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Court Ruling Heats Tax-Credit Debate

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The extent to which the U.S. Supreme Court's decision narrowly upholding Minnesota's tuition-deduction law will affect the prospects for a federal tax credit is still unclear, but both opponents and supporters of tax credits believe one result will be an increased push for similar laws at the state level.

The decision in Mueller v. Allen marked the first time the Supreme Court had approved a program of substantial tuition relief for the parents of private-school students.

But nearly one month after the Court's decision, observers are debating whether the decision will provide legal support for, or against, the Reagan Administration's tax-credit plan.

To Senator Robert Dole, the Kansas Republican who chairs the Senate Finance Committee, the decision is a clear signal from the Court that this type of "carefully crafted tax relief legislation would not improperly promote religion in violation of the Constitution."

To Minnesota's assistant attorney general, Douglas Blomgren, who successfully argued the Mueller case, "The Reagan proposal clearly has Constitutional difficulties" when judged in light of the reasoning used by the Court.

And partisans on both sides suggest that any moves to broaden the federal tax-credit plan to more closely resemble the Minnesota system, or to introduce new state tax-deduction laws, could be prohibitively expensive.

State-Income-Tax Deduction

In its June 29 opinion, the Court upheld, 5 to 4, a Minnesota law that allows parents to take a state-income-tax deduction for some expenses incurred by dependents attending public or private schools.

The law, part of the Minnesota Income Tax Statutes since 1955, allows state taxpayers to claim deductions for tuition, nonreligious textbooks, transportation costs, and basic supplies.

The maximum allowable deduction is now $500 for elementary-school students and $700 for secondary students.

For fiscal 1984, the Minnesota Department of Revenue projects a cost to the state of $5.4 million in claimed deductions.

Because most private schools in the state are parochial, the law was challenged, among other reasons, on the grounds that it constituted state aid to religion in violation of the First Amendment.

The Court upheld the Minnesota plan chiefly because it offers deductions to both public- and private-school parents, even though in practice only a handful of public-school parents are eligible for the law's maximum benefits.

According to briefs submitted to the Court, fewer than 100 of more than 900,000 school-age children in Minnesota attend public schools that charge a general tuition.

The Reagan Administration tuition tax-credit proposal, which has passed in the Senate Finance Committee and awaits action on the Senate floor, would currently benefit only private-school parents—permitting them to take a credit for up to half of private-school tuition costs from their federal income taxes. It would permit tax credits of up to $100 in 1983, $200 in 1984, and $300 thereafter.

"It's pretty clear from the decision that any kind of deduction is going to have to have a broad spectrum of beneficiaries," Mr. Blomgren said. "Anything that is designed to only benefit private schools will have problems."

Amendment Defeated

An amendment to broaden the bill's scope to include public-school expenses was proposed by Senator David Durenberger, Republican of Minnesota, but it was defeated in the finance committee in May. Senator Durenberger, a supporter of tax credits, sent a letter to President Reagan after the Court issued its ruling, urging him to broaden his bill to include public-school parents, according to an aide. He plans to try again to amend the bill when it comes up on the Senate floor, the aide said.

According to Gary L. Bauer, deputy undersecretary for planning and budget in the Education Department, it is "too early to tell" whether the Mueller decision will lead to changes in the Reagan plan.

"Let me emphasize that the bill as written is constitutional," he maintained. "However, we are looking at whether there are any changes that should be made from political and legal standpoints."

But to broaden the Reagan bill to include public-school, as well as private-school, families, the bill's opponents and supporters agree, would probably vastly increase the bill's cost—although no one knows by how much.

"Should the Minnesota plan be implemented nationally, the costs would be astronomical," said Ashley O. Thrift, legislative director for Senator Ernest F. Hollings of South Carolina, a Democratic Presidential candidate who has long opposed tuition tax credits.

He and others said that the cost would depend on whether, as in the case of Minnesota, the law allowed for public-school parents' participation in theory, but in practice benefited mostly the parents of private-school students.

"There would have to be an impression that the law would aid public schools for it to pass," said Joseph L. Conn of Americans United for Separation of Church and State, an organization that opposes government involvement in religion and opposes tuition tax credits.

"We would hope that the Supreme Court would not simply allow wording about deducting 'tuition for public schools,"' he said.

"Our really big concern is that now we'll have to fight this in all 50 state legislatures," Mr. Conn said. "But most states are strapped financially. That may help us."

Others, including Mr. Thrift and Mr. Blomgren, echoed this view.

"This case offers states a roadmap for constitutional permissibility," Mr. Thrift said.

At present, Louisiana is believed to be the only other state that gives a state tax credit for educational expenses in either public or private school—a small $25 credit that has been in place since 1980 and has not been challenged in court.

