In addition to state and local sales taxes, there will be an excise tax on the sale of recreational marijuana. To hold this excise tax, a fund will be created, The Smart and Safe Arizona Fund.

Prop 207 and Prop 208 - Where's the money going?

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Donna H. Laubscher, CPA

The counting is done and certified, and both Proposition 207 and Proposition 208 in Arizona have passed. While neither of these propositions is in effect until 2021, we thought we could outline where the revenue generated from each proposition is headed and how it is to be spent because we are, after all is said and done, accountants. And double entry accounting is cool. Or exciting. Or both. The focus of this article is on the left-hand side of the t-account. Or the debits.

Proposition 207 (Smart and Safe Arizona Act)

Proposition 207 allows for the legalization and taxation of recreational cannabis for adult use. Courts will also be allowed to vacate and expunge certain marijuana arrests, charges, convictions or sentences. Smoking marijuana is banned in public places or open spaces. Personal use of up to one ounce is allowed for use, possession or transfer, as well as no more than six plants at a primary residence.

The Department of Health Services is to establish rules no later than June 1, 2021 which allows marijuana to be subject to state and local sales taxes. Since this will be similar to other retail items, there is no requirement to spend this revenue in any specific way.

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In addition to state and local sales taxes, there will be an excise tax on the sale of recreational marijuana. To hold this excise tax, a fund will be created, The Smart and Safe Arizona Fund. Not only will this fund hold the proceeds from the 16% excise tax, but also any licensing and penalty revenue generated from the implementation of the recreational use of cannabis. The excise tax is imposed on marijuana products for recreational use, but not on products for the previously regulated medical marijuana use. The first portion of this excise tax will be used to enforce state cannabis regulations, including reasonable costs incurred by the Arizona Department of Revenue to impose and enforce the tax, with the remainder divided amongst the following areas:

  • Community colleges – 33%
    • Investing in providing workforce development programs
    • Job training
    • Career and technical education
    • Science, technology, engineering and math programs
  • Police and fire departments – 31.4%
    • Split based upon proportion of number of enrolled members in the Public Safety Personnel Retirement System
  • Arizona Highway User Revenue Fund – 25.4%
    • This is the same fund where gasoline taxes and vehicle license taxes (examples – there are many others) are deposited
    • Funds from here are distributed to cities, towns, counties and the State Highway Fund and used for highway construction, improvements and other related expenses
  • Justice Reinvestment Fund – 10%
    • Established with this proposition
    • After administrative costs, these funds will be allocated as follows:
      • Public health departments – 35%
      • Grants to nonprofit organizations that provide justice reinvestment programs in Arizona – 35%
      • Public health issues – 30%
    • Attorney general – .2%
      • Earmarked for enforcement

The above funds are to be transferred on or before June 30 and December 31 of each year.

Proposition 208 (Invest in Education Act)

Proposition 208 created a 3.5% income tax surcharge on the following individuals filing an Arizona income tax return:

  • Single and married filing separately with taxable income greater than $250,000
  • Head of household and married filing joint with taxable income greater than $500,000

This does not impact Arizona business or trust returns paying Arizona tax. The above amounts are not indexed for inflation.

The revenue from this tax increase is earmarked completely for Arizona public and charter schools. The surcharge levied must be collected regardless of whether the income tax rate brackets are changed, replaced or eliminated by an act of the legislature.

Similar also to Proposition 207, a new fund is created – The Student Support and Safety Fund. However, 100% of the surcharge is placed in this fund. As with Proposition 207, the first portion of the income tax surcharge will be used by various state departments to administer the new requirements, including the Arizona Department of Revenue to implement and enforce the surcharge. After that, the revenue distribution is as follows:

  • 50% for hiring and raising the salaries of teachers and other certified employees, such as counselors and nurses
  • 25% for hiring and increasing the salaries of student support staff, including classroom aides and bus drivers
  • 10% for mentoring and retaining new classroom teachers in their first three years of teaching
    • The equivalent of one full term mentor may not be assigned to more than 15 new classroom teachers
    • If school receives monies in excess of its needs for mentoring and retention programming, then the excess funds may be used for teacher retention
  • 12% for The Career Training and Workforce Fund
    • Established with this proposition
    • After administrative costs, these funds will be allocated as follows:
      • Provide multi-year grants of up to five years for providing services for students in grades 9-12
      • Provide support to schools that receive these grants
      • Within nine months of the effective date, rules to implement shall be established
  • 3% to Arizona Teacher’s Academy
    • Eligible post-secondary institutions shall implement an Arizona teachers academy
    • Incentivizes college students by waiving college tuition for teachers-in-training who commit to teaching in Arizona after graduation
    • Funds not used at the end of a fiscal year can be rolled to the next fiscal year
    • If a student does not successfully complete the academic year in good standing, the student needs to reimburse the Arizona Board of Regents

Funding for all of the above is determined in proportion to the weighted student counts for the prior fiscal year for each school district and charter school. Additionally, included in the recipients are the State Education System for Committed Youth and the Arizona State Schools for the Deaf and Blind. The funds are to be transferred on or before June 30 and December 31 each year.

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Some new funds have been created, or will soon be created, which may be of more interest to the accountants than others in the state. Each of the propositions has specific allocations, but the administrative costs portion may be a bit fuzzy to define. And in all cases the administrative costs take place before any of the other allocations.

There has been some online speculation that the legislature could potentially alter either or both propositions. However, to do that they would need to amend the Arizona constitution, which would require approval by the voters. Therefore, it is unlikely that either of these will be modified – at least without another ballot question or initiative for Arizona voters.

Feel free to contact your Henry+Horne tax adviser with any questions.

Donna H. Laubscher, CPA, Partner, specializes in tax planning and consulting for individuals. She can be reached at DonnaL@hhcpa.com or (480) 483-1170.