Prop. 417: Confusion About a Badly Written Tax Bill Leads to the Challenging of Its Legality

by Timothy Sandefur
March 1, 2018

Pinal County voters may be puzzled about Proposition 417, the “transportation excise tax” approved by a slim margin at last November’s election—and they have a right to be confused. That proposition was so badly written that government officials charged with implementing it can’t make heads or tails of the new tax. Nevertheless, Pinal County has decided to begin collecting the tax on April 1, even though nobody knows exactly what the tax applies to.

The confusion began last fall when voters received publicity pamphlets saying the tax would be imposed on several different tax classifications—everything from restaurants to jet fuel—and that on retail sales, it would apply only to the first $10,000. Anything above that amount wouldn’t be taxed. County representatives told a state legislative committee that the reason for that cutoff was that car dealers and other powerful private interests would have opposed a tax on sales of big-ticket items.

But Arizona law doesn’t let counties draw lines like that. It specifies exactly what must be taxed and in what amounts. That’s wise, because it prevents Arizona from becoming a patchwork in which each local government imposes different taxes in different amounts—which would scare away businesses and harm the economy. State law does let counties adopt taxes that impose “variable rates,” and the County claims the $10,000 cutoff is a variable rate—but it’s not, because it doesn’t vary with anything. Instead, Prop. 417 creates a new type of tax—one that falls heavily on lower-income people than on the wealthy—and falls more heavily on customers of Wal-Mart than on folks buying Cadillacs.

Things got even stranger when voters looked at their ballots: the language of Prop. 417 was not the same as the publicity pamphlet. Voters were being asked to approve a tax only on retail sales—not on the full range of things the law says must be taxed. Jet fuel and restaurants would therefore not be subject to the law. And that’s what Pinal County taxpayers approved when they voted in November.

But then things changed again.

On February 22, Pinal County officials passed a resolution instructing the state Department of Revenue to begin collecting the tax on April 1—and not to follow the wording voters approved, but instead to follow the publicity pamphlet’s list (restaurants, jet fuel, and other things)—even though voters didn’t agree to that.

That took the Department by surprise. They had already told a trial judge—in a lawsuit challenging the legality of the tax—that it only applied to retail sales below $10,000. The state is now in a bind, because along with the County, they’re defendants in that lawsuit, which was brought by taxpayers who say Proposition 417 is confusingly worded, and violates various rules governing how taxes operate. Among other things, the taxpayers say the $10,000 cutoff is illegal and that the County is not allowed to impose taxes that don’t follow state law. Doing so violates constitutional requirements of equal treatment, and make Arizona a crazy-quilt of tax laws.

Not only do the state and the county disagree about what the tax even applies to, but County officials are now in court arguing either that the tax should apply in the manner that state law requires—but which the voters did not approve—or that it should be imposed as voters wanted—but which violates state law.

This muddle could cost the County a lot. If it begins collecting taxes in April, and later loses the lawsuit, it will be forced not only to repay what it collected, but also interest on that amount—perhaps tens of millions of dollars.

Given these layers of confusion, taxpayers asked a judge Monday to halt the new tax until courts can decide whether Proposition 417 is legal.

These difficulties could have been avoided if officials had made wiser choices about how taxes are spent. As the Arizona Free Enterprise Club’s Scot Mussi observed last year, Pinal County already has the highest sales tax in the region—and the half-cent sales tax adopted 30 years ago for highway improvements has raised hundreds of millions, that have been squandered on local projects and even Christmas bonuses for government employees instead of needed infrastructure.

It’s time for the County to go back to the drawing board and find a responsible solution that doesn’t violate state law and punish the hardworking taxpayers of Pinal County as Proposition 417 does. That would save time, trouble, and much-needed money.

Timothy Sandefur is Vice President for Litigation at the Goldwater Institute.