Prop 108: Putting the Brakes on State Tax Increases

By Joni Hoffman, League General Counsel

Two years before being elected to the United State Congress from Arizona, John Shadegg was chairman of the "It's TIME! Committee." The goal of this Committee was to ask the voters of Arizona to pass an amendment to the Arizona Constitution that would make it more difficult for the Arizona State Legislature to increase taxes and fees paid by Arizonans. The It's TIME! Committee gathered enough petition signatures to place the issue on the 1992 statewide general election ballot. Proposition 108 passed overwhelmingly.

So what does Prop 108 do and how does it relate to cities and towns in Arizona? Prop 108 added a provision to the Arizona Constitution that requires a 2/3 vote of each House of the Legislature to enact a bill that provides for a net increase in state revenues if the increase is because of one of seven enumerated ways. The ones that get the most attention are impositions of new taxes or fees or increases in already existing taxes or fees or the elimination of a tax credit or deduction. For example, if the Legislature wishes to impose a tax on dry cleaning services, the bill must pass both the Senate and the House of Representatives with at least 2/3 affirmative votes. Also, any bill subject to the supermajority requirements of Prop 108 must include a statement that the Constitutional provision applies. This statement is known as a "Prop 108 clause." Such a bill is effective on signature of the Governor, similar to a bill that contains an emergency clause.

The provision of Prop 108 that applies to cities and towns provides that if a bill sends more money to the state general fund by changing the current distribution formula of taxes so that fewer revenues go to cities and towns, the Legislature may only do so by obtaining the 2/3 vote of each House.

Right now 15 percent of the monies the state collects from income taxes are deposited in the urban revenue sharing fund. These monies are distributed to cities and towns based on population. Also, 25 percent of a limited base of state transaction privilege taxes and affiliated excise taxes are distributed to cities and towns. Therefore, if the state Legislature wishes to pass a bill that would divert 5 percent of income tax collections to the state general fund, that bill would need a 2/3 vote.

Since Prop 108 was passed in 1992, it has had its desired effect. Bills that are deemed to require a "Prop 108 clause" are generally toxic. Many members, especially those who have signed no-tax pledges, do not want to be on record voting for a bill that increases taxes or fees. Therefore, very few Prop 108 bills pass, although over time legislators have developed clever bill drafting language to technically avoid the supermajority vote requirement. Because there is no case law on some of these drafting maneuvers, it is unclear whether they are constitutional.

An example of drafting to avoid a Prop 108 clause involves a change to state law that occurred in 2007. That bill penalizes certain cities or towns that offer a location tax incentive to retail businesses to locate within their city or town. This penalty comes in the form of withholding a city's or town's share of transaction privilege taxes up to the amount of the incentive. On its face it appears to require a Prop 108 clause since it is reducing the amount given to certain cities or towns and the state general fund is benefitting from that reduction. But the Legislature argues that the distribution formula does not change under this law. Cities and towns still receive the same distribution percentage so the statutory allocation remains the same, legislators argue, and it is only the actions of a city or town, by offering the tax incentive, that causes the withholding. This interpretation has never been tested in court.

The League's legislative staff closely monitors bills to ensure lawmakers understand how even indirect actions that negatively impact state shared revenues might violate the Arizona Constitution. If you have questions about Proposition 108, please contact Joni Hoffman, League General Counsel, at 602-258-5786.

League of Arizona Cities and Towns
1820 W. Washington St.
Phoenix, AZ  85007
Phone: 602-258-5786
Fax: 602-253-3874

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