Arizona Supreme Court holds that regulatory assessment on hospitals to pay for an expanded Medicaid program is not a tax for purposes of article 9, section 22 of the Arizona Constitution and that legislative-supermajority requirement does not apply because the assessment is “not prescribed by formula, amount or limit” and is “set by a state officer or agency.”

The Arizona legislature passed by simple majority vote legislation that expands Arizona’s Medicaid program, the Arizona Health Care Cost Containment System (“AHCCCS”), and authorizes AHCCCS to levy an assessment on hospitals to pay for the expansion.  Dissenting legislators sued the director of AHCCCS to enjoin the assessment on the grounds that it violated article 9, section 22 of the Arizona Constitution, which requires a two-thirds supermajority for most legislation that results in a net increase of state revenue.  The superior court granted summary judgment to the director because the assessment fell within an exception listed in article 9, section 22, and the court of appeals affirmed.  The Supreme Court granted review.

Article 9, section 22 requires a two-thirds vote in each house of the Arizona legislature to enact legislation that provides a net increase in state revenues.  It applies to both the imposition of new taxes and the imposition of new state fees or assessments generally.  The supermajority requirement does not apply, however, for “[f]ees and assessments that are authorized by statute, but are not prescribed by formula, amount or limit, and are set by a state officer or agency.”  Ariz. Const, at Art. 9, § 22(C)(2) ( the “(C)(2) Exception”).  The Supreme Court used a three factor test, adopted in May v. McNalley, 203 Ariz. 425 (2002), as an analytical tool for determining whether the hospital assessment was a tax or a “fee or assessment”, and whether the (C)(2) Exception was applicable.  The Supreme Court held that the hospital assessment is an assessment and not a tax because it is imposed by the director, on a narrow class or payers, and used for the benefit of the payers.

The Supreme Court then held that the language “authorized by statute” in the (C)(2) Exception refers to authorized under the normal legislative process, and not to fees and assessments already authorized when article 9, section 22 was adopted, as consistent with the voter’s intent to constrain the legislature.  The Court further held that optional factors for the agency’s consideration when setting the assessment, presentation of the assessment to a legislative committee, and references to federal law were not “formulas, amounts, or limits” and thus the (C)(2) Exception applied.

Chief Justice Bales delivered the unanimous opinion of the court.