A proposal at the Arizona Legislature could hand families who educate their kids outside the public system a sizable refundable tax credit that tracks with the state’s base school funding formula. Filed this month by Rep. Michele Peña, the bill is pitched as the next step in Arizona’s school choice agenda and is already stirring up a budget and education fight. Lawmakers will weigh the measure this session while a separate ballot campaign aims to tighten rules on the state’s existing Empowerment Scholarship Account program.
What HB 4037 Would Do
HB 4037 would amend Arizona’s tax code to create an “education opportunity” income tax credit for each qualifying child, spelling out who can claim it and under what conditions. The credit is pegged to the state’s base support level for K‑12 schools and is explicitly refundable, so if the credit is larger than a filer’s tax bill, the state cuts a check for the difference. Those mechanics appear in the introduced bill text on LegiScan.
The proposal sets the credit at 80% of the base support level for a child who is not enrolled in a public school or an ESA at any point in the tax year, and 40% for children who spend up to half the year in a public school or an ESA. The bill also instructs the Department of Revenue to write rules and work with the Department of Education to verify how each child was educated before a credit is approved. In its stated purpose, the legislation says it aims “to open and improve the statewide educational landscape by providing additional stronger educational choices for families in this state.” The full introduced language is posted on LegiScan.
Supporters Frame It As Choice Expansion
Supporters argue the credit would help more families afford private school, tutoring, homeschooling and other nonpublic options that might otherwise be out of reach. Rep. Michele Peña told KTAR News that “Arizona's led the way on school choice, and this bill just continues the tradition,” casting HB 4037 as a straightforward extension of policies the state has already embraced. Peña and allied groups say making the credit refundable is critical so that families without large tax bills still get meaningful help rather than a token write off.
Critics Say There Are No Guardrails
Critics see something very different. They argue the measure functions a lot like an ESA or voucher expansion, only with even fewer strings attached in terms of oversight. “The bill potentially has no similar guardrails to make sure funds aren’t misused,” Joseph Palomino, director of the Arizona Center for Economic Progress, told KTAR News, warning that tying the credit to the base support level and making it refundable could speed the drain of public dollars from district classrooms. Palomino and other budget watchers argue that layering on another refundable program raises fiscal risk for school systems already dealing with enrollment dips and tight margins. The Arizona Center for Economic Progress outlines its fiscal priorities and leadership structure on its website.
Ballot Fight Looms Over ESA Limits
At the same time, a separate showdown is brewing at the ballot box. The Arizona Education Association and Save Our Schools Arizona filed initiative language in early February to clamp new limits and accountability rules onto the ESA program, including an income cap that organizers say would cut off eligibility for families making above roughly $150,000 a year. As reported by NationalToday, they need about 255,949 valid signatures to reach the November ballot, setting up a likely statewide fight that could put ESAs and any new tax credits front and center with voters.
Budget Context And Oversight Concerns
Analyses of Arizona’s ESA expansion have documented rapid growth in awards and significant program costs, and opponents of HB 4037 say a large, refundable credit would stack even more pressure onto the state budget. The Common Sense Institute's ESA Q3 2025 report and other state reviews highlight rising ESA spending along with unspent balances that make it harder for districts and the state to plan long term. Those numbers are expected to figure prominently in committee debates over whether lawmakers should bolt on income limits, overall caps or extra reporting before any new refundable credit kicks in. The Common Sense Institute recently updated its Arizona ESA analysis with fresh figures and trends.
What Comes Next
HB 4037 has been routed to appropriations style committees and was set for a mid February hearing after clearing an initial rules review. It still needs to survive more committee votes before House or Senate floor action is on the table. Legislative trackers show the measure working its way through House panels as advocacy groups, school districts and parent organizations line up testimony and outreach on both sides. Unless sponsors agree to add clear guardrails or caps, the refundable structure and its link to base funding appear poised to make HB 4037 one of the headline battles in this year’s budget and education negotiations. TrackBill is posting a running log of hearings and legislative actions as the proposal moves forward.
