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Gaddy v. Georgia Department of Revenue

Supreme Court of Georgia

June 26, 2017

GADDY et al.
GEORGIA DEPARTMENT OF REVENUE et al.; and vice versa

          Benham, Justice.

         These appeals arise out of a complaint filed by four Georgia taxpayers in which they challenge the constitutionality of Georgia's Qualified Education Tax Credit, Ga. L. 2008, p. 1108, as amended ("HB 1133" or the "Bill").[1] The complaint named as defendants the Georgia Department of Revenue and Douglas J. MacGinnitie in his official capacity as State Revenue Commissioner.[2] Later, the trial court permitted four individuals who identify themselves as parents of children who have benefited from the tax-credit- funded scholarship program that is challenged by the plaintiffs, and described below, to intervene as defendants.

         HB 1133 set up a tax credit program ("Program") that allows individuals and business entities to receive a Georgia income tax credit for donations made to approved not-for-profit student scholarship organizations ("SSOs"). The Bill created a new tax credit statute for that purpose. See OCGA § 48-7-29.16. The Bill also added a new chapter to Title 20 of the Georgia Code to govern the creation and operation of these SSOs. See OCGA § 20-2A-1 et seq. In summary, the tax credit statute permits Georgia taxpayers to take a dollar-for-dollar credit against their Georgia income tax liability for donations to SSOs of up to $1, 000 per individual taxpayer or $2, 500 for married taxpayers filing jointly. OCGA § 48-7-29.16 (b).[3] Corporate taxpayers are allowed a credit of the actual amount donated or 75 percent of the corporation's income tax liability, whichever is less. OCGA § 48-7-29.16 (c). The total aggregate amount of tax credits allowed under the statute is currently limited to $58 million per tax year (OCGA § 48-7-29.16 (f) (1)) and the Commissioner of Revenue is directed to allow these tax credits "on a first come, first served basis" (OCGA § 48-7-29.16 (f) (2)). OCGA § 20-2A-2 sets forth the rules by which each SSO is to distribute the donations received for scholarships or tuition grants. Generally speaking, the SSO is required to distribute the donated funds as scholarships or tuition grants for the benefit of students who meet certain eligibility requirements (OCGA § 20-2A-2 (1)), and the parent or guardian of each recipient must endorse the award to the accredited private school of the parents' choice for deposit into the school's account (OCGA § 20-2A-5).

         Plaintiffs' complaint challenges the constitutionality of HB 1133 on three grounds.

• Count 1 alleges the Program violates the Educational Assistance section of the Georgia Constitution, [4] which authorizes the expenditure of public funds for scholarships and other forms of assistance for educational purposes, [5] and also specifies that contributions made in support of educational assistance programs established under this section may be tax deductible for state income tax purposes.[6] Plaintiffs allege that the Program authorized by HB 1133 constitutes an educational assistance program as defined in this section of the Constitution, and allege that the scheme of the Program violates the Constitution in two ways-by permitting private non-profit SSOs to administer the Program, and by authorizing contributions to SSOs to be treated as tax credits as opposed to tax deductions.
• Count 2 alleges the Program violates the Gratuities Clause of the Georgia Constitution, which states that "[e]xcept as otherwise provided in the Constitution, . . . the General Assembly shall not have the power to grant any donation or gratuity or to forgive any debt or obligation owing to the public . . . ."[7] Plaintiffs allege that the Program provides unconstitutional gratuities to students who receive scholarship funds under the Program by allowing tax revenue to be directed to private school students without recompense, and also that the tax credits authorized by HB 1133 result in unauthorized state expenditures for gratuities.
• Count 3 alleges HB 1133 violates the Establishment Clause of the Georgia Constitution, which states: "No money shall ever be taken from the public treasury, directly or indirectly, in aid of any church, sect, cult, or religious denomination or of any sectarian institution."[8] Plaintiffs allege that the Program takes money from the state treasury in the form of dollar-for-dollar tax credits that would otherwise be paid to the State in taxes, and since a significant portion of the scholarships awarded by the SSOs goes to religious-based schools, the Program takes funds from the State treasury to aid religious schools in violation of the Establishment Clause.

         The complaint also alleges in Count 4 that the Department of Revenue has violated the statute that authorizes tax credits for contributions to SSOs by granting tax credits to taxpayers who have designated that their contribution is to be awarded to the benefit of a particular individual, in violation of OCGA § 48-7-29.16 (d) (1), and by failing to revoke the status of SSOs that have represented to taxpayers that their contribution will fund a scholarship that may be directed to a particular individual, in violation of OCGA § 48-7-29.16 (d) (2). In Count 5, plaintiffs seek mandamus relief to compel the Commissioner of Revenue to revoke the status of SSOs that have made representations that are allegedly unlawful pursuant to OCGA § 48-7-29.16 (d) (2). In Count 6, plaintiffs seek injunctive relief against the defendants to require them to comply with the constitutional provisions and statutory laws set forth in the complaint. In addition to mandamus relief and injunctive relief, plaintiffs seek a declaratory judgment that the Program is unconstitutional.

