The Saga of Proposition 208: Understanding Arizona's Income Surtax

In November 2020, voters in Arizona approved an initiated state statute known as Proposition 208, which assessed a 3.5 percent surtax on income above $250,000 ($500,000 for joint filers). The measure aimed to increase funding for education by generating additional revenue from high-income individuals. However, the implementation of this surtax was not without controversy.

The saga surrounding Proposition 208 began when it was challenged in court over concerns that it violated Arizona's expenditure limit on education spending. In March 2021, a lower court confirmed that the measure indeed exceeded the cap. The case then made its way to the Arizona Supreme Court, which ultimately declared the surtax unconstitutional to the extent it mandated expending tax revenue above the constitutional cap.

While Proposition 208 was still winding its way through the judicial process in the summer of 2021, the Arizona legislature took steps to curtail its reach by passing four bills that limited the surtax's impact. One of these bills, Fann v. Arizona, was a lawsuit filed in November 2020, which also challenged the constitutionality of Proposition 208.

With the saga now concluded, the only uncertainty remaining is when Arizona will transition to a flat-rate individual income tax system. The legislature's response to Proposition 208 has sparked debate about the state's tax structure and its impact on education funding. As the state looks to the future, it will be important for policymakers to balance the need for adequate funding with the desire to simplify and streamline the tax system.

In conclusion, while Proposition 208 may have been declared unconstitutional, its legacy will continue to shape Arizona's tax landscape. The debate surrounding a flat-rate individual income tax will likely persist as the state seeks to find a solution that balances competing priorities.

Flat tax rate