Lawsuit announced at the Capitol
Tim Keller, executive director of the Institute for Justice, Arizona Chapter said Oct. 12, “The legal antics of school choice opponents should not be allowed to thwart the promise of expanded educational opportunities for Arizona families.”

A libertarian public interest law firm is asking Maricopa County Superior Court to dismiss a legal challenge against the state’s corporate tuition tax credit scholarship program.
“This frivolous lawsuit flies in the face of settled law embracing school choice and should be dismissed immediately,” said Tim Keller, executive director of the Institute for Justice, Arizona Chapter. “The legal antics of school choice opponents should not be allowed to thwart the promise of expanded educational opportunities for Arizona families.”
Mr. Keller says the Arizona Supreme Court has already approved tax credits given for donations that will be used for private school scholarships in a 1999 ruling in the Kotterman v. Killian case, which was a challenge to a tax credit program for individual taxpayers.
The Institute for Justice is joined in the defense of the corporate tax credit program by former Chief Justice of the Arizona Supreme Court Thomas Zlaket, who wrote the court’s opinion in upholding the individual tax credits in the Kotternam case.
The suit, which was filed Sept. 18 by the American Civil Liberties Union and the Arizona School Boards Association, alleges the tax credit program violates several provisions in the state and federal constitutions.
The program allows businesses to donate a portion of their income tax liability to school tuition organizations, or STOs, which then distribute the money to students in the form of scholarships to private schools. In order to qualify for a scholarship, a student’s family must earn less than 185 percent of the federal poverty level.
The corporate program caps the statewide amount of tax credits for such donations at $10 million, though there is no limit on how much an individual business can donate. The cap for aggregate tax credits will increase by 20 percent each fiscal year for the five-year life of the program.
One of the arguments in the suit is that the Arizona Constitution forbids the state from taxing for or appropriating money to private or religious schools. Article IX, §10 of the state Constitution says, in part, that “[n]o tax shall be laid or appropriation of public money made in aid of any…private or sectarian school…”
ACLU finds ‘smoking gun’
The ACLU’s attorney in the suit, Marvin Cohen, says that, while the Supreme Court found the individual tax credits were constitutional, the corporate tuition tax credit program has one key difference in the way it was crafted. Because of a statutory change made in 2002, tax credit legislation must contain a purpose clause explaining the intent of the law.
The purpose clause in S1499 (Laws 2006, Chapter 14) states the tax credit was enacted “to encourage businesses to direct a portion of their taxes by contributing to school tuition organizations in order to improve education by raising tuition scholarships for children in this state.”
Acknowledging that the donations are “a portion of… taxes,” Mr. Cohen says, is the smoking gun in the lawsuit. This separates it from the Kotterman case, he said, in which the Supreme Court ruled the individual tax credits were technically not an appropriation because the would-be taxes were never given to the Department of Revenue.
However, Mr. Keller says the argument simply isn’t true.
“This program does not direct money away from public schools,” he said, pointing out that the money never reaches the general fund and, therefore, is not an appropriation under the Kotterman ruling.
Mr. Keller added the corporate tax credit program at issue in this lawsuit is but one of nearly two-dozen tax credits in state law, and it only accounts for less than 5 percent of the total revenue diverted by them. Also, he said it would divert only about one-third of 1 percent of revenue from the state’s general fund.
He also cited a new fiscal analysis of the scholarship tax credits that concluded the program will likely save the state an estimated $57.2 million over the next five years because the state spends more per student in the public education system than the student would receive in a private school scholarship.
The report, authored by Vicki Murray, a Paradise Valley education policy analyst, determined that, once a certain number of students participate in the scholarship program — 2,000 this year, up to about 3,800 in five years — the state would save at least $5,000 per student because it wouldn’t have the responsibility of educating them.