How the Espinoza Tax Credits Work

By Sam Brunson

On Tuesday the Supreme Court issued its opinion in Espinoza, holding that Montana couldn’t prohibit “student scholarship organizations” from making tuition payments to religiously-affiliated private schools. I wrote about the decision over on the Nonprofit Law Prof Blog.

After writing the post, I saw this entry in a SCOTUSblog symposium on the Espinoza decision. And, like the authors of that piece, I found the Supreme Court’s decision unsurprising (for reasons that I mention on the other blog). But one part of their analysis jumped out at me as reflecting a critical misunderstanding of the way Montana’s tax credit scheme worked.

Specifically, the authors wrote:

The secular instruction in these schools means that the state gets full secular value for its money. There are complications in putting a dollar amount on this secular value. It might be the schools’ full cost, given that they satisfy compulsory-education requirements. Or some of the cost might be attributed to teaching religion. But one thing we know: the secular value is far more than zero. A $2,250 tuition voucher (the amount involved in the court’s 2002 decision in Zelman v. Simmons-Harris) can easily be allocated entirely to secular value. All the more so in Espinoza, where the tax credit was capped at $150.

(Emphasis mine.)

This paragraph isn’t critical to the blog post; it’s not mentioned in the majority’s analysis. And yet I’m afraid it may have been in the back of the mind of the Justices. Because, after all, what’s $150 out of private school tuition?

The answer is, the $150 is irrelevant. And it’s irrelevant because the tax credit doesn’t go to parents who send their kids to private schools. It goes to donors to the student scholarship organizations. Under the legislative scheme, donors get a dollar-for-dollar tax credit for the amount they donate to these scholarship organizations, up to $150.

Remember that a tax credit reduces a taxpayer’s tax liability. So if I donated $150 to a student scholarship organization, that would reduce my state tax bill by $150. That means that as long as I don’t donate more than $150, I bear no after-tax cost for my donation. Economically, the money in the fund comes from the state as foregone revenue.

Let’s be clear: assuming the few if any donors gave more than $150 (which is probably a fair assumption), every cent of tuition paid by the scholarship fund (to secular and to religious private schools) comes from state money.

And any given child can get scholarships of up to 50% of the per-pupil average of public school expenditures. How much is that? I don’t honestly know, but it could be more than $11,000. (State law provides a method of calculating it, but for blog purposes, I’m calculating it using the Google search method.) That means that a student could receive a scholarship of up to $5,500, most or all of which comes from the state. Meanwhile, the average private school tuition in Montana is about $8,400, so the student scholarship fund (and, by virtue of the tax credit, the state) could pay a substantial portion of students’ religious school tuition.

Again, none of this is explicit in the opinion, and the discussion is a side note in the SCOTUSblog post, but I thought it was worth highlighting.