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Legal Corner: Local Income and Luxury Taxes
Christina Estes-Werther, League General Counsel
A frequently asked question is whether a municipality may impose its own income tax or luxury tax, such as a tax on cigarettes or alcohol. The
short answer is no, but in order to understand the reason we must turn back the clock over four decades.
In 1972 a citizen's initiative promoted by the League established the urban revenue sharing structure that provides fifteen percent of the state
income tax to cities and towns based on population. The initiative, Proposition 200, resulted after failed legislative attempts to create a
sound, balanced tax structure for local governments. Without legislative action, municipalities were seeking to implement or increase local
sales and use taxes due to population growth and inflation in order to maintain basic public services.
The citizen's initiative was not without its challenges. First, an overwhelming effort was necessary to collect the required number of
signatures in a short amount of time. In July 1972, petitions were filed with the secretary of state's office containing over 63,000
signatures. Following certification, lawsuits were filed challenging the validity of signatures but opponents did not prevail. Ultimately
Proposition 200, the Revenue Sharing and Tax Stabilization Act, was placed on the November 7th General Election ballot and approved by
voters.
The initiative included three key components:
- Fifteen percent of the state's annual income tax collections would be distributed to incorporated cities and towns according to population.
- In exchange for revenue sharing with the state, cities and towns were restricted from levying income and luxury taxes.
- The state was authorized to contract with cities and towns to create a uniform system to collect the local sales and use taxes.
Cities and towns have become familiar with the current monthly distribution system of urban revenue sharing monies, which are calculated based on
income tax collections from two years prior to the fiscal year when the funds are dispensed. These monies must be expended for a municipal public
purpose but are otherwise unrestricted.
Although the state preempts the cities and towns from imposing income and luxury taxes, newsletters and fact sheets from the 1972 campaign promoted
this provision as a fair exchange for revenue sharing and a favorable alternative to patchwork of luxury and use taxes across the state. After 40
years in Arizona law, urban revenue sharing has been a stable source of funding that cities and towns use to maintain services for its residents. As
long as revenue sharing continues, local governments are prohibited from implementing income and luxury taxes.
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League of Arizona Cities and Towns
1820 W. Washington St.
Phoenix, AZ 85007
Phone: 602-258-5786
Fax: 602-253-3874
http://www.azleague.org
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