Fann v. State

• Decision Date: 19 August 2021
• Docket Number: No. CV-21-0058-T/AP,CV-21-0058-T/AP
• Citation: 251 Ariz. 425,493 P.3d 246
• Court: Arizona Supreme Court
• Parties: Karen FANN, et al. Plaintiffs/Appellants, v. STATE of Arizona, et al. Defendants/Appellees. Invest in Arizona, et al. Intervenors/Appellees.

251 Ariz. 425

493 P.3d 246

Karen FANN, et al. Plaintiffs/Appellants,

v. STATE of Arizona, et al. Defendants/Appellees.Invest in Arizona, et al. Intervenors/Appellees.

No. CV-21-0058-T/AP

Supreme Court of Arizona.

Filed August 19, 2021

Timothy Sandefur, Scharf-Norton Center for Constitutional Litigation at the Goldwater Institute, Phoenix; Dominic E. Draye (argued), Greenberg Traurig, L.L.P, Phoenix; and Brett W. Johnson, Colin P. Ahler, Tracy A. Olson, Snell & Wilmer L.L.P., Phoenix, Attorneys for Karen Fann, Russell "Rusty" Bowers, David Gowan, Venden Leach, Regina Cobb, John Kavanagh, Montie Lee, Steve Pierce, Francis Surdakowski, M.D., NO ON 208, and Arizona Free Enterprise Club

Brian M. Bergin (argued), Kevin M. Kasarjian, Bergin, Frakes, Smalley & Oberholtzer PLLC, Phoenix, Attorneys for State of Arizona and Arizona Department of Revenue

Daniel J. Adelman, Arizona Center for Law in the Public Interest, Phoenix; and Roopali H. Desai, D. Andrew Gaona (argued), Kristen Yost, Coppersmith Brockelman PLC, Phoenix, Attorneys for Invest in Arizona (Sponsored by AEA and Stand for Children) and David Lujan

Joel W. Nomkin, Austin C. Yost, Kathryn E. Boughton, Perkins Coie LLP, Phoenix, Attorneys for Amicus Curiae Arizona School Boards Association

Aaron T. Martin, Martin Law & Mediation PLLC, Phoenix, Attorneys for Amici Curiae Arizona Business Leaders

James E. Barton, II, Jacqueline Mendez Soto, Barton Mendez Soto PLLC, Tempe, Attorneys for Amici Curiae Potential Ballot Initiative Proponents

Mary R. O'Grady, Joshua D. Bendor, Osborn Maledon P.A., Phoenix, Attorneys for Amicus Curiae Superintendent of Public Education Kathy Hoffman

Timothy J. Berg, Emily Ward, Bradley J. Pew, Taylor Burgoon, Fennemore Craig, P.C., Phoenix, Attorneys for Amicus Curiae Arizona Commerce Authority

Gregory W. Falls, Craig A. Morgan, Sherman & Howard L.L.C., Phoenix, Attorneys for Amici Curiae Americans for Tax Reform and Arizona Small Business Association

Rhonda L. Barnes, Jane Ahern, Ben Bryce, Arizona House of Representatives, Phoenix; and Lisette Flores, Arizona State Senate, Phoenix, Attorneys for Amici Curiae Senate Minority Leader Rebecca Rios and House Minority Leader Reginald Bolding

Giselle C. Alexander, The Cavanagh Law Firm, P.A., Phoenix, Attorneys for Amicus Curiae Arizona Farm Bureau Federation

Gregory B. Iannelli, Bryan Cave Leighton Paisner LLP, Phoenix, Attorneys for Amici Curiae Elliott Pollack and Alan Maguire

Susan M. Freeman, Gregory Y. Harris, Lewis Roca Rothgerber Christie LLP, Phoenix, Attorneys for Amici Curiae Save Our Schools Arizona, Education Law Center, and the Southern Poverty Law Center

Otto S. Shill, III, Jimmie W. Pursell, Jr., Lauren R. Smith, Jennings, Strouss & Salmon, P.L.C., Phoenix, Attorneys for Amici Curiae Arizona Tax Research Association and Arizona Chamber of Commerce and Industry

Tyson C. Langhofer, Alliance Defending Freedom, Scottsdale, Attorneys for Amici Curiae Alliance Defending Freedom and Center for Arizona Policy

Erin Adele Scharff, Phoenix, Attorney for Amicus Curiae Tax Professor Erin Scharff

CHIEF JUSTICE BRUTINEL authored the opinion of the Court, in which JUSTICES BOLICK, LOPEZ, BEENE, MONTGOMERY and JUDGE MCMURDIE,^* joined. VICE CHIEF JUSTICE TIMMER concurred in part and dissented in part.

¶1 In 2020, Arizona voters passed Proposition 208 ("Prop. 208"), a citizens’ initiative imposing an income tax surcharge on "high-income" Arizona taxpayers to provide direct funding to schools. Petitioners sued to challenge the constitutionality of that tax and the initiative's characterization of the direct funding as "grants," exempt from the expenditure limitations of article 9, section 21 of the Arizona Constitution ("Education Expenditure Clause"). Petitioners also sought to enjoin the collection of that tax pending the resolution of their challenge. We hold that the direct funding provision does not fall within the constitutional definition of grants in article 9, section 21 of the Arizona Constitution, and Prop. 208 is therefore unconstitutional to the extent it mandates expending tax revenues in violation of the Education Expenditure Clause. Likewise, the remaining non-revenue related provisions of Prop. 208 are not separately workable and thus not severable. However, because we cannot determine at this preliminary stage of the case the extent to which, if any, such funding will exceed the constitutional expenditure limitation, we decline to enjoin the imposition of the tax pending further proceedings in the trial court.

