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Judge weighs tax cuts challenge

 

A judge is questioning whether she has the right to keep Arizona voters from getting the last word on whether to cut taxes for the state’s most wealthy. 

The comments by Maricopa County Superior Court Judge Katherine Cooper came Friday as Kory Langhofer, attorney for the anti-tax Free Enterprise Club, argued that SB 1828, which would lower income taxes by $1.9 billion, cannot be referred to the ballot. He said the right of voters to second-guess decisions of the legislature do not extend to anything that affects state revenues. 

That contention was disputed by Andy Gaona, attorney for Invest in Arizona, which had gathered more than 215,000 signatures to put the $1.9 billion tax cut on hold until the November 2022 election when voters would get to ratify or reject the plan. 

He said the only thing that is off limits to referral are measures to raise needed revenues to run the government. In this case, Gaona told Cooper, a successful referendum would kill the tax cut and actually leave the state with more dollars than needed. 

Langhofer, however, said it isn’t that simple. He said there are multiple variables that have to be considered to determine what would be the long-term effects of changes in tax law, even one that cuts tax rates and appears initially to decrease state revenues. 

Kory Langhofer

“If you raise taxes too much, people will work less,” Langhofer said. Even the differences between the tax rates here and elsewhere, he said, affect the economy, and by extension, state tax revenues. 

“We all know people who’ve moved here from California partly for taxes,” Langhofer said. All those possibilities, he said, means Cooper is not free to determine that a referendum on the tax cuts won’t ultimately affect state operations. 

The judge, however, said it’s not that simple. Cooper said she must consider — and honor — the fact that the framers of the Arizona Constitution specifically gave voters the right to review — and, if appropriate, repeal — what the legislature enacted. 

She acknowledged there’s no question but that the constitution does give the legislature the power to enact laws, including changes to the tax structure. That’s what they did with SB1828 with the $1.9 billion in tax cuts. 

But she noted the constitutional language does not stop there. 

“But the people reserve the power to propose laws and amendments to the constitution, and to enact or reject the same at polls, independently of the legislature,” Cooper said, quoting that constitutional language verbatim. “And they also reserve, for use at their own option, the power to approve or reject at the polls, any act or item, section, or part of any act, of the legislature.” 

Cooper said she’s willing to accept, for discussion purposes, Langhofer’s contention that there is no way of knowing on a long-term basis whether a tax cut will help or hurt the state’s financial bottom line. But she said that still leaves that constitutional language spelling out the right of referral. 

“Aren’t we then supposed to err on the side of a broader construction of the referendum power and not the exception?” she asked. 

“I don’t think so, your honor,” Langhofer responded. 

Katherine Cooper

Cooper took the matter under advisement but did not say when she will rule. 

At issue is the tax cut plan approved earlier this year by the Republican-controlled legislature. 

An analysis by legislative budget staffers shows it would reduce state revenues by $1.9 billion a year by the time it is fully implemented in 2025. That compares with a current state budget of $12.9 billion. 

It would do that by scrapping the current system where tax rates are based on net taxable income. 

For individuals earning up to $26,500 a year and couples earning $53,000, that rate is 2.59%, There are several interim steps before the tax tables top off at 4.5% for individual earnings of more than 

$159,000; double that for married couples. 

SB1828 collapsed that into a flat 2.5% rate. 

Gaona told Cooper that the legal issues would be different if the petition drive was trying to stop the state from raising the money it needs to function. 

“We don’t want to impair or impede the operations or functioning of government, which makes sense when you think about why you would not want to withhold the general appropriations bill, for example,” he said. “Government would literally cease to a halt if the general appropriations bill were to be halted.” 

But that, Gaona said, is not what this petition drive seeks to refer to voters. 

Andy Gaona

“No matter how you cut this cookie, this measure will slash taxes, particularly for the highest income earners in our state,” he pointed out to Cooper. And that, he told Cooper, undermines any claim that holding up SB1828 until November 2022, when voters would get their say, would in any way harm state government. 

The public debate over SB1828 goes beyond just the fact it would cut $1.9 billion in revenues at a time that some people argue the state is not properly funding public schools and other basic needs. There’s also the question of who gets the relief. 

Gov. Doug Ducey has repeatedly sought to portray the measure as providing a tax cut of about $300 a year for the “average Arizonan.” But the details paint a different picture. 

An analysis of the tax cut by legislative budget staffers put the savings for someone making between $35,000 and $30,000 a year at $11. That increases to $96 for those in the $50,000 to $75,000 taxable income range. 

Bigger benefits kick in at higher income levels. 

Taxpayers with income of between $250,000 and $500,000 would see an average $3,071 reduction in what they owe each year according to the staff analysis. That increases to more than $7,300 annually for those earning from $500,000 to $1 million. 

Even if Cooper decides the referendum drive is constitutional, that doesn’t guarantee that the tax cut will be placed on hold until at least November 2022 or that voters will get the last word. The Free Enterprise Club already has filed a second lawsuit contending that many of the 215,787 signatures turned in are not valid. 

Among the allegations is that some paid circulators had not registered with the secretary of state or that they collected signatures before registering. There also are claims that some of the registration forms are missing required information like providing a full address. 

Any of those would disqualify all the signatures they collected, possibly leaving the petition drive short of the 118,823 valid signatures necessary to force a public vote. 

Other claims include issues of handwriting irregularities and missing dates or addresses of those who have signed the petitions. 

Cooper is not likely to consider those issues until she rules on the legality of the referendum and there is a chance for whoever loses to seek Supreme Court review. 

The Free Enterprise Club also had challenged a second referendum, this one imposing a cap on tax rates for those earning more than $250,000 a year as individuals and $500,000 for couples. That was designed as a work-around for the most wealthy from the effects of Proposition 208, a 2020 ballot measure which sought to impose a 3.5% surcharge on incomes above that level to fund public education. 

But the secretary of state’s office reported Friday that measure failed to get enough signatures. 

It probably did not matter, however, as the Arizona Supreme Court earlier this year effectively voided Proposition 208. 

 

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