To budget analysts, tax deductions and tax credits are “tax expenditures” because they result in the government “spending” tax revenues that otherwise would have been received. In Kotterman v. Killian, choice opponents offered a similar argument about Arizona’s private scholarship tax credit, contending that the credit was “public money” because–without the credit–an equivalent amount of tax revenue would flow into the public treasury.
Presumably not wanting to argue that charitable deductions to religious institutions also involved “public money,” choice opponents offered the novel argument that tax credits and tax deductions were fundamentally different: Atax credit is the “functional equivalent of depleting the state treasury by a direct grant;” a tax deduction, though, merely serves as “seed money” to encourage philanthropy.
The Arizona Supreme Court rejected that notion. “Though amounts may vary, both credits and deductions ultimately reduce state revenues, are intended to serve policy goals, and clearly act to induce ‘socially beneficial behavior’ by taxpayers,” wrote Chief Justice Thomas A. Zlaket.
According to Black’s Law Dictionary, “public money” is “[r]evenue received by federal, state, and local governments from taxes, fees, fines, etc.” It does not follow, argued Zlaket, that reducing an individual’s tax liability is the equivalent of spending a certain amount of money. Since no money ever enters the state’s control as a result of the tax credit, the tax credit cannot be considered to be “public money.”