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Walz (1970) and Mueller (1983) allowed property tax exemptions for churches and tax deductions for parochial school tuition, respectively. Hunt (1973), the Court's only decision on tax-exempt bonds and the Establishment Clause, strongly indicates the Court's doubts about whether tax-exempt imancing is, in fact, state aid at all within the meaning of the Establishment Clause. Numerous state supreme court cases assume this basic perspective also. Thus, the authority for concluding that tax benefits are indirect rather than direct aid programs is also clear and compelling. Tax-exempt fmancing is a particular kind of tax benefit, which comes in many forms and is available to a wide variety of eligible entities besides faith-based organizations. Authorizing statutes provide a multi- faceted program for addressing various public purposes and are neutral in purpose and neutral in effect with regard to religion. Tax-exempt fmancing is indirect aid in two respects. First, tax-exempt financing is the most attenuated of tax benefits discussed by the courts, sometimes compared to a mere governmental service, like police or fire protection. Further, Zelman directly governs tax-exempt fmancing because the benefits of tax-exempt financing are mediated to institutions through the independent decision-making exemplif'ied by the market. The benefits are provided directly to bondholders who receive the direct benefit of exemption from taxation, rather than to tax-exempt borrowers who may or may not receive a financial benefit in the form of lower rates, because the markets receive the benefit and "decide" how much to pass through to borrowers. Further, the markets neither favor nor disfavor religiosity: it simply has no impact whatsoever in this decision making process. Thus, tax-exempt bond financing, even for pervasively sectarian institutions, should normally not be subject to constitutional challenge on Establishment Clause grounds, because these attenuated benefits are indirect, and because they are mediated through the private decision-making of the financial markets on a basis which is wholly neutral between the religious and non-religious. NEW CLIMATE REVISITED New Climate identified a matrix of factors governing Establishment Clause analyses. Neutrality is the sine qua non for constitutionality. The interplay of the other factors - whether aid is direct or indirect the nature of the activities assisted, the nature of the institution assisted; whether participation in, or benefits or burdens of aid programs are determined on the basis of religion, and whether other constitutional rights or duties come into play • determine the level of constitutional scrutiny. After Zelman, the matrix is more useful than ever. As we have seen: � I f aid is neutral and indirect, constitutional scrutiny is low. Conversely, scrutiny will be somewhat higher ifaid is direct. "Special dangers" of endorsement or entanglement may come into play if direct aid is to religious or pervasively sectarian institutions, particularly those involved in essentially religious activities. Aid for specifically religious activities is least likely to be constitutional, absent other circumstances. However, if either of the final two factors of the matrix comes into play and individual rights are adversely affected or ordinary participation in society is undermined, then even religious institutions, religious activities and direct aid may be permissible (or even necessary) in some circumstances. The application of the last two components of the matrix, particularly in the context of direct aid to religious entities, remains somewhat unresolved. Some recent cases strongly indicate that refusing to allow an otherwise eligible religious institution or an individual to participate in a neutral program might be unconstitutional Content- based speech discrimination or a free exercise violation. Counsel for governmental entities in these circumstances would be well advised to review these decisions with care, for their focus on individual religious and speech liberties provides provocative clues as to the most likely ultunate resolution of this conflict. For more information on this topic, please contact Jeffrey 0. Lewis at (317) 236-2334, or via e-mail at jeffrey.lewis@icemiller.com. For atltlitional copies of current publications, contact the Business Development Department at (317) 236-2434. Please visit our Internet Web site at WWWICBl111��Bl.COl1'1 for more information about Ice Miller. This publication is intentletl for general information purposes only antl tloes not antl is not intentletl to constitute legal ativice. The reatler must consult with legal counsel to tletermine how laws or tlecisions tliscussetl herein apply to the reatler's specific circumstances. Copyright 2002 Ice Miller. All rights reservetl. One American Square Box 62001 Indianapolis, IN 46282-0002 P 317-236-2100 F 317-236-2219 wWW.iCCmilltf.CORI Indianapolis Chicago Washington, �.�.