Arizona cities are preparing to either tighten their belts or raise sales taxes as they adjust for revenue reductions from the state Legislature that will start next year.
Last year, the Legislature passed a ban on cities and towns collecting rental taxes on residential properties that goes into effect in January 2025. That, combined with cities receiving less state-shared revenue after the Legislature’s change to a flat income tax rate instead of a graduated rate went into effect last year, is leading to much less in city coffers.
City of Phoenix officials estimate the city will have $120 million less revenue each year going forward.
That is only about 1% of the city’s overall budget, which for the current fiscal year is about $11.7 billion, but with cities required by the state to pass a balanced budget each year, it will mean either cutting $120 million worth from services or staff pay, adding it in sales tax or fees, or a combination of those options.
Phoenix City Hall, 200 W. Washington St. (Courtesy City of Phoenix)
Mayor Kate Gallego likened it to losing funding for 350 sworn police officers, more than many cities’ entire police departments.
It doesn’t help that federal funds from the American Rescue Plan Act, which have helped the city with a variety of services and programs in recent years, will be used up by the end of the 2026 fiscal year.
City Manager Jeff Barton noted the loss of revenue comes as the city’s expenses continue to grow, both because of a growing population and the city dealing with rising costs like everyone else.
During a council meeting last week, council members railed against the Legislature for these changes to revenue.
“They’ve unfairly kind of backed this city into making these difficult decisions,” said Councilmember Kesha Hodge Washington.
Gallego, others on council and the city’s Government Relations Department have been lobbying the Legislature to delay the implementation of the residential rental tax ban for at least an additional year. Gallego noted there has been bipartisan support in the past for a slower implementation of the ban.
Barton said the upcoming loss of revenue “is not the greatest news” but “things could definitely be worse.”
Barton, who was once the city’s budget director, said Phoenix has some time to figure out what changes to make. Though the loss of residential rental tax revenue will have a partial impact on the upcoming 2024-25 fiscal year, city staff projects an $80 million surplus at the end of that year. It is the following 2025-26 fiscal year when the projected deficits will begin.
“The benefit of having this multiyear forecast when we have it is we have time to make those corrective actions,” Barton said.
City staff projects a $92 million deficit in fiscal year 2026 and a $31 million deficit in fiscal year 2027.
Staff does project a rebound where annual revenues will start to climb again after the initial dip, so projected deficits will lessen beyond these years, if not disappear.
Councilmember Jim Waring said he trusted the city’s budget and finance team, led by Barton and Budget Director Amber Williamson.
“Been down this road before; pretty much always made it work out… Definitely seen bigger budget problems,” Waring said.
In the immediate term, the city is beginning its budget season that includes public meetings where residents tell staff what they’d like to see funded. Hodge Washington mentioned her office is constantly getting requests for additional city services.
Barton said the impact on the upcoming 2025 fiscal year will likely be restraint on adding or expanding city services. Though there is a projected $80 million surplus for the fiscal year, Barton said it doesn’t make sense to use one-time money for ongoing services, nor does it make sense to add ongoing services when the city’s budget will be stressed soon.
A communication priority during the public input of the budget process for Phoenix staff will be communicating this situation did not come from the city being irresponsible stewards of taxpayer money.
“This deficit did not come because we outspent ourselves,” Barton said.
He added the city has had some big expenditures in recent years, including across-the-board raises to city staff and a $500 million general obligation bond program approved by voters in November, but the city’s budget was balanced if not for this unforeseen loss in revenue.
Staff noted that the general obligation bond program, which supports a range of projects and programs from public safety, to streets, to housing, to arts and culture, should proceed as planned and will not be affected by the loss in revenue.
In last week’s discussion, city officials mostly just laid out the situation and the options without leaning toward any option in particular.
Williamson said if council did opt to raise sales taxes, it would want to keep them competitive with other cities. She said the city may want to enact a combination of tax and fee increases and reduction in services, as they have to correct deficits in the past. Barton noted there is not much wiggle room for added revenue through fees, as they are based on cost recovery, so the city cannot charge more than the cost to provide the service.
Reduction in staff pay did not receive any consideration. The pay raises passed last year were the result of an in-depth class and compensation study meant to ensure Phoenix was competitive to attract top talent in competition with both public and private employers.
Gallego pointed out the Legislature has made affordable housing a goal and said she feels like Phoenix and other cities have been punished by the rental tax ban for adding more than their share of apartments.
Vice Mayor Debra Stark noted Tempe, a college town, has a lot of renters.
“They’re scurrying,” Stark said about Tempe city leadership.
Stark said she thinks people often take for granted the things city funding does, such as provide clean water, trash pickup and response to 911 calls.
For which programs to cut, Waring suggested a last-in, first-out type of approach.
“Are citizens really wedded to stuff we only invented in the last two years? Are they so addicted to it they can’t live with it and so therefore we should hit them with a tax increase?” Waring asked.
Waring also repeated a recommendation he’s made often in recent months, reducing funding for homeless services. He said people experiencing homelessness are a small percentage of the population, “gobbling up a greater and greater share of the resources.”
Williamson noted much of the city’s recent homeless funding has been through American Rescue Plan Act dollars, but the Office of Homeless Solutions does anticipate needing an additional $6 million in fiscal year 2025 and $22 million per year thereafter for ongoing services.
“That’s a decent chunk of our issue,” Waring said.
Barton said he does not believe the loss of revenue will hurt the city’s bond ratings. He said bond raters are watching what the city does, as they always are during budget season, but Phoenix’s budget staff has built up trust with the raters and expects they’ll receive grace as long as they present a reasonable plan.
We’d like to invite our readers to submit their civil comments on this issue. Email AZOpinions@iniusa.org. Mark Carlisle can be reached at mcarlisle@iniusa.org.
Mark Carlisle joined Independent Newsmedia, Inc., USA, in 2017, covering Glendale. He has since moved to the Daily Independent team, primarily covering the city of Phoenix along with other topics affecting the Valley at-large.
Community: Mark enjoys taking his two young sons to parks, the Phoenix Zoo, the Phoenix Public Library and other fun events around the Valley. He also participates in a local book club.
Education: Chapman University with a BA in English Journalism and one in Screenwriting.
Random Fact: Mark worked at a tuxedo shop in college. Just don’t ask him to tie a bowtie.
Hobbies: Spending time with his wife, sons and dog, watching sports and TV shows, listening to audiobooks and occasionally writing fiction or designing a board game.
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