Sunday, August 22, 2021
The Arizona Supreme Court ruled that an income tax surcharge on high-income earners, the proceeds of which go to schools, is subject to the education expenditure caps in the state constitutional Education Expenditure Clause. The ruling will likely sharply limit the amount of tax-surcharge revenue that can go to the schools, sharply limiting the voter initiative that created the mechanism in the first place.
The case, Fann v. State of Arizona, tests the constitutionality of Prop 208, a 2020 voter initiative that imposes an income tax surcharge on high-income earners to provide direct funding to the schools. Prop 208 imposes a 3.5 percent surcharge on high-income earners, places those funds in a "student support and safety fund," and requires the fund to distribute the revenue to school districts and charter schools through "grants."
High-income earners sued, arguing that the provision violates the state constitutional Education Expenditure Clause on its face. This Clause, adopted by Arizona voters in 1980, sets an "aggregate expenditure limitation" for each Arizona school district. Put simply, it creates a cap on educational expenditures for each district. The provision contains an exception, however, for "grants, gifts, aid or contributions of any type except amounts received directly or indirectly in lieu of taxes received directly or indirectly from any private agency or organization, or any individual." The plaintiffs' challenge, therefore, raises the question whether Prop 208 is really a "grant" program.
The court ruled that it's not. "Considering the context of the Grant Exception, and in light of canons of construction, we conclude the more plausible reading of the Grant Exception is that the language 'received directly or indirectly from any private agency or organization, or any individual' modifies the entire sentence and limits the word 'grants' to private, non-governmental voluntary contributions." The court ruled that Prop 208 is facially unconstitutional insofar as it "incorrectly characterizes the allocated monies" to circumvent the Education Expenditure Clause and "to the extent allocated revenues exceed the expenditure limit set by the Education Expenditure Clause."
The court remanded the case to determine "whether such payments will in fact exceed the constitutional expenditure limitation." But it gave a clue as to how this'll all come out:
if the expenditure limit remains at current levels, Prop. 208's projected $827 million in revenues will far outpace its permissible spending, even accounting for Prop. 208 expenditures that are not subject to the expenditure limit. Furthermore, the EEC projects that the expenditure limit amount will decrease by 4.6%, or approximately $300,000,000. These facts strongly suggest that Prop. 208 will produce far more revenue than it can constitutionally spend.
The court also held that Prop 208 did not violate the state constitutional Tax Enactment Clause. That Clause says that an "Act that provides for a net increase in state revenues" has to get a super-majority in each house and the governor's signature to become effective. The court said that the Clause doesn't apply to voter initiatives like Prop 208, however, because a voter initiative isn't an "Act": the legislature enacts "Acts," while voter initiatives are "measures."