Decree Will Make It Much Harder to Address Pressing Public & Social Determinants of Health Issues

Last week the Arizona Supreme Court set a new individual state income tax rate of 2.5% decreasing revenue to the state by more than $1B annually, perhaps more. Here’s what went down:

Voters approved Proposition 208 in 2020, which imposed a surcharge of 3.5% on incomes above $250,000 for single filers ($500K for joint filers) with the proceeds earmarked for K-12 education. The state’s maximum marginal individual income tax rate was 4.5%, so after Prop 208 the top rate should have been 8%.

The majority in the legislature didn’t like what the voters had approved, so they passed a law that did an end-around the surcharge last year. They set a flat tax of 2.5% for those not subject to the Proposition 208 surcharge. The tax rate for those subject to the surcharge was capped at 4.5%. People subject to the surcharge would pay the 3.5% into the Proposition 208 fund and another 1% into the state’s general fund.

People that didn’t like Prop 208 sued and that case worked its way through the courts. Last week the AZ Supreme Court ruled that the proceeds from Prop 208 were subject to a spending cap that had been approved by voters decades ago. 

But, instead of finding that the Prop 208 money was subject to the spending limit and allowing it to be collected but not spent unless the legislature approved annual increases in the limit (which they can do under the decades old initiative), the Court nullified the surcharge, setting the income tax limit at 2.5% instead of the pervious 4.5%.

In summary, Arizona had a top individual income tax rate of 4.5%. Voters increased it to 8% with Prop 208. The Legislature returned it to 4.5%… but last week the Arizona Supreme Court dismissed that cap and set the top individual state income tax rate at only 2.5%.

Editorial note: This action from the state supreme court is flat-out legislating from the bench, the very thing that Governor Ducey and many ‘conservatives’ rail about. But when legislating from the bench helps himself and his wealthy pals, it’s hunky dory.

If you recall, the Governor expanded the Court by 2 seats even though the court said they didn’t need more justices. By packing the court, he has achieved a key objective: drastically lowering taxes on the wealthy through the bench.