Arizona Supreme Court allows Proposition 208 to stand, but spending limit could undo tax hike

A voter-approved tax increase for education will stand, at least for now, the Arizona Supreme Court ruled Thursday.

The justices found that it is too early to tell if the Invest in Ed initiative, known as Proposition 208, would raise so much money that it would exceed a constitutional limit on education spending. They are sending the matter back to a lower court.

The justices, with Vice Chief Justice Ann Timmer dissenting, concluded that if the money collected by Proposition 208 exceeds the constitutional spending cap, then the entire measure is overturned. That's because the money collected could not be spent, undermining the intent of the entire measure.

"If the court finds that the tax revenues allocated will not exceed the expenditure

limit, then there is no present constitutional violation and Prop. 208 stands," Chief Justice Robert Brutinel wrote.

That decision will be made by the Maricopa County Superior Court. If that court finds the 3.5% surcharge raises more money than the state can constitutionally spend, then the lower court "must declare Prop. 208 unconstitutional and enjoin its operation."

Maricopa County Superior Court Judge John Hannah has overseen the case in the lower court.

Timmer disagreed, however, arguing the conclusion that one part of the measure dooms the entire law "throws out the constitutional baby with the

unconstitutional bathwater."

The high court did find that voters have the ability to raise taxes with a simple majority via a ballot measure, which was the other key question in the case. Lawmakers had argued a tax hike required a two-thirds majority.

The ruling was 6-1, with Timmer agreeing in part and dissenting in others.

Critics of Proposition 208 viewed the ruling as an early sign of its demise.

"There is a clear legal path to Prop. 208 being knocked down entirely, it's only a matter of time," Gov. Doug Ducey wrote in a statement. "Today's ruling is a very positive one for the state and for taxpayers. The out-of-state proponents of this measure measure drafted bad language, and now they are paying the price."

Ducey has made tax reduction, not tax increases, a hallmark of his tenure.

Senate President Karen Fann, R-Prescott, also saw victory in the ruling. 

"The proposition was built on a gimmick, that the tax increase was a 'grant', and therefore not in violation of constitutional restrictions on spending," Fann said. 

The court's opinion found that grants are subject to the spending limit.

Voters said yes to tax hike

Arizona voters last fall approved a 3.5% surcharge on any income earned above $250,000 for single filers, or $500,000 for married couples filing jointly. The surcharge was estimated to raise $827 million a year, effective with the filing of 2021 taxes. Most of the money was targeted for teacher salaries.

However, tax law changes approved by lawmakers in June reduced that estimate by as much as 45%, or up to $378 million.

The measure won voter approval 51.7% to 48.3% on last November's ballot.

Republican legislative leaders, the Free Enterprise Club and other allies sued in April. The ruling in the case, Fann et al v. Arizona, was posted on the state Supreme Court's website. 

The lawmakers argued the measure needed a two-thirds majority to pass since it increased taxes. The court rejected that argument, saying it only applies to taxes enacted by the Legislature.

Supporters, including the Arizona Education Association and the nonprofit Stand for Children, contended the lawsuit was premature, as the state has not yet collected a dime from the surcharge. The then-pending fate of a bill in the Legislature to create a new tax category that would exempt many taxpayers from the surcharge could become law, potentially keeping spending below the cap.

That bill, Senate Bill 1783, passed and is now the subject of a voter referendum drive that could put the measure on hold until voters can decide it at the November 2022 election.

Reach the reporter at maryjo.pitzl@arizonarepublic.com and follow her on Twitter @maryjpitzl.