December 5, 2020

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Battle Over Arizona Education Funding Ballot Measure Heats Up

8 min read
With election day quickly approaching, the fight over votes for Invest in Ed, the ballot...

With election day quickly approaching, the fight over votes for Invest in Ed, the ballot initiative that would tax wealthy residents in Arizona to pay for public education, is turning into a bare-knuckle brawl.

The initiative, which is technically called Proposition 208,  would levy a 3.5 percent tax on people earning above $250,000 and married couples with incomes over $500,000. The revenues would be spent on various aspects of Arizona’s K-12 public education system, like teacher salaries, technical education programs, and boosting pay for school support staff. Proponents of the measure estimate that it will raise hundreds of millions annually.

Opponents of the measure, primarily the Arizona Chamber of Commerce-backed group Arizonans for Great Schools and a Strong Economy, had attempted to keep it off the November ballot by filing a lawsuit alleging that the 100-word summary of the initiative used by petitioners to get signatures was misleading. A lower court judge agreed. But the state Supreme Court overruled him, keeping the initiative on the November ballot.

Now the sparring has moved out of the courts and onto the airwaves. On September 15, opponents of the measure dropped a television ad featuring Jaime Molera, chairman of Arizonans for Great Schools and a Strong Economy, criticizing the ballot measure. In the ad, Molera claims that only a fraction of the money raised by the measure “actually reaches the classroom,” while a narrator alleges that it will result in the “biggest tax increase in Arizona history and will force small businesses to pay higher income taxes than big corporations.”

“I served as Arizona’s superintendent of public education, so I support our public schools, but Prop 208 is the wrong way to do it,” Molera says, staring into the camera. “We need to support our public schools, but Prop 208 is the wrong plan. Vote no.”

The next day, proponents of the measure released an ad titled “Bankrolled” that took aim at Molera’s work as a lobbyist and the fact that he hasn’t been Arizona’s superintendent since 2003, facts that weren’t mentioned in the original ad. The spot attempted to paint Molera and opponents of the measure as agents of big business.

“These negative ads. It’s always what they don’t tell you,” the narrator says over an opening shot of a screen grab from the Molera ad. “Him? He hasn’t been superintendent of public instruction for 17 years. His real job? Professional lobbyist. His clients? Big insurance companies like Aetna. Wall Street banks, like JP Morgan.”

In a news release issued with the rollout of the new ad, Invest in Ed proponents played up the narrative.

“The efforts that wealthy corporate executives, politicians, and lobbyists are making to crush educational opportunities for our most vulnerable students is deeply disturbing,” said Amber Gould, chairwoman of Yes on 208. “I just can’t understand for the life of me, given our teacher shortage and huge class sizes and lack of staff to meet our students’ needs, why very wealthy people who won’t miss what they’ll pay are fighting Prop 208, or how Jaime Molera can look straight into a TV camera and tell lies about Prop 208. It’s just very disappointing.”

In a phone interview with New Times, Garrick Taylor, a spokesperson for Arizonans for Great Schools and a Strong Economy and senior vice president at the Arizona Chamber of Commerce, denied that the original ad was misleading about Molera.

“Jamie is proud of his service as state superintendent. The tax increase proponents have chosen to attack him personally because their initiative isn’t resonating with voters,” he said. “He says, ‘I’m the former state superintendent of public education.’ That’s true. He was.”

New Times attempted to contact Molera to inquire about his former and current clients as a lobbyist, but so far has not received a response. In response to questions about Molera’s clients, Taylor wrote in an email, “I’m working on the Proposition 208 campaign. If the proponents want to debate the policy they’re pushing under this initiative, I’m happy to have that conversation.”

Naturally, proponents of Prop 208 have taken issue with their opponents’ claims that the measure will hit small businesses hard. They say that the argument is misleading because while the initiative would tax pass-through income — meaning revenue from businesses that owners take home as profits — it would only apply to income that met the thresholds identified in the initiative: $250,000 for individuals and $500,000 for married couples.

Lydia Chew, a fiscal analyst with the Joint Legislative Budget Committee (JLBC) who authored a report on the economic impacts of Prop 208, confirmed to New Times that this is how the initiative would function.

“It would only be on the income that is passed through to them as their personal income,” said Chew. “It would only be on the profits. It wouldn’t be on any money that they’re using in their business.”

“The argument that our opponents make is that this is going to tax small business owners. And that’s completely false,” said David Lujan, director of the Arizona Center for Economic Progress, a left-leaning think tank. “First, it’s legally impossible for any business to be taxed under proposition 208. It’s true that there are some wealthy individuals who get their income from businesses, but those are not going to be your typical mom-and-pop small businesses. These are going to be people who are in the top 1 percent of Arizonans.”

Lujan also cited estimates from the Federal Small Business Administration that the median income for individuals self-employed at their own incorporated businesses is around $48,000.

