When the Arizona Supreme Court ruled against an income tax hike that voters approved last year, it illuminated another K-12 funding issue that could strip $600 million a year out of Arizona schools. 

Funding from the legislature’s 2018 extension of an expiring sales tax is likely to count against an education spending limit that voters imposed on the state more than four decades ago. Recent increases in K-12 spending, along with a COVID-induced reduction in the spending cap, are making an urgent problem all the more dire. 

Proposition 301, which voters approved in 2000, enacted a six-tenths percent sales tax increase to fund education. That tax hike was only good for 20 years, so in the face of a rapidly approaching expiration date, lawmakers and Gov. Doug Ducey approved an extension in 2018. 

But they didn’t replicate a key element of Prop. 301. While lawmakers two decades ago recognized that the sales tax money would violate the constitutional spending limit and convinced voters in 2002 to exempt the recently approved ballot measure, that exemption doesn’t apply to the 2018 extension — and legislators haven’t asked voters to ensure that schools can spend the money. 

Lawmakers three years ago copied language from the 2000 ballot measure declaring that money from the reauthorized sales tax hike is exempt from the spending limit, but didn’t ask voters to amend the 1980 spending cap to exempt the sales tax extension.

And the Supreme Court’s ruling last week on Proposition 208 makes clear that that won’t cut it, putting the $600 million in annual sales tax revenue in jeopardy.

The Invest in Education Act, which voters approved as Prop. 208, created a 3.5% income tax surcharge on Arizonans who earn more than $250,000 a year in order to inject an estimated $827 million a year into public schools, much of it aimed at increasing pay for teachers. To get around the spending cap, the ballot measure classified the new money as a grant and declared that the funding was “not considered local revenues” subject to the constitutional limit. 

The Supreme Court disagreed. Chief Justice Robert Brutinel wrote in the unanimous opinion that “a statute cannot circumvent or modify constitutional requirements.” The court didn’t explicitly strike down Prop. 208, but set the stage for a trial court to determine that it’s unconstitutional.

Though they never mentioned Prop. 301 in the ruling, the justices made clear that, without an amendment to the state constitution, the legislature has no power to exempt that sales tax revenue from the spending limit. 

Legislative Council, which advises lawmakers on legislation, has also concluded that the 2002 constitutional amendment doesn’t exempt funding from the 2018 reauthorization of the Prop. 301 tax, which went into effect in July.

‘I’m surprised that wasn’t caught’

No court has yet said that the Prop. 301 money will count toward the cap. But one lawsuit may be all it takes to trigger an education funding crisis involving the sales tax money. It’s unclear whether anyone will actually go to court over the issue. 

The Arizona Department of Education is now looking into the issue and trying to determine what the ruling and the spending limit issue mean for Prop. 301.

Somehow, the issue didn’t come up in 2018, when lawmakers, K-12 education advocates and others banded together to re-up the expiring sales tax. 

“I’m surprised that wasn’t caught by the powers that be that were actually doing it,” said Jaime Molera, a former superintendent of public instruction who helped craft Prop. 301 as a member of then-Gov. Jane Hull’s staff.

Chuck Essigs, a longtime lobbyist for the Arizona Association of School Business Officials, said education advocates were more focused on the potential problems of replacing a voter-protected funding source with one that the legislature could amend at will. Some people wondered what effect it might have on the spending cap, he said, but no one considered the possibility that the money would count toward the limit or cause the state to exceed it, because people were aware that Prop. 301 was exempt. 

“Nobody went back and looked at what did it specifically say that exempted those revenues,” Essigs said. “Obviously, people are looking at it differently today than they did then because of what is happening with (Prop.) 208.”

Sen. J.D. Mesnard, who was House speaker during the 2018 vote on Prop. 301, said the spending limit issue wasn’t on anyone’s radar at the time. He also noted that the reauthorization predated the influx of increased K-12 spending the legislature approved for teacher salaries later that year and the increase in district additional assistance funding, which brought the state closer to the expenditure limit.

‘Now there is really an urgency’

Lawmakers have a couple of options to alleviate the problem, one short-term and one long-term. Over the past couple years, neither has had much luck at the Capitol.

The constitution allows the legislature to exceed the cap for one year with a two-thirds vote, which has happened only twice since 1980. Lawmakers could also send another measure to the ballot, as they did in 2002, asking voters to amend the cap so that it won’t apply to the Prop. 301 extension. Or they could ask voters to increase the spending limit, as they did in 1986 when it was increased by 10%.

Sen. Vince Leach, R-Tucson, attempted both a short- and long-term fix in 2020. His proposed ballot referral would have reset the base year for determining the spending limit, which would have raised it by about $670 million. His resolutions passed 29-1 in the Senate, but never received a hearing in the House after the COVID-19 pandemic cut the legislative session short. 

Earlier this year, Sen. Paul Boyer, R-Glendale, looked to pass both the short- and long-term fixes, while Rep. Michelle Udall, R-Mesa, pushed to scrap the limit for the 2022 fiscal year. All three measures passed the education committees in their respective legislative chambers but were never heard in the appropriations committees, blocking them from advancing. 

Prop. 301 didn’t come up during any of the debates or votes over those measures during the past two legislative sessions. Boyer said his proposals weren’t crafted with Prop. 301 in mind, though it would have exempted the money from the reauthorized sales tax, in addition to resetting the base year for the expenditure limit.

But the likelihood that the sales tax money will vault K-12 spending over the cap, as highlighted by the Prop. 208 ruling, adds a new impetus, Boyer said. 

“The intent was to make sure that schools can actually spend the money that they have,” Boyer said. “Now there really is an urgency.”

If the funding from either Prop. 208 or Prop. 301 counts toward the spending cap, determining exactly how far over the limit the state will be is difficult. 

Boyer said legislative budget analysts are predicting the state will exceed the spending limit this fiscal year.

“Even if (Prop.) 208 gets tossed out by the courts, which it sounds like it’s going to, we’re going to exceed the limit this fiscal year anyway,” he said.

The limit applies to money spent by school districts, not money appropriated by the legislature, and the districts won’t know that number until November, when their budgets must be finalized. Even then, it will be subject to change: School spending was initially expected to exceed the limit by about $138 million in fiscal year 2021, but after budget numbers were revised in February, the state determined that spending would be under the cap by just $144 million.

Exacerbating the problem now is a substantial lowering of the cap, a result of the decrease in student enrollment caused by the pandemic. The limit was about $6.3 billion for fiscal year 2021, but is down to $6 billion for the current year.

Arizona Mirror is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Arizona Mirror maintains editorial independence. Contact Editor Jim Small for questions: info@azmirror.com. Follow Arizona Mirror on Facebook and Twitter.