The City of Phoenix is planning on raising taxes on businesses that provide services in order to pay for an alleged revenue shortfall. However, the Goldwater Institute (GI) sent Phoenix officials a letter on March 6 warning them that the Arizona Constitution does not allow any new taxes or tax increases on “services.” GI said the tax increase would “rais[e] the prices of services like construction, contracting, and lodging.”
Article IX, Section 25 of the Arizona Constitution provides, “The state, any county, city, town, municipal corporation, or other political subdivision of the state … shall not impose or increase any sales tax, transaction privilege tax, luxury tax, excise tax, use tax, or any other transaction-based tax, fee, stamp requirement or assessment on the privilege to engage in, or the gross receipts of sales or gross income derived from, any service performed in this state.”
GI said in their letter, “This is a clear prohibition on cities from increasing any form of tax on any service performed in the state.” GI said the definition of service in the Arizona Constitution is broad, and affected industries include “construction contracting, hotel/motel, rentals, and restaurant and bars.”
The final vote on the tax increase is scheduled for Tuesday. The proposal to increase the Transaction Privilege and Use Tax rates was introduced on January 15. It will increase the current tax rate of 2.3 percent to 2.8 percent. Officials state that there is a $92 million deficit for the 2025-2026 fiscal year and a $31 million deficit for 2026-2027.
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