Arizona Pension Tax Battle Heats up

June 24, 2002 ( - Nearly 52,000 retired Arizona state and local government workers could be eligible for an average $5,000 tax refund under a class-action lawsuit that claims retiree pension income was wrongly taxed by the state.

The suit, brought by retired Tempe high school teachers Manuel and Mary Lou Torres and Robert and Mary Frances Yniguez, claimed that state laws as far back as 1969 promised government employees that their pensions would be tax free.

Those promises, besides being written in law, were made in prospectus documents given to employees when they enrolled in the state’s retirement plan, according to court records. But the government decision to tax pensions in 1989 broke that agreement, the lawsuit alleged.

The state could be out about $250 million if the claims are upheld in court, according to a report in the Mesa Tribune.

The Maricopa County Superior Court case could ultimately impact more than 180,000 current and former government workers in Arizona, depending on when the litigation is resolved.

Abrupt Tax Policy Shift

Arizona’s abrupt tax policy change came after a 1989 US Supreme Court ruling that Michigan’s practice of charging income tax on federal retirees’ pensions, but not state retirees’ pensions, was unconstitutional. Arizona had similar laws in place at the time.
The ruling left Arizona officials with two choices: tax no government retirees’ pensions or tax them all. It chose the latter.

Attorneys for the state have asked Judge J. Kenneth Mangum to dismiss the lawsuit, claiming the Arizona constitution has always banned state officials from promising any group, company or individual permanent immunity from taxation.

A hearing on the state’s motion to dismiss is scheduled for August 19.
No settlement negotiations are under way, he said, and such complicated tax cases typically take two to 10 years to litigate.

Disputed Tax on Dividends

The law firm representing Torres and Yniguez is the same firm that sued in the state in 1991 for its practice of charging people income tax on dividends they earned from out-of-state companies but not on dividends they earned for in-state companies.

Arizona lost the case last year and is now required to pay more than $300 million in illegally collected taxes to about 250,000 people. Attorneys are still negotiating a payment schedule and other details in that case.

Manuel Torres and Robert Yniguez, both teachers in Arizona for about 30 years, retired from the Tempe Union High School District in 2000. Mary Lou Torres is still working as a teacher. Documents do not indicate Mary Frances Yniguez’s occupation.