August 20, 2021
By Timothy Sandefur

The Arizona Supreme Court yesterday issued its long-awaited decision in the Goldwater Institute’s case challenging the constitutionality of Prop. 208, an initiative that imposes a massive tax on Arizona small businesses to fund spending for public schools. On behalf of taxpayers, small business owners, and legislators, the Goldwater Institute filed suit challenging the initiative for violating the state Constitution’s restrictions on spending and taxation—particularly a provision of the Arizona Constitution called the “Education Expenditure Clause,” which establishes a process for ensuring that the state spends taxpayer money responsibly. The Institute argued that Prop. 208 violates that Clause because it is not a constitutional amendment, but a mere statute—yet it simply declares itself exempt from the state Constitution! That’s something initiatives can never do. As the state constitution itself says, “any law which may not be enacted by the Legislature under this Constitution shall not be enacted by the people.”

In its opinion, the Supreme Court unanimously agreed with the Goldwater Institute, holding that Prop. 208 cannot simply exempt itself from the Education Expenditure Clause. “Because [part of Prop. 208] incorrectly characterizes the allocated monies in order to exempt Prop. 208 from the Education Expenditure Clause,” the Court said, “it is facially unconstitutional. As a consequence [another part] is also unconstitutional to the extent allocated revenues exceed the expenditure limit set by the Education Expenditure Clause.” In other words, Prop. 208 cannot simply override the state Constitution’s limits on spending.

The pro-tax forces who backed Prop. 208 tried to argue that the state Constitution’s spending limits didn’t apply anyway, because Prop. 208 only gives “grants” to schools, and “grants” are exempt from the spending limits. That, they claimed, means that the initiative couldn’t possibly conflict with those spending limits anyway. But the Court wholeheartedly rejected that sophistical notion. “Prop. 208 revenues are not grants,” the justices wrote. Therefore, the Education Expenditure Clause applies—and Prop. 208 must comply with it.

Does Prop. 208 comply with it? The straightforward answer is no, but the justices declared that they need additional facts to decide that question. “To the extent they exceed the constitutional expenditure Limitations,” they said, “Prop. 208’s direct payments to school districts…are unconstitutional…. However, the record before this Court is insufficient to establish whether such payments will in fact exceed the constitutional expenditure limitation.” Thus, the Court sent the case back to the trial judge to find out whether Prop. 208’s spending will violate that limitation.

The answer to that is almost certainly yes, as the Court itself noted. The evidence, wrote the justices, “strongly suggest that Prop. 208 will produce far more revenue than it can constitutionally spend.” In her separate opinion, Vice Chief Justice Timmer wrote that given the evidence that will be presented to the trial judge, Prop. 208 is “almost certainly doom[ed].”

Prop. 208 isn’t just unconstitutional—it’s also a foolhardy and extreme measure. Imposing a massive tax increase on Arizona’s small businesses—the primary generator of jobs in our economy—in the midst of an unprecedented economic downturn is a recipe for crippling our economy and worsening the standard of living in Arizona. As the Goldwater Institute’s Jim Rounds and Matt Beienburg have explained, Prop. 208 would—if implemented—lead to the loss of some 124,000 jobs in its first decade, and it will drive businesses away from Arizona, meaning that it will actually reduce government revenue by some $2.4 billion.

The Goldwater Institute—which worked alongside Dominic Draye of Greenburg Traurig and Brett Johnson, Colin Ahler, and Tracy Olson of Snell and Wilmer to argue the case before the Arizona Supreme Court—is proud to defend the rights of this state’s small business owners, who are responsible for our high standard of living and will help generate our recovery from the COVID-19 downturn. Yesterday’s decision is a crucial step forward in ensuring that constitutional limits on spending and taxes are enforced, and that the economic freedom that those limits are designed to protect are secured in the coming years. We applaud the Court for finding that Prop. 208’s language is unconstitutional, and we look forward to proceeding in the trial court and winning a final decision declaring the initiative unconstitutional.

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

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