The Arizona Court of Appeals on March 12 upheld a state law that permits businesses to reduce their tax liability by contributing money to organizations that distribute private school scholarships to students.

Two of three judges on the appellate panel found the corporate tuition tax credit does not violate constitutional provisions that prevent the state from directing money to private schools, nor does it present an illegal diversion of funds destined for state coffers.

The challenge was brought last year by attorneys representing several families who oppose the law, as well as the Arizona School Boards Association and Arizona Center for Law in the Public Interest.

The law "creates a corporate tax credit program that assists parents with additional educational choices for the children," according to Judge John Gemmill, who wrote the majority opinion. "The corporate tax credit dollars have not been earmarked and, indeed, cannot be earmarked until falling into the sovereign purse of the state."

Gemmill and Judge Patricia Norris also found the program did not amount to an unlawful support of religion by the state, as opponents had claimed, because it "provides for genuine private choice."

That finding was not supported by Judge Donn Kessler, who, in a dissenting opinion, found the law was not religiously neutral as required by the U.S. Constitution.

Institute for Justice attorney Tim Keller, who helped defend the law on behalf of several families, said the opinion proves the corporate tuition tax credit is both constitutional and "sound public policy."

Keller said he believes the lawsuit was filed by school-choice opponents who are intent on discouraging alternatives to public schooling.

"They want to keep a constitutional cloud over these programs to suppress participation," he said, adding he thought the challenge to the corporate tuition tax presented a "chilling effect" intended to stop businesses from making contributions.

The program, created by the Legislature in 2006, resulted in Arizona businesses contributing almost $12 million during the 2007 fiscal year to student tuition organizations that sent about 2,000 students to more than 150 private schools.

Other defenders of the state law include the Attorney General's Office, former Arizona Supreme Court Chief Justice Thomas Zlaket and the Alliance Defense Fund.

Attorney Tim Hogan, of the Arizona Center for Law in the Public Interest, said he was not surprised the Arizona Court of Appeals rejected the challenge because of a 1999 precedent set by the Arizona Supreme Court in ~Kotterman v. Killian~ that upheld individual tuition tax credits.

Hogan argued that both tuition tax credit programs represent an unconstitutional contribution by the state to religious organizations. He said opponents of tuition tax credits will most likely request the Arizona Supreme Court to hear an appeal that will also include a challenge against the ~Kotterman~ opinion.

"We haven't had a chance to talk about it, but I'm sure we will," he said.