“It’s a reflection of a general size of what small business owners earn in terms of income, and it’s well below the thresholds that would be triggered by Invest in Ed,” he said.

Taylor countered that business owners use their profits to reinvest in their business operations.

“Small business owners are oftentimes investing those dollars back into their business to use as working capital,” he said. “These small businesses are what power the Arizona economy.”

On the question of whether business owners that would be taxed by Prop 208 qualify as “small business owners” in the mom-and-pop sense, Taylor said, “These are businesses that are powering the Arizona economy. I don’t know what more to say than that. We just have a vast difference of opinion about how damaging raising this rate would be and who it would affect.”

Taylor also argued, as Molera did in the anti-Prop 208 ad, that small businesses would be taxed at a higher rate than corporations if the ballot measure were to pass.

“Taxing a small business much higher than corporate tax filers is tremendously unfair, because the rate currently is 4.5, and Proposition 208 takes that to 8,” he said, referring to the highest income tax bracket for individuals and married couples. “They’ll be taxed at a higher rate than even a corporate behemoth, never mind that this is all happening to small businesses in the middle of a pandemic. So it’s bad policy with even worse timing.”

Lujan said that talking point is a misrepresentation of how Arizona’s tax system actually works.

He said that while Arizona’s corporate tax rate is a flat 4.9 percent, individuals who report their business income as personal income are taxed through Arizona’s graduated income tax scheme, in which an average of all the bracketed income tax rates is taken to become their “effective tax rate.” Lujan added that the effective tax rate for people would likely be lower than the corporate rate even if their incomes qualified for further taxation under Proposition 208.

“Either they don’t understand the difference between the corporate tax code and the individual tax code or they’re just being misleading,” he said. “The math just doesn’t add up to that claim.”

The anti-Prop 208 ad also claimed that the ballot measure would institute the “biggest tax increase in Arizona history.”

On this point, one proponent of the initiative didn’t dispute the characterization.

“If they’re adding this revenue in perpetuity, yes, because this is the first time that we’ve passed education funding in perpetuity,” said Rebecca Gau, the executive director of Stand for Children, an education advocacy nonprofit that’s backing Prop 208. “It’s a red herring and a scare tactic and I think Arizona’s voters are smarter than that.”

Other players have also jumped into the fray. Both the Arizona Tax Research Association (ATRA) and the Goldwater Institute, a libertarian think tank, released lengthy research reports slamming Invest in Ed as economically destructive and ineffective.

The Goldwater Institute report estimates that the state would lose 124,000 jobs 10 years after Prop 208 goes into effect and that state and local governments will lose out on $2.4 billion from the “erosion of the current economic base,” and that 50 percent of those hit by the new tax would be small businesses, which they define as “either one-person businesses or businesses with at least one employee.”

Similarly, the analysis from ATRA argues that Arizona’s current tax structure attracts high-income earners while producing substantial tax revenue and that Prop 208 would undercut economic growth. It also claims that Prop 208 would knock Arizona into ninth place among states with the highest top income tax rate. The authors accuse backers of Prop 208 of “riding the recent populist political wave” and cynically pitting “the majority against a tiny fraction of income tax payers.”

The JLBC’s fiscal note on Prop 208 raised somewhat similar points, stating that the measure could result in “taxpayer migration.” The report was careful to warn that the actual impact of Prop 208 on taxpayer migration is “difficult to determine” and that studies on the issue have led to various different conclusions. The report did concur that the measure would make Arizona’s top income tax rate the “ninth highest nationally (out of the 50 states and the District of Columbia).”

The report also made nods to other potential economic impacts of the measure. For instance, the new tax could lead some businesses to incorporate due to the higher top tax rate on pass-through income. But at the same time, the tax could boost consumer spending by giving school staff larger incomes, the report said.

Of the ATRA report’s claim that Prop 208 would give Arizona the ranking of a high income-tax state, Lujan scoffed, again arguing that Arizonans’ effective tax rate would still be low under Prop 208. Even with Prop 208, the effective tax rate of people affected by the measure would be lower than many other states, he said.

“The most misleading thing that our opponents say is that this is going to be one of the highest state income taxes in the country and that is flat-out false,” he said. “This will only impact 1 percent of Arizona taxpayers, and those people in the 1 percent will still pay less state taxes than the majority of other states.”

In response to claims that Prop 208 will cause damage to Arizona’s economy, the initiative’s proponents point to research showing the overall economic benefits of investing in public education. For instance, a recent report from the Arizona Center for Economic Progress cited a 2016 study that found a “strong relationship” between increased school spending and positive educational and economic outcomes, such as higher graduation rates, wages for former students and a decreased risk of them falling into poverty. That report noted how Arizona lawmakers slashed state funding public schools between 2009 and 2014.

“There are many economists both in Arizona and nationally who have consistently said that investing in education is good for your economy,” Lujan said. “Invest in Ed is going to be good for business and good for our economy because it’s going to put millions of new dollars into our education system.”

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