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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PHOENIX, ARIZONA – Tonight, voters in the City of Tucson rejected the Safe & Vibrant City ballot measure. This proposition would have increased sales taxes by a half-cent, accumulating approximately $80 million in revenue over each of the next ten years. Scot Mussi, President of the Arizona Free Enterprise Club, released the following statement:
“Voters from all sides of the political aisle made the correct decision in Tucson today. This tax increase was another failed attempt by Tucson’s radical leaders to take more tax dollars from hard-working men and women to fund an insatiable leftist agenda. We have seen over the years how Tucson officials have embraced globalist environmental, energy, and social justice propaganda and policies to steer their municipality – and even our state – into that camp. Tonight, Tucson voters rejected these efforts, rightly deciding to keep their tax dollars for themselves.”
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PHOENIX, ARIZONA – Yesterday, the Arizona House of Representatives Committee on Ways and Means approved HCR 2035 – the freedom to move ballot referral. The measure passed along party lines. If given the green light by both the Arizona House and Senate and a majority of voters in November 2026, the proposal would amend the constitution to prohibit the state government from tracking, taxing, or limiting miles of travel.
“As we have seen in other states, governments left to their own devices will succumb to radical attempts to track, tax, or limit their citizens’ transportation miles,” said Scot Mussi, President of the Arizona Free Enterprise Club. “These environmental schemes have no place in a free and prosperous society. In this divided state government, it is critical for our Republican-led Legislature to proactively send this constitutional amendment to the voters to protect our state from these authoritarian policies. I’m thankful to the lawmakers who have supported this bill, and I look forward to seeing it pass the full House in the near future.”
HCR 2035 is the first of its kind in the nation. As a constitutional amendment, it would prohibit the state, cities, towns, and counties from imposing a Vehicle Miles Traveled tax and limiting or monitoring vehicle miles traveled by an individual – whether they are using a gas-powered car or an electric vehicle. If approved by the Arizona House and Senate, the measure would then be transmitted to the Secretary of State to be included on the November 2026 General Election ballot to be considered by voters, bypassing the Governor’s Office.
Last month, the Senate Government Committee approved the mirror version of the legislation, SCR1004.
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PHOENIX, ARIZONA – Yesterday, the Arizona Senate passed SB 1013, which protects hardworking taxpayers in counties, cities, and towns from those jurisdictions raising taxes and fees that a supermajority of the relevant local officials did not approve. The proposal was sponsored by Senate President Warren Petersen.
“For over three decades, Arizona voters and their elected officials in the state legislature have expressed their strong preference to keep taxes and fees as low as possible,” said Greg Blackie, the Director of Policy for the Arizona Free Enterprise Club. “With Proposition 108 and Proposition 132, voters have time and again voted to prevent the state and themselves from raising taxes or fees without a supermajority in support. Despite this, many counties, cities, and towns continue to extract taxes and fees from citizens through edicts by faceless bureaucrats. Thankfully, legislators realize the importance of protecting the financial interests of the men, women, and children they represent by applying to the same standard to all jurisdictions.”
Despite counties, cities and towns protesting these proposals, complaining that the legislature is cutting local funding, these jurisdictions are flush with increasing financial revenues. Just this past year, cities alone have benefited from $315 million of new revenue from the collection of online sales tax.
In 1992, Arizona voters passed Proposition 108 to prevent the legislature from increasing taxes without a two-thirds majority.
In 2022, Arizona voters passed Proposition 132 to require a sixty percent threshold on voter initiatives to approve any tax increase on the ballot.
There is also a referral – SCR 1008 – moving through the Arizona Legislature at this time. SCR 1008 sends the policy of SB 1013 to Arizona voters for an up-or-down vote in the November 2026 General Election in the event that Governor Hobbs vetoes a bill sent to her Office. This ballot measure will be considered by the Senate Government Committee this week.
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As President Trump gets to work cleaning up Joe Biden’s failed economy, the last thing the people of Arizona need is to be sending their hard-earned dollars to woke Hollywood. But that’s exactly what’s happening.
Thanks to a law passed in 2022, movie companies that film in Arizona will begin receiving refundable tax credit subsidies this year—up to 15 percent if they spend up to $10 million in production costs, 17.5 percent if they spend between $10 million and $35 million, and 20 percent if they spend over $35 million. Then, to top it all off, these movie companies can get an additional 2.5 percent if they meet other criteria.
But here’s the real kicker. The keyword in all of this is “refundable.” This essentially means that if a movie company qualifies for more credits than they owe in taxes, the State of Arizona sends them a check!
So, how much does this outrageous tax scheme cost the people of Arizona?
Up to $125 million each year!
For that kind of money, there must be at least some kind of return on this investment, right? Nope.
If a company comes to Arizona, films a movie, mentions our state in the credits but decides not to release or distribute the film, it still receives the money.
Yes. You read that right. Arizona taxpayers could be funding Hollywood movies that won’t ever see the light of day. Who came up with this scheme?
This is not only absurd, it’s unconstitutional. That’s why the Goldwater Institute filed a lawsuit against these Hollywood handouts last week.
The Arizona Constitution’s Gift Clause is clear. The state cannot handout subsidies or cash for private purposes unless taxpayers receive a direct benefit. And the Arizona Supreme Court even ruled in 2021 that the government cannot include “anticipated indirect benefits” such as projected sales and tax revenue as part of the consideration with a private party under the Gift Clause in the Arizona Constitution. In other words, Hollywood dazzling our state’s leaders with projected economic development leading to increased tax revenue is an “irrelevant indirect benefit” that can’t be included in the consideration.
While Goldwater litigates the issue, the Arizona legislature needs to get to work as well. Movie production is a multi-billion-dollar industry. They do not need a subsidy. And if that’s not enough of a reason, consider this. Our state has been down this road before.
