Title
Request to Authorize Amendment to Phoenix City Code Chapter 14 Proposed Tax Rate Increase (Ordinance G-7369)
Description
Consideration of the proposed amendment to Phoenix City Code Chapter 14 to increase the tax rate for certain business activities from 2.3 percent up to and including, but not exceeding, 2.8 percent effective July 1, 2025. Further request City Council approval of such amendment to offset the State's actions to reduce City revenues, ensure the sustainability of the City's budget going forward and provide additional resources for public safety and community programs.
THIS ITEM IS FOR DISCUSSION AND POSSIBLE ACTION.
Report
Summary
City revenues were impacted by the State’s actions to diminish the tax base with the enactment of Senate Bill (SB) 1131 and SB 1828. SB 1131 eliminated residential rental Transaction Privilege Tax (TPT) collected from businesses engaged in the rental of residential property effective January 1, 2025. With this change, the City anticipates a revenue loss of approximately $37.1 million in Fiscal Year 2024-25 (5 months) and an ongoing annual revenue loss of approximately $90.8 million beginning in Fiscal Year 2025-26 based on revised estimates. City revenues were further impacted due to SB 1828, which transitioned the state’s individual income tax rate to a flat rate of 2.5 percent. State income tax is distributed to cities and towns based on its population in relation to the total population of all cities and towns and is based on collections from two years prior. The City relies on estimates provided by the State Joint Legislative Budget Committee (JLBC) for state shared income tax revenue projections. These actions will result in less ongoing state shared income tax revenue to the General Fund compared to prior projections had the tax rate not decreased.
Finally, the City finds it necessary to identify resources to:
- Maintain existing programs and services;
- Provide additional resources to reduce Fire Department response times;
- Continue efforts to address homelessness and replace expiring grant funds;
- Fund operating costs for the voter approved 2023 General Obligation (GO) Bond Program projects;
- Support major facility maintenance;
- Replace vehicles, fire apparatus, and public safety equipment;
- Invest in City employees to attract and retain a high quality workforce; and
- Address the impact of inflation that has significantly increased the cost to provide programs and services.
A TPT and Use Tax increase of up to 0.5 percent is proposed for consideration with an effective date of July 1, 2025 for the business classifications below. This proposed amendment to Chapter 14 of the Phoenix City Code is estimated to generate the revenue required to ensure delivery of essential City services and offset anticipated revenue decreases due to the State’s actions. (See Attachment A)
Although commonly referred to as a sales tax, TPT is a tax on a vendor for the privilege of doing business in Arizona. The tax rate varies depending on the type of taxable business activity and the city/town in which the activity occurs. The current TPT rate for most business categories in the City of Phoenix is 2.3 percent. Individuals are subject to use tax when a vendor does not collect tax for tangible personal property used, stored, or consumed.
Public outreach included a series of public notices, social media posts and five information sessions held in the community from January 27, 2025 to February 6, 2025. On January 15, 2025, a 60-day public notice was published in accordance with Arizona Revised Statute (A.R.S.) 9-499.15. On February 27, 2025, a 15-day notice of intent was published in accordance with A.R.S. 9-499.15, as well as notice of public hearing for March 18, 2025 in the Arizona Business Gazette in accordance with A.R.S. 42-6054. Taxpayers will receive a tax bulletin via postal mail in May and June of 2025. Notifications of the change will also be included on the City's website at https://www.phoenix.gov/finance/plt and Arizona Department of Revenue's website at https://azdor.gov/model-city-tax-code/rate-and-code-updates.
Financial Impact
If approved, the TPT and Use Tax rate increase is anticipated to generate enough to offset the annual revenue loss from the State's actions and to provide resources to deliver City programs and services. For more information on the budget and proposed TPT and Use Tax rate increase visit phoenix.gov/budget.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research and Finance departments.