Education Funding

Justices Weigh Jurisdiction of Arizona Tax-Credit Lawsuit

By Caroline Hendrie — January 28, 2004 5 min read
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Lawyers for the state of Arizona and the Bush administration got a mixed reception last week as they sought to persuade the U.S. Supreme Court that the federal courts have no business hearing challenges to state tax breaks for scholarships to religious schools.

Taking the opposite stance in the Jan. 20 oral arguments before the high court was a lawyer for a group of taxpayers that wants Arizona’s program of tuition tax credits declared unconstitutional. The program allows individuals to claim credits of up to $500—or $625 for married couples—on their state income taxes for donations to scholarship organizations that pay for tuition at private schools.

The taxpayers who sued in 2000 say the Arizona program runs afoul of the First Amendment’s ban on government-established religion, in part because many of the scholarship organizations support students only in religious schools.

The plaintiffs have not yet gotten to argue the merits of that claim, though, because a U.S. District Court judge threw out the case in 2001 on jurisdictional grounds. A federal appeals court reinstated the challenge in 2002, and the state appealed to the Supreme Court.

The issue before the justices in Hibbs v. Winn (Case No. 02-1809) is not whether the 7-year-old tax-credit program violates the principle of church- state separation, but whether the dispute belongs in federal court.

Despite its technical nature, the outcome may well affect the fate of various types of tuition tax breaks that have been the subject of political and legal controversies over school choice in several states. If the high court says it’s up to state judges to decide whether state tax credits for religious schooling pass constitutional muster, then opponents of such breaks will likely lose a potentially important avenue for blocking them.

Marvin S. Cohen, a Scottsdale, Ariz., lawyer representing the taxpayers, argued before the justices last week that his clients had as much right to their day in federal court as did the opponents of school vouchers.

But Arizona Attorney General Samuel Goddard, noting that the state’s own supreme court has upheld the tax credits under the Arizona Constitution, said the plaintiffs were attempting an end run around that 1999 ruling.

“They’re trying to take another shot by going into federal court and getting another opinion,” Mr. Goddard told the justices.

Justices David H. Souter, Ruth Bader Ginsburg, and Stephen G. Breyer seemed skeptical of the state’s arguments that the federal district court had been right to throw out the case. All were among the dissenters in the high court’s 5-4 ruling in 2002 that upheld the private- school-voucher program in Cleveland.

By contrast, Chief Justice William R. Rehnquist and Justices Antonin Scalia and Anthony M. Kennedy, all in the majority in the voucher case, asked questions more sympathetic to the state.

A major point of contention in the Arizona case is how to interpret a 1937 federal law called the Tax Injunction Act. The law says federal courts cannot “enjoin, suspend, or restrain the assessment, levy, or collection of any tax under state law,” as long as “a plain, speedy, and efficient remedy may be had” in state courts.

A three-judge panel of the U.S. Court of Appeals for the 9th Circuit, in San Francisco, held unanimously in 2002 that the law did not apply to tax credits such as Arizona’s. The panel essentially held that the law was not pertinent because the effect of invalidating a tax credit is typically to increase the flow of state revenues, rather than restrain them.

Questioning Mr. Goddard, Justice Sandra Day O’Connor—another member of the majority in the Cleveland voucher case—asked about other federal appellate decisions that the plaintiffs say support that position.

“Is it the case that other courts of appeals have concluded that the Tax Injunction Act does not bar suits that would not reduce state tax collections—that it doesn’t apply where the effect of the suit would be to increase the state’s coffers?” she asked.

Mr. Goddard said he didn’t think those other rulings were relevant, and he pointed to another that had gone the other way.

Justice Breyer said he viewed the tax law’s wording as “pretty ambiguous,” and he asked Mr. Goddard for “evidence” that Congress meant to impose a broad ban on federal courts’ meddling in state tax codes.

Taxing Questions

The plaintiffs argue that the Tax Injunction Act was prompted by federal lawsuits over taxes filed against states by foreign companies, a practice that typically resulted in the states’ being blocked from collecting the money while the suits proceeded.

“There’s no one here trying to stop the state from collecting revenue,” Justice Ginsburg said while questioning Mr. Goddard.

Justice Scalia said that protecting states’ purse strings might have been the law’s main purpose, but that it could now be construed as holding up a “hands off” sign to the federal courts when it comes to state taxes.

“I don’t care what the purpose was,” he said. “I care what the language says.”

Justice Kennedy said that the law’s language could be read to bar federal courts from ordering the collection of state taxes—which would be the effect of a ruling invalidating the tax credit— as well as from ordering that taxes not be collected.

Deputy U.S. Solicitor General Thomas G. Hungar, arguing in support of the state, agreed.

“It would be quite extraordinary for federal courts to order ... the collection of taxes that the state legislators had decided should not be collected,” Mr. Hungar said.

But Mr. Cohen argued that his clients’ stance jibed with how courts had interpreted the Tax Injunction Act for more than 60 years. If Arizona and the 40 other states supporting its appeal to the high court don’t like that, he suggested, they should complain to federal lawmakers.

“If there’s a problem with how it’s interpreted, they—the states— can take that problem to Congress,” Mr. Cohen said.

While Arizona is the only state to offer tax credits to individuals for donations to groups that provide tuition scholarships for K-12 students, Florida and Pennsylvania offer such credits to corporations. The Florida program has sparked controversy, prompting policymakers to consider tightening its oversight. (“Supporters Debate Fla. Voucher Rules,” Jan. 14, 2004).

In Arizona, more than 50,000 taxpayers claimed credits totaling more than $25 million in 2002, with donations going to dozens of scholarship organizations, state records show. Taxpayers are not permitted to earmark such scholarships for their own dependents.

The leading recipient of scholarships paid for through the program was the Catholic Tuition Organization of the Roman Catholic Diocese of Phoenix, which was the beneficiary of tax credits worth more than $7.2 million, according to state records.

A version of this article appeared in the January 28, 2004 edition of Education Week as Justices Weigh Jurisdiction of Arizona Tax-Credit Lawsuit


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