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F I S C A L I M P A C T R E P O R T

SPONSOR Taylor

ORIGINAL DATE

LAST UPDATED

2/3/08

HB

SHORT TITLE Certain Scholarships Donation Tax Credit

SB 462

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

($4,800.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Arizona Department of Revenue

(

http://www.azdor.gov/researchstats/schooltaxcredit.htm

)

Responses Received From

Public Education Department (PED)

SUMMARY

Synopsis of Bill

Senate Bill 462 creates a new personal and corporate income tax credit for contributions to

scholarship granting organizations called the “Equal Opportunity Scholarship Tax Credit." The

maximum credit is $500 for an individual or $1,000 for married taxpayers. The taxpayer cannot

claim a credit if the taxpayer has already itemized the contribution on his or her federal return

and the credit is only good against current year tax liability. There is no maximum credit if it is

claimed against corporate income tax liability.

A scholarship granting organization (SGO) must be a 501(c)(3) nonprofit and notify Taxation

and Revenue Department (TRD) of its intention to begin granting scholarships. 90 percent of the

SGO’s revenue from contributions must be spent on educational scholarships and all revenue

from interest or investment earnings must be spent on educational scholarships. The

scholarships the SGO awards must be portable, going to any qualified school that accepts the

eligible student. The SGO cannot award scholarships to students of the SGO’s paid staff, board

Senate Bill 462 – Page

2

members or relatives of paid staff or board members. Each year the SGO must report publicly to

TRD the total number and dollar amount of contributions received during the previous year and

total number and dollar amount of scholarships. The SGO must provide scholarships to more

than one qualifying school.

Qualifying schools must comply with all health and safety laws or codes that apply to nonpublic

schools, certify that it will not discriminate on the basis of race, national origin, or ethnicity, and

provide regular student performance reporting to the parent(s) and require students to take an

annual academic test. The school must operate in New Mexico and fill spaces by a random

selection process (except for siblings of enrolled students and previously enrolled scholarship

students) if there are more students than spaces.

An eligible student is a member of a household whose total annual income does not exceed an

amount used to qualify for a reduced price lunch program and who resides in New Mexico while

receiving the scholarship. Once eligible, however, the student remains eligible until graduation

or the student reaches 21 years of age.

TRD must promulgate rules and create the appropriate receipt for SGOs to deliver to

contributors. TRD is expressly given audit authority and can ban an SGO from participation if it

finds the SGO has intentionally and substantially failed to comply with the requirements.

The credit is available in tax years 2009 through 2012.

FISCAL IMPLICATIONS

The State of Arizona has a similar credit to the one proposed here except that the Arizona

personal income tax credit does not have a low income requirement (though the Arizona CIT

credit does have a low income requirement). Extrapolating from data from the Arizona

Department of Revenue, it is estimated that 3,340 New Mexican taxpayers will donate an

average of $692 per return (which includes both individuals and married taxpayers) and reduce

general fund revenue by $2.3 million. The estimate for the CIT credit is that 30 firms will donate

an average of $83,500 each for a net reduction in general fund revenue of $2.5 million. Total

impact is a reduction of $4.8 million per year.

Since the credit is not allowed until tax year 2009, there is no impact for FY09 because returns

will not be filed until the second half of FY10.

SIGNIFICANT ISSUES

PED raises important legal questions:

Because the bill does not restrict the availability of the credit if the 501(c) (3) charitable

organization primarily supports private religious schools, the state may find itself

indirectly supporting private religious schools by permitting corporate and individual

taxpayers to take this credit. This implicates the Establishment Clause (1st Amendment)

of the federal Constitution. It bears observation that this bill defines a qualified school as

one that does not discriminate on the basis of a student’s race, national origin or ethnicity,

noticeably omitting religion or gender, and that qualified schools may not have

admissions standards, as many secular private schools do. The language in the bill does

not reflect all three prongs of the test for determining Establishment Clause violations,

Senate Bill 462 – Page

3

which were laid down by the Supreme Court in Lemon v. Kurtz, 403 U.S. 602 (1971).

But see:

- On January 29, 1999, the New Mexico Attorney General Opinion 99-01 opined that “A

school voucher program involving the use of public money to provide parents of private

school children with tuition assistance raises serious and substantial state constitutional

questions, most significantly under Article XII, Section 3, which proscribes the use of

public money for the support of private schools, and the anti-donation clause of Article

IX, Section 14."

- In November 27, 2006, the U.S. Supreme Court refused to hear a challenge (by a writ of

certiorari) to an April 2006 decision of the Maine Supreme Judicial Court that upheld a

Maine law that prohibited the use of public funds to send students to private religious

schools.

- Zelman v. Simmons-Harris, 536 U.S. 639 (2002) (The Supreme Court upheld an

Establishment Clause challenge against an Ohio pilot scholarship program that sought to

give aid primarily to families below the poverty line with children at a failing school

district so they could choose to either attend another public or private school, receive

tutorial assistance, enroll in a magnet school or receive a scholarship.)

- Walz v. Tax Commission of the City of New York, 397 U.S. 664 (1970) (The Supreme

Court upheld the city’s granting of property tax exemptions to religious organizations for

properties used solely for religious worship, which was authorized by the state

constitution and the implementing statute providing for tax exemptions for property used

exclusively for religious, educational or charitable purposes.)

- Mueller v. Allen, 463 U.S. 388 (1983) (The Supreme Court upheld a Minnesota law that

allowed state taxpayers, in computing their state income tax, to deduct expenses incurred

in providing "tuition, textbooks and transportation" for their children attending an

elementary or secondary school and was challenged on the basis that it violated the

Establishment Clause.)

- Committee for Public Education & Religious Liberty v. Nyquist, 413 U.S. 756 (1973)

(“The system of providing income tax benefits to parents of children attending New

York's nonpublic schools also violates the Establishment Clause because, like the tuition

reimbursement program, it is not sufficiently restricted to assure that it will not have the

impermissible effect of advancing the sectarian activities of religious schools.")

(emphasis added)

- Byrne v. Public Funds for Public Schools of New Jersey, 442 U.S. 907 (1979) (The

Supreme Court summarily affirmed a lower federal court holding that a state tax

deduction for taxpayers with children attending nonpublic school violated the

Establishment Clause.)

- Franchise Tax Board of California v. United Americans for Public Schools, 419 U.S.

890 (1974) (The Court summarily affirmed a lower federal court judgment that struck

down a state statute providing income-tax reduction for taxpayers sending children to

nonpublic schools.)

Senate Bill 462 – Page

4

- Hibbs v. Winn, 542 U.S. 88 (2004) (Despite the federal Tax Injunction Act that

prohibits federal courts from restraining the implementation of state tax laws, the

Supreme Court here allowed Arizona taxpayers to proceed, on the basis of violation of

the Establishment Clause, in a suit seeking to enjoin the operation of an Arizona tax law

that authorizes an income tax credit for payments to nonprofit “state tuition

organizations" that awards scholarships to students in private elementary/secondary

schools including those attending religious-based schools.)

Another possible consequence of this bill might be that while it would provide a

reduction of taxes for taxpayers who donate to scholarship organizations, it might provide

an incentive for parents to enroll their child or children in a private school, thus reducing

public school enrollment. It should be noted that the school choice provision of the

Assessment and Accountability Act [§22-2C-7(E)] favors a student’s choice to attend a

higher ranked public school if the student’s public school fails to make adequate yearly

progress for two or more consecutive school years.

NF/nt