Wednesday, April 13, 2011

Fungibility Part Two: A Taxing Opinion

By Mike Dorf

Speaking of the fungibility of money--which I was speaking about just yesterday--what should one make of last week's Supreme Court decision in Arizona Christian School Tuition Organization ("ACSTO") v. Winn?  The case holds that taxpayers lack standing (qua taxpayers) to bring an Establishment Clause challenge to a state tax credit for those who donate to organizations that provide private school scholarships, including scholarships for private religious schools that discriminate on the basis of religion.  The plaintiffs argued that the state could not--consistent with the Establishment Clause--directly fund religious discrimination, and so it could not do it through the tax code.

That argument might be wrong on the merits.  After all, a line of Supreme Court cases holds that where the government makes some benefit (such as a sign-language interpreter or private school vouchers) available to private parties, the fact that some of those private parties use the benefit in a religious institution does not amount to an Establishment Clause violation--so long as the benefit is available for use at both religious and non-religious institutions.

But the Court did not say in ACSTO that the plaintiffs lost on the merits.  The Court said that a federal court could not adjudicate the merits because the taxpayers who objected to the tax credit were not injured by it.  Prior cases had established that in general a taxpayer lacks standing to complain about the unlawful expenditure of government funds.  The 1968 case of Flast v. Cohen recognized an exception to the no-taxpayer-standing rule for Establishment Clause cases, but more recent cases have read Flast so narrowly that the exception was virtually unavailable.  ACSTO narrows the Flast exception even further, if that's possible.

As Justice Kagan's dissent makes clear, the basic reasoning of ACSTO is hard to take seriously.  She gives the following hypothetical example:
[A]ssume a State wishes to subsidize the ownership of crucifixes.  It could purchase the religious symbols in bulk and distribute them to all  takers.   Or it could mail a reimbursement check to any individual who buys her own and submits a receipt for the purchase.  Or it could authorize that person to claim a tax  credit equal to the price she paid.  Now, really—do taxpayers have less reason to complain if the State selects the last of these three options?  The Court today says they do, but that is wrong. 
Post-ACSTO, a taxpayer would still have standing to challenge the government's direct purchase of crucifixes and the government's mailing of reimbursement checks to crucifix purchasers but would lack standing to challenge the tax credit.  As Justice Kagan explains--and really, as should be patently obvious to anyone with at least a fifth-grade education--this makes no sense whatsoever.

The best I can say about the majority opinion is that the justices who signed onto it probably don't believe what they wrote.  That is, perhaps this is just another effort to inch closer to completely overruling Flast (as Justice Scalia has urged in the past and as he urged again in a concurrence in ACSTO).

But is it possible that Justice Kennedy (who authored the Court's opinion) and CJ Roberts and Justice Alito (who joined without joining the Scalia concurrence) actually do think there is something to the distinction between expenditures and tax credits?  Remarkably, there are hints that this may be so.  The plaintiffs argued that unlike a tax deduction, a tax credit is economically identical to a cash payment from the government.  Here is the Court's response:
But what matters under  Flast is whether sectarian [organizations] receive government funds drawn from general tax reve­nues, so that moneys have been  extracted from a citizen and handed to a religious institution in violation of the citizen’s conscience.   Under that inquiry, respondents’argument fails.  Like contributions that lead to charitable tax deductions, contributions yielding . . . tax credits are not owed to the State and, in fact, pass directly from tax­payers to private organizations.   Respondents’ contrary position assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands.  That premise finds no basis  in standing jurisprudence.
If the Court is saying that a tax credit--unlike a tax deduction--doesn't pass through the state treasury, that's just wrong: Imagine a taxpayer who, but for the credit, would have a zero balance on his tax return: He gets the exact same size check from the state under the tax-credit-for-crucifxes as the reimbursement-for-crucifixes scheme.

Accordingly, we might read the Court to be saying something narrower--not that tax credits can never give rise to taxpayer standing but that tax credits for individual donations to religious organizations do not give rise to taxpayer standing because the donations aren't being made by the government.  To be sure, this reading makes the ACSTO opinion a mess for a different reason: it confuses the standing question with the merits question.  If this is what the Court means, then in Justice Kagan's hypothetical example, there would be standing to challenge the crucifix tax credit because it's the government that has decided to give tax credits for a specifically religious item.  And that's hard to square with the majority's focus on whether the money has come into the tax collector's hands rather than with who directs where it goes from there.  But at least reading the opinion this way does not require one to assume that five justices of the Supreme Court don't understand what a tax credit is.


