Cutter v. Wilkinson unanimously held (in the words of Linda Greenhouse) "that a new federal law requiring prison officials to meet inmates' religious needs is a permissible accommodation of religion that does not violate the separation of church and state." As Greenhouse noted:
The ruling marked the latest chapter in a 15-year dialogue among the court, Congress and the states over the degree to which the government may take religious interests into account in law or official policy. The statute in question, passed in 2000, is a direct outgrowth of that dialogue, which began with a 1990 Supreme Court case from Oregon, Employment Division v. Smith.
Cutter is an interesting example of how the courts tend to actually do their job as compared to the simplistic ways some might think they do. For instance, the ruling went out of its way to decide matters on narrow grounds, rejecting Ohio's broad argument that the First Amendment prohibits a federal law (in part via its spending power ... a question not addressed*) that specifically protects the rights of religious believers, especially in special state controlled contexts such as prisons.
Nonetheless, it was only a "facial" challenge -- the state might still win on the particular facts. [The presence of cases like a Aryan nationalist suggests the state might win some on remand.] Furthermore, even though the law requires strict scrutiny be applied, the opinion noted that the law also respects that special concerns are present in the prison context -- security interests, for instance, often would meet the test. This, it bears noting, is why some strong critics of such protections should chill a little.
And, in fact, even in the days when the Supreme Court itself honored a more stringent test for free exercise, the states were given a broader power to regulate in that area. The opinion itself notes the same applies when speech is involved, which it often is in religious exercises. The past also suggests the "dialogue" referenced by Greenhouse, an ongoing back and forth between the Supreme Court, Congress, and the states to determine the proper reach of religious freedom. The fact that the Supreme Court struck down RFRA did not mean Congress was powerless to try a narrower approach ... an approach that the courts might ease along by carefully dealing with possible pratfalls.
Such is the law -- a slow, nuanced dance, even when dealing with the emotional and potentially quite problematic matters seen in this case.
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* As noted by Justice Thomas' concurring opinion, the First Amendment bars laws "respecting the establishment of religion," not religion per se. The opinion also suggests the spending power concerns have merit, though perhaps Ohio's acceptance of the funds negated them. I don't know if this solves the matter, if one believes Congress has no power to fund this sort of thing in the first place. Voluntary delegation of powers one does not have is still illegitimate.
The concurring opinion is interesting, but provides the typically stunted view of the Establishment Clause put forth by its author. Nonetheless, it does recognize that Free Exercise Clause concerns might arise in cases of this nature.