Why Arizona Cities Oppose Governor’s Flat Tax Proposal

Published: Thursday, May 20, 2021 - 4:36pm

Arizona cities are sounding the alarm over a flat income tax proposal. The League of Arizona Cities and Towns says if state lawmakers approve the change being promoted by Gov. Doug Ducey, it would result in the single largest cut to local governments in Arizona’s history.

Arizona’s current income tax ranges from 2.59% to 4.5%. Ducey wants to see everyone pay a flat tax of 2.5%. 

During Tuesday’s City Council meeting, Phoenix Mayor Kate Gallego said it could be detrimental to all cities.

“Cities currently receive 15% of state income tax revenue, which is split amongst them according to their population in a system known as urban revenue sharing that was approved by voter initiative in 1972,” she said. “That initiative took cities’ powers to assess income tax away but guaranteed them this percentage each year.”

The League commissioned an economic analysis by Rounds Consulting, which found the flat tax would cut collections $1.9 billion a year and result in a $285 million annual reduction to cities and towns.

“While we have a very, very good budget situation now, it is premised on the idea that all the existing funding sources are left intact,” said Ed Zuercher, Phoenix city manager.

Daniel Scarpinato, Ducey's chief of staff, told Capitol Media Services said lower taxes could help Arizona attract more businesses, "Other states are becoming more competitive, so we're going to continue being more competitive and if we don't act these things will be left behind and we won't see this continued economic activity."

The Rounds analysis argues the flat tax proposal relies on “the misguided opinion” that cities and towns will make up for lost income tax revenue through sales tax collections from online retailers and legalized recreational marijuana. 

It said most online transactions were already taxable before the 2018 U.S. Supreme Court ruling that allowed states to mandate certain-sized businesses collect and remit sales taxes on transactions in the state. The analysis pointed out that  Prop 207, the voter-approved initiative to legalize marijuana for adults 21 and up, directs sales tax revenue to be split among community colleges, local law enforcement and fire departments, state and local transportation programs and public health and criminal justice programs.

The League is asking that the share of income tax collections for cities and towns be permanently increased to 18.9%.

BusinessPolitics Retail + Consumer

One Source, My Connection!