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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

2/19/07

HB

SHORT TITLE School Tuition Donation Tax Credit

SB 1080

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

(5,000.0)

(5,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to SB284

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Public Education Department (PED)

SUMMARY

Synopsis of Bill

Senate Bill 1080 creates a tax credit against personal income tax liability for donations to

qualified school tuition organizations of up to 75 percent of the amount of the donation. The

total credit available is $5 million per year on a first come, first served basis.

The school tuition organization must be a registered non profit with a board of seven members,

allocates at least 90 percent of “tax credit revenue" in tuition grants, only awards tuition grants to

children who reside in NM; provides the tuition grants to more than one school; only to students

from households with income less than 300 percent of federal poverty; and who prepares an

annual financial report and a report to the Public Education Department (PED).

The credit can be carried forward for five years and is effective immediately upon signing due to

an emergency clause.

Senate Bill 1080 – Page

2

FISCAL IMPLICATIONS

While it is difficult to ascertain the total qualified donations that may be eligible for this credit, it

is reasonable to assume that the $5 million cap will be easily reached each year.

SIGNIFICANT ISSUES

People for the American Way (PFAW), a Washington DC advocacy organization, has reported

that Arizona’s tuition credit that is similar to the one proposed by SB1080 is operating in this

manner. Although Arizona’s credit also stipulates that the parent contributing is precluded from

designating their own children as beneficiaries, they are able to designate a specific beneficiary.

PFAW reports that parents designate friends’ children as the beneficiaries and those friends

reciprocate.

The tuition credit would be for contributions to an organization that provides scholarships for

attendance at private schools, including religious schools. Whether state support of religious and

private schools would pass a constitutional challenge is a significant issue. The Arizona credit

faced such a challenge in 1998 and withstood it. PFAW also reports that 25 of the 35

organizations in Arizona set up to receive contributions provide tuition to religious schools.

According to an Arizona Department of Revenue report on the tuition credit, the largest single

scholarship from one of the organization’s set up to receive contributions went to a school for

emotionally disabled children. The report which includes data on all schools that received

scholarships from organizations shows that there were 345 private schools who received

scholarships from organizations. The list includes mostly religious schools of all faiths. The

report can be found at

http://www.azdor.gov/ResearchStats/private_schl_credit_report_2006.pdf

.

PED:

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

reduction of income taxes for taxpayers with a child or children in a private school, 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.

According to the latest federal poverty guidelines, the level for a family of three is $17,170

which means that a student in a family with annual income of $51,510 would qualify for tuition

grants from this program.

ADMINISTRATIVE IMPLICATIONS

TRD:

The proposed measure would impose moderate administrative impacts on the Taxation

and Revenue Department. To implement provisions of the measure, the Department

would need to create certificates to issue to taxpayer wishing to claim the credits. The

Department would also need to track the credit amounts that granted to ensure that the $5

million is not exceeded. The department would also be require to need to create forms

the tuition organizations would report information in support of the credits. The

Senate Bill 1080 – Page

3

Department would need to track these from year to year since the report refers to the

previous tax year. The school that receives the contributions may need to complete a

form as well to verify the amount that was donated and how it was used. The Department

would also need to track amounts carried forward until they are fully expended.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Relates to SB284 which has provides a $500 credit without any income limitations.

TECHNICAL ISSUES

TRD:

Meaning of the term "filed separately on a combined return" on page 3, lines 16 through

24 is unclear. It would apparently require the Department to wait until both spouses file

returns before the processing the returns. It is also unclear what would occur in cases

where one spouse does not file a return or files a return two years later. These provisions

will be very difficult to administer properly, and require substantial amounts of human

intervention.

The bill is not clear on whether the total approved tax credit of five million dollars is per

year or total credit allowed and once exhausted, no longer exists.

When a husband and wife file separate returns, the Department normally allows them to

claim half the credit on each return. This bill, however, stipulates allocation of the credit

based on net income. This is inconsistent with how the Department administers all other

credits claimed on married filing separate returns.

Non-resident and part-time resident allocation procedures in paragraph F may violate

U.S. Constitutional provisions which prohibit states from providing their residents greater

tax preference than non-residents.

The term “annual income" needs clarification as to whether it refers to the defined term

“modified gross income" or if it is adjusted gross income. If it is adjusted gross income, a new

form may be needed to calculate household adjusted gross income since it might be different

from the taxpayer’s adjusted gross income.

OTHER SUBSTANTIVE ISSUES

PED has prepared a digest of court cases that may support litigation pursuant to the

Establishment Clause which deals with violations of separation of church and state:

Even though the bill does not promote that the state become involved or entangled with

religions instruction or other operations of a private religious school, this does not

insulate the proposed tax credit from legal challenge on those very grounds. The

language in the bill does not reflect all three prongs of the test for determining

Establishment Clause violations, 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

Senate Bill 1080 – Page

4

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 antidonation 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 proving income-tax reduction for taxpayers sending children to

nonpublic schools.)

- 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

Senate Bill 1080 – Page

5

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.)

NF/csd