Proponent tells court wealth tax would provide education 'grants' exempt from state cap

PHOENIX — The fate of a tax on the rich to help fund education could come down to whether the Arizona Supreme Court believes the money raised will provide “grants’’ to schools.

During a hourlong argument Tuesday, Andy Gaona, representing the organization that crafted Proposition 208, told the justices the dollars the new tax would raise are earmarked for special purposes. These range from teacher salaries to funding career and technical education programs.

That, he said, makes it different from the basic aid given to schools each year by the state and any dollars they raise locally, all of which districts are free to allocate as they wish.

What makes that crucial is the Arizona Constitution puts a cap on how much can be spent on education each year. And even Gaona admits the $800 million or more that the tax will raise is likely to exceed that cap.

But if the new dollars are considered grants, as he contends, those are specifically exempt from the limit. And that, he told the court, makes the levy legal.

With some of the justices questioning that claim, Gaona had two fallback positions.

First, he pointed out that the constitution allows lawmakers every year, on a two-thirds vote, to let schools exceed that cap. And Gaona said the court should not void the voter-approved measure before giving legislators a chance to have that vote and honor the will of the people.

And if the court wouldn’t buy that argument, he said that about a third of the money raised with the levy still could be spent without bumping into that cap. So he told the justices they should leave the levy in place.

All that drew a skeptical response from Justice Bill Montgomery who pointed out the measure was promoted based on a promise there would be additional dollars flowing into education.

“Weren’t voters then told something that can’t happen?” he asked.

And Justice Clint Bolick pointed out that the full tax would still be collected, “regardless of how much of the money can or can’t be spent’’ if the court accepts Gaona’s argument that the levy should be upheld. That, he suggested, made no sense.

Hanging in the balance is a 3.5% surcharge being placed on the incomes of individuals whose income is higher than $250,000 a year, or $500,000 for married couples filing jointly.

Voters narrowly approved the measure despite stiff opposition from the business community. Now some of those same interests have combined with Republican legislators who also opposed the initiative to try to have it declared unconstitutional.

One claim by foes is that a voter-approved constitutional provision requiring a two-thirds vote by the Legislature for new taxes also applies to taxes sought by voters at the ballot box.

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“This is the people acting in their capacity as amenders to the constitution to bind themselves so that bare majorities can’t grow the size of government and impose new taxes,’’ said Dominic Draye, representing the challengers. That argument was rejected earlier this year by a trial court judge who said voters never intended to tie their own hands but only those of legislators.

The potentially stronger argument for foes goes to that constitutional question of whether the voters, in enacting a law enacting a new tax surcharge, have run afoul of the constitutional spending cap.

“Proposition 208 is a statutory initiative that needed to be a constitutional amendment,’’ Draye told the justices. And he said proponents can’t simply declare that the measure’s tax hike is exempt from what’s in the Arizona Constitution.

What that leaves, Draye said, is that claim that the new money is a grant or gift to schools and therefore specifically exempt from that spending cap.

“But 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 applications, would qualify as a grant, gift, aid or contribution,’’ he said.

Justice Ann Scott Timmer said even if that is true — a point she is not conceding — there is an escape clause. That is the ability of the legislature, on an annual basis, to override that spending cap to allow the will of the voters to be enacted and the money collected to be spent.

Draye conceded nothing, saying even that exemption provision itself is unconstitutional.

But the issue goes beyond that.

He said the measure was sold to voters based on the premise that the Legislature was failing to properly fund schools, which is why they needed to enact this new levy to boost the available dollars. Now, Draye said, supporters of the levy are arguing that the measure should be declared constitutional because those very same legislators — the ones who proponents told voters weren’t providing enough cash for education — could, if they wanted, authorize an override.

“That’s not the bargain that was presented to voters,’’ he said. “All of the ballot materials were oriented toward the ability to spend $827 million right now on education.’’

Gaona, however, said the court should not assume that lawmakers, faced with the prospects of all those new dollars coming in, will not honor the will of the voters and approve an override to allow the cash to be spent as laid out in Prop. 208.

He said the actual constitutional limit won’t be known until May 2023. And by that time, Gaona said, the makeup of the Legislature will be different, not only because of the 2022 election but because the lines for the state’s 30 legislative districts will be redrawn.

If the court leaves the levy intact, that could provide new impetus for a proposal by Sen. J.D. Mesnard, R-Chandler, to help some people escape paying the new levy. His measure would create an entirely new 4.5% tax category for certain small businesses, a category that would not be subject to the 3.5% surcharge because it did not exist when Prop. 208 was approved last year.

The justices did not say when they will rule.