¶2 Additionally, we hold that Prop. 208 does not violate article 9, section 22 of the Arizona Constitution ("Tax Enactment Clause"), because that clause does not apply to voter initiatives. Therefore, the bicameralism, presentment, and supermajority requirements found therein are inapplicable to Prop. 208.

I. BACKGROUND

¶3 On February 14, 2020, Invest in Education¹ filed an initiative application with the Secretary of State. That initiative, titled the "Invest in Education Act," was placed on the ballot as Prop. 208, and asked voters to approve a statutory measure implementing a new income tax surcharge to fund additional spending on education. A.R.S. § 43-1013. Prop. 208 has three central provisions: (1) a taxing provision ("Taxing Provision"), (2) a provision allocating revenues to various funds for various educational purposes ("Allocating Provision"), and (3) a provision exempting itself from the constitutional definition of local revenues ("Local Revenues Provision").

¶4 The Taxing Provision imposes a 3.5% income tax surcharge on "taxable income in excess of $250,000" for anyone filing separately or on "taxable income in excess of $500,000" for married couples. § 43-1013(A). Prop. 208 requires the Arizona Department of Revenue ("ADOR") to "separately account for revenues collected pursuant to [this] income tax surcharge" and to "deposit those revenues" into the newly established "student support and safety fund." § 43-1013(B). This requirement is codified at A.R.S. § 15-1281.

¶5 The Allocation Provision details how state officials must distribute this revenue. § 15-1281(B), (D). First, the costs of administration are paid from the account. § 15-1281(B). Next, Prop. 208 creates a "student support and safety fund" ("Fund") and mandates that the Fund distribute nearly all the remaining revenue to school districts and charter schools through "grants." § 15-1281(D). The allocations are as follows:

• 50% "as grants" for "hiring teachers and classroom support personnel and increasing [their] base compensation," § 15-1281(D)(1) ;

• 25% "as grants" for "hiring student support services personnel and increasing [their] base compensation," § 15-1281(D)(2) ;

• 10% "as grants" for "providing mentoring and retention programming for new classroom teachers to increase retention," § 15-1281(D)(3) ;

• 12% to "to the career training and workforce fund established by [A.R.S.] § 15-1282," § 15-1281(D)(4) ; which become "multi-year grants ... to school districts, charter schools and career technical education districts," § 15-1283(A)(1); and

• 3% to the "Arizona teachers academy fund," § 15-1281(D)(5).

¶6 In the Local Revenues Provision, Prop. 208 states that "monies received by school districts and career technical education districts pursuant to this chapter ... [a]re not considered local revenues for the purposes of" the Education Expenditure Clause and "[a]re exempt from any budgetary, expenditure or revenue control limit that would limit the ability of school districts or career technical education districts to accept or expend those monies." § 15-1285.

¶7 Before the initiative was certified for the ballot, Invest in Education requested a review of their initiative language from Arizona's Legislative Council, who opined that the provision defining Prop. 208 money as grants and not local revenues was "likely invalid" because it conflicted with the Education Expenditure Clause. Despite receiving this legislative feedback before the initiative was certified for the ballot, Invest in Education declined to modify the text of its initiative or to pursue an initiative to amend the constitution.

¶8 Subsequently, an action to enjoin Prop. 208's placement on the ballot was filed, challenging the sufficiency of its 100-word description under § 19-102(A). Molera v. Hobbs , 250 Ariz. 13, 18 ¶ 3, 474 P.3d 667, 672 (2020). The challengers also claimed that the initiative lacked sufficient valid signatures, alleging that many of the signatures should be disqualified because they were gathered by petition circulators who were paid in violation of § 19-118.01(A). Id. After a trial, the superior court enjoined Prop. 208's placement on the ballot. Id. ¶ 4. Affirming in part and reversing in part, we ordered Prop. 208's placement on the ballot. Id. at 27 ¶54, 474 P.3d at 681.

¶9 Voters approved Prop. 208 with a 51.7% majority vote. On November 30, 2020, the vote was certified, and the law became effective on January 1, 2021. The same day of the vote certification, Appellants Karen Fann, Russell Bowers, David Gowan, Venden Leach, Regina Cobb, John Kavanagh, Monte Lee, Steven Pierce, Francis Surdakowski, "No on 208," and the Arizona Free Enterprise Club (collectively, "Fann") sued to enjoin Prop. 208 and requested a preliminary injunction pending trial. On December 3, 2020, Invest in Education was granted leave to intervene.

¶10 After briefing and oral argument, the superior court denied the Motion for Preliminary Injunction. Fann appealed, asking the court of appeals to reverse the superior court's denial of a preliminary injunction and declare Prop. 208 unconstitutional. We subsequently granted Fann's petition to transfer the case to this Court. On appeal, Fann presents two issues. First, does Prop. 208's Local Revenues Provision violate the Education Expenditure Clause by purporting to exempt Prop. 208 monies from the expenditure limitation contained in the Arizona constitution? Second, can Prop. 208 impose a new tax without a...