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Court rejects bid to put hold on surcharge on wealthy

A new income tax surcharge on the wealthy to add more dollars to public education can take effect.

In a 21-page ruling Tuesday, Maricopa County Superior Court Judge John Hannah Jr. rejected a series of arguments by business interests and some Republican lawmakers that Proposition 208 was so flawed that he needed to immediately quash it. Hannah said that’s not the case.

The judge said there appears to be little merit to the claim that only elected lawmakers are authorized to raise taxes. If nothing else, he pointed out that the Arizona Constitution makes the people co-equal with the legislature.

Similarly, he said when voters approved a constitutional amendment requiring a two-thirds vote for new or increased taxes, they worded it so as to apply only to the legislature and not to their own initiatives. And Hannah found little merit to the claim that the 3.5% surcharge on earnings above $250,000 for individuals and $500,000 for married couples filing jointly is not a sufficient revenue source for the money that will go to public schools and other education issues.

Finally, in declining to issue an injunction, the judge also concluded that enacting the tax, by itself, likely does not run afoul of constitutional caps on total spending on education. He said there are legitimate ways to interpret Proposition 208 in ways that make it legal.

John Hannah

John Hannah

And even if there is a legal problem — a point Hannah does not concede — he said it would require a full-blown trial, complete with evidence, to reach such a conclusion.

In the meantime, however, he said there is no immediate reason to declare the law or this provision illegal.

Hannah pointed out that while the higher tax rate officially took effect Jan. 1, it won’t really be an issue for most people until April 2022 when they pay their income taxes. And even for people whose income is high enough to require them to pay estimated taxes, the judge said the worst that could happen is they pay a little more now and then could get a refund if Proposition 208 eventually is declared illegal.

All that technically leaves the door open for the foes of the tax, who tried unsuccessfully to keep the measure off the ballot in the first place, to renew their arguments at a trial. But they have an uphill fight.

In refusing to issue the injunction, Hannah had to consider whether the challengers had a likelihood of success. And he said that does not appear to be the case.

Jonathan Riches, an attorney for the Goldwater Institute, called the ruling “unfortunate.” But he pointed out that Hannah is giving foes another chance to make their case at trial.

“We are confident that once constitutional flaws with Prop 208 are fully and finally litigated, our courts will act to protect Arizona taxpayers against the grave threat of its burdensome and permanent tax increase,” he said.

The ruling is a key victory for the backers of Invest in Education who convinced 51.7% of those who turned out in November to support the plan to add new dollars for education. It is expected to raise anywhere from $827 million to $940 million a year, depending on whose estimates are used.

Half of the dollars are earmarked for grants to school districts and charter schools to hire teachers and classroom support personnel. Those dollars also can be used to raise teacher salaries.

Another 25% is for student support personnel, with 10% earmarked to retain teachers in the classroom, 12% for career and technical education and the balance into a fund to help pay the college tuition of students who go into teaching.

Opponents argued that it would be bad for small business. And they pointed out that, for the most wealthy, it effectively would raise the top tax rate in Arizona to 8%, a move they said would put a damper on economic growth.

But with Arizona’s tiered tax system, only the earnings above that $250,000/$500,000 threshold are subject to the higher levy. Estimates are that only about 4% of Arizonans would be affected.

One of the key legal arguments by foes involves the question of who can raise taxes and what margin is needed.

Hannah brushed aside the claim that only the legislature has that power, pointing out that the Arizona Constitution specifically empowers voters to create and defeat legislation at the ballot box.

As a fallback argument, challengers pointed to the constitutional requirement for a two-thirds vote of the legislature for higher taxes, claiming that same margin also applies to voters. The judge found little merit to the claim that’s what voters meant when they approved it in 1992.

“It expresses the electorate’s intent to make it more difficult for the legislature to increase taxes,” Hannah wrote. “But it does not follow that the voters intended when they enacted (the constitutional provision) to repeal or limit their own separate, co-equal power to increase taxes by initiative.”

That issue of the education expenditure limit is a bit more complex.

The Arizona Constitution sets a spending limit for all school districts in the state by taking the current revenues and adjusted for the number of students and inflation.

In anticipation that Proposition 208 could bust the spending limit, the drafters of Proposition 208 specifically said that the dollars raised by the new levy are exempt from that limit. But Hannah said that’s not so simple, as the initiative is a law which, by definition, cannot overrule a constitutional provision.

The judge said, though, that Proposition 208 could be read so that the funds raised do not fall within the cap. He said the new dollars could be considered “grants” which are not covered by the constitutional limit.

And even the new cash is subject to the limit — a point yet to be proven — Hannah said there is no evidence on the record that the extra cash will, in fact, exceed the revenue limits.

 

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