SJH said...
This comment has been removed by the author.
Michael C. Dorf said...

I thought that was implicit in the parenthetical "(qua taxpayers"). Too subtle?

egarber said...

In terms of real-world application, credits and deductions are labeled "expenditures" when introduced into new spending bills. So in a way, the justices are making up a distinction that most legislatures (or at least finance experts) don't embrace.

egarber said...

I mean legislators... No way I'm gonna delete / resubmit a comment from the bberry -- would take an hour. :)

Hashim said...


You say that a taxpayer who buys a crucifix but already owes no taxes would still get the same size check from the govt under a reimbursement-for-crucifixes scheme and a credit-for-crucifixes scheme. But that's just wrong. Under the reimbursement scheme, a taxpayer with no tax liability who buys a crucifix gets a check, which offsets the cost. Under the credit scheme, a taxpayer with no tax liability who buys a crucifix does *not* get a check, since there's no tax to credit, and so incurs the cost himself. (Unless the AZ scheme was a so-called "refundable" tax credit, which is just a disingenuously named subsidy -- but I don't believe that's the case, and I'm sure Kagan would have pointed it out if it were.) Accordingly, Kennedy is definitely right that true tax credits aren't coming out of the State Treasury, but only refraining from taking more money into the State Treasury.

Now, whether that distinction should matter for taxpayer standing purposes is a different question. Kagan is certainly right that plaintiffs would be just as upset. But they were just as upset when Congress gave the Executive unfettered discretion to spend on religion (Hein) and when it transfered property to a church (Valley Forge). And they were just as upset when a school paid teachers to read from the bible (Doremus). So the question isn't, and never has been, would the plaintiff be equally upset? The question is would they be upset as a *taxpayer*? And, taxpayers here have even less cause to be upset here than in Hein, Valley Forge, or Doremus, since not even a fraction of their money is involved in a tax credit.

To be clear, I think Flast is ridiculous. (I clerked the Hein Term.) And given the disingenuous way it distinguished Doremus and Frothingham, its proponents have no right to object when it is likewise distinguished in turn. But, for the reasons noted, I do think the distinction in Winn is actually more consistent w/ the "reasoning" of Flast (such as it was) than most of the other cases that have distinguished Flast. And I think that explains why Scalia concurred rather than concurred in the judgment (as he did in Hein).

Michael C. Dorf said...


I don't have a view about whether a refundable tax credit is "really" a tax credit. By referring to a "zero balance," I meant to refer to what the taxpayer owes after crediting him for withholding and/or estimated tax. So I'll give you a clearer case.

Suppose that the taxpayer had $5,000 in state tax withheld from his paycheck during the course of the year and also bought a crucifix for $20.

Scenario 1: He calculates his annual state income tax and it comes to $5,000. He pays zero additional dollars in tax and receives a check for $20 from the Office of Crucifix Purchase Reimbursement, funded by the State Treasury.

Scenario 2: He calculates his annual state income tax and, after subtracting his $20 tax credit, it comes to $4,980. He pays zero additional dollars in tax and receives a refund check for $20 from the State Treasury.

In both scenarios the money is coming out of the State Treasury. QED.

Hashim said...


Withholding is just an accounting/enforcement device, not a way of proving whether money is coming "out of" the State treasury. The fundamental point is that a credit is merely the refusal to impose a tax on one individual, not itself the expenditure of another individual's tax revenues.

This is proven by the fact that an individual who owes no tax can't get the credit. If he could, then there'd be a legitimate claim that the Govt was using other people's money to fund religion. But since he can't, credits only refuse to take that taxpayer's own money.

Sherry F. Colb said...

