http://www.azcentral.com/arizonarepublic/news/articles/0502state-budget0502.html

Arizona's cities fight plan to cut state taxes Say revenue loss may hurt services

Robbie Sherwood and Amanda J. Crawford The Arizona Republic May. 2, 2006 12:00 AM

Arizona cities and towns are hitting the panic button over a proposal to cut state income taxes by $600 million over the next three years.

Mayors from Phoenix, Mesa and other cities say the proposal, which is emerging as a key sticking point in legislative budget negotiations between Republican leaders and Democratic Gov. Janet Napolitano, will take a substantial bite from shared state revenues that cities use to pay for police, fire, parks and other services.

"The cuts to Phoenix would be catastrophic," said Phoenix Mayor Phil Gordon, who met with Senate President Ken Bennett about the proposed tax cuts. "If we take another hit, you would have to dramatically reduce police and fire, plus other services. We rode the hard times down, and now that there's more revenue, to not ride it up and not share in the revenue that we helped create is morally unfair."

Gordon argues that the cities' investment in quality of life is an important reason the state benefits from strong economic growth. If the state is going to cut taxes because of that growth, it should increase the cities' share to offset the cuts as it did when taxes were cut during the 1990s, he said.

But Republican leaders have been cool to that idea and have accused city leaders of "being greedy" at a time when state coffers are overflowing with a $1.1 billion revenue surplus. They argue that the tax cuts will help spur more economic growth.

In closed-door budget talks with Napolitano and other Democrats, GOP leaders are pushing combined income and property-tax cuts of $250 million next year. Although Napolitano has not vowed publicly to fight for shared revenues, she did say the three-year income-tax cut would put the state into a deficit.

At the same time, sources close to the negotiations say Napolitano is in for a hard fight for her top spending priorities. They include spending $100 million to expand full-day kindergarten statewide, increasing teacher pay, fully funding universities and creating a $150 million fund for bioscience research. With bipartisan support for up to $250 million for freeway and road construction, the surplus is disappearing fast.

Impact on cities

If the tax cut is enacted, cities' income from revenue sharing will continue to grow but much more slowly than in recent years. Gordon and other officials say the increase would not be enough to cover the costs of rapid growth.

Without the tax cut, Phoenix would expect to get about $210 million from state income tax in 2008. That share would fall to $201 million if the tax cut goes through. By the third year of the tax cut, the difference would be $27 million and the year-to-year increase would be small. Phoenix gets about a third of its budget from state shared revenue, about half of which comes from income tax.

Other Valley cities would face a similar situation.

Under the state's revenue-sharing arrangement dating to 1972, Arizona cities and towns receive 15 percent of the state's revenue haul and cannot impose their own income taxes. So, any changes to state revenue directly affect the amount that the cities receive, unless the state adjusts their percentages. That's what happened in 1998, when the cities' share was increased to offset tax cuts under Gov. Fife Symington.

Kevin Adam of the Arizona League of Cities and Towns said that, because of the two-year lag on receiving shared revenues, many Arizona cities are just now pulling out of financial hard times. During those down times, the influx in new residents and demands for services grew even if revenues didn't.

"The growth now would mask the loss (of an income tax cut)," Adam said. "But there are obviously more people that we need to provide services to."

Gordon said Phoenix has had to trim $117 million from its budget over the past four years and has thus far avoided cuts to police, courts and fire protection, which make up more than 40 percent of the city's budget. The shared revenue from the economic uptick would begin to make up for the losses of previous years and allow the city to invest in public safety and other amenities.

"If you want this state to prosper, you've got to grow," Gordon said. "The city of Phoenix is not being greedy. It is being practical."

Mesa, the state's third-largest city, is in an even worse position to deal with less money from the state because of a $25 million budget shortfall. If Mesa voters reject a property- and sales-tax increase next month, city leaders say they will be forced to close museums, public swimming pools and other programs. The proposed income-tax cut would reduce Mesa's shared revenues by $2.8 million the first year and $8.5 million after three years.

"The timing couldn't be worse for Mesa," Mesa Mayor Keno Hawker said.

Cities crying wolf?

Republican lawmakers said the cities are prospering under the revenue-sharing arrangement and are crying wolf about the public-safety effects of the proposed tax cut.

Rep. Laura Knaperek, one of the prime movers behind the income-tax cuts, said cities are "just being greedy" by balking at the cuts, which she predicts will spur economic activity and lead to even higher tax collections.

"It's a little disingenuous because they are going to be rolling in money," said Knaperek, R-Tempe. "They are not going to lose any money. They are going to see increases."

Other influential Republican leaders on the budget, including House Speaker Jim Weiers and Senate Appropriations Chairman Bob Burns, are adamant against protecting cities from the impact of the tax cut.

Weiers said city representatives have asked that they be "held harmless" from the impact of the tax cut.

"I pointed out to them that it doesn't take anything away from them," said Weiers, R-Phoenix. "It just slows the growth of what they are going to be getting."

History

The state set up its current revenue-sharing arrangement after a 1972 ballot initiative. In exchange for 15 percent of the collected taxes, local governments agreed not to levy income taxes of their own.

Officials with the cities point out that during the Legislature's last spate of income-tax cuts during the 1990s, Symington did not allow city budgets to suffer. He had promised during his campaign against Democrat Terry Goddard, who had been mayor of Phoenix, that he would never touch state shared revenues. And he didn't. When the Legislature cut taxes, the percentage of shared revenues for cities inched up so they would receive the same amount of money.

Conversely, in the late 1980s, when lawmakers and Gov. Rose Mofford raised taxes, the share of revenue for the cities decreased from 15 percent to nearly 12 percent to prevent a windfall.