Prop 208: Arizona Supreme Court won't block tax increase for school funding

PHOENIX - The Arizona Supreme Court on August 19 allowed a new tax on high earners approved by the state’s voters in November to remain in effect while a lower court determines if the revenue it raises for schools will exceed a constitutional spending limit.

The ruling from the high court was likely a brief win for education proponents who backed Proposition 208′s new tax. The court rejected as unconstitutional the part of the voter initiative that classified the money as school grants exempt from the spending limit. And it said if the trial court decides that the spending limit is exceeded, it must declare Proposition 208 unconstitutional and void it entirely.

That appears likely — the court noted that the estimated revenue from the initiative will put school spending several hundred million dollars over the cap.

A dissenting opinion from Justice Ann Scott Timmer said the framework the court imposed to analyze the spending limit "almost certainly" dooms the measure.

Republican Gov. Doug Ducey called the ruling a win for the state and taxpayers.

"There is a clear legal path to Prop 208 being knocked down entirely, it’s only a matter of time," Ducey said in a statement. "The out-of-state proponents of this measure drafted bad language, and now they are paying the price."

The Invest in Education Act was backed by education advocates across Arizona and was an outgrowth of a 2018 teacher strike that resulted in educators getting a 20% pay raise but fell short of other major school funding boosts. Major funding for the campaign came from an Oregon group that advocates for public education.

The state is near the bottom nationally in spending on schools despite an increase in funding backed by Ducey.

Groups that worked to get Proposition 208 on the ballot issued a statement via Twitter slamming the high court and calling the decision politically motivated.

Joe Thomas, president of the state teacher’s union and a member of the coalition backing the initiative, said the ruling makes it even more important for voters who backed the measure to sign petitions to block a massive income tax cut passed by the Legislature this year.

"There’s funding in those tax cuts, to where the Legislature and governor could recreate Invest in Ed next year," Thomas said. "They have plenty of money to do that. So it’s not a lack of money, it’s that they don’t want to invest in schools, and that’s unfortunate."

The court rejected opponents' arguments that Proposition 208 required a 2/3 vote to be enacted as required for tax increases imposed by the Legislature. But the court said it can’t yet tell whether the money it raises can be legally spent so it sent the case back to the lower court.

The Supreme Court threw a version of the initiative off the ballot in 2018 after ruling it was poorly written, but backers came back with a revised version last year, winning a slim voter approval.

Proposition 208 was expected to raise more than $800 million per year for K-12 schools by boosting income taxes on high-earning Arizona residents.

The challenge was filed by Republican legislative leaders and business groups, who argue the new tax would damage the economy by discouraging the wealthy from living or investing in the state. Republican Gov. Doug Ducey also is fiercely opposed and has said he hopes the Supreme Court finds it unconstitutional. Ducey has appointed five of the court’s seven members.

The Legislature gutted parts of the tax in the session that ended in June, but backers of the Invest in Education Act are collecting signatures to block the new tax cuts and asking voters to repeal them.

The court was focused on the spending limit during oral arguments in April. Justice Bill Montgomery noted that about $600 million of the new cash might not be able to be spent if the court finds it was not legal for an exemption in the initiative to dole out the money as grants.

Thursday’s ruling did just that.

Senate President Karen Fann released the following statement, syaing she was "pleased" with the outcome:

I am pleased that the Arizona Supreme Court, in a near unanimous decision, found the Prop 208 tax increase unconstitutional. The proposition was built on a gimmick, that the tax increase was a 'grant', and therefore not in violation of constitutional restrictions on spending. The Court saw through that and ruled it unconstitutional. I expect the Superior Court to find clear evidence Prop. 208 revenues do exceed the expenditure limit, and because the Court also ruled the non-revenue provisions are not separately workable, the entire proposition will be thrown out.

Writing for the court, Chief Justice Robert Brutinel said declaring the entire initiative unconstitutional if it caused school spending to exceed limits at any point was the only way to properly analyze the case, and said suggestions embraced by Timmer that excess money could be spent in later years was unworkable.

"The partial dissent urges that even though the act may be unconstitutional in some years, it could be constitutional in others, allowing it to lurch along even though it contains no provision to account for hundreds of millions of dollars in unspent revenues in years in which it is not operational," Brutinel wrote. "With respect, once the measure requires expenditures that we all agree would be unconstitutional, it renders the entire act incoherent and unworkable ... "

Timmer, the lone dissenter, said the majority was wrong because there were several ways the money could be spent without exceeding the constitutional spending limit and they ignored them.

"Declaring all of Prop. 208 unconstitutional throws out the constitutional baby with the unconstitutional bathwater," Timmer wrote.

Proponents unsuccessfully argued that distributing the money through grants to schools is often used to avoid triggering the spending limit. They also plan to argue in the lower court that the spending limit is now set artificially low and that resetting it to its proper place will allow all of the initiative’s new tax to be spent even if the grant provision is found to be unconstitutional.

Proposition 208 imposes a 3.5% tax surcharge on income above $250,000 for individuals or above $500,000 for couples. The Legislature’s budget analysts estimated it would bring in $836 million a year.

But the Legislature enacted a new tax category that would exempt small business income now taxed on personal returns from the Proposition 208 tax. If that stands, it will cut about $292 million from the new tax revenue schools would get under the initiative.

The measure was an outgrowth of a 2018 teacher strike that resulted in educators getting a 20% pay raise over three years. But the state did not meet their other demands, including that the Legislature boost other school spending and enact no more tax cuts until Arizona’s per-student school spending reaches the national average.

The state is near the bottom nationally in the amount of money it spends on schools.

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