Government

Group going to court over Arizona tax cuts for wealthy

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PHOENIX — A group opposed to the tax cuts approved by the legislature that largely benefit the wealthy wants a judge to reject legal efforts to keep voters from having the last word.

Attorney Andrew Gaona, who represents Invest in Arizona, says there is no legal basis for claims by that the constitutional right of people to second-guess anything lawmakers approve does not entitle them to vote on — and possibly veto — $1.5 billion a year in cuts to individual income taxes.

Gaona told Maricopa County Superior Court Judge Katherine Cooper that right of referendum is backed by “the plain language of the Arizona Constitution and binding authority from the Arizona Supreme Court dating back nearly 75 years.”

He is asking Cooper to toss the arguments advanced by the Free Enterprise Club, an organization that lobbies for lower taxes, limited government and fewer regulations, that she should quash the petitions and keep the issues off the November 2022 ballot.

Hanging in the balance are whether Arizonans get to vote on a measure enacted by the Republican-controlled legislature and signed by Gov. Doug Ducey to scrap the state's current system of progressive income tax brackets.

Those rates range from 2.59% for earnings up to $26,500 a year for individuals and $53,000 for married couples filing jointly, up to 4.5% for income exceeding $159,000 for individuals and double for married couples. In its place would be a single 2.5% tax rate.

Ducey has promoted the change as saving the average Arizonan about $300 a year. But that figure is misleading.

An analysis of the plan by legislative budget staffers puts the annual savings at $11 for someone making between $25,000 and $30,000. That increases to $96 for those in the $50,000 to $75,000 taxable income range.

At the other extreme, taxpayers with income of between $250,000 and $500,000 would see an average $3,071 reduction in what they owe. And that increases to more than $7,300 for those earning from $500,000 to $1 million.

Invest in Arizona, the successor to the group that got voters in November to approve Proposition 208, an income tax surcharge on the wealthy, gathered the necessary signatures on petitions to put the measure on hold until votes can decide whether to ratify or reject it.

That vote, however, can’t happen until November 2022. In the interim, the legislative changes to the law remain unenforceable — and the state has to continue collecting income taxes at the old and higher rates.

It is that fact that the Free Enterprise Club is using to argue to Cooper that the petition drives are legally invalid.

Attorney Thomas Basile, representing the organization, does not dispute that the Arizona Constitution allows voters to decide for themselves whether they do or do not like what their elected lawmakers have approved. All they need do is gather the requisite number of signatures within 90 days — currently 118,823 — to block enforcement until the next general election.

But Basile said that right does not extend to measures “for the support and maintenance of the department of state government and state institutions.” And since these measures involve taxes, he contends, they are beyond the reach of voters to put on the ballot.

Gaona said there's a big flaw in that argument. He said nothing in the referendum actually impairs the ability of the state to operate or denies it the revenues needed.

In fact, Gaona said, the reverse is true: If the referendum succeeds, it actually will leave the state with more money than it needs. And that, he told Cooper, means that anything the petition drive seeks to delay — and eventually get voters to reject — would not impair the ability of the state to support and maintain state government and state institutions.

That fact, he argues, is what makes this case different from one cited by Basile.

In that 1992 case, the state Court of Appeals quashed a referendum to overturn a decision by Greenlee County supervisors to impose a half-cent sales tax. Appellate Judge Joseph Livermore said the purpose of the petition drive was to halt an increase in taxes to keep government operating, not to cut them.

“Permitting referenda on support measures would allow a small percentage of the electorate, in Arizona 5%, effectively to prevent the operation of government,” Livermore wrote. And that, he said would thwart until the next election the decision of the majority of the supervisors to fund what they said were “necessary government programs.”

“The functioning of government can be as effectively damaged by the inability to acquire funds as by the inability to spend them,” the appellate judge said.

That's not what's happening here, Gaona told Cooper. That because what legislators are trying to do here is decrease tax collections, not increase them.

"There's no evidence -- nor could there be any evidence -- that these tax cuts are required to support state institutions,'' he said.

Cooper is set to hear arguments early next month. But whatever she rules is unlikely to be the last word, as whichever side loses will seek Supreme Court review.

Also at issue in this case is the fate of a second referendum. It seeks a public vote on a bill passed by GOP lawmakers to give the owners of certain small businesses the option of paying a maximum tax rate of 4.5%.

That became relevant after voters in November approved Proposition 208 which imposed a 3.5% surcharge on incomes of more than $250,000 for individuals and $500,000 for couples. The legislation was engineered as a work-around for what for business owners otherwise would be an 8% tax rate.

But the relevance of that law — and the referendum to overturn it — remains unclear. That's because the Supreme Court, in a separate ruling, has raised serious legal questions about whether the surcharge ever can legally be collected.

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