand.

By 2006 Arizona was a national school choice leader, expanding the individual tax credit scholarship program donation limit from $250 to $500 and adding a separate corporate tax credit scholarship program allowing businesses to donate any amount until a statewide annual cap was reached. STOs could distribute up to $10 million in corporate tax credit scholarships.

Unlike the individual tax credit scholarships, corporate scholarships were limited to families whose annual income did not exceed 185 percent of the income level required to qualify for the federal free- or reduced-price lunch program. For 2009-10, annual income to qualify would be $75,467 or less for a family of four.

The success of the programs led legislators to create the Displaced Pupils Choice Grant Program in 2006, providing private school scholarships for foster care and special-needs students. The grant program was similar to Chafee grants for college students, allowing money to flow to the student directly from the state instead of using nonprofit organizations as middlemen.

More Lawsuits

In late 2006 the American Civil Liberties Union and People for the American Way filed a lawsuit arguing the Displaced Pupils Choice Grant Program violated Arizona’s “Blaine Amendment,” which forbids giving public dollars to private schools, and asked the state to disband it along with the two tax credit scholarship programs. The Arizona Supreme Court dismissed the challenge in January 2007.

The Arizona Education Association filed a second suit, which was dismissed by the Maricopa County Superior Court in June 2007. The union appealed to the Arizona Court of Appeals.

By 2009 another case, Cain v. Horne, landed with the 9th U.S. Circuit Court of Appeals. The court overturned the ruling, declaring vouchers unconstitutional.

In March 2009 the Supreme Court of Arizona upheld the verdict, ending the Displaced Pupils Choice Grant program. Afterward, Arizona Gov. Jan Brewer (D) called a special legislative session during which the corporate tax credit scholarship program was expanded to allow for foster and special-needs students to be eligible for tax credit scholarships.

Evelyn B. Stacey ([email protected]) is an education studies policy fellow at the Pacific Research Institute in Sacramento, California.