Opponents Make a Federal Case of Arizona’s Tax Credits

Published September 1, 2004

Arizona’s pioneering school choice tax credits must withstand scrutiny of their constitutionality yet again–only this time those passing judgment will be federal, not state, jurists.

A 5-4 majority of the U.S. Supreme Court injected an element of uncertainty into the tax credit plan when it decided June 14 to allow an American Civil Liberties Union-sponsored challenge to go forward in federal district court.

The decision has far-reaching significance because it extends federal judicial review over state tax matters usually reserved to the states.

“This decision is an erosion of the important constitutional boundary between the autonomy of individual states and the powers of the federal government,” commented Mark Brnovich, constitutional expert for the Goldwater Institute.

The High Court did not rule on the merits of Arizona’s school choice program.

Largest School Tax Credit in U.S.

The tax credit plan was enacted in 1997 and upheld in 1999 by the Arizona Supreme Court in Kotterman v. Killian. Later that year, the U.S. Supreme Court refused to review the Arizona court’s ruling.

Under the program, an Arizona taxpayer may receive a dollar-for-dollar tax credit of up to $500, and a married couple filing jointly may receive a credit of up to $625, for donations to School Tuition Organizations (STOs).

The STOs have helped some 21,000 Arizona children attend the private schools of their families’ choice, making this the largest program of its kind in the United States. In addition, the program supports character education and extracurricular activities in public schools.

Opponents argue that because 80 to 90 percent of the children use the benefit to attend a religiously affiliated school, the program amounts to an “establishment of religion” forbidden under the First Amendment to the U.S. Constitution.

Reacting to the U.S. Supreme Court’s decision to allow federal court review of the program, Marvin Cohen, a Scottsdale lawyer representing taxpayers who object to the credits being used predominantly to support religious schools, said, “this is an important ruling for the entire country,” in that it advances the right of citizens to use both federal and state courts to “vindicate constitutional rights.”

The Phoenix-based Alliance for School Choice (ASC), however, stressed the Supreme Court’s reinstatement of the legal challenge to Arizona scholarships will not ultimately threaten school choice tax credits.

“Of all the lawsuits challenging school choice programs, this is the most frivolous,” said Clint Bolick, ASC’s president and general counsel. “The Arizona Supreme Court already has upheld the program under the First Amendment, and the ACLU just wants a second bite at the apple.”

Bolick contended the Arizona program “is constitutional because it provides aid to needy students, not to religion.” That was the central rationale of the Supreme Court in upholding–as an exercise of “true private choice”–Cleveland’s voucher program in the landmark Zelman decision of 2002. Bolick was a key litigator for the Institute for Justice (IJ) in that case.

The Washington-based IJ did not participate in the recent Arizona litigation that went to the Supreme Court because it dealt with issues unrelated to school choice. However, in the next phase of the litigation the Institute plans to defend the families benefitting from choice.

Federal Authority to Review State Taxes Questioned

At issue in the case decided by the Supreme Court June 14 in Hibbs v. Winn was the federal Tax Injunction Act of 1937–specifically, whether it and federal common law forbid lawsuits challenging state taxes in federal courts when they can be adjudicated in state courts. Much of both the majority and minority opinions dealt with such fine points as the definition of the word “assessment.”

Writing for the majority, Justice Ruth Bader Ginsburg cited a series of instances in which the federal judiciary has weighed in on the constitutionality of state tax schemes.

“In decisions spanning a near half-century,” she wrote, “courts in the federal system, including this court, have entertained challenges to tax credits authorized by state law.” She cited a case involving Prince Edward County, Virginia, in which the High Court ruled in 1964 that the state could not use tuition grants or tax credits to circumvent the mandate of Brown v. Board of Education to fund desegregated public schools.

Ginsburg said the contention of Arizona–supported by 40 other states–that the state’s tax credit program exists beyond review by federal courts “argues, in effect, that we and other federal courts were wrong in those civil rights cases.”

In dissent, Justice Anthony Kennedy–joined by Chief Justice William Rehnquist and Justices Antonin Scalia and Clarence Thomas–argued that the decision, by going beyond the statutory text, “treats states as diminished and disfavored powers” and renders the states “second-rate constitutional arbiters, unequal to their federal counterparts.”

“State courts are due more respect than this,” Kennedy declared. The Ginsburg majority’s “dismissive treatment” is particularly unjustified given that the Tax Injunction Act lifts its bar on federal court intervention when state courts fail to provide “a plain, speedy, and efficient remedy,” he added.

Robert Holland ([email protected]) is a senior fellow at the Lexington Institute, a think tank in Arlington, Virginia.

For more information …

The June 14, 2004, U.S. Supreme Court ruling in Hibbs v. Winn, Docket #02-1809, is available online at http://a257.g.akamaitech.net/7/257/2422/14june20041230/www.supremecourtus.gov/opinions/03pdf/02-1809.pdf.