On March 11, 2022, a Maricopa County Superior Court judge struck down the tax-hike provision of Proposition 208, which Arizona voters approved in 2020.

We first reported on Prop. 208 in a September 2020 article, noting that, if passed, it would impose a 3.5% income tax surcharge on certain income tax filers.

While Prop. 208 was designed to fund Arizona’s K-12 schools, which consistently rank near the bottom, it would have made Arizona the nation’s 10th-highest top marginal tax-rate state and the fourth highest in the western United States, trailing California, Hawaii, and Oregon.

In a July 2021 article, we reported on a major income tax cut package that, beginning January 1, 2022, capped Arizona’s income tax rate at 4.5%, counteracting the tax hike that Prop. 208 would have caused.

The Prop. 208 saga continues with the March 11 ruling by a Maricopa County Superior Court judge in Fann v. Arizona, permanently enjoining the voter-approved law’s tax-hike provisions.

On March 15, 2022, the Arizona Department of Revenue issued guidance to taxpayers on the Maricopa County Superior Court ruling, including the following:

• Taxpayers that have already filed their income tax returns do not need to amend them because there will be no impact to the overall income tax liability thanks to the income tax cut package that was passed in 2021.
• The Department will work with its software vendors to ensure that the overall tax liability of a taxpayer is appropriately allocated, but no change in filing is required by the taxpayer.
• If a taxpayer has not already filed their 2021 income tax return, the Department urges them to do so on or before Monday, April 18, 2022, unless an extension to file has been requested on or before that date.

Background. Shortly after Prop. 208 was passed in the November 2020 election, the plaintiffs in Fann v. Arizona sought a preliminary injunction against the new law. The injunction was denied, and the plaintiffs appealed the denial to the Arizona Supreme Court.

In August 2021, the Supreme Court held that a provision of Prop. 208 was unconstitutional because it sought to evade the state’s restrictions on school spending. The Supreme Court remanded the case back to the superior court to determine whether Prop. 208’s spending mandates would result in spending that exceeded the constitutional limit.

As a result of the remand order, the superior court issued its March 11 ruling, finding that more than $200 million in funds generated by Prop. 208 would be sequestered in a designated state fund because it could not be spent without exceeding the constitutional limit. Combining its factual findings with the direction from the Supreme Court’s remand order, the superior court struck down Prop. 208, permanently enjoining it.

“This Court understands the remand order as a direction to declare Proposition 208 unconstitutional in its entirety, and to enjoin its operation permanently, if the Court finds as a fact that the annual education spending limits imposed by the Arizona Constitution will prevent Arizona’s public schools from spending a ‘material’ amount of Proposition 208 tax revenue in 2023,” the judge wrote in his March 11 decision. “On that basis, the Court is obligated to strike down Proposition 208.”