The distinction that Hashim draws between a refundable and a non-refundable tax credit strikes me as material only if our baseline is that the government performs its services entirely free of charge and that *any* taxes paid are to be considered extractions from individual taxpayers. Only under that approach (under which, unlike all other systems in which services are provided and enjoyed by those within the community, we assume that no one receiving the services has any obligation to finance them), does it make sense to characterize any reduction in an individual's tax burden as not a disbursement but simply a "refraining from taking money" (in the way a bully might refrain from taking a nerdy classmate's lunch money) (and accordingly no business of other tax-payers who have paid for government services -- including, by hypothesis -- the crucifix program -- through their own checks to the Internal Revenue Service). Taking a different baseline assumption -- that everyone pays taxes to support government services, unless they have a reason not to pay taxes (e.g., they earn too little money) -- a tax credit offered to one of the many people who do pay for such services does in fact represent a return of funds properly belonging to the U.S. Treasury and therefore properly is considered an expenditure funded by taxpayers (who ought therefore to have standing to complain if the expenditure funds the purchase of crucifixes).

Hashim said...

Sherry is absolutely right about the implicit baseline about property ownership underlying my position and the Court's opinion. I'd note that, under her contrary baseline, Valley Forge is utterly untenable, as is Hein and Doremus. Indeed, under her view, I'm hard-pressed to understand Flast itself -- if tax revenues really belong to the Govt, not to taxpayers, than why is it that taxpayers, and only taxpayers, have standing to complain about how the money is spent? Flast's reasoning, such as it is, is grounded in the notion that there's something uniquely problematic about the Govt taking your money for religious purposes. But under Sherry's view, the money was never really yours in the first place, so why do you have a right to complain?

Sherry F. Colb said...

In response to Hashim's question, the reason you have a right to complain if the government uses tax money to purchase crucifixes is that you are paying for services provided by the government and you thereby have a stake in how the money is spent (even though it rightly belongs to the government). The fact that you owe the government money for services, in other words, does not thereby make your voice irrelevant in complaining about the sorts of services provided with your payment.

To give you a different sort of example, I pay tuition to a private school. If the school gives me a $20 discount on my tuition when I show proof that I spent $20 for a worthy cause, the school is thereby spending $20 of its revenue for my worthy cause. If it turns out that my worthy cause is offensive to the underlying values of the school (for example, if I were to donate to the upkeep of a an extreme fighting studio), another parent -- who pays for the services provided by the school -- could legitimately complain that he does not want to be subsidizing extreme fighting, as a tuition-payer of the school. The fact that the money rightly belongs to the school does not, in other words, give the school complete freedom to do what it likes with the money, given that its customers -- as customers of the particular private school -- oppose violent causes. The conduct of the government in buying crucifixes, by the same token, is objectionable because the government is doing it, but taxpayers have standing qua taxpayers because they are the customers of the government that pay for services.

Of course, on the merits, the parent and the taxpayer may lose, given existing precedents, but their interests payments are nonetheless as implicated by tax credits as they are by reimbursements, because both uses of government money are accountable to the customer-source of the money, the individual taxpayer.

Michael C. Dorf said...


I understand your argument against taxpayer standing in general but I don't understand why you want to defend the particular line the Court has drawn here. To me it's telling that in order to do so, you continually need to rely on nomenclature and formal distinctions rather than substance. Thus, you say that a tax credit is different from an expenditure because the former does not rely on money that is initially parked in the state treasury (even though its economic effect is identical). Then, when I give you an example in which money is parked in the state treasury, you say that's just an accounting mechanism. (That's not true, by the way: you can be penalized for under-withholding and since many people can't predict exactly what their tax bill will be, this creates a strong incentive to over-withhold, thus giving the govt the time value of the extra money--as a function of the law.) But that makes it sound like I'm invoking artificial categories when you're the one who's doing so--at least if you're trying to defend the line the Court is drawing here. Since you don't believe in that line anyway, you should simply abandon it--as perhaps you've done in your response to Sherry.

Note that I've said nothing in my post or these comments about whether I think there is ever a good justification for taxpayer standing. I'm not sure what I think about that. But I certainly do understand the argument for taxpayer standing. As Sherry's second comment indicates, it's very similar to the argument for the Abood line of cases, resting ultimately on Jefferson's aphorism that taxing people to support other people's opinions is tyrannical. Of course, that can't be taken literally. To do so would give taxpayers standing to challenge anything and everything. So the hard question will involve figuring out where the limits of taxpayer standing are, not the impulse that underwrites it.

tjchiang said...

