Arizona Individual Tax Credit Scholarships (Federal)

In 1997, Arizona adopted the nation’s first statewide scholarship credit program. The program allowed individuals who donate to School Tuition Organizations (STOs) to take a dollar-for-dollar tax credit against their state income taxes, up to a maximum of $500 per taxpayer. STOs were required to use 90 percent of the donations received to award tuition scholarships which enabled low- and middle-income parents to send their children to private schools.

IJ successfully defended the program before the Arizona Supreme Court, in the landmark case of Kotterman v. Killian. After the state court litigation concluded in 1999, a group of Arizona taxpayers, represented by the ACLU of Arizona, filed a second legal challenge in federal court in February 2000 against the program arguing it violated the Establishment Clause of the U.S. Constitution. The group argued that taxpayers were harmed by virtue of parents using the tax-credit-funded scholarships to pay for tuition at religious schools. The Institute for Justice moved immediately moved to intervene in the federal case on behalf of parents and children who relied on the program.

IJ’s intervention was initially denied as moot because the federal district court dismissed the case on non-constitutional grounds. The case was ultimately remanded to the district court for a decision on the merits. However, by the time of the remand, IJ has set a second landmark school choice precedent—this one in the U.S. Supreme. In 2002, the U.S. Supreme Court had held in Zelman v. Simmons-Harris that school choice programs that were (1) religiously neutral (meaning the program neither favored nor disfavored religion) and (2) governed by genuine private choice (meaning that parents decided where to enroll students) would pass muster under the Establishment Clause.

IJ once again moved to intervene in the case to defend the program, this time successfully, and immediately moved to dismiss the case, arguing that our victory in Zelman controlled the outcome of this case. A second group of intervenors, represented by the Alliance Defense Fund also intervened in the case.  The 9^th U.S. Circuit Court of Appeals reversed IJ’s victory, but on April 4, 2011, the U.S. Supreme Court ruled 5-4 that the taxpayer plaintiffs who were challenged the program did not have standing to file the case, and dismissed the case. The Court said that the plaintiffs did not have standing because the donations to STOs that gave rise to the available tax credits were private, not public, funds.  Thus, the taxpayer plaintiffs suffered no injury because no money ever came into, or flowed out, the public treasury.

IJ similarly argued in Kotterman—and in every cases in which it defended tax credit scholarship programs—that money donated to STOs are not public funds . To date, IJ has won all of its ten tax credit cases, and every appellate court sided with the proposition that tax-credit-eligible donations to private charities are private funds.