Private School Tax Credits in Arizona

The Supreme Court held oral argument today in Arizona Christian School Tuition Organization v. Winn, a case challenging Arizona's law which allows an individual taxpayer a dollar-for-dollar tax credit for donating to a state-approved K-12 private school "scholarship" organization.  Based on this recap of the argument, this law could be struck down based on the subtle distinction between a tax credit and a tax deduction.  For those of you unfamiliar with the distinction, the latter reduces the amount of your income used to compute your tax bill, while the former actually reduces your ultimate tax bill itself after it has already been computed.  If you have a choice between the two and all other factors are equal, take the credit over the deduction every day and twice on Sunday!  The gist of the plaintiffs' argument is that the Arizona credit amounts to the forgiveness of a debt to the state, and this is the equivalent of an expenditure made by the state (which is true in all other contexts that involve balance sheets). 

Justices Kagan and Kennedy appeared to be following the same intuitions about the case, as both were very concerned that, by forgiving, dollar-for-dollar, the tax obligations of donees to scholarship organizations that discriminate based on religion, the state could do through intermediaries what it could not do legally itself (i.e., fund religious discrimination).  The Chief Justice even seemed a bit sympathetic to that line of thinking.  This may end up a 6-3 decision striking the law down.

On the other hand, there is also an issue of "taxpayer standing" in the case, so the Court may punt, as it did in the Pledge of Allegiance case a few years back.  Watch this one closely. 

UPDATE: I forgot my manners: Hat tip to my good friend Cory Andrews for information on the case. 

Comments

[Stuart Buck]

But tax deductions for donations are fine, even if you give the money directly to a church. The difference between a credit and a deduction is really just a matter of degree. You donate $5,000 to fund religion, and the state gives you back either $1,000 or $5,000.

[Scott Bauries]

Thanks for the comment, Stuart. That is gist of the argument of the state in defense of the law. Based on the recap linked above, it appears that at least Justices Alito and Scalia buy it.

Myself, I see a distinction. A tax credit represents actual money that would go to the government (i.e., an asset on the government's balance sheet), but for the government's choice to allow it to be allocated to a specific, favored set of entities. A deduction does not, in and of itself, represent money that would otherwise go to the government. It simply represents money that the government has decided does not count as "income" for tax purposes.

This distinction may or may not be enough to treat the two differently for Establishment Clause purposes, but I lean toward an interpretation that it is.

[Stuart Buck]

But charitable deductions also deal with money that would otherwise have gone to the government. It's not the case that charitable deductions are excluded from being income in the first place; the income is there, the tax is owed, and the government says, "Oh, you donated something to a church, so your tax bill will go down." The only difference between that and a credit is the amount at stake. So it seems like a matter of degree, not kind.

[Scott Bauries]

Stuart, I certainly see what you are saying, and I think it's a valid point--thank you for continuing the discussion. I am nevertheless hoping that the Court will be willing to draw a distinction.

The reason is that these "scholarship" programs are clearly intended to allow state governments to fund things indirectly that they could not fund directly. The states in which these programs exist are controlled by legislatures that would love to be able to give lots of money directly to private religious institutions, but are prevented from doing so by the Establishment Clause. So they set up these "credit" programs as a subterfuge.

You may compare the credit to a deduction, and I think you are right that a proper way to conceive of the difference is one of degreee, rather than kind, but at least a deduction asks the donee to spend most of the money himself (no person or entity pays more than 50% in state income taxes--even corporations--so the most a donee will get back from a deduction is less than 50% of it). A credit program, by contrast, asks nothing of the donee--the donee receives every cent back from the government. Thus, it is the functional equivalent of a "strawman" transaction, where the government uses a straw buyer to purchase that which it is prohibited from purchasing itself (religious discrimination). Leaves a bad taste in my mouth.

But again, I see your point, and I can certainly see the Court accepting it.