by David Safier
The media has been writing about a special session to create new tuition tax credits, and it has jumped on the story that Steve Yarbrough is doing very well financially with his own STO. I've been covering the same territory in greater depth and detail.
But you can't follow the story unless you understand the terms. So here is a simple, then increasingly complex explanation of the tuition tax credit/STO situation.
Here are the basics. Individual taxpayers can give $500 — $1,000 for a couple — as a tuition tax credit, which will eventually be given to private school students in the form or scholarships to take care of part or all of their tuition. At tax time, the taxpayer's donation will be taken away from the money he/she owes in state taxes, meaning that it won't cost the taxpayer a penny.
The tuition tax credit doesn't go directly from taxpayer to student or from taxpayer to private school. The money is given to an intermediary, a School Tuition Organization, or STO. [Note: In earlier posts, I referred to STOs as Student Tuition Organizations instead of School Tuition Organizations. My mistake.] Families submit scholarship applications to School Tuition Organizations, which then give money to students in the form of scholarships.
So, if I want to give a tuition tax credit, I write a check to a School Tuition Organization (STO), like Steve Yarbrough's Arizona Christian School Tuition Organization (ACSTO), or one of many other STOs out there, and the STO does the rest. The only other thing I have to do is fill out the proper form when I submit my state income tax return to get 100% of the money I gave refunded as a tax credit. If a family wants a scholarship for a child, it submits a scholarship application to an STO, which decides who to give the money to.
That's it for the basics.
Now, a few more details. Tuition tax credits began in 1999, and Yarbrough began his ACSTO soon after. He wasn't in the legislature at the time. Yarbrough was first elected to the state senate in 2002. In 2006, he was one of the main backers of a new tax credit for private schools, the corporate tax credit, which allows corporations to give money to STOs for private school scholarships.
Yarbrough's ACSTO only deals with individual tuition tax credits, not corporate tax credits. But if you read my post, Steve Yarbrough, landlord, you might remember that the business condo he owns houses two STOs, ACSTO (the one he runs) and another, School Choice America. School Choice America deals only with corporate tax credits. Though the organization pays Yarbrough rent and uses the services of his HY Processing, he has no direct relationship with School Choice America. Funny thing, though. The officers and boards of directors of the two STOs are made up of the same people. Yarbrough is not an officer or on the board of either STO.
An STO has to give away 90% of the tuition tax credit money it receives in the form of scholarships. The other 10% can be used for legitimate expenses, which are itemized on the STO's tax return. Because all STOs have to be nonprofit 501(c)3 organizations, their returns are public records and can be found online. That's why all the digging into the itemized expenses of Yarbrough's ACSTO has been possible.
The important question about the expenses claimed by Yarbrough's ACSTO is whether they are legitimate. It's illegal for a 501(c)3 to pay more for supplies and services than a reasonable market rate, especially if people directly or indirectly involved with the 501(c)3 are the ones getting money for the supplies and services. So, if an STO buys a ten cent pencil for ten dollars, that's illegal, especially if the company selling the pencil is connected directly or indirectly with the people who run the STO.
Steve Yarbrough runs ACSTO. He gets a $96,000 salary. He charges upwards to $60,000 per year for legal counsel (because the $60,000 in legal services aren't broken down on ACSTO's return, we don't know how much of that goes to Yarbrough, but the return specifies that some money is paid to Steven B. Yarbrough, PC). He owns HY Processing, which gets about $400,000 per year for Processing Expenses. And he owns the business condo housing ACSTO and collects something like $40,000 in rent.
Add those together, and you get a total of $596,000, or a little more than half of ACSTO's yearly expenses. Are all those expenses justified? As folks back in the 50s used to say, "That's the $64,000 question." But in this case, it's the $596,000 question.