The League of Arizona Cities & Towns (the League) commissioned Rounds Consulting Group, an Arizona economic consulting firm, to analyze the impacts of a flat state income tax on local governments. The findings of the analysis confirm that failure to hold cities and towns harmless will hamstring municipalities’ potential for future growth, according to a statement from the League.

As lawmakers discuss and negotiate the FY 2022 state budget, communities are asking the Legislature to consider the ramifications of a $1.9 billion tax cut on cities and towns statewide. The measure could cost the Town of Fountain Hills $1 million per year, according to Mayor Ginny Dickey.

“Some Legislators are concerned about the impact of a flat tax on municipalities and on paying down existing state debt, such as from pensions and more from the 2008 recession, reportedly at $1.5B,” Dickey told The Times. “It is unknown when the budget will be voted on, but like us, the end of the fiscal year is June 30.”

The budget bills are expected to be voted on this week, according to Dickey. “The analysis (done for the League) stated a reduction in local tax revenue could lead to less business attraction as the quality of services provided by local governments could diminish due to budget constraints,” Dickey said.

“I share that concern, as the way this tax proposal exists currently, Fountain Hills would face significant cuts to our budget at a time when we are looking for revenue solutions for streets and other infrastructure needs. The League noted this would cost Fountain Hills about $1M per year if no offset is included, which is questionable at this time. In April, the Town Council communicated through Manager Grady Miller our opposition to the 2.5 percent flat tax as proposed to our local Legislators.

“The Phoenix Business Journal notes that the Institute on Taxation and Economic Policy found that 20 percent of Arizona taxpayers would get 91 percent of the reductions, leaving 9 percent for the remaining 80 percent of taxpayers.

“I concur with the concern regarding the effect to the state as a whole of this now expected $1.9 billion reduction every year, realistically in perpetuity.”

The League release continues, stating as part of a 1972 voter approved initiative, cities and towns receive 15 percent of the state’s collection of income tax. The proposed cut would result in $285 million in annual losses to Arizona cities and towns – the single largest cut to local governments in Arizona’s history.

A key finding from the Rounds Consulting dynamic analysis is that a reduction of this magnitude to local tax revenues will hinder local government’s ability to deliver quality essential services to residents, including the potential for cuts to public safety. These losses will negatively impact infrastructure investments and quality of life, further hindering municipalities’ ability to attract residents, businesses and job growth.

The Rounds analysis additionally addresses the opinion that cities and towns will make up these losses through Prop 207 and Wayfair revenues. While Wayfair modernized the tax code as it relates to online sales, most remote transactions were already taxable because of the physical nexus of retailers in the state and do not represent net-new revenue. Regarding Prop 207, the initiative’s language is definitive in stipulating that monies from the excise tax on adult-use marijuana cannot be used to supplant or reduce existing allocations.

“During a time in which cities are only now gaining a sense of stability following the uncertainty of the COVID-19 pandemic, safeguarding longstanding voter-approved local revenues is at the forefront of our priorities,” concludes the statement. “To hold cities and towns harmless, the League requests that municipalities’ share of income tax collections be permanently increased to 18.9 percent. Doing so will allow cities and towns to maintain the quality of life their constituents expect and meet infrastructure commitments necessary to maintain and grow the state’s economic viability.”