Here’s why Phoenix faces budget shortfall, might hike sales tax rate and/or cut services

PHOENIX – Recent state tax policy changes are largely the reason Phoenix is facing a projected budget shortfall of over $100 million, according to Vice Mayor Ann O’Brien.

O’Brien told KTAR News 92.3 FM’s Arizona’s Morning News on Monday the city has to reconfigure its finances because of a new rental tax ban and the state’s flat income tax rate.

The state shares income tax revenues with cities, but the pot shrunk after a 2.5% flat rate went into effect for the 2023 tax year under a law passed while Republican Gov. Doug Ducey was in office.

“That reduced our state shared revenue,” explained O’Brien, who represents District 1 in northwest Phoenix.

On top of that, a rental tax ban signed by Democratic Gov. Katie Hobbs in 2023 went into effect on Jan. 1, 2025.

“While … getting rid of rental tax was a savings of $7.50 a week to a renter, potentially, it was a $120 million hit to our budget for this year,” O’Brien said.

How will Phoenix address budget shortfall?

Phoenix officials are mulling a sales tax hike, service cuts or a combination of options to create a balanced budget, which is required under state law.

On Jan. 15, the city posted a 60-day notice for a proposed sales tax increase of up to 0.5% (5 cents for every $10 spent on taxable items). The City Council is scheduled to vote on raising the sales tax on March 18. Any hike enacted would go into effect July 1.

Meanwhile, if officials opt to cut spending to address the budget shortfall, it would affect departments supported by the General Fund such as police, fire, parks and libraries.

O’Brien said she will learn more details about what might be cut at a meeting later this month, but she said the prospect of reducing services “is concerning.”

She acknowledged that the police department is already dealing with staffing shortages, while the fire department is failing to meet some national response time standards.

“It certainly is concerning, right? We want our residents and community members, visitors, businesses to all be safe,” she said.

Related

Phoenix exploring options with potential budget shortfall in 2025Arizona Gov. Katie Hobbs signs $16.1 billion budget for 2025 fiscal yearMaricopa County budget for FY 2025 lowers property tax rate again, reduces spendingMaryvale High School stabbing suspect reportedly has been offered a plea dealPedestrian dead after getting hit by vehicle in PhoenixPhoenix stabbing victim hospitalized in critical condition, suspect detained