November 20, 2017

Arizona Supreme Court ignores voters’ intent in decision interpreting constitutional limitations on taxation

By Jeffrey W. McCoy Attorney

Last Friday, the Arizona Supreme Court issued its decision in Biggs v. Betlach, a case brought by a group of Arizona legislators challenging the imposition of a hospital charge to pay for state Medicaid expansion. The charge at issue, which was passed by a simple majority of the Arizona Legislature, requires hospitals to pay an “assessment” on hospital revenues, discharges, and bed days. Yet Article IX Section 22 of the Arizona Constitution requires a 2/3 vote before the state legislature can impose any new taxes.

As a result, the Arizona Supreme Court had to decide whether the charge constituted a “tax” within the meaning of the Arizona Constitution. In a friend of the court brief PLF, on behalf of itself and the Howard Jarvis Taxpayers Association, argued that the court should define the meaning of “tax” broadly, in order to further the intent of the voters who imposed the supermajority requirement on the Legislature. In 1992, Arizona residents faced some of the highest tax rates in the nation and, in response, they amended the state constitution to limit the Legislature’s power to raise taxes.

Unfortunately, the court decided to narrowly define “tax” and upheld the hospital charge. In reaching its decision, the court looked at three factors: (1) the entity that imposed the charge; (2) the parties upon whom the assessment is imposed; and (3) whether the assessment is expended for general public purposes. The court decided that all three factors weigh in favor of the charge not being a tax.

One problem with the court’s decision is that it may allow the Legislature to circumvent the constitutional requirements for raising taxes. For example, in applying the first factor, the court held that because the legislature only authorized the charge, and left the details up to the head of an agency, the charge was not a tax. Under this reasoning, the state government can raise taxes if the Legislature simply passes the buck to an agency.

Similarly, the court’s analysis of who must pay the charge leaves much to be desired. The court reasoned that because the charge is only imposed on hospitals, rather than the entire public, that the charge was not a tax. But taxes are often imposed on different classes of people and businesses. If the Legislature wants to avoid the supermajority requirement of the Constitution, then, under the court’s reasoning, it needs to only impose a tax on some subset of the population.

There is some hope for Arizona taxpayers, however. The court’s opinion suggests that the nature of a charge is going to be decided on a case-by-case basis. Although such an approach makes it uncertain when the 2/3 requirement applies, courts will continue to refine the definition of tax in future cases. Hopefully, over time, future cases will become more aligned with the voter’s intent in imposing the supermajority requirement. If, on the other hand, courts and the Legislature continue to ignore the Arizona Constitution, then the citizens of Arizona may have to impose new limits on the state Legislature.

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Biggs v. Betlatch

A bare majority of the Arizona state legislature passed a law requiring the director of the state Health Care Cost Containment System – which governs the state Medicaid program – to levy an “assessment” on hospitals to pay for Medicaid expansion. Legislators who opposed the law sued to invalidate it on the grounds that the bill created a tax that required a supermajority vote in the Legislature. Lower courts upheld the law. PLF filed an amicus brief urging the Arizona Supreme Court to grant review and protect the interests of taxpayers and the integrity of government by enforcing constitutional, statutory, and regulatory restraints on taxing and spending.

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