RALEIGH — In yet another of its pivotal 5-4 decisions, the United States Supreme Court ruled Monday that taxpayers in Arizona have standing to challenge that state’s school-scholarship tax credit in federal court on federal constitutional grounds.
Naturally, and I don’t fault anyone for this, the initial round of media coverage and reaction to the tax-credit decision focused on its implications for Arizona’s innovative school-choice credits, which allow residents to take dollar-for-dollar credits up to $500 a person for contributions to private scholarship funds that assist families who choose independent or religious education for their children.
State programs facilitating wider parental choice of schools have long been controversial, and the issue deserves additional consideration. But I happen to think that the Arizona taxpayers, now that they have established a right to challenge the program, will fail in their constitutional claim.
After all, the U.S. Supreme Court has already ruled that state governments can provide taxpayer funds directly to families choosing private education without violating the First Amendment’s establishment clause, as long as families are free to choose religious or non-religious options. Tax credits, being one step removed from direct payments, are certainly not more problematic, and are arguably far less so, than vouchers. Moreover, the principle of neutrality is already well-established in other kinds of tax policy towards private institutions, such as “above the line” state tax credits (as in North Carolina) for those who make contributions to charities, which can be but need not be religious ones.
What most observers (but not all) appear to have missed about the Supreme Court’s decision in this case is that it speaks to another controversial issue: targeted tax incentives for business. For critics of these policies, which offer special tax treatment to some firms that locate in a state or otherwise do what politicians want them to do, an attractive option for ending the policy has been to puruse a constitutional challenge in court. Lawsuits in state court, such as the Maready v. Winston-Salem decision that reached the North Carolina Supreme Court back in the 1990s, have points in their favor. For one thing, state constitutions offer a range of provisions upon which to base a challenge (I think a North Carolina court challenge would now succeed, given the past decade of experience and change in the court’s makeup). Also, it is easier for average taxpyers to establish standing to file suit in state courts against wrongful actions by state governments.
The obvious problem with a state court challenge to incentives is that a favorable ruling would apply only to that state. In the Maready case, state attorneys were probably successful in convincing justices that striking down incentives on the basis of state constitutional protections for equal treatment and the public-purpose doctrine would be a form of unilateral disarmament — allowing other states to gain economically while North Carolina, stripped of its ability to compete, stagnated.
A federal lawsuit would overcome this objection by, if successful, establishing a binding precedent across a region or even the whole country. But average taxpayers normally have had less opportunity to use federal courts to challenge their governments’ actions.
That’s why the new Supreme Court ruling is intriguing. There is a good case to be made that selective tax incentives violate the federal constitution’s Interstate Commerce Clause, which effectively forbids state governments from engaging in “trade wars” via de jure or de facto tariffs. Tax laws that fail to treat firms doing business in your state the same — on the basis of where their headquarters or major operations are located — arguably create the kind of interstate trade barrier that the federal constitution forbids.
It’s unlikely that a favorable ruling for incentive opponents in federal court would end the debate altogether. States might be able to substitute other kinds of corporate subsidies, such as free or below-cost land or infrastructure, for tax credits. Still, the ruiling would take away some of the tools from those misguided policymakers and corrupt consultants who are distorting the free market, harming the interests of small and apolitical companies, and generating dangerous level of public resentment against corporate America.
There is already a case before a federal district court, a challenge by taxpayers in Toledo, Ohio against an incentive deal for Chrsyler. Michael LaFaive of the Michigan-based Mackinac Center for Public Policy has written about the case, and told me Monday that the plaintiffs had informed him just last week that a long-delayed decision is expected soon — and that they interpret the delay as a good sign that the judge is preparing to strike the incentives down.
Regardless of whether the Ohio challenge meets with early success, it now seems time for incentive opponents in North Carolina to study carefully how best to proceed. Now, given news from Washington, a new option may have presented itself.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.