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Tuesday, April 5, 2011

Supreme Court Adds Fuel to Tax Expenditure Debate

Bloomberg, Court Backs Separation of Tax and Spending in Church-State Case, by Richard Rubin:

The U.S. Supreme Court, in a case involving separation of church and state, provided rhetorical backing for congressional Republicans who argue that government grants and tax credits aren’t equivalent.

The court yesterday upheld an Arizona program that gives taxpayers a credit for contributions made to groups that provide scholarships to private schools, including religious institutions. The 5-4 majority on the court said such tax expenditures, unlike spending programs, involve private funds that don’t reach the government’s coffers.

“When the government collects and spends taxpayer money, governmental choices are responsible for the transfer of wealth,” Justice Anthony Kennedy wrote for the majority. “Here, by contrast, contributions result from the decisions of private taxpayers regarding their own funds.” That distinction led the majority to determine that the taxpayers suing Arizona lacked standing, or the right to challenge the program as a constitutional violation. Politically, the decision provides support for lawmakers who argue against lowering the budget deficit by curbing tax expenditures, no matter how much they resemble spending programs.

“Cases like this encourage more government spending, rather than less,” said Edward Kleinbard, a law professor at the University of Southern California and former chief of staff of the congressional Joint Committee on Taxation. “It simply encourages that spending to take the form of ever sillier tax credits and other targeted tax breaks.” ...

The question of whether tax expenditures are equivalent to spending has been roiling the Republican Party in recent months. ... 

If tax credits aren’t considered government spending, [Kleinbard] said, Congress could just add pages to the income tax form to give tax filers an unlimited number of credits and decisions about how to spend them. “And then having done that,” Kleinbard said, “we will declare that we’ve shrunk the size of government to zero.”

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The link does not seem to go to the right article.

The decision and dissent were very interesting. Whatever your opinion on the merits of the tax expenditure debate, it's a welcome reminder that it is very much a debate: it often seems that (in particular) proponents of the tax expenditure way of looking at things dismiss opposing arguments out of hand.

My own opinion is that while tax credits and exemptions sometimes share some attributes of spending, it does not follow at all that the two are exactly the same in all circumstances or that they should be subject to the same constraints. The government has a much greater degree of control over government spending programs, so treating the two as exactly equivalent in effect means that the government would exert much greater control over private spending decisions. Perhaps that is the attraction for proponents of the tax expenditure concept.

Posted by: Nonce | Apr 5, 2011 1:47:52 PM

Let’s cut through the rhetoric and view this decision for exactly what it is, which is the Conservatives of the Supreme Court endorsing using government funding to support private, religious sponsored elementary and secondary education. Direct payments by government to schools founded by and teaching religious doctrine is clearly unacceptable, even to most Conservative jurists. Consequently Arizona has found a way to craft such a policy that will pass muster under the guise of tax credits.

Make no mistake about it, this is government support of religion. Of course, it will be interesting to see what happens if American Muslims use this practice to fund their education. I am guessing Conservatives will suddenly have a big change of heart, or else require that the credits are available only for Christian schools. And the current Supreme Court would probably support that.

Posted by: Sid (real one) | Apr 5, 2011 5:28:29 PM

No Sid, the decision says simply that a tax credit for money paid for private education is legitimate, even though some people taking the credit choose their private education to involve religion. The program in question does not require the children to go to religious schools. It simply gives the parents a choice.

Posted by: John | Apr 6, 2011 5:39:46 AM

No John, the tax credit is a government expenditure for private religious education.

In Tax Law and Tax Policy we look at substance over form. If an individual donates $1,000 to a private religious school and takes a $1,000 tax credit, the result is this.

1. The individual has a $1,000 expenditure and a $1,000 reduction in taxes, net outlay = zero.
2. The religious school has $1,000 more than it had before.
3. Government has $1,000 less than it had before.

Clearly government has made a $1,000 expenditure to the school. In fact, this is why we calls these items "Tax Expenditures".

