Is Prop. 208 destined to be struck down? Officials react to Supreme Court opinion

(The Center Square) – Arizona officials and organizations fighting on both sides of a tax on high-earners and small businesses are reacting to a Supreme Court opinion that one justice said leaves the initiative’s fate all but sealed.

Arizona Supreme Court justices didn’t summarily nullify Proposition 208, a 3.5% tax on income over $250,000 for single filers and small businesses that file as pass-through entities to better-fund schools. Still, it did shoot down a crucial portion of the measure that classifies the hundreds of millions of dollars in expected income as “grants.” Without that description, the tax revenue is likely subject to the Arizona Constitution’s cap on school spending.

The challenge – brought forth by Senate President Karen Fann, R-Prescott, other Republican lawmakers and taxpayer advocates – now heads back to a lower court with specific guide rails for consideration.

In placing the limitations on Prop. 208 and requiring it to be viewed as a whole initiative rather than severable, Vice Chief Justice Ann Timmer said the court is “certainly dooming the measure.”

Timmer was the only member to dissent, albeit partially.

Gov. Doug Ducey called the opinion “a very positive one for the state and for taxpayers.”

Fann said in a news release Prop. 208’s attempt to classify the tax as a grant was nothing more than a “gimmick” that she’s pleased the court saw through.

“I expect the Superior Court to find clear evidence that Prop. 208 revenues do exceed the expenditure limit, and because the court also ruled the non-revenue provisions are not separately workable, the entire proposition will be thrown out,” Fann said.

The Invest in Education Coalition, which changed its name to Invest in Arizona after intervening in the lawsuit, is demanding Ducey call a special session to remove the cap in education spending.

“This is a punch in the gut to 1.1 million students and their families, and 55,000 hardworking Arizona educators – and a slap in the face to the 1.7 million voters that voted for this funding to flow to schools. They voted for it to be a grant, and to be severable,” said Rebecca Gau, executive director of Stand for Children Arizona. “

Those allied with Fann in the lawsuit said the ruling eventually will relieve Arizona taxpayers from the worry of a large new tax.

“This is great news for the state of Arizona and taxpayers,” said Scot Mussi, president and executive director of the Arizona Free Enterprise Club. “The drafters of this initiative ignored the advice of Legislative Council and as a result pushed an unconstitutional tax hike on Arizona families, taxpayers, and small businesses.”

Pass-through businesses, often smaller than those filing as corporations, would have been subject to the tax, something National Federation of Independent Business Arizona director Chad Heinrich had warned about.

“Arizona’s small-business owners are pleased with today’s decision from the Arizona Supreme Court on Proposition 208,” he said Thursday. “The out-of-state special interest groups that financed the campaign didn’t mind trampling on Arizona’s small businesses, but the state constitution’s expenditure limit appears to be holding as a backstop.”

Save our Schools Arizona, a nonprofit that was instrumental in the initiative’s success at the polls, said the opinion is proof Arizonans’ votes don’t matter.

“… by ruling that Prop. 208 revenues violate the Revenue Expenditure Clause, the Supreme Court discounted the votes of 1.7 million Arizona voters, sending the case back to a lower court and most likely setting the stage for a yearly loss of $1 billion for Arizona kids and classrooms.”

The Arizona Chamber of Commerce and Industry said it anticipates the tax will be shot down in a lower court, citing out-of-state interests that were the heart of the effort.

“We are gratified that the Arizona Supreme Court affirmed that out-of-state special interest groups can’t make an end-run around our state constitution through passage of a regular statute – they’d have to instead amend the Arizona Constitution, which the proponents failed to do,” chamber President Danny Seiden said.

Joe Thomas, president of the Arizona Education Association, said the decision ultimately will affect the state’s economic well-being.

“Today’s decision not only negates the will of the voters to raise Arizona’s school spending from among the lowest in the nation, but without legislative action it jeopardizes existing Arizona school revenue sources like Prop 301 and would lead to permanently underfunded Arizona schools – and a weaker Arizona economy.”

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