The Arizona Supreme Court is set to release its decision Thursday in a constitutional challenge to a new tax on high earners that was designed to increase school funding and approved by the state’s voters in November.
The highly-anticipated decision could be devastating for education proponents who worked for years to get the tax increase on the ballot after Republican lawmakers did not provide the school funding they believed was needed. The Supreme Court threw a version of the initiative off the ballot in 2018 after ruling it was poorly written, but backers came back with a revised version last year, winning a slim voter approval.
The court is considering whether Proposition 208 required a 2/3 vote to be enacted, like tax increases considered by the Legislature. It also is deciding whether the state constitution’s education spending cap makes it illegal to spend the more than $800 million per year the tax was expected to raise for K-12 schools by boosting income taxes on high-earning Arizona residents.
The challenge was filed by Republican legislative leaders and business groups, who argue the new tax would damage the economy by discouraging the wealthy from living or investing in the state. Republican Gov. Doug Ducey also is fiercely opposed and has said he hopes the Supreme Court finds it unconstitutional. Ducey has appointed five of the court’s seven members.
The Legislature gutted parts of the tax in the session that ended in June, but backers of the Invest in Education Act are collecting signatures to block the new tax cuts and asking voters to repeal them.
A lower court refused to issue a preliminary injunction requested by opponents, rejecting the argument that a supermajority vote was required. The judge refused to block the tax based on the spending cap, saying it would require additional hearings to determine if the new revenue would exceed the cap.
The high court, however, appeared focused on the spending limit issue during oral arguments held in April.
Justice Bill Montgomery noted that about $600 million of the new cash might not be able to be spent if the court finds it was not legal for an exemption in the initiative to dole out the money as grants. He noted that the Legislature had to seek a constitutional amendment to exempt a 2000 tax increase for education from the spending limit.
“I’m looking at the history that we have here and a previous effort to raise taxes for education and people realizing after the fact – oops – you can’t exempt a tax for education spending from the expenditure limit,” Montgomery said to the attorney representing the group that backed the measure.
Proponents argued that distributing the money through grants to schools is often used to avoid triggering the spending limit. They also plan to argue in the lower court that the spending limit is now set artificially low and that resetting it to its proper place will allow all of the initiative’s new tax to be spent even if the grant provision is found to be unconstitutional.
Proposition 208 imposes a 3.5% tax surcharge on income above $250,000 for individuals or above $500,000 for couples. The Legislature’s budget analysts estimated it would bring in $836 million a year.
But the Legislature enacted a new tax category that would exempt small business income now taxed on personal returns from the Proposition 208 tax. If that stands, it will cut about $292 million from the new tax revenue schools would get under the initiative.
The measure was an outgrowth of a 2018 teacher strike that resulted in educators getting a 20% pay raise over three years. But the state did not meet their other demands, including that the Legislature boost other school spending and enact no more tax cuts until Arizona’s per-student school spending reaches the national average.
The state is near the bottom nationally in the amount of money it spends on schools.
