Tax Credits

During the latter half of the 20th century, legislators in a number of states began to propose statutes designed to provide public relief, via adjustments to state tax codes, to those constituencies choosing private, religious, K–12 schools for their children's education in place of public schools. These initiatives, in effect, were intended to divert some public funds to those parents. Politically, such initiatives tended to be supported by Republicans, who favor lesser involvement of government and greater tax breaks for individuals, and opposed by Democrats, who tend to support increased governmental services.

The philosophical justification for such legislation was that a significant portion of the essential function of even the most religious of such schools [Page 871]was largely identical to the secular function of the public schools: prepare students for successful citizenship, further education, and eventual employment to enable them to become self-sufficient participants and taxpayers in the economy of the United States. Since parents choosing private education already supported the public schools through their income and property taxes, those supporting tax credit legislation reasoned that those parents were entitled to tax relief because of the additional expenses incurred in paying the costs of private education.

Among the state statutes proposed in that time period were those that allowed parents to reduce their state tax burdens through either tax credits or tax deductions for private school expenses. An understanding of the difference between tax credits and tax deductions is more important for an understanding of economic impact than for constitutionally justifiable status. Tax credits provide for a direct dollar reduction of actual tax liability: a credit toward taxes due. Tax deductions allow for a reduction of gross income, the basis on which most state and federal income taxes are calculated. Generally, tax credits have a more dramatic effect on an individual's tax situation.

As is the case with many contentious political actions, constitutional questions arose making state and federal courts the scene of final resolution. Into the 1970s, federal courts consistently ruled that direct provision of resources to religious schools was in violation of the Establishment Clause of the First Amendment to the U.S. Constitution. The often-cited Lemon test (Lemon v. Kurtzman, 1971) specified that statutes would not be in conflict with the Establishment Clause of the First Amendment if such laws proposed action that was secular in purpose, neither advanced nor inhibited the free exercise of religion, and did not involve “excessive entanglement” of the state with religious agencies or groups. State statutes granting tax relief to parents raised constitutional questions, although the aid certainly was not flowing directly to religious schools. The resolution of two cases by the U.S. Supreme Court provided direction.

In Committee for Public Education and Religious Liberty v. Nyquist (1973), the Court declared a New York law designed to provide tuition reimbursement or tax relief (credits) only to parents of students attending nonpublic schools unconstitutional in violation of the First Amendment's Establishment Clause. By contrast, 10 years later in Mueller v. Allen, the Court upheld a Minnesota law allowing all parents tax deductions for their dependent children's educational expenses for tuition, materials, and transportation even though private school parents were much more likely to benefit from the law than public school parents (LaMorte, 2008). The Court's conclusions suggest that portions of state tax codes made applicable to broad classifications of citizens are much less likely to be successfully challenged under either the Establishment Clause or as “suspect classifications” under the Fourteenth Amendment's Equal Protection Clause.

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