Years ago, Arizona lawmakers passed an “incentive” program similar to this one that cost us millions of dollars. And guess what happened? It offered no benefits to the people of Arizona and was allowed to expire. On top of that, other states like New York, Louisiana, Georgia, Connecticut, and Massachusetts have enacted Hollywood subsidies. But a recent study showed that despite $10 billion in taxpayer spending, there wasn’t even a statistically significant impact on employment.
It’s time to stop this terrible tax policy in our state. The people of Arizona don’t want to subsidize Hollywood’s woke movies while thousands of liberal California voters are shipped to our state. Arizona’s lawmakers need to do taxpayers a favor and repeal this awful program before the court is forced to shut it down.
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Last weekend, the Arizona legislature completed its constitutional duty and finally passed a state budget, concluding its business for the year. Looming over the entire process was a budget deficit that needed to be filled—fluctuating from around $1.6 billion to just over $2 billion over the 3-year budgeting period.
Though the left and the media wanted to blame historic tax cuts and landmark school choice expansion for the shortfall, the real problem was record spending that resulted in Arizona’s budget growing by over 50% in the last five years. So, when lawmakers gaveled into session in January, the solution was to right-size state spending. Our organization even provided a roadmap for a successful budget process:
Cut spending to align with current and future funding projections
Don’t raid the rainy-day fund
Don’t use budget gimmicks to balance the sheets
Don’t roll back our school choice programs
Don’t raise taxes
So how did the legislature do? Here is a breakdown of the good and the not so good results from the budget:
The Good
Big picture, the package resolves the expected deficit and balances the budget. It did so largely with an across the board cut of roughly 3.5% in ongoing spending for state agencies, removing some prior one-time spending items, and largely sweeping surpluses in various funds to the tune of $714 million (more on that later).
Slush Fund Swept at Arizona Commerce Authority
Of those, the budget swept $57 million from the Arizona Competes Fund, which exists as a slush fund for the Arizona Commerce Authority (ACA) to hand out grants to corporations. Of all the problematic programs administered by the ACA, the Competes Fund is the most apparent violation of the Arizona gift clause, which we have written about extensively.
Protecting School Choice
Hobbs came into this session (just as the last) with her top priority being regulating the wildly popular ESA program out of existence. Despite the noise from Hobbs, legislative Democrats, and their pals in the media, the budget does not place any limitations on how many students can obtain an ESA, even though Hobbs wanted to force thousands of students back into government-run schools.
The budget did include minor changes to the program, such as requiring fingerprinting for teachers and staff with unsupervised access to students at qualified schools (mirroring existing requirements for schools who accept STOs), limiting audits on families to no more than once every five years, and allowing for reimbursements of expenses instead of requiring only the use of Class Wallet. This leaves the program largely untouched, despite the fuss and strong posturing since its passage in 2022—from a failed referendum attempt, to a failure to place any limitations last session, and now a failure to restrict it this year.
Several Measures Referred to the Ballot
Further, as part of passing the budget, legislative Republicans also sent four more measures to the November ballot. Among those is SCR 1041 which protects our ballot from unconstitutional measures by allowing for legal challenges before the election, SCR 1040 to protect tipped wage earners, and SCR 1012 which requires legislative authorization before any agency regulation that will cost $500,000 is implemented.
The Not So Good
Fund Sweeps
However, as mentioned earlier, the largest mechanism used to balance the budget was sweeping funds, including many that are funded from fees charged for occupational licenses. These fees are paid by regulated professionals, and surpluses in the fund imply that they are being overcharged. Those surpluses should be returned to the professionals who paid excessive fees, not swept to balance the budget. That said, the budget prevents fee increases from these boards for the next two years, which is a solid protection to ensure they do not turn around and further burden regulated professionals to refill their coffers.
Lack of Executive Oversight
There were also some missed opportunities this session, specifically in holding the executive branch accountable. Last session, the Arizona Senate held firm in doing thorough investigations of Hobbs’ agency nominations, to the point that she rescinded them all and resorted to breaking the lawto avoid the Senate confirmation process. Similar to nominating the directors who run her agencies, this session brought many of those agencies that were set to automatically terminate without a legislative continuation, providing an opportunity to continue that track record and ensure accountability. Among those were the ACA and the Arizona Department of Transportation.
No Agency Reforms
While it was good to sweep the large stockpile of cash at the ACA in the Competes Fund, the Authority was continued for five years without any substantive reforms. Most critically, there was no statutory test to protect taxpayer dollars from unconstitutional expenditures. Similarly, ADOT received an 8-year continuation, excluding the reforms included in a bill that passed the Senate earlier in session that would have prohibited them from conducting DEI trainings, developing “Climate Action Plans,” and building electric vehicle charging stations.
No Action on Kris Mayes Report
There was also no real action in response to a thorough report from the House Executive Oversight Committee finding “that Attorney General Kris Mayes has abused power, neglected legal duties, and committed malfeasance in office.”
An Acceptable Budget with Divided Government
Given the dynamics that were at play—a budget deficit, divided government, and the specter of election year politics looming over the process—this was an acceptable package that won’t give anyone buyers’ remorse in a few years. It did cut spending, it did protect school choice, it didn’t touch the rainy-day fund, and it didn’t raise taxes.
So all-in-all, enough was accomplished to continue to feel good about the future prosperity of our state.
Help Protect Freedom in Arizona by Joining Our Grassroots Network
Arizona needs to have a unified voice promoting economic freedom and prosperity, and the Free Enterprise Club is committed to making that happen. But we can’t do it alone. We need YOU!
Join our FREE Grassroots Action List to stay up to date on the latest battles against big government and how YOU can help influence crucial bills at the Arizona State Legislature.
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