The court's 7-2 ruling held that the state of Washington was within its rights to deny a taxpayer-funded scholarship to a college student who was studying to be a minister. That holding applies even when money is available to students studying anything else.
"Training someone to lead a congregation is an essentially religious endeavor," Chief Justice William H. Rehnquist wrote for the court majority. "Indeed, majoring in devotional theology is akin to a religious calling as well as an academic pursuit."
The case is a departure from recent church-state fights in which the Supreme Court has gradually allowed greater state sponsorship of religious activities. Rehnquist is usually a supporter of that idea.
Wednesday's case has implications for President Bush's plan to allow more church-based organizations to compete for government money, and the Bush administration argued that the state had been wrong to yank the scholarship from former student Joshua Davey.
Davey won a state Promise Scholarship, but the state rescinded the money when it learned what he planned to study.
Like 36 other states, Washington prohibits spending public funds on this kind of religious education. Bans on public funds for religious education, often known as Blaine amendments, date to the 19th century, when anti-Catholic sentiment ran high.
"It imposes neither criminal nor civil sanctions on any type of religious service or rite," the high court majority said.
"It does not deny to ministers the right to participate in the political affairs of the community. And it does not require students to choose between their religious beliefs and receiving a government benefit. The state has merely chosen not to fund a distinct category of instruction."
Justices Antonin Scalia and Clarence Thomas dissented.
"Let there be no doubt: This case is about discrimination against a religious minority," Scalia wrote for the two.
"In an era when the court is so quick to come to the aid of other disfavored groups, its indifference in this case, which involves a form of discrimination to which the Constitution actually speaks, is exceptional."
Scalia said the court's majority was trying to play down the damage to Davey, who continued his education without the subsidy. He did not choose to enter the ministry after graduation, and is now in law school.
"The indignity of being singled out for special burdens on the basis of one's calling is so profound that the concrete harm produced can never be dismissed as insubstantial," wrote Scalia, the father of a Catholic priest.
Davey's lawyers argued that the state violated his constitutional right to worship freely.
A broad ruling that Davey had a constitutional right to the scholarship money could have forced a vast reordering of government spending, to ensure that government did not exclude religious programs or organizations.
The Bush administration had argued that the implications were less dramatic.
The Davey case is a follow-up to the court's major ruling two years ago that allowed parents to use public tax money to send their children to religious schools. A ruling in Davey's favor would have made it easier to use vouchers in many states, because it could overturn provisions in state constitutions like the one at issue in Washington.
The Davey case was in many ways the flip side of the voucher argument. It asked not whether governments can use tax money to underwrite religious education, as the voucher question did. Instead, the Davey case asked whether, when money is available, it must be available for religious and secular studies alike.
"This ruling is a huge defeat for those who want to force taxpayers to pay for religious schooling and other ministries," said the Rev. Barry W. Lynn, executive director of Americans United for Separation of Church and State.
"This erects an important barrier to efforts to fund school vouchers and faith-based programs."
The case is Locke v. Davey, 02-1315.