Since state goverments are required to have balanced budgets, another way of looking at this is that when the state provides the $1,000 tax credit it must

1. Reduce expenditures by $1,000 in other programs, in other words, replace one expenditure with another.


2. Raises taxes by $1,000, thus forcing individuals who do not support a particular religion to pay for supporting that religion.

This is not an issue of choice. Parents in the U. S. are free to send their children to public school, private school or even no school if they wish to home school the children. The issue is whether or not taxpayers are required to support religion.

Many people belieive in heaven, and may think there is rejoicing in heaven over this decision. If there is a heaven, I imagine the only sound is Thomas Jefferson weeping.

Posted by: Sid (real one) | Apr 6, 2011 6:32:33 AM


I am familiar with the concepts, thanks.

Your arguments are not very coherent. The most basic errors stem from your belief that allowing a tax credit for private schools, some of which are religious in nature, constitutes direct support and funding of religion.

You also make short-sighted errors in your "budgetary analysis." Even if such analysis is important, you forget that when children forgo public schooling, the government does not have to spend money on the public schools for that student. As such, the government's spending on schools is reduced.

Posted by: John | Apr 6, 2011 11:16:21 AM

If you think that religion is not being taught in public schools, then you haven't been paying attention. In public schools, students can learn about humanism, that there are no moral values, the state is supreme, and that there is no God. Students in religious schools couldn't get a worse education than the government offers.

Posted by: Woody | Apr 6, 2011 11:19:58 AM


My arguments may or may not be very coherent, but my ecample is unambiguous. At the end of the day, the government has $1,000 less and the religious school $1,000 more. If you support the tax credit as public policy, then to be consistent you must also support direct public expenditures to private religous schools as correct public policy. There is no economic or substance differences between the two.

The fact that government can spend less on public education when students opt out is irrelevant. The only question is whether or not in our system of Constitutional government it is correct for government to support religious education.

A fundamental principle of the founding of this nation was that government does not support religion, any religion. What we have with the Arizona decision is an example where five so-called conservatives justices have amended the Constitution because they decided that government should support religion.

We can disagree on whether or not this is correct public policy, but let's agree on what it is, which is the equivalent of direct public spending in support of religion.

Posted by: Sid (real one) | Apr 6, 2011 12:41:11 PM

Even if we assume you are correct and this is "direct public spending," you still are incorrect in your conclusions. It would be direct public spending of private education, some of which is religious in nature.

I don't think Woody's points are correct or relevant, but the way you paint the picture you would thing that the government is only funding religious schools. But I guess when political opinions are involved, hyperbole and sweeping generalizations are acceptable.

Posted by: John | Apr 7, 2011 6:33:28 AM

So if a tax credit is spending substantively equivalent to a direct expenditure, then by logical extension we should also prohibit Earned Income Tax Credit recipients from using religious services, tithing, and/or supporting other religious programs. After all, the credit is fungible and there is no way to assure that the recipient will not spend the government's credit in violation of the First Amendment.

Moreover, this particular credit is no different than the charitable contributions Section 501(c)(3) deduction. At the taxpayer's discretion, government is indirectly supporting potentially religious organizations by foregoing the portion of revenue not received due to the deduction.

One could further argue (to the absurd) that with the broad taxing power enjoyed by Congress, all income is subject to taxation, and that which is not due to the Treasury is a government expenditure, thus no one individual could legally support their religion because in doing so, government has indirectly "spent" money for that purpose.

Posted by: James | Apr 8, 2011 4:56:15 PM

The credit IS significantly different the charitable contribution. The is established law that parents cannot deduct the cost of a religious elementary and secondary school education. Now, however, what those parents could not deduct they can take as a credit. And we all know a credit is worth more than a deduction (credit = $1 for $1; deduction equals cents on the $1).

Posted by: tax guy | Apr 9, 2011 7:13:29 AM