fer from public to private schools; those
$500 in taxes and choose to donate to a
transfers will potentially save taxpayers
scholarship organization receive the credit
millions of dollars. Overall, we estimate
up to the full amount they owe in income tax
that by 2015 the scholarship tax credit
but do not receive money back from the state
could raise $58 million for scholarships
for any portion that exceeds their tax liabili-
per year, fund 35,000 to 61,000 scholar-
ty. However, the taxpayer may carry forward
ships annually, and help 11,000 to 37,000
the extra donation and receive a tax credit in
future years.1 1
students who would otherwise have to
attend public schools attend nonpublic
To be eligible to receive donations, scholar-
schools of their choice. The data suggest
ship organizations must meet set require-
that the tax credit should, at a minimum,
ments. First an organization must be non-
be revenue neutral; more likely, it will save
profit, in accordance with sec. 501(c)(3) of the
Arizona taxpayers tens of millions of dol-
Internal Revenue Code. Second, at least 90
lars per year.
percent of the organization's revenue must be
These findings are significant not just for
made available for scholarships (remaining
Arizona but for policymakers across the
funds are used for administrative purposes).
country who want parents to have greater
Third, scholarships must be redeemable at
By 2015 the schol-
control over their children's education. This
more than one qualified school.
arship tax credit
analysis shows that scholarship tax credits
A school that accepts scholarship recipi-
are an effective method of increasing
ents must be a private primary or secondary
could raise $58
parental choice for lower-income families.
school in Arizona and may not discriminate
million for schol-
Moreover, taxpayers may reap significant sav-
on the basis of race, color, handicap, familial
arships per year.
ings as children transfer to private schools,
status, or national origin.
freeing resources that could be reinvested in
Although the process of allocating schol-
education or returned to taxpayers. Policy-
arships differs from organization to organi-
makers in other states should consider
zation, prospective scholarship recipients
implementing similar tax credit initiatives.
usually apply directly to the organization.
Each organization sets standards of scholar-
ship eligibility and determines the cash value
Arizona's Scholarship
of each scholarship.
Tax Credit
In the fall of 1997 a coalition of teachers,
clergy members, and public education offi-
cials challenged the legality of the law con-
In 1997 the Arizona legislature passed a bill
tending that it provided support to religious
that amended the state tax law (title 43, art. 5,
schools in violation of Arizona law and the
sec. 1089) to enable Arizona taxpayers to receive
First Amendment to the U.S. Constitution.
a dollar-for-dollar tax credit up to $500 against
The Arizona Supreme Court ruled in favor of
their state income tax for donations to
the law in 1999, and the U.S. Supreme Court
approved organizations that provide students
declined to review the decision, ending the
with scholarships to attend private schools.
legal challenges to the law.1 2
Those credits became effective for the taxable
year beginning January 1, 1998. Therefore, 1998
was the first year during which taxpayers could
Taxpayer Participation
claim this credit.9 In the November 2000 elec-
tion, Proposition 301 increased the amount of
the tax credit to $625 for married couples effec-
Since the law passed in 1997, the number
tive January 1, 2001.1 0 Previously, married tax-
of taxpayers making donations and using the
tax credit has increased dramatically.1 3 In
payers filing a joint return were allowed to claim
a maximum credit of only $500.
1998 there were 15 active scholarship organi-
Taxpayers who owe the state less than
zations and, as shown in Table 1, those orga-
3