Is a Tax Expenditure an Appropriation? Montana Tests Definitions in Scholarship Tax Credits Case

In late May, a district court set aside a Montana Department of Revenue rule restricting the applicability of the state’s scholarship tax credits. It is the latest chapter in an ongoing dispute about whether credits can be claimed for contributions to organizations awarding scholarships for religiously-affiliated schools. Now the Department has signaled its intention to appeal.

The conflict arises from Senate Bill 410 of 2015, which provides tax credits of up to $150 for contributions to scholarship organizations which provide financial assistance to students attending non-public schools. With SB 410, Montana became the 17th state to offer a tax credit-based school choice program, alongside the 14 states (and the District of Columbia) with voucher programs. The Department of Revenue, however, has concluded that the Blaine Amendment to the state’s constitution, which prohibits using state funds to support religious entities, precludes allowing tax credits to be claimed by anyone contributing to an organization that issues scholarships to students attending sectarian institutions.

Twelve of the other 16 states with scholarship tax credit programs have Blaine Amendments in their state constitutions, and while the language of each amendment varies, nothing about Montana’s is facially unique from, or more restrictive than, those in other states. That makes the Department’s position somewhat surprising. A district court evidently thought so as well, holding that the Department “misinterpreted the intent of the legislation” and misunderstood the scope of the constitutional prohibition.

Fundamentally, the point at issue is whether tax credits constitute a state appropriation. They are certainly a tax expenditure: the state brings in less revenue than it would absent the credit. This would not, however, generally be understood as an appropriation; in fact, in a somewhat similar case, the U.S. Supreme Court rejected the notion that a scholarship tax credit in Arizona constituted an appropriation. In the present Montana case, the district court, citing extensive state case law, affirmed that “‘appropriation’ refers only to the authority given to the Legislature to expend money from the state treasury.”

This is an important distinction. When a state elects not to include groceries in its sales tax base, to take one example, it is not voting an appropriation of funds to grocers or consumers, even if the practical upshot of the exemption is to redistribute money in those directions. The Department of Revenue contends that the credits constitute an “indirect payment” to religious schools, but that’s not a position that has found favor with any courts currently, and it’s one that could have sweeping ramifications for setting tax bases.

The state legislature polled its members—a nonbinding parliamentary procedure designed to produce statements of legislative intent when bills are litigated—and the majority asserted their belief that the Department’s rule was “contrary to the intent of the legislation.” The Department, however, continues to maintain that it is constitutionally prohibited from implementing the legislation in full, and plans to appeal the ruling. A decision in the Department’s favor could implicate far more than just the state’s scholarship tax credits, and thus bears watching—though it seems unlikely that the Department will prevail.


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