Opponents of tax reforms signed into law by Arizona Gov. Doug Ducey are attempting to block their implementation by heading to the ballot box.   

Several progressive activist groups on July 2 filed a voter referendum with the Secretary of State’s office to block bills that phase in a 2.5% tax rate for most taxpayers, that cap the top tax rate at 4.5%, and that create a new tax filing classification for small businesses. 

The state constitution allows citizens to pause temporarily the implementation of a bill passed by the Legislature and signed into law by the governor by gathering a minimum number of signatures equal to 5% of those who voted in the last general election. The temporary blockage of legislation spans from the time signatures are certified to the time of the referendum vote in the next election cycle, where voters would determine whether to repeal the law entirely or allow it to stand. 

Opponents of the pro-economic-growth tax reforms signed by Gov. Ducey must gather at least 130,000 valid signatures by September 28 to pause the bills’ implementation and send them back to voters on the November 2022 ballot. 

The citizens’ referendum was last used in 2018 by groups hostile to school choice who blocked the expansion of Arizona’s Empowerment Scholarship Account program. 

Tax reform opponents unsuccessfully lobbied the Legislature earlier this year to reject the bills, which blunted the most severe repercussions of Proposition 208, a measure that would slam certain taxpayers, including small business filers, with a 77.7% income tax increase. 

The urgency of the tax reform opponents to overturn the laws has heightened since the state Supreme Court last week put the fate of the tax increase in doubt. 

The court ruled that the proposition’s attempt to bypass expenditure limits in the state constitution by classifying the new tax revenues as “grants” was unconstitutional. The court left to a lower court, however, the task of determining whether the new revenues would indeed exceed those limits. 

The lower court must strike down Proposition 208 in its entirety if the revenues are found to exceed the limits. 

Even if the pro-tax groups are successful in their signature gathering campaign, the path to the ballot faces its own legal challenges. 

The Arizona Free Enterprise Club has filed a lawsuit arguing that the three bills the groups are attempting to refer to the ballot conflict with the state constitution, which does not allow for legislative actions that are “for the support and maintenance of the departments of state government and state institutions” to be referred to the ballot.

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Mayors from across Arizona on Monday signaled their support for passage of a Fiscal Year 2022 state budget that would phase-in a major tax reform designed to sustain Arizona’s economic competitiveness while assuring cities and towns an increased share of state revenues.

In a letter sent to state legislators that was signed by 21 mayors from communities small and large, urban and rural, the mayors wrote, “In addition to ensuring vital resources to local communities, the budget includes important tax reforms that will keep Arizona as a leader in attracting people and jobs. That will inevitably have a positive impact on our communities.”

The announcement by mayors comes as the state comes perilously close to the end of the current fiscal year. Failure to adopt a state budget by June 30 would result in a state government shutdown. With the clock ticking, both legislative chambers on Tuesday morning attempted to act on the new budget bills, but the House session was scuttled after Democrats left the floor, denying the attendance necessary to achieve a quorum. 

Gov. Doug Ducey cheered the news of the mayors’ support, saying in a , “We are pleased to have mayors across the state supporting the state’s budget package. Thank you, to these local leaders!”

Despite attempts earlier this month to move a budget through the legislative process, previous versions could not secure the requisite votes due in part to cities’ concerns that a tax cut would not spark economic growth but would instead shrink their slice of the overall state budget pie.

Groups that advocate for private sector job creators and economic growth earlier this month their support for a budget package that included a significant income tax and commercial property tax reform. 

The latest budget proposal would increase cities’ Urban Revenue Sharing to 18 percent, while phasing in a reduction of the individual income tax that would result in two rates — 2.5 percent and 4.5 percent — once fully implemented. The exact timing of the phase-down would be determined by the pace at which state revenues achieve annual targets.

In addition to the looming end of the fiscal year, lawmakers are also acting with urgency because Arizona could soon have one of the highest individual income tax rates in the country due to last fall’s narrow passage of Proposition 208. That measure’s constitutionality is currently being considered by the state Supreme Court, but if the proposition is allowed to stand, Arizona’s top income tax rate will jump 77.7 percent, going from 4.5 percent up to 8 percent, which is spurring lawmakers to seek ways to mitigate the negative impact on affected filers, which include small businesses. 

An eight percent top income tax rate would give Arizona the nation’s ninth-highest rate among states with an individual income tax.

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