As Tucson's economy grows, residents may see city services cut. Why?

During recent budget discussions for fiscal year 2025, city of Tucson staff alerted the Tucson City Council of falling revenue despite the city's growing economy.

To cut costs, the city could limit the number of services it provides, delay pay increases and even freeze hiring.

Although the budget for 2025 is currently balanced, the city will have to develop a plan to avoid drastic cuts over the subsequent years. The revenue loss is fueled by a statewide change in income tax policy expected to cut funding across the state while giving taxpayers a lower rate.

“It’s nothing we did or didn’t do, it’s just the function of folks up north,” said City Manager Mike Ortega at an April 9 council meeting.

How much is Tucson projecting its revenue will decrease?

For fiscal year 2025, which begins July 1, the city is looking at a $27 million decrease in revenue compared to the previous fiscal year. That's a roughly 18.9% loss.

Ortega said the city's current reserves are enough to cover the loss of funds in fiscal year 2025, but not for future years of funding loss.

“Without added cost-saving measures, we will experience operational deficits in FY26-FY29, and the current fund balance could be entirely depleted by FY27,” Ortega said in an April 9 memo to the mayor and city council.

Projections forecast operating fund deficits of $23 million in 2026, $17 million 2027, and $10 million in 2028, according to the latest 5-year projection.

Why is there a decrease in revenue?

The deficit comes from decreased revenues following a statewide implementation of a 2.5% flat-rate income tax passed by the Arizona legislature in 2021. The changes went into effect in 2023.

Previously Arizona’s tax rates ranged from 2.59% to 4.5%. Arizona cities and towns argued against the flat tax, noting it will annually cut them out of $225 million in income tax revenue the state shares with local governments. The flat tax's supporters said it made the state more competitive and economically appealing.

Ortega said the revenue from the flat tax will slowly increase, but it could take as long as a decade for the state-shared revenue funding to return to previous levels.

Despite the loss of revenue, Tucson's economy is growing.

In the April 9 memo to the council, Ortega outlined the areas of growth as shown by an increase in revenue from the Business Privilege Tax, up 4% from last year; growth as high as 4.6% in retail and restaurant sectors; and a 13.9% growth in the construction contracting sector.

What will this impact?

With Tucson’s budget decreasing annually, the city will be in a “negative position” by the end of 2027, said Anna Rosenberry, Tucson’s assistant city manager and chief financial officer. She noted how the available fund balance is projected to be consumed between the operating budget, the investment plan, and “one-time items.”

The deficit could require the city to scale back on some of its services, Ortega said. For help in deciding which services to prioritize, the city sent a survey to obtain input from the public. From March 4 to April 18, the city opened a survey to the community and hosted public town halls about the questionnaire.

With 40 hours of public comment and 818 survey responses, the highest priorities were most frequently affordable housing, city infrastructure, transit, public safety, water, mental health, poverty and crime.

Is this happening in other parts of Arizona?

The loss of state-shared revenue is also being felt in cities across the state, like Phoenix, which projected a deficit as high as $103 million for fiscal 2025 stemming from the state ending residential rent tax collections starting in January 2025 and the flat income tax.

A 2021 report by the Arizona Center for Economic Progress found the flat tax will also weaken state revenues by larger amounts over time. The report noted this could disproportionately impact rural communities that depend more on state-shared revenues.

What is the city's plan to address this?

Ortega reiterated that changes will be needed in the future, and the city has time to figure out how to avoid drastic cuts.

Some of these strategies could include changes to investment plan spending, deferring compensation decisions, and implementing hiring freezes or delays. The city is also looking at state and federal funding opportunities.

To help increase revenues starting next fiscal year, the city is also considering fee increases for Parks and Recreation, Reid Park Zoo, Tucson City Golf, Park Tucson, and Planning and Development Services. The city is also conducting public outreach for a proposed increase in parking rates and fees to take effect on July 1.

The city also approved a special election to bring a new sales tax before voters this summer.

The first public hearing on the budget was held May 7. The public will have two more chances to weigh in on the fiscal year 2025 budget with a public hearing on May 21 and another on June 4 before the council votes to adopt the new budget on June 18.  

Reach the reporter at sarah.lapidus@gannett.com. The Republic’s coverage of southern Arizona is funded, in part, with a grant from Report for America. Support Arizona news coverage with a tax-deductible donation at supportjournalism.azcentral.com.