Hamm,
You are absolutely right about your first point -- I only didn't go that far b/c in the mixed economy we have adopted in this country, that argument doesn't often get far with most people and in order to fix that problem we have to first fix a whole ton of other problems (the whole system!). But, you I am 100% with you -- it's sad that our original system based on capitalism and individual Rights has been largely abandoned.
But I have to disagree with your 2nd point (that is, unless I misunderstand the mechanics of the resolution). My understanding of it is that the money didn't go directly to the parents unconditionally but that it had to be used at a "participating" school. That fact means that it isn't entirely up to the parents to do with it as they wish, since they can't actually apply to any school they choose (otherwise homeschoolers would be able to collect) and since a school has to meet certain "qualifications", the door is opened for gov. interference of the school and thus the religious values taught there.
Additionally, though your 2nd point is correct given your 1st, your 2nd point depends on your 1st which depends on an incorrect assumption (that our society is based on a system of capitalism and individual Rights). Since your first premise is actually no longer true (and hasn't been since the early 1900's), your 2nd doesn't hold, even though both you and I wish it did. And here's an example of why: Family "A" is relatively well-off and pay AT LEAST their portion of the $7000 a year, via taxes, that it is said to school their 1 child. Absolutely, any amount "refunded" back to them under this proposal would be warranted as THEIR money; no doubt about it. However, family "B" barely scrapes by and has 5 kids -- they pay no where near the $35,000 their 5 kids consume via schooling. To "refund" them *ANY* amount of money is to take away from family "A" and give to family "B" (just exactly as you said in your post). This is where the proposal DOES sponsor religion -- b/c family "B" gets the "public" money paid into the system by family "A" and family "A" ends up supporting family "B"'s religious values. It's nothing short of government-forced Church tithing/donating.
In my example, my wife and I earn well-above the state average. Though we don't live like it, we are pretty well off (not rich, but nowhere near strapped). We also have no kids, as of yet. But, b/c we own a home, we pay into the school system the same as everyone else. Therefore,under this proposition, I am also paying for family "B"s religious values whether I like it or not.
This is why your 2nd point is invalid. In the case of the well-off family "A", no state-sponsoring of religion is necessarily occurring b/c family "A" paid that amount into the system anyways... it was their money to begin with. However, in the case of family "B", there absolutely is a state-sponsoring of religion occurring when money from family "A" and my family is taken from us, given to family "B", and then family "B" is permitted to use that money at a religious school.
In closing:
Utah State Constitution, Article I, Section 4:
...No public money or property shall be appropriated for or applied to any religious worship, exercise or instruction, or for the support of any ecclesiastical establishment....