March 29, 2021
By Timothy Sandefur
A group of economists, tax experts, business leaders, and others filed briefs with the Arizona Supreme Court last week urging the justices to strike down the unconstitutional tax increase in Proposition 208, in the lawsuit currently being litigated by the Goldwater Institute. The briefs cover a wide range of subjects, but together, they show why Prop. 208’s massive tax hike—and its effort to override the state Constitution—are such dangerous ideas.
One brief, filed by economists Elliott Pollack and Alan Maguire—two of the three members of Arizona’s constitutionally created Economic Estimates Commission, represented by attorney Gregory Iannelli, a member of Goldwater’s American Freedom Network of pro bono attorneys litigating for liberty—gets to the heart of Prop. 208’s effort to override the state Constitution’s limits on spending. Those limits were created to ensure the state’s fiscal sanity by requiring the Economic Estimates Commission to come up with an estimate of how much the state can afford, and then preventing spending that goes too far past that limit. But Prop. 208 tries to override those limits by declaring that the money raised by its hefty new tax is exempt from that constitutional limit. Prop. 208, however, isn’t a constitutional amendment—it’s just an ordinary law—so it can’t override the Constitution.
In their in-depth analysis, Pollack and Maguire point out “the effect of the new tax will be to drain hundreds of millions of dollars from the Arizona economy—and lock them up in untouchable government bank accounts.” It drastically increases taxes—so that “Arizona now has a top marginal income tax rate (the most important tax statistic for economic development) that is higher than all but eight other states,” where it was previously near the least-taxed states. “Such a dramatic change,” they write, “will predictably slow economic growth.”
Worse, the effort to declare itself exempt from the Constitution is a mere matter of “wordplay,” designed “to circumvent the limits” on spending. The key to this wordplay is the argument that the income from the Prop. 208 tax qualifies as a “grant” to schools. That’s important because the Constitution does exclude “grants” from the spending caps. But as Pollack and Maguire point out, that was intended to apply to grants from private entities, not to government spending of money raised by taxes. Prop. 208 isn’t a grant system—it’s just an ordinary tax-plus-spending law. The entire “grant” argument “is based on nothing more than the outcome [the tax’s supporters] wish to achieve.”
On a similar note, Americans for Tax Reform and the Arizona Small Business Association—represented by AFN member Greg Falls—filed a brief pointing out that Prop. 208’s tax is not really on the rich, but on everyone. “Most businesses operate as sole proprietorships, limited liability companies, S-corporations, and partnerships,” they note. “All of these ‘organizations’ pay individual income taxes as income and expenses are passed through to the owners for income tax purposes”— which means that the actual burden of the tax falls “not only on the owners, but [on] the jobs of employees,” as well as consumers, of course. And because the higher tax rate is likely to deter businesses from locating in Arizona, it may very well lead to a reduction in income to the state.
That point was reinforced by a brief from the Arizona Farm Bureau Federation (represented by AFN member Giselle Alexander) which points out that Prop. 208 not only burdens small business owners, but does so in ways that add confusion and uncertainty to the state’s tax laws. Given the extraordinary fluctuations in the agriculture industry, they argue, farming and ranching businesses already face a great deal of economic uncertainty—which federal law helps remedy by allowing farmers to pay their taxes in ways that cushion the blow of unusually bad economic years. But Prop. 208 contains no such provision. “Tax code uncertainty adds an additional layer of volatility to [farmers’ and ranchers’] already uneven income stream,” the Federation writes, which is bad for business, bad for the state’s economy, and bad for the state’s jobholders.
But the 208 lawsuit has implications beyond even economics. In another brief, the Alliance Defending Freedom and Center for Arizona Policy argue that the efforts by Prop. 208’s proponents to exempt themselves from the Constitution would set a disastrous precedent if upheld. “If Arizona voters can enact laws through initiative in contravention of express constitutional provisions, then every right in the Arizona Constitution is at risk,” they note. “The people did not amend the Constitution in enacting Proposition 208; they created [an ordinary] law…. Allowing an initiated law to override contrary constitutional provisions…places in jeopardy every state constitutional right that Arizonans currently enjoy.”
And the Arizona Tax Research Association and Arizona Chamber of Commerce agree. Prop. 208 “constitutes an overt attempt to override the strict limitations that Article IX, § 21 of the Arizona Constitution imposes on educational funding,” they write in their brief. “In a time when voices from outside of Arizona seek to influence local issues such as these changes to our school funding limits, this Court stands as the final protector of Arizona’s unique local interests and the Arizona Constitution.”
Amicus briefs like these are valuable because they help give judges additional information and perspective on legal disputes, and they fill in the details about matters such as the economic and political consequences that can follow from a decision. (That’s why the Goldwater Institute itself files many amicus briefs in cases across the nation.) We’re grateful to the many friends of the court who are participating in the case and who recognize the importance of defending the Arizona Constitution against Prop. 208’s assault.
Timothy Sandefur is the Vice President for Litigation at the Goldwater Institute.