ARIZONA SUPREME COURT RULES ON PROP. 208

Appellate and Tax Update

Litigation over the Invest in Education initiative, commonly referred to as Prop. 208, has been in the news recently—especially with last Thursday’s decision from the Arizona Supreme Court in Fann v. State of Arizona.  Here’s what you need to know about the Court’s decision and what to expect about Prop. 208’s future.

Background

Prop. 208 created a 3.5% income tax surcharge on income above $250,000 (single filing) or $500,000 (joint filing).  The revenue from the 3.5% income tax surcharge is required to be spent on teacher and classroom support staff salaries, teacher mentoring and retention programs, career and technical education programs, and the Arizona Teachers Academy.  In November 2020, 51.75% of Arizona voters approved Prop. 208. 

Several state senators later challenged the enforcement of Prop. 208, arguing that its revenues are “local revenues” subject to the constitutional expenditure limit on K-12 school district funding in article IX, section 21 of the Arizona Constitution and only the legislature can enact new taxes and only with a 2/3 majority under article IX, section 22 of the Arizona Constitution. 

The Arizona Supreme Court’s Decision

In a 6-1 opinion authored by Chief Justice Brutinel, the Supreme Court concluded that Prop. 208’s revenues are subject to the expenditure limit on K-12 school district funding received from tax disbursements and, if the revenues generated by Prop. 208 would exceed what could be spent under the expenditure limit, Prop. 208 would be invalid in its entirety.  Arizona voters approved that expenditure limit in 1980 as a means of curbing increasing taxes assessed on Arizonans. 

The Court further rejected the state senators’ argument that only the legislature can enact new taxes, holding that the Arizona Constitution does not prohibit voter initiatives to raise taxes.  The Court also held that the Arizona Constitution’s 2/3 majority requirement only applied to legislative tax increases—not voter-initiated ones. 

Going Forward

Although the Court held that Prop. 208’s revenues were subject to the Arizona Constitution’s expenditure limit, the Court could not, however, determine at this preliminary stage of the case the extent to which, if any, Prop. 208’s funding will exceed the constitutional expenditure limitation.  For that reason, the Court declined to enjoin the imposition of the tax at this point and remanded the case back to the trial court to determine whether revenues from Prop. 208 will in fact exceed the expenditure limit. 

That said, the Court foreshadowed Prop. 208’s almost-certain demise.  The Court acknowledged Superintendent of Public Instruction Hoffman’s letter to the state senator plaintiffs, which explained that the “current expenditures for fiscal year 2020–2021 were $6,165,430,899 and the expenditure limitation was $6,309,587,438,” leaving just a $144,156,539 gap between school expenditures and their expenditure limit.  As such, Prop. 208’s projected $827 million in revenues will “far outpace its permissible spending,” which suggests that Prop. 208 “will produce far more revenue than it can constitutionally spend.” 

We anticipate that the superior court will issue its ruling on whether Prop. 208 does in fact exceed the expenditure limit in the coming months.