Arizonans have no constitutional right to block lawmakers from cutting – or even eliminating – taxes, the Arizona Supreme Court ruled Friday.
In an 18-page decision, the majority of the court acknowledged the framers of the Arizona Constitution gave broad powers to voters to not only create their own laws but to review – and veto – those approved by elected legislators.
But Justice John Lopez, writing for himself and four others, said that right does not extend to measures for the “support and maintenance” of the state.
Attorneys for Invest in Arizona never really contested the idea that a referendum could not challenge a measure to increase taxes.
That’s because such a move, if backers get sufficient signatures, would hold up enactment until a public vote. And that could deny government the dollars needed to operate.
In this case, however, attorney Andy Gaona, representing Invest in Arizona, pointed out to the court that the measure approved in 2021 by the Republican-controlled legislature actually cut tax revenues by $1.9 million, and in a way to largely benefit the wealthiest.
Put another way, he told the justices the only thing that his organization sought to send to the ballot for voter review was the desire of GOP lawmakers and Gov. Doug Ducey, who signed the measure, to forego revenues that otherwise would flow into state coffers. Gaona said holding up the tax cut plan and giving the public a chance to review it – including who benefits – would not have affected the ability of state agencies to do their jobs.
Friday’s ruling, however, shows the majority were unwilling to constrain lawmakers that way.
Until last year, Arizona had a “progressive” income tax, with the rate tied to earnings.
So, anyone with a taxable income up to $26,500 a year paid a tax rate of 2.59%, with the earnings number doubled for married couples filing jointly. That rate increases in steps, to the point where taxable earnings on individual earnings above $159,000 were taxed at 4.5%.
The law imposed a single 2.5% tax rate on all incomes beginning in 2025. Legislative budget staffers peg the revenue loss at $1.9 billion a year.
Ducey has repeatedly sought to portray the measure as providing a tax cut of about $300 a year for the “average Arizonan.”
But an analysis of the package by legislative budget staffers puts the annual savings for someone making between $25,000 and $30,000 a year at $11. That increases to $96 for those in the $50,000 to $75,000 taxable income range.
At the other extreme, taxpayers with income of between $250,000 and $500,000 would see an average $3,071 reduction in what they owe. And that increases to more than $7,300 for those earning from $500,000 to $1 million.
Invest in Arizona, the successor to the group that got voters in November 2020 to approve Proposition 208, an income tax surcharge on the wealthy, gathered the necessary signatures on petitions to put the measure on hold until votes can decide whether to ratify or reject it.
That led to a legal challenge by the business-oriented Free Enterprise Club, citing that “support and maintenance” provision in the constitution – the one the majority accepted.
David Lujan, director of the Arizona Center for Economic Progress, one of the organizers of the petition drive, said the ruling is disappointing.
“The income tax cuts passed by the legislature last year will have a devastating impact on our state’s future,” he told Capitol Media Services. And then, Lujan said, there’s the analysis that those cuts “disproportionately benefit only the richest 5%.”
He also said the permanent reduction will make it “extremely difficult to adequately fund education or other critical state needs.”
But the problem is even more complex than that.
Theoretically speaking, future lawmakers could undo the tax cuts if collections do not keep pace with expenses.
Only thing is, a separate constitutional provision says it takes a two-thirds vote of both the House and Senate to enact new taxes or even to rescind prior reductions. And that has never happened.
“We chose to do the referendum because we knew that once tax cuts go into effect, there is little chance of reversing them later,” Lujan said.
Nothing in Friday’s ruling keeps any group from gathering signatures to put a tax hike on the ballot.
Even that, however, is not simple.
Voters did approve Proposition 208 in 2020 to impose a 3.5% surcharge on income of individuals making at least $250,000 a year, with the more than $900 million it was estimated to raise earmarked for K-12 education. But the Supreme Court voided the levy after concluding there was no legal way to spend the dollars collected without exceeding a constitutional limit on education spending.
And there’s something else.
Republican lawmakers put a measure on the November ballot that would put an additional hurdle in the path of those seeking voter-approved tax hikes. Proposition 132, if approved, would require any such future levy to be approved by 60% of those who vote, versus a simple majority.
“We are making it increasingly difficult to raise revenues in this state,” said Lujan. “And that is going to be a big problem when we have our next economic downturn.”
There is another possible workaround.
Invest in Arizona or some other group could ask voters to amend the section of the constitution the court said Friday denies voters the right to overrule changes in tax law.
Such a change would spell out that the public does get the last word when lawmakers are cutting taxes. But the earliest that could go to the ballot is 2024.
Not everyone on the high court agreed with Lopez.
Justice Bill Montgomery, writing for himself and Justice James Beene, said the history of the creation and early interpretation of the Arizona Constitution convinces them that the framers never intended to create a blanket immunity protecting legislatively approved tax measures from voter purview.
“A categorical exemption from the referendum is a categorical limitation on a power reserved by the people in (the constitution) that has no support in the historical record,” Montgomery wrote.
More to the point, he said that only those revenue measures “immediately necessary” for state operations cannot be referred to the ballot.
In this case, he said, there was no finding by lawmakers the tax cut was immediately necessary. And Montgomery noted it passed without a two-thirds vote of either the House or Senate, something that would have designated the tax cut as an emergency.
Friday’s ruling pleased Scot Mussi, president of the Free Enterprise Club, which successfully quashed a public vote.
“The referendum process was never meant to be used to block the legislature’s ability to appropriately budget and set tax rates,” he told Capitol Media Services. “Now the court has affirmed that position.”