Ever since Stanley Surrey popularized the concept of tax expenditures nearly half a century back, economists have argued that many tax breaks are equivalent to government spending. Virtually any spending program can be transformed into a tax expenditure that directs money in the same way. This week the Supreme Court rejected that equivalence, ruling that an Arizona tax credit differed enough from a comparable direct spending program to deny taxpayers the right to sue on the basis that the credit represented an unconstitutional government activity. The Court’s decision suggests that while the majority in this decision may be great lawyers, they are lousy economists. Some background: In 1968, the Court ruled that citizens may sue to stop the government from spending that violates the Constitution, in the specific case supporting religious activity (Flast v. Cohen). Citizens had standing to sue, the Court concluded, because the challenged spending directly affected taxpayers who fund government programs. The current case, Arizona Christian School Tuition Organization v. Winn et al., involves not direct government spending on an unconstitutional activity but rather a tax credit that serves the same purpose as a spending program. Arizona allows taxpayers to claim a non-refundable credit of $500 a year ($1,000 for couples) for donations to qualified school tuition organizations (STOs), which then use the funds to support tuition payments to private schools. The original suit claimed that STOs violated the First Amendment’s prohibition of government activities promoting the “establishment of religion” because tuition payments could go to parochial schools. In a 5-4 decision, the Court ruled that the challenged tax credit was not government spending and therefore the claimants lacked the standing to sue allowed in Flast. Unlike spending, the majority argued, tax expenditures do not necessarily affect the tax bills of others; that is, the government won’t necessarily raise taxes to cover the revenue cost of a tax credit. In fact, the opinion claimed, “the purpose of many governmental … tax benefits is ‘to spur economic activity, which in turn increases government revenues.’” And further, private school tuition assistance might induce some students to switch from public to private schools, thus reducing government costs. Since tax expenditures thus don’t necessarily harm taxpayers, they have no right to sue. Of course, the same could be said of spending programs. In a concurring opinion, Justices Scalia and Thomas argued that the Court should reverse Flast and deny standing to anyone objecting to either federal spending or tax expenditures. The minority, led by Justice Kagan in her first dissent, took the economist’s view: “Cash grants and targeted tax breaks are means of accomplishing the same government objective—to provide financial support to select individuals or organizations.” Because they do the same thing, the Court should treat them the same way. She further observed that “because appropriations and tax breaks can achieve identical objectives, the government can easily substitute one for the other.” Much of the discussion of the Court’s decision has focused on the religious issue: Did the Court approve of government activity promoting religion? But the majority view that spending and tax expenditures are not inherently equivalent speaks directly to a major flaw in how we oversee the federal budget. Congress regularly reviews discretionary spending programs but tax expenditures rarely receive comparable oversight. Since the 1986 tax reform, politicians have increasingly used the tax code to serve social purposes. Political reality clearly favors tax expenditures (read “tax cuts”) over spending programs and we have consequently littered the code with spending programs masked as tax preferences. As yesterday’s Tax Policy Center discussion of tax expenditures clearly showed, that’s no way to design and run a tax system.