Several Arizona legislators along with the Free Enterprise Club and the Goldwater Institute are celebrating a major court victory for Arizona taxpayers after a Maricopa County Superior Court judge struck down the largest tax hike in state history on Friday.
Today, @maricopacounty Superior Court Judge John Hannah ruled against Prop 208, determining that the $$ raised from the tax would exceed the constitutional spending limit for education.
Judge John Hannah’s ruling bars enforcement of Proposition 208, which imposed a significant income tax surcharge on small-business owners and individuals making over $250,000 a year. Prop 208, also called the Invest in Education Act, was narrowly passed by voters in November 2020 and was immediately challenged in court on multiple grounds, including a conflict with Arizona’s Constitution.
Governor Doug Ducey called Hannah’s ruling “a win for Arizona taxpayers,” adding that it is marks “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.”
The Goldwater Institute-sponsored lawsuit was filed in February 2021 on behalf of numerous taxpayers, small business owners, and legislators. Last summer, the Arizona Supreme Court agreed with the plaintiffs’ argument that the surcharge taxes from Prop 208 were considered “local revenues” subject to spending limits under the state’s Constitution. The Justices sent the case back Hannah for a determination of whether Prop 208’s Local Revenues Provision runs afoul of the Constitution’s Education Expenditure Clause by violating that limitation. In a decision today, the judge agreed that Proposition 208 violated the Constitution.
“This Court understands the remand order as a direction to declare Proposition 208 unconstitutional in its entirety, and to enjoin its operation permanently, if the Court finds as a fact that the annual education spending limits imposed by the Arizona Constitution will prevent Arizona’s public schools from spending a ‘material’ amount of Proposition 208 tax revenue in 2023,” Hannah wrote in his ruling. “On that basis, the Court is obligated to strike down Proposition 208.”
Reaction to the ruling came swiftly, despite a possibility the Justices may be asked by the losing parties to review Hannah’s order later this year.
“While we expect the ruling may be appealed, we are confident the Arizona Supreme Court will find 208 unconstitutional, as they did last year. Arizona is – and will remain – a state that knows how to prioritize education while keeping taxes low and attracting jobs,” Gov. Ducey said.
Senate President Karen Fann, one of the plaintiffs, called Friday’s ruling “a major victory” against an initiative she said misled voters by trying to get the tax-and-spend hike around the Constitution.
“Out-of-state special interests tried to deceive our voters,” Fann said after Hannah released his ruling. “We are thrilled that this job-killing tax hike won’t go into effect.”
Many attributed the success of the lawsuit to the work of the Goldwater Institute which pointed out concerns with Prop 208’s constitutionality well before Election Day in 2020.
“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,” said Victor Riches, President and CEO of the Goldwater Institute.
The Arizona Secretary of State’s Office announced last week that enough valid signatures were turned in to let voters decide next year whether they support substantially reduced income tax rates set to take effect in 2022 or want to maintain the current higher rates.
But whether voters can actually weigh in on such issues in the November 2022 General Election is something the Arizona Supreme Court will likely be asked to decide.
In June, Gov. Doug Ducey signed an overhaul of Arizona’s income tax system as part of the $12.8 billion budget packet approved by the Legislature. It changes the state’s current five-tier income tax rates -from 2.59 percent up to a 4.5 percent base- to a two-tier plan with lower rates in 2022.
The legislation which created the new tax structure could even trigger a single 2.5 percent tax rate as soon as 2023 if Arizona’s revenues meet certain levels.
The flat tax system also addresses the impacts of Prop 208, which voters narrowly passed last year. Known as the Invest in Education Act, Prop 208 imposed an additional 3.5 percent tax surcharge effective 2021 on any income above $250,000 for a single filers or $500,000 for joint filers. The surcharge is on top of the current 4.5 percent base rate.
