The Supreme Court ruled Monday that federal courts can hear constitutional challenges to state taxes, a decision that could leave tax credits in nearly every state vulnerable to federal court challenges.

Justices said such lawsuits are permitted despite a 1937 law that says federal courts may not interfere with the "assessment, levy or collection" of state taxes (search). The 5-4 decision was a defeat for Arizona and its tax break that helps fund private religious schools.

The case arose from income tax credits (search) given to Arizona residents for donating money for private school education. Those contributions fund grants and scholarships and are part of a state effort to give parents more choices in educating their children.

A group of Arizona taxpayers sued the state in federal court, arguing that the tax credits are an unconstitutional promotion of religion.

The Supreme Court agreed to let them continue the lawsuit, without giving an opinion on whether the tax credits are constitutional.

"In decisions spanning a near half century, courts in the federal system, including this court, have entertained challenges to tax credits authorized by state law," Justice Ruth Bader Ginsburg wrote for the majority.

Ginsburg said that among those cases were challenges to state tax credits intended to get around the Supreme Court's (search) ruling that barred racial segregation (search) in public schools.

Monday's decision was at odds with the Supreme Court's recent rulings that bolstered states rights.

Court conservatives complained bitterly that their colleagues seemed concerned "that state courts are second-rate constitutional arbiters, unequal to their federal counterparts."

"State courts are due more respect than this," Justice Anthony M. Kennedy wrote in a dissent joined by Chief Justice William H. Rehnquist, and Justices Antonin Scalia and Clarence Thomas.

Justice Sandra Day O'Connor (search), who grew up on a ranch in Arizona, was the key swing vote in ruling against the state.

Arizona's tax break allows a dollar-for-dollar credit of up to $500 for an individual and $625 for a married couple. The credits were passed five years before the Supreme Court's 2002 ruling that tax money can be used to pay tuition at private or parochial schools if parents retain a wide choice of where to send their children.

Arizona had the backing of the Bush administration, which supports government funding for private parochial education, and 40 other states worried about federal challenges to their tax policies.

Those states are Alabama, Alaska, Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wisconsin.

The case is Hibbs v. Winn, 02-1809.