(CN) — A new Arizona education tax on income above $250,000 is unconstitutional — if the cash it generates forces school district spending above state-set limits, the state Supreme Court ruled Thursday.
“However, because we cannot determine at this preliminary stage of the case the extent to which, if any, such funding will exceed the constitutional expenditure limitation, we decline to enjoin the imposition of the tax pending further proceedings in the trial court,” Chief Justice Robert M. Brutinel wrote in the 33-page opinion remanding the case back to Maricopa County Superior Court.
If the funding exceeds the limit, the entire measure must be struck down, Brutinel wrote.
Voters approved the Invest in Education Act in November with a 52% majority, creating a 3.5% surcharge on individual income over $250,000 or $500,000 for couples. Soon after the election was certified, a group of non-profits and Republican state lawmakers, including Senate President Karen Fann and House Speaker Rusty Bowers, sued to block the law.
The plaintiffs’ attorney, Dominic Draye, argued before the Supreme Court in April that the law violates annual limits on school spending set by a state commission and that only the Legislature can authorize spending of revenue above the limit.
Defendants argued that the money raised by the tax would be distributed as grants, which are exempt from the spending limit. The court disagreed.
“We hold that Prop. 208 revenues are not grants within the meaning of the grant exception and thus are local revenues,” Brutinel wrote, adding that the law is unconstitutional “to the extent allocated revenues exceed the expenditure limit.”
Fann issued a brief statement after the ruling.
“The proposition was built on a gimmick, that the tax increase was a ‘grant,’ and therefore not in violation of constitutional restrictions on spending. The Court saw through that and ruled it unconstitutional,” Fann said.
She expects the lower court to throw out the entire measure, as does Republican Governor Doug Ducey, who praised the ruling.
“There is a clear legal path to Prop 208 being knocked down entirely, it's only a matter of time,” he said.
State Treasurer Kimberly Yee, a 2022 GOP candidate for governor, urged the lower court to act fast and signaled her support for requiring a two-thirds vote for tax hikes passed via voter initiative — something the justices ruled is not required.
“The Arizona Legislature must refer to the 2022 ballot a measure making it clear that all tax hikes by initiative, referendum or the Legislature require a two-thirds vote at the ballot box,” Yee wrote in a statement.
Justices Clint Bolick, John R. Lopez IV, James Beene, and William Montgomery joined Brutinel in the majority, along with Judge Paul J. McMurdie, who was sitting in for Justice Andrew Gould, who recused himself to retire.
Vice Chief Justice Ann A. Scott Timmer dissented in part. In her dissenting opinion, she wrote that the entire measure need not be struck down and that funding up to the limit set by the state should be allowed.
“Would voters have enacted Prop. 208 had they known that a material amount of generated tax funds could languish in state accounts unless excess expenditures were authorized? Maybe, maybe not,” Timmer wrote.
Plaintiffs include state senators Fann, David Gowan, and Vince Leach; state representatives Bowers, Regina Cobb, John Kavanagh, and Steve Pierce; Yuma farm company owner Montie Lee; Phoenix physician Francis Surdakowski; and the nonprofits No on 208 and Arizona Free Enterprise Club.
Defendants include the state of Arizona; Arizona Department of Revenue; state Treasurer Kimberly Yee; and Revenue director Carlton Woodruff.
An attorney for the defendants referred questions to the Attorney General’s Office, which didn’t immediately respond to a request for comment. A spokesman for Bowers also did not respond.
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