The revenue from the surcharge is slated to be used for public K-12 schools, but it does so by kicking Arizona’s highest earners to an 8 percent income tax. This put businesses in the state at a competitive disadvantage with Texas and Nevada which have no income tax, while New Mexico has a top rate of 4.9 percent.
Because the 3.5 percent Prop 208 surcharge was put into law by voters, state lawmakers could not directly undo it. Instead, the new flat tax rate plan would top out at 4.5 percent by absorbing the 3.5 percent surcharge.
However, supporters of Invest in Ed, now known as Invest in Arizona, want to void the new tax rate law despite the fact all Arizonans would share in the projected $1 billion savings. The group is trying to kill the flat rate plan by utilizing a provision of the Arizona Constitution which gives citizens 90 days after the legislative sessions ends to attempt to refer new state laws for voter approval.
Last week Invest in Arizona successfully submitted enough valid petition signatures to get the matter on the ballot next November as Proposition 307. In response to the petition drive, Ducey’s spokesman has continued to champion the new income tax structure, which would ultimately be the lowest flat tax in the country if state revenue targets are met.
“It keeps Arizona competitive,” said C.J. Karamargin. “We are returning tax dollars to the citizens of Arizona.”
Whether new laws dealing with state revenues such as income taxes are eligible for voter referendum has never been ruled on by a state court.
A lawsuit by the Arizona Free Enterprise Club argues that the Arizona Constitution actually prohibits issues related to the support and maintenance of state government to be referred to the ballot. A decision by Judge Katherine Cooper of the Maricopa County Superior Court is expected any day.
Whichever side loses in Cooper’s court is expected to appeal, with the Arizona Supreme Court expected to hear the case eventually.
Another wrinkle in the tax saga is that the Arizona Supreme Court ruled earlier this year that Prop 208 can be challenged on the basis of the state’s constitutional spending limits for K-12 schools. The justices recently sent the matter back to the Maricopa County Superior Court for additional arguments although the case is expected to be back at the Arizona Supreme Court early next year.
Invest in Arizona, a campaign to have voters overturn three Senate bills via a ballot referendum, failed a signature review for at least one of their efforts in their three-prong approach: the ballot to overturn SB1783. The Secretary of State’s attorney, Spencer Sharff, shared this information during oral arguments Friday in the case Arizona Free Enterprise Club, et al. v. Katie Hobbs, et al. (CV2021-011491). The campaign reportedly turned in over 123,500 signatures, but only 100,300 were valid. Signature reviews for the other two are underway.
Invest in Arizona characterized SB1783 as a “direct attack” on Prop 208, the ballot initiative passed last year to accrue more educational funds by imposing an additional 3.5 percent surcharge on taxpayers with an annual income over $250,000 for those filing individually or $500,000 filing jointly.
“It gives wealthy individuals a new loophole to use to avoid paying taxes,” claimed Invest in Arizona.
A ruling is pending in the case, which named both Invest in Arizona and Secretary of State Katie Hobbs as defendants. The plaintiff, Arizona Free Enterprise Club, argued that Invest in Arizona’s referendum would violate the state constitution.
“The Arizona Constitution even provides that legislative actions ‘for the support and maintenance of the departments of state government and state institutions’ may not be the subject of a referendum,” asserted the group. “And as our complaint contends, these provisions ‘provide for, and directly relate to, the generation of revenues that are remitted to the general fund and appropriated to various agencies, departments and instrumentalities of the state government.’ That means they are not referable. It also means that [Hobbs] must refuse to accept for filing, verification, or certification any petition in support of these three referendums.”
As AZ Free News reported, out-of-state donors gave millions to Invest in Arizona. One of their principal donors, the National Education Association (NEA), donated over $2.4 million, $30,000 of which Invest in Arizona refunded. The NEA has come under fire by its state associations and the nation at large after it submitted a letter to the Biden Administration requesting parents and community members protesting or getting involved in school board operations be investigated for domestic terrorism.
