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Bisbee, Arizona

Legislature’s Flat Tax Proposal Will Cut Revenue for Arizona’s Cities and Towns by $225 Million

The proposed 2.5% flat tax rate and the 4.5% total cap on any income taxes would not only mean a $1.9 billion cut to state revenues, it would also mean a cut to the urban revenue sharing dollars Arizona’s cities and towns receive that are based on individual and corporate state income tax revenues. These cuts would result in a loss of critical services that our communities depend on to thrive like public safety, transportation, parks, libraries, and infrastructure.

“I am very concerned about all of the talk about substantial income tax cuts. I have said this before and I believe there is a lot of momentary money in our revenues right now that will be gone in three or four years. In Arizona it is much much easier to cut taxes than to raise taxes. When we start cutting, for example, income taxes we cut revenue not only for the state of Arizona but we cut revenue for local governments as well.”

- Alan Maguire, Economist, Arizona Finance Advisory Committee, April 15, 2021

In 1972, voters established the urban revenue sharing structure that provides 15 percent of state income tax revenues to cities and towns based on population. In exchange, cities and towns are prevented from adopting local income taxes. In Fiscal Year 2021, cities and towns will receive $828 million in urban revenue sharing. Under the proposed 2.5 percent flat tax rate and 4.5 percent cap on any income taxes, cities and towns are expected to lose 31 percent of their urban revenue sharing dollars, or $285 million.

Arizona’s cities and towns are critical to the health and economic well-being of the state. Some cities and towns have been hit harder by the pandemic, resulting in business closures, high unemployment, and financial insecurity for families and individuals. As local leaders work to help their communities face these new economic realities, they are also tasked with ensuring that they have the much-needed revenue to pay for the services they provide and to invest in economic recovery.

The Loss of Shared Revenues from the Flat Tax Will Hurt Small, Rural Communities

State sales and income taxes are often the largest revenue sources for Arizona’s smaller cities and towns. With significant restrictions on raising new revenues for cities and towns, permanent income tax cuts can lead to immediate revenue concerns and cuts to services at a time when communities need them most. Local economies will be impacted as cities and towns reduce or cancel planned capital projects. The impact of the proposed flat tax will be felt not only at the state level but also in every Arizona city and town. This will be especially true for small, rural Arizona communities – many of which have already been facing significant economic struggles.

Arizona’s current urban revenue sharing works to complement other forms of revenue to achieve a more balanced and equitable tax system. Currently, Arizona’s only progressive tax is its tiered income tax structure. A flat tax will continue Arizona’s increasing dependency on regressive sales taxes to fund cities and towns across the state. According to the annual state and local government finance report by the U.S. Census, Arizona’s cities and towns receive less funds from income taxes and are more reliant on general sales taxes than the U.S. average.

Arizona leaders should aim to create revenue systems that raise sufficient funds to support public goods and services at all levels of government.

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