(CN) – A new income tax approved by voters in November violates the state constitution and should be blocked, attorneys for a group of Republican lawmakers argued Tuesday before the Arizona Supreme Court.
The Invest in Education Act, known as Proposition 208 on the November ballot, imposes a tax surcharge of 3.5% on income over $250,000 for individuals or $500,000 for couples filing joint tax returns. It passed via a voter initiative and took effect Jan. 1.
But a group of nonprofits and Republican lawmakers sued, arguing the tax violates constitutional limits on increases in school district funding based on previous years, student population changes, and cost of living increases. Only the Legislature can override this limit, which is set annually by a state commission.
The law “fails out of the gate,” because funds it generates are not grants under state law, which would exempt it from the spending limits, said plaintiffs' attorney Dominic Draye.
“No court and no ordinary user of the English language would think that a dedicated revenue stream with mandatory spending, no qualification, no discretion, no application would qualify as a grant, gift, aid or contribution,” Draye told the en banc court.
Chief Justice Robert M. Brutinel asked whether some of the money generated by the tax could be spent, as long as it doesn’t push districts over spending caps. Some of the taxes raised could be spent right away, Draye said. The rest, aside from 12% that would be legitimate grants, can’t.
“I’ll agree that there is $100 million (that could be spent), and you’ve got another 12% of this that is a legitimate grant. OK, take that out. We’re still $600 million over,” Draye said of the estimated $800 million the tax would raise annually.
Justice Clint Bolick asked whether any parts of the law could be separated and preserved. Draye said no, because the law takes all of the money from one pot.
“If it had a tax for charter schools, for example, or a tax for the portion of Prop 208 that is a legitimate grant program, those taxes might be salvageable,” he said.
Attorney Andy Gaona argued the case for the defendants alongside Brian Bergin of the Arizona Department of Revenue. After Bolick asked whether the exemption to funding limits applies only to private funds, not public, Gaona said the wording that limits school district funding is not entirely clear.
“I think what the court is confronting and what the parties have been arguing about is, ‘What is the most reasonable interpretation of that statute?’” Gaona said.
The state’s interpretation is that public entities can grant money to districts in excess of spending limits, he said.
Even if the interpretation is that the money in excess of spending limits can’t be spent, there is a remedy available. The legislature decides year-to-year whether to override the limits, Gaona said.
Justices Bolick and Bill Montgomery questioned the accumulation of hundreds of million of dollars in school district accounts that couldn’t be spent. Not so, countered Gaona.
“We know right off the bat that 30% won’t be subject to the expenditure cap. What happens after that depends year-to-year,” when the Legislature decides on a potential spending cap override, he said.
Plaintiffs in the lawsuit include state Senators Karen Fann, David Gowan, and Vince Leach; state Representatives Rusty 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.
The court gave no indication when it might rule.
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