Commentary

Mueller and Nyquist: The Distinction Between Deductions and Credits

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Patricia M. Lines's recent Commentary on the significance of the U.S. Supreme Court's decision upholding Minnesota's plan allowing income-tax deductions for expenses incurred by parents with children in public and private schools, although generally accurate, was misleading in two respects. (See "The Impact of Mueller: New Options for Policymakers," Education Week, Aug. 24, 1983.)

First, she said the decision "removes barriers to the implementation of other financial means of supporting parents who want to send their children to nonpublic schools, such as education tax credits or direct grants to low-income families."

My reading of the case is different. The majority appears clearly to distinguish this case from the kind of system disapproved in Board of Education v. Nyquist, a 1973 case in which the Court found a New York state tuition-grant program unconstitutional.

The Nyquist system extended a tuition grant or benefit (not directly tied to tuition costs) to low-income families and others with children in private schools. The Mueller system allows a tax deduction based on tuition costs.

In a footnote to the majority opinion in Mueller, Justice William H. Rehnquist highlights the importance of this difference between the two systems:

"Indeed, the question of whether a program having the elements of a 'genuine tax deduction' would be constitutionally acceptable was expressly reserved in Nyquist. While the economic consequences of the program in Nyquist and that in this case may be difficult to distinguish, we have recognized on other occasions that 'the form of the [state's assistance to parochial schools must be examined] for the light that it casts on the substance.' The fact that the Minnesota plan embodies a 'genuine tax deduction' is thus of some relevance ..."

I find it significant that the Court did not overrule Nyquist, and that Justice Lewis F. Powell Jr.--who wrote the majority opinion in that case--joined the five-person majority in Mueller.

The majority's distinction between a tax deduction and a tax credit was the focus of criticism from the four dissenting Justices. In an opinion by Justice Thurgood Marshall, they argued: "Our prior decisions have rejected the relevance of the majority's formalistic distinction between tax deductions and the tax benefit at issue in Nyquist." The dissenters argued, unsuccessfully, that the impact of the financial support--and not its form--should determine its constitutionality.

Thus it is by no means clear that Ms. Lines is accurate to assert "there is no difference between credits and deductions under the Court's three-part constitutional test."

In fact, the Court's decision will force the Reagan Administration to consider changing its tax-credit proposal to resemble the tax-deduction program approved in Mueller. And the difference between the two systems is not merely semantic. Tax deductions are taken off gross income before tax liability is calculated, while tax credits are direct reimbursements on taxes owed.

Second, Ms. Lines has underestimated the economic and political implications of the Mueller decision. If it became national policy, a tax deduction plan of the type approved in Mueller would be very expensive, providing a strong argument for its defeat in the political arena. Although they have no firm estimates, researchers at the Institute for Research on Educational Finance and Governance at Stanford University--who have been studying various plans to underwrite private-school costs--estimate that if a tax deduction plan were approved at the federal level the costs could be enormous.

This is so because, to resemble Mueller, the deduction plan would have to include public-school parents who would claim tax deductions for special services.

It can also be anticipated that a federal tax-deduction policy allowing public-school parents to recover costs for such things as special enrichment classes, summer-school tuition, and tutoring will encourage public schools to add such programs to enhance their attractiveness because these programs would qualify for tax deductions. And, as Ms. Lines notes, a federal tax-deduction program will have to include some means of assisting low-income parents who do not pay taxes.

It is clear, therefore, that the economic consequences of a federal tax-deduction plan similar to the Mueller system will be a major factor during debate on such a proposal.

In light of the large federal deficits, which still threaten the economic recovery, an expensive federal program that would meet the criteria established in Mueller would not be politcally viable at this time.

Vol. 03, Issue 03, Page 19

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