Judge deals fatal blow to Arizona's Proposition 208, ending 2-year battle over K-12 funding
Proposition 208, the voter-approved tax increase for education, is officially dead.
A ruling Friday from Maricopa County Superior Court Judge John Hannah closed the nearly two-year controversy swirling around the measure, which boosted the income-tax rate for high income earners by 3.5 percentage points, with the money directed primarily to salary increases for teachers and school support personnel.
"(T)he Court is obligated to strike down Proposition 208," Hannah wrote in a nine-page ruling, citing the guidelines given him by the Arizona Supreme Court. However, he left open an avenue for Invest in Arizona, the organization that brought the measure to the ballot, to appeal his finding to the state Supreme Court.
The high court last August found the proposition was mostly unconstitutional, but left it to the lower court to determine if the money it would raise would exceed the constitutional spending limit for education. Hannah determined that it would.
Voters in November 2020 approved Proposition 208 with 51.7% of the vote. It imposed a 3.5% surcharge on taxable incomes over $250,000 for single filers and $500,000 for joint filers.
The tax was set to be collected when people and businesses filed their 2021 taxes, due next month. Projections were the tax could raise between $827 million to $1 billion per year, but its proponents estimated a $289 million collection in its first year.
The state Department of Revenue will be issuing guidance soon on how taxpayers should handle their filings, given Friday's action.
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Reactions range from glee to gloom
The ruling drew predictable reactions from Proposition 208 opponents, who viewed it as a crippling tax increase, and supporters, who saw the measure as a sustainable source of public school support in the face of what they view as stingy state funding.
Gov. Doug Ducey, legislative Republicans and the Goldwater Institute cheered Hannah's ruling.
"This ruling is a win for Arizona taxpayers. It’s another step in undoing the damage of Prop. 208 and making sure we continue to benefit from having the lowest flat income tax rate in the nation," Ducey said in a prepared statement.
The Goldwater Institute was among the groups challenging the measure in court.
"Today's decision puts a nail in the coffin of the unconstitutional, job-killing Proposition 208, and it cements Arizona’s position as the national leader in lower taxes and building a stronger economy,” Victor Riches, the institute's president and CEO, said in a statement.
In a post on Twitter, state Schools Superintendent Kathy Hoffman lamented the ruling as a blow to schools.
"How will we ensure our students have high-quality educators at the front of the classroom?" Hoffman said. "How will we remain competitive when our neighboring states have increased teacher pay?"
She urged Ducey and lawmakers to take action to answer these questions, noting that's what parents care about.
The Invest in Arizona coalition, which brought the measure to the 2020 ballot, aimed its criticism at the state Supreme Court, which created the roadmap that led to Hannah's decision. The court prioritized Republican lawmakers over Arizona citizens, the group said in a statement.
Rebecca Gau, CEO of Stand for Children, noted the state has resources to do what Proposition 208 cannot now do: Boost school funding.
“We still have an opportunity," she said. "We have a $1 billion budget surplus, even with the tax cut they (lawmakers) want to get through."
That surplus would go a long way, she said, toward alleviating the three biggest challenges facing Arizona public schools: low teacher pay, which is fueling a teacher shortage, high class sizes and the worst counselor-to-student ratio in the nation.
Stand for Children is one of the partners in Invest in Ed, along with the Arizona Children's Action Alliance, the Arizona Education Association and other community groups.
Gau said she did find some solace in Hannah's suggestion that his ruling could be appealed on the grounds that the Supreme Court lacked a fully developed record on which to base its decision that Proposition 208 revenues would exceed the constitutional spending cap on schools. Instead, Hannah wrote, the high court dealt with that issue in the abstract.
Gau said she and partners are considering an appeal, but made no commitment.
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More room for tax cuts?
The ballot measure was controversial from the start because it raised the top tax rate to 8%, from 4.5%. Its enactment set off a flurry of legal and political actions, leading to last summer's Supreme Court ruling.
Republican legislative leaders filed suit soon after the 2020 election, arguing the measure was unconstitutional because it classified the dollars it would raise as "grants" exempt from the spending limit. They argued that was an unconstitutional dodge around the spending cap.
Concern that the higher tax rate would cramp business expansion fueled legislative efforts to get around the 3.5% surcharge, if it were to remain in place. Last spring, lawmakers created a new tax category for small business owners as well as some higher-income earners. That category effectively exempted them from the higher 8% rate.
Other legislative moves were designed to blunt the impact of the tax increase and helped fuel the drive to enact a flat income-tax rate. Parts of the flat tax legislation were referred to this fall's ballot for voter approval.
House Majority Leader Ben Toma, R-Peoria said Hannah's ruling gives lawmakers certainty about the the tax picture as they work on a state budget and a potentially even larger tax cut than they enacted last year. Portions of that measure were referred to the ballot, but GOP lawmakers are thinking about repealing the underlying policy and trying again with a new flat income-tax rate.
The current state budget set aside about $400 million to hold harmless taxpayers who might have had the higher Proposition 208 rate, Toma said. That money now is freed up for other uses, including tax reduction.
A message from the judge
In his ruling, Hannah said he had little choice but to block Proposition 208 from taking effect, given the guidance from the Supreme Court.
But he added his view that the court's August ruling made "a muddle of law and politics" and suggested the court might want to consider separating the topics if it receives an appeal from Invest in Ed.
The Supreme Court ruling, Hannah wrote, exempts the Legislature from any political duty to treat decisions made at the ballot as co-equal to decisions lawmakers make when they pass bills.
"If legislators can find a legal flaw in a measure they disagree with as a matter of policy, their incentive is now not to fix it but instead to exploit it," Hannah wrote.
Proposition 208 was the second time education advocates had targeted the income tax for a sustainable funding source for the public school system. An earlier effort had failed to qualify for the ballot.
Reach the reporter at [email protected] and follow her on Twitter @maryjpitzl.
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This article originally appeared on Arizona Republic: Proposition 208 tax increase for Arizona's K-12 schools struck down
