The regulations, adopted December 14, implement SB 410, which authorized a new income tax credit of up to $150 for donations to organizations that grant scholarships to students at private schools. However, the Department of Revenue may have knocked a majority of those schools out of eligibility by ruling that credits will not be available for organizations providing scholarships for religious schools.
Shortly after the rules were proposed, there were questions about the department's interpretation of the state constitutional provisions that it said prohibit credits for such donations, as a consistent application of that interpretation could have barred credits for any school.
The department initially appeared to be treating the credits as an appropriation, which may not be made "for any sectarian purpose or to aid any church, school, academy, seminary, college, university, or other literary or scientific institution, controlled in whole or in part by any church, sect, or denomination" under Article 10, section 6.
Article 5, section 11, goes even further, barring appropriations for "educational or benevolent purposes to any private individual, private association, or private corporation not under control of the state," which could have meant that no credits could be awarded for any scholarship organization.
After additional research, however, the department says it believes it is on solid ground. DOR spokeswoman Mary Ann Dunwell said on December 18 that rather than treating the credits as appropriations, the department is relying on language that bars "direct or indirect payments" for sectarian purposes, but not for educational purposes.
"This is an indirect payment using public funds," Dunwell said. "It's money that the state would not realize by issuing these tax credits, so in that sense, it's an indirect payment of public funds."
But interpretation of SB 410 and the relevant constitutional provision will now likely fall to the courts, as a trio of mothers of students at Stillwater Christian School filed a lawsuit December 16 challenging the new rules
The complain in the case, Espinoza v. Dep't of Revenue, says that besides violating free exercise and equal protections in both the federal and state constitutions, the rule simply misinterprets SB 410's directive that it "must be administered in compliance with" Article 5, section 11(5), and Article 10, section 6, of the Montana Constitution.
The "provisions, however, do not apply to the program as the case law is unanimous that tax credits do not constitute appropriations or payments of public funds," the complaint says. "Moreover, the scholarships are awarded to families, not schools."
Although the complaint does not cite any of that case law, Richard Komer of the Institute for Justice, which is representing the plaintiffs, said that there is an abundance of case law from other states where similar restrictions have been knocked down.
"Appropriation is kind of a term of art," Komer said. "It's how you take money out of the state treasury and use it, but it doesn't apply to tax benefits . . . that prevent money from actually ever coming in to the state treasury, because the state is trying to encourage taxpayers to do other things that they think will be beneficial."
Dan Whyte, chief legal counsel for the DOR, agreed that "there isn't any case law that's specifically applicable to these rules" but said the State Legislature directed the DOR to consider the issue.
"There are constitutional provisions that require us to prevent direct or indirect payments to sectarian schools, and the Legislature specifically referred to those provisions in the bill and now in the statute," Whyte said.
The resulting rules attracted plenty of controversy. The rulemaking process includes a public hearing that often has little to no input from the public, but this one generated dozens of written comments and witnesses who came to testify.
Based on the strong reaction, the DOR polled lawmakers, who overwhelmingly indicated that the proposed rules were contrary to legislative intent.
Revenue Director Mike Kadas said that he appreciated the public's input and engagement but concluded that the department's interpretation was correct.
"The department made minor adjustments following public input, however the main premise of the rules remains the same," Kadas said in a statement. "The department is following the new law . . . in which the Legislature directs the department to administer the law in a constitutional manner. Articles V and X of the Constitution prohibit direct and indirect payments or appropriations to religious or sectarian schools."
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