May 16, 2024 - News

ESA expansion may be cutting into tuition tax credit program

Illustration of a dollar made out of chalk on a chalkboard being erased

Illustration: Sarah Grillo/Axios

The amount of money going into and coming out of Arizona's tax credit program for private school scholarships declined last fiscal year for the first time since the Great Recession, and the recent expansion of another school choice system could be to blame.

Why it matters: If the numbers mark the beginning of a long-term trend, it could dramatically shrink one of Arizona's marquee school choice programs.

The big picture: Arizona has been at the forefront of school choice for decades, but new data shows two popular programs — School Tuition Organizations (STO) and Empowerment Scholarship Accounts (ESA) — may be competing for the same students, with the latter chipping away at the former.

Driving the news: The total dollar amounts contributed to STOs and awarded through student scholarships decreased between fiscal years 2022 and 2023, according to a report from the Arizona Department of Revenue. It was the first dip in more than a decade.

  • The drop coincided with a dramatic increase in ESA usage, after the program was expanded to include all students in 2022. Previously, it was only available to certain categories, such as students who are disabled or attending failing schools and Native Americans living on reservations.

How it works: Tuition tax credits allow people and corporations to receive a dollar-for-dollar tax credit for donations to STOs, which distribute the scholarships to students.

  • ESAs, which come from the state's general fund, provide students who don't attend public schools with money for private school tuition, tutoring, learning materials or other educational uses.

What they're saying: "Everybody in the STO world that I've spoken with is telling me a similar story, that ESAs are causing or at least contributing to the reduction in donations," Steve Yarbrough, executive director of the Arizona Christian School Tuition Organization, tells Axios.

Friction point: Students in many, though not all, situations can get more money from STOs than ESAs. But Kim Kirschner, executive director of Tucson's Institute for Better Education, says there are other reasons why a family might favor ESAs.

  • The ESA program is simply easier to use, she says.
  • Yarbrough notes that ESAs can be used for various purposes while STOs can be used only for tuition.

Reality check: State law prohibits students from using both programs.

Yes, but: Even if it's chipping into STOs, Yarbrough says, ESA expansion as a good thing because it bolsters school choice in Arizona.

Zoom in: There are four types of tuition tax credit-based scholarships, some of which are available to all students and some that are only for low-income or disabled students.

  • Dollar amounts for the low-income program increased while two others shrank in 2022-2023, causing a cumulative decrease for tuition tax credits.

What's next: Yarbrough believes it'll take another year or two to get a clear picture of what will happen with STOs.

  • Kirschner hopes the decrease will level out, saying families looking to switch from STOs to ESAs may have already largely done so.
  • Yarbrough says he believes tuition tax credits will remain a viable option for many students.
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