Every time the Republican-controlled legislature considers cutting taxes, the biggest obstacle is the taxpayer-funded lobbyists representing cities, towns, and counties. They come down to the legislature year after year accusing lawmakers of “defunding” local government. And, of course, it is always police, fire, and public safety on the chopping block and never DEI programs, art projects, or other unessential and unnecessary spending projects.
The problem with this narrative is that it is completely false. Cities and towns are flush with cash and have actually received enormous windfalls, not cuts, from the legislature. The result has been hundreds of millions in new revenue for the cities in just the last 6 years. Most of it from two sources—online sales and enhanced state shared revenue.
Online Sales Tax Windfall
In 2019, the legislature passed legislation responding to the Wayfair decision, allowing the state and local governments to tax online sales from sellers outside of this state. At the time, it was sold as a “meager” $85-million-a-year tax increase. But now, five years since the legislation was enshrined into law, taxpayers are doling out over one billion dollars in total collections each year to state and local government.
The most recent full fiscal year shows that cities alone collected $250 million directly from taxing online sales in FY24. They pocketed an additional $70 million in shared revenues from the state’s collections, resulting in a net increase of $320 million in revenue that they did not have five years ago.
Income Tax Windfall
If that wasn’t enough, in 2022 the legislature passed landmark tax cuts benefiting every tax-paying Arizonan, consolidating our previous four bracket income tax rates into one, single bracket of 2.5%. At the time, the cities claimed it would bankrupt them. Why? Because cities and towns receive 15% of state income tax collections, known as Urban Revenue Sharing (URS). So, the legislature increased that to 18% to hold cities “harmless.”
The cities like to claim that the 18% has barely held them harmless, going as far as claiming that they think they still lost a little revenue in the deal. But, five years ago, URS totaled $750 million. Last year? $1.5 billion. In other words, the share of income tax cities receive has doubled in the course of just five years. How many Arizona residents have seen their income double in just five years?
This increase was not anticipated. The Arizona budget five years ago projected that cities and towns would be receiving roughly $900 million by now, not nearly a billion and a half. This means they are reaping a windfall compared to what was anticipated in the amount of $600 million. Not only were they completely held “harmless,” they have far outpaced expected revenue growth.
That’s $320 million from taxing online sales and a $600 million windfall from income tax collections, for a total windfall of $920 million.
Municipal Budgets Are Out of Control
As city revenues from the state have exploded, so has the size of their budgets. If the state had defunded the cities, we would expect to see budget cuts. Yet year after year, municipalities have seen their budgets grow bigger and bigger.
Just take a look at the city of Phoenix. In 2019, Phoenix had a General Fund budget of $1.39 billion. Five years later, their budget has nearly doubled to a whopping $2.13 billion! It’s obvious that no amount of revenue can satiate their appetite to spend, evident by their current attempt to impose another tax increase on their already overtaxed residents to avoid any sort of fiscal sanity.
And yet, they continue the same talking point and continue to send their lobbyists down to the capitol to block commonsense taxpayer protections, all on the taxpayers’ dime.
This year they are opposing Senate President Peterson’s bill (SB1013) that would require cities, towns, and counties to obtain a 2/3 majority before raising taxes and fees, a policy that applies to the legislature, and now to the people, who must get to a 60% vote threshold on the ballot to raise taxes after the passage of Prop 132 in 2022. Though the cities might bank on a veto from Katie Hobbs, President Petersen has also introduced his bill as a referral to the ballot, SCR1008.
The cities should be careful in their opposition. If Hobbs vetoes the bill, the voters will likely support it on the ballot, putting the protection behind the Voter Protection Act, which means they won’t be able to change it in the future without going back to the ballot.
Instead of spreading misinformation about being “defunded,” the cities should tackle their own bloated budgets.
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