The Arizona Supreme Court will hear an expedited constitutional challenge Tuesday to a new voter-approved tax on high-earning Arizonans that was designed to boost school funding.
The justices will hear arguments from attorneys representing the Republican-controlled state Legislature and a group of businesses that say the new tax required a two-thirds vote in November’s election to pass, as tax increases imposed by the Legislature do. The court also will consider whether the new money, doled out to school districts and charter schools in grants, will put schools over a legal spending limit.
Proponents of the Invest in Education Act, passed as Proposition 208 with nearly 52% of the vote, say voter initiatives clearly do not require a two-thirds majority to pass. And they say distributing the money through grants to schools is often used to avoid triggering the spending limit.
A trial court judge sided with the initiative’s proponents when refusing to issue a preliminary injunction blocking the tax in February. In addition to the two-thirds vote requirement and the spending limit argument, opponents also said the measure does not have its own funding source to cover implementation costs as the constitution requires and that a provision that bars lawmakers from using the new tax to replace other school funding was illegal.
Maricopa County Superior Court Judge John Hannah Jr. rejected all of these arguments, finding it was unlikely that opponents of Proposition 208 would prevail. Opponents then asked the state Supreme Court to take the case even though it is early in the legal process.
Proposition 208 imposes a 3.5% tax surcharge on income above $250,000 for individuals or above $500,000 for couples. Supporters say it could raise about $940 million a year for schools, although the Legislature’s budget analysts estimate it will bring in $827 million a year.
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.
Republican Gov. Doug Ducey opposed the measure and told a business group last month that he’s hoping that either the Supreme Court blocks the measure or the Legislature comes up with a way to sidestep the new tax.
There are multiple tracks the Legislature could take, and one that eliminates about a third of the estimated $827 million a year in new revenue has already passed the Senate. That measure, by GOP Sen. J.D. Mesnard, creates a new tax code section just for small businesses, setting the top tax rate at 4.5% but avoiding the new 3.5% surcharge.
Arizona small business income is currently taxed on personal tax returns. Opponents tried to persuade voters the new tax would hurt small businesses.