The Arizona Constitution, written in 1910, includes several features traceable to the reform efforts of the Progressive Era. Chief among these are the initiative, recall, and referendum—direct democracy provisions that let voters create laws, remove officials from their posts, and repeal laws passed by the legislature. The latter of these provisions—the referendum power—was at issue in Arizona Free Enterprise Club v. Hobbs,[1] a case decided in August which was actually triggered by an earlier use of the initiative power.

The story began in 2020, when Proposition 208 imposed a hefty tax increase on Arizona small business owners. Opponents of that initiative filed suit shortly after its passage, arguing that it was unconstitutional—a position the state supreme court ultimately vindicated.[2] But while that case was proceeding, legislators seeking to cushion the blow of the Prop. 208 tax increase drafted a number of measures to reduce Arizona’s tax burden. One of these was SB 1828, which established a flat 2.5 percent tax on incomes.[3]

Supporters of Prop. 208 viewed the SB 1828 tax reduction as an assault on the Proposition, and they responded in several ways, including by circulating referendum petitions to repeal SB 1828. Those who supported SB 1828 (and opposed Prop. 208) filed suit to block the referendum from proceeding. They pointed out that the state constitution restricts the referendum power by prohibiting voters from repealing laws “for the support and maintenance of the departments of the state government and state institutions.”[4] Any law relating to taxation, they argued, is by definition a law for the support and maintenance of government agencies, and is therefore outside the scope of the referendum power.

A trial judge disagreed, holding that SB 1828 reduced taxes, and was therefore not for the “support and maintenance” of government. What’s more, the judge said, only laws that appropriate funds—not laws relating to taxes—are exempt from referendum.

In a 5-2 decision, the Arizona Supreme Court reversed that ruling. Justice John Lopez wrote for the majority and was joined by Chief Justice Robert Brutinel, Vice Chief Justice Ann Timmer, and Justices Clint Bolick and Kathryn King. They rejected the trial court’s effort to distinguish between tax-increasing laws and tax-reducing laws. Considering that tax measures are often extremely complex, and that “[t]he net revenue impact of a bill in the short term may invariably differ from its long-term effect,” the justices said it would be impossible for courts to determine whether any particular tax measure qualified as a tax-increasing or tax-reducing measure.[5] It was wiser to conclude that “all revenue measures that support and maintain existing state departments and institutions, including those that decrease net revenue, are exempt from referendum.”[6]

As for the argument that only appropriations, not tax laws, fall within the “support and maintenance” exemption, that turned on the curious language of the state constitutional provision, which says not only that “laws immediately necessary for the preservation of the public peace, health, or safety, or for the support and maintenance of the departments of the state government and state institutions” are exempt from referendum, but also that voters enjoy a three-month period in which to begin the referendum process. This grace period, however, does not apply to laws that “require earlier operation to preserve the public peace, health, or safety, or to provide appropriations for the support and maintenance of the departments of the state and of state institutions.”[7] What relevance is there in the fact that the word “appropriations” appears in this second clause, but not the first?

The justices answered that while “the constitutional convention records do not definitively elucidate the founders’ reasoning” in using two different phrases, the most likely explanation is that appropriations alone are exempt from the grace period, but both appropriations and taxes are included in the first clause—the clause that exempts such statutes from the referendum process.[8]

Justices William Montgomery and James Beene dissented and argued that a better way of reconciling the two different phrases in the constitution was to hold that only appropriations are exempt from the referendum power. The reason for the grace period, they argued, was to allow for referenda. Therefore, only laws falling outside the grace period—that is, laws the legislature declares “immediately necessary”—are immune from the referendum. But the constitution only allows the legislature to declare appropriations—not tax laws—to be “immediately necessary” (i.e., outside the grace period). Therefore, they concluded, it cannot be the case that tax laws are the kind of “support and maintenance” laws that are categorically exempt.[9]

The majority rejected this theory. It said the clause relating to the grace period was only intended to clarify the meaning of the phrase “preservation of the public peace, health, or safety”—a phrase that might otherwise be interpreted with dangerous breadth to allow the legislature more power than was intended.[10] Moreover, the dissent’s interpretation “disregards the framers’ striking of ‘appropriation’ in the first clause,” which, the majority said, must be given effect by concluding that even laws that do not appropriate funds—but which are nevertheless for the “support and maintenance” of government—must be categorically exempt from the referendum power.[11] The only thing that can fall within that category is a tax measure.

The bottom line is that SB 1828 remains on the books. And combined with the courts’ declaration in a separate case that the original Proposition 208 tax increase was unconstitutional,[12] the Grand Canyon State—which in November 2020 appeared destined to become one of the highest-taxed states in the nation—is now one of the states with the lowest tax burdens. Even aside from its practical consequences, though, the Free Enterprise Club case is a revealing study in the methods state courts use when interpreting their constitutions, particularly where the records of the framers’ “original” intentions are incomplete: by implementing the common law’s traditional interpretive tools and seeking to give effect to the best overall understanding of legal language.

[1] 515 P.3d 664 (Ariz. 2022).

[2] Proposition 208 included not only a tax increase but also spending requirements. Those requirements exceeded limitations in the state constitution, but Prop. 208 purported to exempt its spending provisions from those constitutional limits. In August 2021, in Fann v. State, 493 P.3d 246 (Ariz. 2021), the Arizona Supreme Court found that these provisions would be unconstitutional, given that Prop. 208 was a mere statute, not a constitutional amendment, and could not therefore declare itself exempt from the state constitution. But the court nonetheless remanded to the trial court to determine whether, in fact, the spending mandated by Prop. 208 would exceed those constitutional boundaries. In July 2022, the superior court answered that question in the affirmative and enjoined enforcement of Prop. 208. No appeal was taken.

[3] S.B. 1828 (Ariz. 2021).

[4] Ariz. Const. art. IV, pt. 1, § 1(3).

[5] Hobbs, 515 P.3d at 673 ¶ 31.

[6] Id. at 673-74 ¶ 31.

[7] Ariz. Const. art. IV, pt. 1, § 1(3).

[8] Hobbs, 515 P.3d at 669 ¶ 13.

[9] See id. at 684 ¶ 79, 685 ¶ 84 (Montgomery, J., dissenting).

[10] See id. at 674 ¶ 36.

[11] Id.

[12] Fann v. Arizona, No. CV2020-015495 (Maricopa County Superior Court July 25, 2022).

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