BILL #    HB 4037	TITLE: individual income tax; credit; education
SPONSOR:    Peña
PREPARED BY:    Gordon Robertson	STATUS:   As Amended by House WM

Description

HB 4037, as amended by House WM, would establish a refundable tax credit equal to 80% of a child's Base Support Level (BSL) if that child did not attend public school or receive monies from an Empowerment Scholarship Account (ESA) or School Tuition Organization (STO), or 40% of the BSL if the child attended public school or received monies from an ESA or STO for less than 50% of the tax year. A refundable tax credit allows the tax filer to receive the full benefit of the credit even if its dollar value exceeds the filer's tax liability.

Estimated Impact

We estimate the bill would decrease state income tax revenue by $(135.2) million on an ongoing basis beginning in FY 2027, assuming 50% of those eligible for the credit actually claim it. Under a scenario where all eligible taxpayers claim the credit, we estimate the maximum potential revenue loss would be approximately $(270.5) million ongoing. The actual revenue loss could be larger if there are pupils in public schools, the ESA program, or STOs who opt out of those programs and instead receive the tax credit. We anticipate, however, that such additional revenue losses would be offset by Basic State Aid spending reductions or reduced utilization of the STO program. The loss could be smaller if eligible households do not apply for the credit or if the program takes time to reach its long-run participation level.

We consider this estimate to be highly speculative, as we lack data on actual private and homeschool enrollment. Actual participation in the tax credit created under the bill would be dependent on the choices of taxpayers.

Analysis

Our estimate assumes the following:

1) The average value of the tax credit would be $6,320 in FY 2027. This estimate is based on total estimated BSL formula costs of $6.5 billion and estimated unweighted district Average Daily Membership (ADM) of 822,600. If a higher-than-average proportion of those who participate in the new refundable tax credit qualify for additional formula funding attributable to a disability, the actual cost per tax credit could be larger.

2) In FY 2027, there would be approximately 43,000 students that receive no state funding for their education. This estimate is based on total school-age population figures derived from the Arizona Office of Economic Opportunity, reduced by estimated FY 2027 enrollment in public schools, ESAs, and STO scholarships. The remainder represents a combination of homeschool and private school enrollees not receiving an STO scholarship or an ESA award, and children who have dropped out of high school, all of whom would be eligible for the refundable tax credit.

3) Given that both ESA and STO monies are governed by certain restrictions on spending, some families may choose to disenroll from these programs and instead become eligible for the tax credit established by this bill. We assume the state would generate savings of approximately $3,880 for each student that switches from the ESA program to the tax credit. However, because the awards for the ESA program are materially larger than what would be offered under the tax credit, we assume most enrollees would choose to retain their ESA.

4) For students who receive state monies for less than 50% of the tax year, individuals may claim a refundable tax credit equal to 40% of the child's BSL. In the majority of circumstances, we assume the costs incurred by the state for a family whose child receives state funding for a portion of the year and the tax credit for the remainder of the year would be comparable to if the child received only one mode of funding throughout the fiscal year. 

2/26/26