On Thursday, the Arizona Supreme Court upheld a 2013 law pushed by former Arizona Governor that levied a provider tax on state taxpayers, to fund expansion of the state’s Medicaid program. Opponents argued that the law was passed without obtaining the two-thirds vote that the state Constitution requires of all revenue-raising measures.
The justices found that “the hospital assessment is not a “tax” for purposes of article 9, section 22. The assessment is imposed by the director on hospitals, a narrow class, and directly benefits hospitals by expanding AHCCCS coverage for uninsured patients, thereby increasing payments to the hospitals.”
The hospitals spent massive amounts of money fighting for the passage of Brewer’s bill, and later handsomely rewarded pro-expansion legislators with sizable campaign contributions.
The Goldwater Institute represented the thirty-six legislators who voted against the tax. Their lawsuit argued that their votes, which they believe should have defeated the bill, had been effectively nullified.
The Institute argued that the “assessment” that the legislature used to fund the expanded Medicaid program was actually a tax, and should therefore have received the two-thirds vote.
Christina Sandefur, executive vice president of the Goldwater Institute and the lawyer who argued the case, pointed out that the Supreme Court’s decision creates a dangerous loophole. “This decision allows the legislature to call taxes assessments and escape the two-thirds requirement,” Sandefur said. “Assessments are established by unelected, unaccountable bureaucrats. The voters who limited the legislature’s ability to raise taxes certainly didn’t intend to give even greater power to unelected officials to impose ‘assessments.’”
Chief Justice Bales authored the Opinion of the Court, in which Vice-Chief Justice Pelander and Justices Brutinel, Timmer, Gould, and Lopez and Judge Staring joined. The Opinion reads in part:
Several aspects of the hospital assessment lead us to conclude it is imposed on a narrow class, which weighs against treating it as a tax. The assessment is imposed only on hospitals, which cannot pass on the costs to patients or third-party payors. The statute further contemplates that the assessment will not be imposed on all hospitals, as the director may “establish modifications or exemptions” based on various factors, including a hospital’s size, services, and location. Indeed, as implemented, the assessment does not apply to many types of hospitals. Finally, even if the assessment did apply to all Arizona hospitals, it would still be limited to a narrow class for purposes of determining whether it is a tax.
As for the third May factor, Opponents argue that the hospital assessment is collected for a general public purpose – to fund the Medicaid expansion – and not to provide any specific benefit to hospitals. We reject this argument insofar as it presumes that a fee or assessment necessarily constitutes a tax if the revenues collected serve any public purpose rather than benefiting only those who pay it. Instead, an assessment or fee can be characterized as such rather than a tax if there is “‘some reasonable relation to the service to be performed’ on the payor’s behalf.”
Although H.B. 2010 serves a public purpose by expanding AHCCCS eligibility, the assessment was expressly intended and in fact serves to benefit the hospitals. Hospital assessments are to “be used for the benefit of hospitals for the purpose of providing health care for persons eligible for coverage funded by the hospital assessment.”
Assessment revenues are deposited into a “hospital assessment fund,” A.R.S. § 36-2901.08(F), and cannot revert to the state general fund to be used for another public purpose. “An assessment placed in a special fund and used only for special purposes is less likely to be a tax.” The assessments also enable hospitals to be compensated for treating patients who are unable to pay. Hospitals are required by federal law to provide emergency room treatment for patients regardless of their ability to pay. Because of the AHCCCS expansion, which depends on the assessment, more than 250,000 additional persons are now covered, and hospitals receive payments for treating them and have lower costs for uncompensated care. Indeed, Opponents acknowledged below that the assessment operates in a way that benefits the hospitals.
Weighing the three May factors, we conclude that the hospital assessment is not a “tax” for purposes of article 9, section 22. The assessment is imposed by the director on hospitals, a narrow class, and directly benefits hospitals by expanding AHCCCS coverage for uninsured patients, thereby increasing payments to the hospitals.
“This is a classic case of taxation without authorization,” said Sandefur.