Professor Dorf, I read Kennedy as saying neither of the options you outline. Rather, I read him as saying htat even in the example of a crucifix tax credit, the government has not "directly" given to the religious organization. In all cases the structure is still taxpayer --> religion and then government --> taxpayer. Because there is no direct transfer, there is (apparently) no standing.

Of course it is an utterly intellectually bankrupt distinction. But that is why Kagan is pointing out that the same reasoning would seem to apply to crucifixes. My understanding is that under Winn the government could give a tax credit for donations to only the Catholic Church without taxpayer standing, since those don't come "directly" from the government, either, in that the government is not wiring money to the church itself. Of course the tax credit would be facially unconstitutional -- if anybody had standing to challenge it.

Hashim said...

Mike and Sherry,

I find it notable that neither of you have disagreed with my observation that all of your arguments would require overruling Hein, Valley Forge, and Doremus. Wouldn't you at least agree with me that this case is more distinguishable from Flast than those cases were, since there the plaintiff could directly trace (an infinitesmal fraction of) his own money to the challenged expenditure? And if you do agree, then doesn't that show why my argument is more than mere formalism?

Specifically, I think there's a fundamental difference between a plaintiff who is complaining that the Govt has taken his actual money and spent (an infinitesmal fraction of) it impermissibly, and a plaintiff merely complaining that the Govt has refrained them taking a third-party's money because of how that third party chose to spend it. While there's no economic difference for the Treasury's bottom line, taxpayer standing isn't based on Wallet Injury. It's based on Psychic Injury about how the plaintiff's own money is spent, and I simply don't think that's at play when the money spent was never owned by the plaintiff in the first place (even if it was suppposedly owned by the Government).

But I suspect we'll have to agree to disagree.

Michael C. Dorf said...

Hash: I'd be happy to agree to disagree if we need to, but I think the core difference is that I do see a tax credit--unlike a deduction--as taking from those who don't get the credit and giving it to those who do.

Frankly, I haven't focused on whether the other cases are worse or not quite as bad, just on how flimsy this distinction is.

Professor Chiang: I think the theory to which you refer is what I called the account that confuses the merits with standing--but it's a mess one way or the other.

Hashim said...

Now I'm really baffled -- why do you think a deduction is any different from a credit? A deduction is just a percentage tax credit where the percentage is your marginal tax rate. If you're at the 25% tax bracket, have $500 in taxable income, and spend $100 on a crucifix, the credit reduces your taxes by $100 (down to $25 from $125) and the deduction reduces your taxes by $25 (down to $100 from $125). But why isn't it equally using the "Govt's money," and thus somehow the "pltf's money," to subsidize the purchase of the crucifix?

Michael C. Dorf said...

Hash: A deduction that is reverse-engineered in the way you describe is equivalent to a credit of the deduction times the marginal tax rate, but for two reasons this typically won't be the case: 1) Deductions are usually determined independent of the taxpayer's top marginal rate, so for many taxpayers it will not exactly match the outlay of funds; and 2) the theory behind deductions that are not understood as tax expenditures is that these really are exclusions from income.

Don't get me wrong, though. I share the view of the tax scholars who argue that the very notion of a "tax expenditure" falsely assumes an apolitical "pure" baseline against which deductions can be measured. Thus, any deduction is a kind of subsidy (thus making sense of the Bob Jones University case); it's just not as clearly equivalent to an expenditure as a credit.

Now that we've veered into tax law, I'll let Neil take over!

tjchiang said...

I agree it is a mess one way or the other, but I think there is a slight difference between merits and standing. On the merits, the Catholic-church-only tax credit or the crucifix-only-tax-credit are clearly unconstitutional. But there would be no taxpayer standing to challenge them under Winn. I read your account to imply differently (that because the crucifix-credit would be unconstitutional on the merits, then there would be standing). Perhaps that was jsut my misreading.

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The best I can say about the majority opinion is that the justices who signed onto it probably don't believe what they wrote. That is, perhaps this is just another effort to inch closer to completely overruling Flast (as Justice Scalia has urged in the past and as he urged again in a concurrence in ACSTO).

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