Green v. Garriott – 3/26/2009

March 26, 2009

Arizona Court of Appeals Division One Holds that A.R.S. § 43-1183, Which Establishes a State Income Tax Credit For Corporate Scholarship Contributions, Is Constitutional.

A.R.S. § 43-1183 establishes a dollar-for-dollar tax credit for corporate contributions to a school tuition organization (“STO”).  An STO is a charitable 501(c)(3) organization that allocates at least 90% of its annual revenue for educational scholarships or tuition grants to children.  To qualify under the statute, STOs may only provide assistance to students whose family income does not exceed 185% of the income limit to qualify for reduced-price lunches.  Plaintiffs sued Gale Garriott in his official capacity, seeking a declaration that § 43-1183 violates the Establishment Clause of the U.S. Constitution, Article 2, § 12, and Article 9, § 10 of the Arizona Constitution, and §§ 20 and 26 of the Arizona’s Enabling Act.  The trial court concluded that the statute is constitutional and this appeal followed.

The Arizona Appeals Court first explained that the statute does not run afoul of the federal Establishment Clause so long as it has a secular purpose, neither advances nor inhibits religion, and does not foster government entanglement with religion.  The Court concluded that the statute has the secular purpose of improving education by raising tuition scholarships for children in Arizona.  The Court also concluded that the statute neither advances nor inhibits religion because (1) it does not provide aid directly to religious schools; (2) the corporate taxpayer is the one who decides whether to make a contribution, which particular STO receives a contribution and the amount of a contribution; because parents of qualified children decide which school their children will attend; and (3) the statute does not differentiate between sectarian and non-sectarian schools.  Finally, the Court concluded that the statute does not foster government entanglement because the State’s involvement is merely administerial in nature and does not require the State to get involved with the religious or non-religious nature of STOs or private schools.

Next, the Arizona appeals court held that A.R.S. § 43-1183 does not offend Article 2, § 12 or Article 9, § 10 of the Arizona Constitution.  The Court reasoned that A.R.S. § 43-1183 is significantly analogous to the statutory scheme upheld in Kotterman v. Killian, 193Ariz. 273, (1999), which held that the government does not impose a tax by declining to collect potential revenue and that a tax credit does not amount to the laying of a tax by increasing the tax liability of those who choose not to take advantage of it. 

Lastly, the Court held that A.R.S. § 43-1183 does not violate §§ 20 and 26 of Arizona’s Enabling Act because neither section touches upon tax credits that provide educational opportunities in private schools.

Judge Kessler dissented in part and concurred in part.  While Judge Kessler agreed that A.R.S. § 43-1183 does not violate the Arizona Constitution or Arizona’s Enabling Act, he disagreed that the statute does not violate the federal Establishment Clause.  Judge Kessler concluded that the statute does not have a purely secular purpose and is not neutral with regard to religion.

Judge Gemmill authored the opinion joined by Judge Norris; Judge Kessler dissented in part and concurred in part.