For the first time in six years, the Flagstaff City Council appears to have enough votes to increase primary property taxes that underwrite the General Fund.
Whether a majority ultimately votes for a tax hike and by how much is still up in the air.
State law allows cities and counties to increase total property taxes by up to 2 percent a year. Flagstaff has forgone that option for five years, freezing collections at $5.7 million this year (including new construction) on a General Fund budget of $63.5 million. Cumulatively, the freeze has cost the General Fund $1.7 million over the past five years, or about $2.4 million if it is extended a sixth year in the upcoming budget.
By comparison, sales taxes contribute three times as much to the General Fund: an estimated $18.6 million this year.
At the council’s budget retreat last week, councilmembers were somewhat divided on what the property tax increase should be, but city staff was directed to explore possibilities, including raising taxes 12 percent. That is the highest allowable under state law, which permits cities to make up forgone tax hikes all in one year.
However, if the levy increases 12 percent, it does not correlate to a 12 percent property tax increase across all types of properties because of varying valuation formulas. For example, collecting $720,000 more this coming year would translate into just a $30 tax hike on a $300,000 house, said Rick Tadder, the city’s management services director. Each 2 percent increase to the city’s levy would end up costing the owner of that home $4 more annually on a primary property tax bill that this year is $243. (The secondary tax, which pays for bonded indebtedness, is not limited under law but rises and falls with the voter-approved repayment schedule.)
If the council were to move forward on an increase in the property tax levy, they must hold a public truth in taxation hearing before any changes can be made.
Out of 50 cities and towns in Arizona that have a primary property tax, Flagstaff’s rate ranks 25th, falling right in the middle of Arizona cities.
In the past, the council minority in favor of raising taxes up to the 2 percent limit contended it was needed to cover inflation and ongoing increases in costs for city pensions, health insurance and liability insurance.
The majority argued that other taxes such as sales and BBB were already bringing in more revenue that was sufficient to cover General Fund expenses. Voters did approve a new dedicated sales tax in 2014 to pay for road repairs that had been paid for, in part, out of the General Fund.
Councilmembers last week were divided as to how high to potentially increase the levy, but a majority said they would be interested to hear their options in a future meeting.
Regardless of a potential upcoming increase, Councilwoman Eva Putzova said the freeze years were a savings to taxpayers.
“In the last five years, the city has not increased its revenue from property taxes,” Putzova said.
Councilman Jim McCarthy said he would be interested in looking at increasing the levy as a way to a balanced budget, given the tentative shortfall.
“I hope to keep the buying power of the property tax level, not increasing it more than inflation and not lowering it,” McCarthy said.
Councilman Charlie Odegaard said he would be interested in looking at keeping the tax rate flat, which would increase the city’s tax levy due to increasing home values this year. That amount, according to city officials, would be an extra $400,000 next year, or $13 more for a $300,000 house.