Karen Fann v. State of Arizona, 493 P.3d 246

Background

In 2020 Arizona voters approved Proposition 208, imposing a 3.5% income-tax surcharge on high-income filers and directing revenues into a newly created "Student Support and Safety Fund."
Prop. 208 required the Department of Revenue to account for and deposit surcharge receipts into the Fund and allocated revenues largely "as grants" to school districts and charter schools (50% for teacher compensation, 25% for student support, 10% for mentoring/retention, 12% to career training multi-year grants, 3% to a teacher academy).
Prop. 208 also declared those monies "not considered local revenues" and "exempt" from Article 9, § 21's education expenditure limitations (the Education Expenditure Clause).
Plaintiffs (majority legislative plaintiffs and related groups) sued claiming (a) Prop. 208 unlawfully attempts to treat mandatory tax receipts as constitutional "grants" to evade the expenditure cap, and (b) the Tax Enactment Clause requires bicameral/supermajority legislative action for tax increases. They sought a preliminary injunction; the superior court denied it and the matter reached the Arizona Supreme Court on transfer.
The Court held Prop. 208 funds are not "grants" within the constitutional Grant Exception, so the statute is unconstitutional to the extent its mandated expenditures would exceed Article 9, § 21 limits; the allocation provisions are not severable from the rest of Prop. 208; the Court remanded to the trial court to determine whether projected revenues will in fact exceed the expenditure limit and therefore require an injunction; and the Tax Enactment Clause does not apply to voter initiatives.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Prop. 208 payments qualify as "grants" under Ariz. Const. art. 9 §21(4)(c)(v)	Fann: The Grant Exception covers voluntary, non-governmental gifts; Prop. 208 is a compulsory tax transfer and thus cannot be a "grant."	Invest in Education: "Grant" can include government disbursements; Prop. 208 properly labels allocations as grants.	Court: "grant" is best read in context as voluntary/private contributions; Prop. 208 revenues are not grants and therefore are local revenues subject to the expenditure limit.
Whether Prop. 208 is unconstitutional because it mandates expenditures that would exceed the Education Expenditure Clause limits	Fann: The initiative's enforced spending will (or likely will) cause exceedances of the constitutional expenditure cap and thus is unconstitutional.	Invest in Education: Challenge is not ripe; spending may remain within caps or could be remedied by legislative authorization.	Court: The statute is unconstitutional to the extent allocations exceed the cap; but record insufficient to determine now whether projected revenues will necessarily exceed the limit, so remand for factual determination.
Severability: can invalid provisions be severed so the remainder stands?	Fann: The unconstitutional allocation/"grant" exemption infects the whole initiative; non-severable because the tax's purpose was to fund schools.	Invest in Education: Sever the offending exemption and leave the taxing/other provisions in force; legislature could authorize excess spending if needed.	Court: The allocation provisions (esp. §15-1281(D)(1)–(3)) are inextricably linked to the tax; severance would leave large sums sequestered and unspendable — therefore not severable; remainder cannot operate as intended.
Does Ariz. Const. art. 9 §22 (Tax Enactment Clause) bar a tax increase by voter initiative or require a supermajority of voters?	Fann: §22 either precludes the people from raising taxes by statutory initiative or requires a supermajority vote for initiative tax increases.	Invest in Education: §22 restricts only the legislature; initiatives remain available to enact tax changes.	Court: §22 applies to "acts" by the legislature and does not apply to voter initiatives; initiatives may enact taxes subject to other constitutional limits.

Key Cases Cited

Randolph v. Groscost, 195 Ariz. 423 (1999) (severability test for voter initiatives)
Citizens Clean Elections Comm'n v. Myers, 196 Ariz. 516 (2000) (application of Randolph severability test)
State v. Wein, 244 Ariz. 22 (2018) (standard for facial constitutional challenge)
Ruiz v. Hull, 191 Ariz. 441 (1998) (presumption of constitutionality for initiative statutes)
Yates v. United States, 574 U.S. 528 (2015) (canons of construction, noscitur a sociis)
Ayotte v. Planned Parenthood of N. New England, 546 U.S. 320 (2006) (partial/in-lieu severance and narrowing statutes where possible)
Barth v. White, 40 Ariz. 548 (1932) (distinguishing legislative acts from initiative measures)
Biggs v. Betlach, 243 Ariz. 256 (2017) (interpretation acknowledging Tax Enactment Clause limits the legislature)