Hibbs, J. Elliott, Dir., AZ Dept. of Revenue v. Winn, Kathleen, et al. (06/14/2004)

BY EMILY DUPUIS, MEDILL NEWS SERVICE

In Arizona, state law allows any state income taxpayer to satisfy up to $500 of his or her annual tax obligation by giving money to organizations which provide grants to children who attend state private primary and secondary schools.

In turn, these private organizations, called School Tuition Organizations (STOs), are required to provide at least 90 percent of the money as tuition grants to students. The organizations, which are not required to consider student financial need, must provide the grants to students at more than one non-public school. They may restrict grants to students attending only religious schools or only to students of specific religions.

The law prohibits STOs from making grants to students attending schools that discriminate on the basis of race, color, handicap, family status or national origin. The law, however, makes no reference to religion.

These tax breaks concerned Arizona residents Kathleen M. Winn, Diane and Maurice Wolfthal and Lynn Hoffman. Overwhelmingly, the funds went to religious-based institutions. Out of a total $1,815,799 received by these organizations from taxpayers in 1998, at least 94 percent went to students attending religious schools.

With the help of the American Civil Liberties Union, Winn, Hoffman and the Wolfthals filed suit in Arizona federal court in February of 2000 against Mark W. Killian, then-director of the Arizona Department of Revenue. They sought to prohibit the state from allowing the statute to be used to divert state income tax revenues to religious uses.

By "affirmatively authorizing and permitting STOs to use state income-tax revenue to pay tuition for students at religious schools, A.R.S. 43-1089, on its face and as applied, violates the First and Fourteenth Amendments to the United States Constitution," the plaintiffs claimed.

Arizona contended the Tax Injunction Act and the 11th Amendment right to state sovereignty prohibited the district court from determining the constitutionality of a state tax credit system. The Tax Injunction Act reads that "District Courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under state law where a plain and efficient remedy may be had in the courts of such state."

The district court dismissed the case under the Tax Injunction Act for lack of jurisdiction and principles of comity principles under which courts of one jurisdiction will recognize and defer to the decisions, proceedings and laws of another out of mutual respect. The court stated that federal courts are required to dismiss claims that challenge state tax systems regardless of constitutionality as long as "an adequate state remedy" is available.

The appeal to the 9th Circuit Court of Appeals focused on the jurisdiction of federal courts to address the constitutionality of state tax legislation.

Arizona countered that if a state has adequate remedies, a district court has no jurisdiction to consider a challenge to the constitutionality of state tax legislation. Only Congress has that power.

The plaintiffs claimed the district court had jurisdiction to hear and decide the case, under the 1st Amendments Establishment Clause. Neither the Tax Injunction Act nor principles of comity prevent federal courts from halting an unconstitutional tax credit, they claimed.

On Oct. 2, 2002, the 9th Circuit reversed, holding that the Tax Injunction Act was not applicable in the case.

"We hold that because plaintiffs attack the grant of a tax credit, which is not one of the three types of state tax procedures barred from challenge in federal court by the Tax Injunction Act, the district court erred in dismissing the action pursuant to that Act," Judge Stephen Reinhardt stated in his opinion. "Equally important, the relief requested by plaintiffs in this action would not hinder Arizona in its ability to impose taxes or collect revenue, but in fact would result in the states receiving more funds that could be used for the public benefit.

"Although [the STO credit], like any state statute, expresses the policy views of the state of Arizona, and thus should not be lightly disregarded, in this case Arizona identifies no harm that renders federal court review of this statute any more intrusive on the states sovereignty than the review of any other state statute that is alleged to be unconstitutional. Accordingly, comity does not bar plaintiffs attempt to vindicate the important constitutional rights at issue," Judge Reinhardt wrote.

Arizonas request for an en banc hearing by all the 9th Circuit judges was denied.

J. Elliott Hibbs, the new director of the Arizona Department of Revenue, sought review by the U.S. Supreme Court. The petition asked the Court to focus on the interpretation of the word "assessment" in the Tax Injunction Act. Only two definitions of assessment were considered "to estimate officially the value of (property, income, etc.) as a basis for taxation or "to impose a tax or other charge on." Hibbs contended the 9th Circuit erred in "narrowly defining the word," which should be defined more broadly under a third definition as encompassing everything having to do with the state taxation.

Hibbs also asked the Supreme Court to resolve conflicts in the 1st, 6th, 9th and 11th circuits over whether the Tax Injunction Act and principles of comity prohibit challenges in district courts to state tax provisions.

On Sept. 30, 2003, one week before the start of the 2003-04 term, the U.S. Supreme Court accepted review in the case.