New Jersey is considering two new bills, both produced in response to the Mueller decision, either of which would provide public- or private-school parents with a $1,000 maximum state income-tax deduction for education expenses (expenses that would qualify are different in the two bills).

There are apparently no estimates on how much either bill would cost if enacted, but Gov. Thomas H. Kean is opposing them for budgetary reasons, an aide said.

Other states appear to be considering the idea of new legislation. Mr. Blomgren said he was contacted by officials in Alabama and that he had heard of "interest in the concept" in Nebraska.

Rhode Island had a similar deduction struck down by the U.S. Court of Appeals for the First Circuit in 1980, but there are currently no plans to revive the system.

In spite of the state action, Mr. Blomgrem said, "I don't think passing something like this in the 1980's is nearly as likely as it was in the 1950's."

Satisfies "Three-Part" Test

The majority opinion in Mueller v. Allen, written by Justice William H. Rehnquist, says the Minnesota law satisfies all elements of the "three-part" test first laid down in Lemon v. Kurtzman that must be met for a statute to be upheld under the Establishment Clause.

According to the opinion, the law has the "secular purpose" of ensuring that Minnesota's citizenry "is well educated, as well as of assuring the continued financial health of private schools, both sectarian and nonsectarian."

And it does not have the "primary effect" of "advancing the sectarian aims" of nonpublic schools. The opinion notes that the tax deduction is "only one of many deductions—such as those for medical expenses and charitable contributions—available under Minnesota tax laws; [and] is available for education expenses incurred by all parents, whether their children attend public schools or private sectarian or nonsectarian private schools. ..."

Chiefly because of the last point—the availability of the deduction to both public- and private-school parents—the majority drew a sharp distinction between Minnesota's tax deduction system and a New York system struck down by the Court in 1973 in Committee for Public Education and Religious Liberty v. Nyquist.

In that case, the Court struck down a New York law that extended tax credits only to parents with children in private schools. "In this respect, as well as others, this case is vitally different from the scheme struck down in Nyquist," Justice Rehnquist wrote.

The Court also made another distinction between the two systems: Minnesota taxpayers receive a deduction based on the amount they actually pay for education, while New York allowed what amounted to a tax credit not directly tied to tuition costs.

The majority also dismissed arguments that, because only a handful of public school parents actually benefit from the law, and because 96 percent of the state's private-school students attend sectarian schools, the law primarily benefits religious institutions.

"We need not consider these contentions in detail," Judge Rehnquist wrote. "We would be loath to adopt a rule grounding the constitutionality of a facially neutral law on annual reports reciting the extent to which various classes or private citizens claimed benefits under the law. Such an approach would scarcely provide the certainty that this field stands in need of. ..."

The Court also noted that Minnesota's system is "more acceptable" under the Establishment Clause because it provides benefits to individual parents, rather than directly to private and parochial schools themselves.

Monitoring by the State

In addition, the Court found that the law does not "excessively entangle" the state in religion. The Minnesota system requires the state to disallow tax deductions for textbooks used for religious instruction, but the Court said this type of monitoring by the state does not constitute "entanglement."

Chief Justice Warren E. Burger, and Associate Justices Byron R. White, Lewis F. Powell Jr. and Sandra Day O'Connor joined the majority opinion.

In a dissent joined by Associate Justices William J. Brennan Jr., Harry A. Blackmun and John Paul Stevens, Associate Justice Thurgood Marshall completely rejected the majority's distinction between the Mueller and Nyquist systems. "...[T]here is no significant difference between the two schemes," he wrote. "The Minnesota tax statute violates the Establishment Clause for precisely the same reason as the statute struck down in Nyquist: it has a direct and immediate effect of advancing religion."

The system has the effect of providing "desired financial support for nonpublic, sectarian institutions," he wrote.

It is irrelevant, he argued, that parents receive a reduction in their tax liability rather than a direct reimbursement.

Justice Marshall also rejected the notion that the tax benefit is equally available to public- and private-school parents.

"Contrary to the majority's suggestion, the bulk of the tax benefits afforded by the Minnesota scheme are enjoyed by parents of parochial-school children not because parents of public-school children fail to claim deductions to which they are entitled, but because the latter are simply unable to claim the largest tax deduction [that for tuition] that Minnesota authorizes.

"That this deduction has a primary effect of promoting religion can easily be determined without any resort to the type of 'statistical evidence' that the majority fears would lead to constitutional uncertainty," he wrote.

The dissent also said the majority distinction between Minnesota's "genuine tax deduction" and the Nyquist "tax credit" is "a distinction without a difference."

The Court's decision upholds an April 1982 decision by the U.S. Court of Appeals for the Eighth Circuit, which also said the law did not violate the Establishment Clause.

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