The Supreme Court ruled 5 to 4 yesterday that taxpayers can use federal courts to challenge state taxes, a defeat for Arizona and its tax break that helps fund private religious schools. The decision could leave tax credits in more than 40 states vulnerable to federal court challenges.
Justices said that federal courts can hear constitutional challenges to state tax schemes despite a 1937 law that says federal courts may not interfere with the "assessment, levy or collection" of state taxes.
The case arose from income tax credits given to Arizona residents for donating money for private school education. Those contributions fund grants and scholarships and are part of a state effort to give parents more choices in educating their children.
A group of Arizona taxpayers sued the state in federal court, arguing that the tax credits are an unconstitutional promotion of religion.
"In decisions spanning a near half century, courts in the federal system, including this court, have entertained challenges to tax credits authorized by state law," Justice Ruth Bader Ginsburg wrote for the majority.
Arizona had the backing of 40 other states, which wanted their tax decisions protected from federal lawsuits, and the Bush administration, which supports government funding for private parochial education.
The U.S. Court of Appeals for the 9th Circuit had ruled that federal courts can hear constitutional challenges of state income tax credits. Arizona argued that those lawsuits belong in state court.
Justice Anthony M. Kennedy, in a dissent joined by Chief Justice William H. Rehnquist and Justices Antonin Scalia and Clarence Thomas, said "state courts are due more respect than this."
The case is Hibbs v. Winn, 02-1809.