Lawmakers consider tax breaks for unincorporated areas

PHOENIX - State lawmakers are debating whether to give tax breaks to people who live outside of city limits.

In Yuma County, the break would apply to residents of the Foothills, Gadsden, Roll, Dateland and other areas outside incorporated areas.

The proposal by Sen. Bob Burns is based on the fact that 15 percent of all state income taxes collected from all individuals and corporations are redistributed to cities. Yet Burns said close to one out of every five Arizonans does not live in incorporated areas.

And in some areas, that is even more pronounced: More than one out of three Pima County residents does not live within any of the cities.

What that means, Burns said, is that the rural residents are, in effect, subsidizing city dwellers.

"Rural" might not exactly be the right word. Several built-up areas are not incorporated.

That includes Green Valley and much of the foothills area north of Tucson - and Sun City, an area Burns happens to represent.

The move is getting stiff opposition from lobbyists for cities around the state who have become dependent on the revenue flow.

That's because the measure does more than give the residents of unincorporated areas a tax break. SB 1254 reduces the revenue sharing to cities by the same amount.

And there's a lot of money at stake.

Revenue sharing, as it is known, currently divides up more than $717 million a year among the cities.

Burns said it is impossible to know at this point how much that figure would drop if his measure becomes law. That's because there is not necessarily a correlation between the percentage of Arizonans who live in unincorporated areas and the percentage of total income taxes collected from them.

But it's enough so that Jeff Kros, lobbyist for the League of Arizona Cities and Towns, is leading the effort to kill the measure.

His main argument is that slashing revenue sharing would break what he believes is a deal between the cities and the state.

That goes back to a 1972 voter-approved initiative which established revenue sharing. But the trade-off, Kros said, was that cities and towns were precluded from levying their own local income taxes.

Burns said, though, that doesn't entitle the cities to share in the income taxes of people who do not live there.

Kros, however, said the services funded with the dollars pay for parks, police and roads. And he said these create strong cities which, in turn, help the economy of the entire state.

He also had his own figures to suggest that the revenue transfer - to the extent there is one - is minimal. Kros said 85 percent of Arizonans live in cities. Yet he said urban residents generate 92 percent of all income tax collections for the state, proving that the cities are Arizona's revenue generators.

That contention, though, brought a sharp retort from Sen. Ron Gould, R-Lake Havasu City. He said businesses produce tax dollars, not cities.

Kros said that does not undermine his argument.

"Businesses take advantage of the infrastructure that's put in place by the city, things like roads, outlets, traffic signals," he said.

Burns, however, said that doesn't answer his contention that residents of places like Sun City probably aren't widely using the services of nearby cities as they can shop and entertain themselves within their own communities. Yet their income tax dollars are shipped elsewhere.

But Kros pointed out that any tax system is far from perfect.

For example, he noted there are taxes levied countywide to help pay for rural fire districts, meaning even city residents pay that levy even though they do not benefit and, in fact, are paying city taxes for their own fire departments.

Burns admits that if he had his way, he would scrap revenue sharing entirely. And the issue, he said, is more philosophical than fiscal - what he calls a "lack of accountability" in the system.

"The Legislature imposes a tax policy, in effect raising the money, and then hands it over to cities to spend. That's a disconnect."

He said the level of government that wants to spend the money should be the one that has to raise the funds - and justify the spending to its taxpayers. Otherwise, Burns said, it simply amounts to politicians giving away "free" money - money that doesn't come from locally raised taxes.

"But I cannot get support for that here," Burns said of the Legislature. He said that's why he is attempting to at least resolve the issue of the rural residents' taxes going to urban areas.

Burns has managed to get his measure through the Senate Finance Committee. But its future remains uncertain.