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Court rules Prop 208 surcharge can stay – for now

Returns case to trial court for further proceedings

Judges chair in court room

The Arizona Supreme Court on August 19 ruled the income tax surcharge on the wealthy can remain, at least for the time being. 

But it may be legally impossible to actually get any of those dollars into the classroom, which was the intent of the sponsors of Proposition 208. 

The justices rejected arguments by supporters of the initiative that the money that would be raised – estimated at $827 million a year – is a “grant” to schools. That would have exempted the revenues from a constitutional limit on how much the state can spend overall on education. 

But Chief Justice Robert Brutinel said that doesn’t end the matter. 

“Because we cannot determine at this preliminary stage of the case the extent to which, if any, such funding will exceed the constitutional expenditure limitation, we decline to enjoin the imposition of the tax,” he wrote. Instead, the justices sent the case back to the trial court. 

“If the trial court finds that the tax revenues allocated will not exceed the expenditure limit, there is no present constitutional violation and Prop 208 stands,” Brutinel said. 

“However, if the trial court finds that (the law) will result in the accumulation of money that cannot be spent without violating the expenditure limit, it must declare Prop 208 unconstitutional and enjoin its operation,” he continued. 

That appears to be a likely outcome. 

The expenditure limit, enacted by voters in 1980, uses 1979 figures as a baseline, adjusted for inflation and student growth. 

Kathy Hoffman, the state school superintendent, said that limit for the just-ended fiscal year was $6.31 billion. At the same time, the total expenses that fall under that cap were $6.16 billion. 

Brutinel said that leaves just a $144.2 million gap between current spending and the limit. 

“Thus, if the expenditure limit remains at current levels, Prop 208’s projected $827 million in revenues will far outpace its permissible spending,” he said. 

And that, Brutinel said, presents a legal problem, particularly as Proposition 208 says any money raised can be used only for the purposes stated. 

“That leaves Prop 208 with no statutory authority to spend approximately 85% of the funds raised by the tax,” he said. Brutinel said he and his colleagues cannot approve a statute that results in taxes being collected and simply “impounded with no prospect of being spent or refunded.” 

And he said that isn’t acceptable. 

He noted Proposition 208 was crafted to impose a 3.5% income surcharge on taxable income of more than $250,000 for individuals and $500,000 for married couples filing jointly, all to raise additional dollars for K-12 education. 

Half of whatever comes in is earmarked for grants to hire new teachers and classroom support personnel as well as increasing the salaries of those already hired. 

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

It was approved by a margin of 51.7%. 

“The stated purpose of Prop 208 was to tax high-income individuals to raise revenue that would be directly provided to school districts based on ‘years of underfunding by the legislature,’ ” Brutinel said, quoting proponents. 

“Given that the tax increase was not itself the measure’s objective, but rather how its objectives would be achieved, leaving the taxing provision in place without the allocation provision is simply not rational,” he continued. “Collecting taxes that cannot be spent does little or nothing to provide increased support for school districts.” 

The final word now is up to Maricopa County Superior Court Judge John Hannah who, having previously upheld the legality of Prop. 208, is directed to see if the funds can be spent. 

The Supreme Court ruling drew praise from Danny Seiden, president of the Arizona Chamber of Commerce and Industry. 

It was his organization that tried first to keep Prop. 208 off the ballot and then, unsuccessful there, sought to convince voters to reject it. And it was his organization that, along with Republican lawmakers, mounted the post-election legal challenge.   

“We are gratified that the Arizona Supreme Court affirmed that out-of-state special interest groups can’t make an end-run around our state constitution through the passage of a regular statute,” he said in a prepared statement, a reference to the lion’s share of the funding coming from the National Education Association and Stand for Children. “They’d have to instead amend the Arizona Constitution, which the proponents failed to do.” 

But David Lujan, one of the organizers of the initiative, said he was disappointed that the justices essentially punted the issue to Hannah. But he said there may still be options to save the tax and the funding.

Lujan pointed out that lawmakers are empowered to override that constitutional spending limit. And he said there will be pressure on them to do that next year because an exemption from that limit fr a previous ballot measure will expire.

Thursday’s ruling wasn’t a total victory for the business interests and their GOP allies. 

The court rejected their arguments that voters lack the legal authority to impose that income tax surcharge. Opponents of Proposition 208 had argued only the legislature can do that. 

And the justices were no more impressed by their contention that even if voters can raise their own taxes, such measures have to be approved by a two-thirds margin, which this did not get. Brutinel said that restriction applies only to the legislature itself. 

While the tax officially took effect at the beginning of the year, it is unlikely that much, if any, already has been collected. That’s because most people don’t pay their 2021 income taxes until April 2022. 

And while high-income earners are supposed to make payments of “estimated taxes” throughout the year, there is no penalty if they make the same payments as the prior year – before Proposition 208 took effect. 

Editor’s note: This story has been revised to include more information than the original version. 

 

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