Just days later, the Biden Administration heeded the NEA’s request. Attorney General Merrick Garland issued a memo directing the FBI and local agencies to investigate the NEA’s claims. It appears that the NEA was comfortable with reaching out for Garland’s assistance: they submitted formal letters of endorsement on behalf of his appointment earlier this year.
“This is a complex issue, it’s a systemic issue, and so [Attorney General Merrick Garland] wants to bring the best thinking in terms of how to resolve it,” says NEA President @BeckyPringle
In August, the Arizona Supreme Court found that the majority of Prop 208 was “likely unconstitutional,” but remanded the case to a lower court. The justices determined that the constitutionality of the proposition wouldn’t be evident until revenue is accrued: that is, if Prop 208 exceeds the state constitution’s limits on education spending. If the trial court agrees with the supreme court’s assessment, then Prop 208 would be struck down.
Corinne Murdock is a reporter for AZ Free News. Follow her latest on Twitter, or email tips to corinne@azfreenews.com.
Invest in Arizona wants you to believe that they ran a grassroots campaign. But that notion is absurd. And you don’t need to look very far to find out.
Recently, the political committee filed its campaign finance report. And lo and behold, what does it show? That the National Education Association (NEA) and Stand for Children, two out-of-state special interest groups, purchased the referendum against historic tax cuts that Republicans delivered earlier this year.
Just look at the numbers. In Quarter 3, Invest in Arizona received just over $16,000 from individual donors. Now, compare that to the nearly $2.4 million it received from the NEA and the more than $2.3 million it received in cash, goods, and services from Stand for Children.
That’s more than $4.5 million—basically their entire budget—with the overwhelming majority spent on gathering signatures.
So much for “grassroots,” eh?
Of course, Stand for Children is trying to claim that its money came from its Phoenix office. But these groups can’t be trusted…
Invest in Arizona – a referendum to reverse the tax cuts passed recently by the Arizona legislature that would negate Prop 208 – reported several million in out-of-state funds in their latest campaign finance report. The National Education Association (NEA) donated over $2.4 million, $30,000 of which Invest in Arizona refunded.
The second-largest source of funds, nearly $2.4 million, came from Stand for Children Arizona, the local chapter of the national education advocacy group, Stand for Children. Stand for Children’s Arizona chapter hasn’t always donated to Invest in Arizona. Up until last July, their national organization headquartered in Portland, Oregon was responsible for those million-dollar donations.
Together, the NEA and Stand for Children Arizona comprised the vast majority of Invest in Arizona’s funds. Individual contributions amounted to just over $16,600, while total funds were reported to be over $4.7 million.
AZ Free News inquired with Stand for Children Arizona about these recent donation patterns: specifically, whether these donations were furnished from their national organization to their local chapter. This was their response:
“Thank you for reaching out! Stand for Children Arizona has a long history supporting families in AZ,” stated Stand for Children Arizona spokesperson Carlos Alfaro. “Our support of Invest in AZ is one piece of that, as indicated by the donation of our 501c4 organization Stand for Children, Inc.”
A majority of the over-$4 million that Invest in Arizona raised went toward operating expenses – signature gathering to submit their two referendums. The top recipients, in order, were: Fieldworks LLC with nearly $4 million alone, Save Our Schools Arizona with $115,000, Arizona Asian American Native Hawaiian and Pacific Islander for Equity (AZ AANHPI For Equity) Coalition with $10,000, Fieldcorps LLC with $75,500, La Machine with $65,000, and Valley Interfaith Project with $29,000.
Invest in Arizona also spent $48,000 in polling from Lake Research, $5,000 for campaign consultancy from Strategies 360, and gave Valley Interfaith Project an additional $49,000 for text messaging outreach, field organizers and coordinators, outreach captains, and travel expenses.
Corinne Murdock is a reporter for AZ Free News. Follow her latest on Twitter, or email tips to corinne@azfreenews.com.