         A number of dispositive motions were filed. Defendants filed a motion to dismiss the constitutional challenges as well as the prayer for injunctive relief for lack of standing, among other reasons. The intervenors filed a similar motion to dismiss as well as a motion for judgment on the pleadings with respect to these claims. Defendants sought dismissal of the claim for mandamus relief on the ground that it fails to state a claim on which relief could be granted. Plaintiffs filed a motion for judgment on the pleadings with respect to Count 4 (alleging violation of the tax code). After conducting a hearing on these motions, the trial court granted the motions to dismiss plaintiffs' constitutional challenges (Counts 1, 2, and 3) for lack of standing. The trial court granted the defendants' motion to dismiss Count 4 for failure to state a claim because no private right of action exists to enforce the tax credit statute, and denied plaintiffs' motion for judgment on the pleadings on this count. The trial court found that plaintiffs' claims for declaratory and injunctive relief are barred by sovereign immunity. Defendants' motion to dismiss the claim for mandamus relief, however, was denied. As an alternative disposition to certain claims, the trial court granted the intervenors' motion for judgment on the pleadings as to the constitutional claims and the claim for injunctive relief.

         This Court granted plaintiffs' application for discretionary appeal and plaintiffs' appeal was docketed as Case No. S17A0177. The Georgia Department of Revenue and Lynette T. Riley, in her capacity as Georgia Revenue Commissioner, [9] filed a cross-appeal which was docketed as Case No. S17X0178.

         Case No. S17A0177

         1. Plaintiffs/appellants argue that the trial court erred in concluding they lack standing to seek declaratory and injunctive relief to address alleged constitutional infractions. In general, to establish standing to challenge the constitutionality of a statute, a plaintiff must show actual harm in that that his or her rights have been injured.[10] Here, plaintiffs claim they have standing to challenge the constitutionality of the statutes in question because they can show injury by virtue of their status as taxpayers. They also claim standing is conferred by OCGA § 9-6-24. Neither assertion survives scrutiny.

         (a) Standing as Taxpayers.

         First, plaintiffs assert the complaint shows they are Georgia taxpayers, and they argue that their status as taxpayers demonstrates they have been harmed by the unconstitutionality of the tax credits created by HB 1133. "As a general rule, a litigant has standing to challenge the constitutionality of a law only if the law has an adverse impact on that litigant's own rights." Feminist Women's Health Center v. Burgess, 282 Ga. 433, 434 (1) (651 S.E.2d 36) (2007). Each of plaintiffs' allegations regarding the constitutionality of HB 1133 hinges on certain assumptions, the first one being that the grant of tax credits for student scholarships amounts to a diversion of public revenue that leaves the plaintiffs shouldering a greater portion of Georgia's tax burden. Plaintiffs also assume that the tax credits amount to an unconstitutional expenditure of public funds because these funds actually represent tax revenue, or because the revenue department bears the costs of administratively processing these credits. But these premises are false.

         (i) Relying upon Lowry v. McDuffie, [11] plaintiffs argue they have standing as taxpayers due to the increased tax burden created by the tax credits granted to other taxpayers. Plaintiffs' reliance on Lowry is misplaced. Lowry involved a challenge to a tax exemption from ad valorem taxation provided to another taxpayer, and this Court concluded that because an illegal exemption would place a greater tax burden upon other taxpayers with respect to their share of the taxes levied by the local government entity, the plaintiff had standing to challenge the legality of the tax exemption. But exempting property from ad valorem taxation removes property from the tax digest and may result in an increased millage rate on the remaining property to make up the difference. The notion that a tax credit from state income tax liability decreases the total revenue pool and increases the tax burden on the remaining taxpayers, however, is purely speculative. Governor Nathan Deal approved a $25 billion state budget for 2018, [12] and the Program currently caps tax credits at $56 million. Even assuming an adverse effect on the state's budget, it requires pure speculation that lawmakers will make up any shortfalls in revenue by increasing the plaintiffs' tax liability. They could just as easily make up shortfalls by reducing the budget. Further, a tax credit that funds a program that encourages attendance at private schools might, in fact, create a tax savings by relieving public schools of the burden of educating the students who chose to attend private schools. This argument relating to budget shortfalls has been considered and rejected by other courts, both state and federal, as a basis for creating standing to assert a constitutional challenge to similar scholarship programs in other states that grant tax credits for contributions to private organizations that administer and grant private school scholarships. See, e.g., Arizona Christian School Tuition Organization v. Winn, 563 U.S. 125 (131 S.Ct. 1436, 179 L.Ed.2d 523) (2011); McCall v. Scott, 199 So3d 359 (Fla. Dist. Ct. App. 2016), cert. denied 2017 WL 192043, Case No. SC16-1668 (Fla. Jan. 18, 2017).

         (ii) We also reject the assertion that plaintiffs have standing because these tax credits actually amount to unconstitutional expenditures of tax revenues or public funds. The statutes that govern the Program demonstrate that only private funds, and not public revenue, are used. As demonstrated by HB 1133, the Program sets out a scheme by which (1) donations of private funds by private individuals or entities, (2) made to nongovernmental SSOs to be used for scholarships to private schools, whether secular or religious, (3) may be claimed as tax credits by individual and corporate taxpayers. Individuals and corporations chose the SSOs to which they wish to direct contributions; these private SSOs select the student recipients of the scholarships they award; and the students and their parents decide whether ...

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