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.
The new rates would go into effect on July 1, 2025. While GI did not threaten to sue the City of Phoenix, the organization often sends government officials letters accusing them of violating the law, which result in lawsuits when the officials fail to change their actions.
GI has a lengthy history of prevailing in lawsuits against the City of Phoenix. In 2023, GI successfully stopped the city from implementing a prevailing wage mandate for contractors. GI forced Phoenix officials to dismantle The Zone, a huge homeless encampment near downtown. GI won their lawsuit against the city in 2020 over violating the Arizona Constitution by giving millions of dollars in tax breaks to developer Amstar to construct a 19-story building downtown. In 2023, GI won a lawsuit against the city over trampling free speech when it allowed the National Football League and Arizona Super Bowl Host Committee to decide what signs residents could or could not display in a part of the city.
GI has filed similar lawsuits around the state. The think tank sued the town of Gilbert for enacting an unconstitutional “pickleball tax” on homebuilding and short-term rental properties to fund pet projects like pickleball courts, splash pads, and a ropes course. GI sued the town of Payson when officials bypassed the democratic process by abusing their emergency powers to incur $70 million in debt without public consent.
There are still some ongoing lawsuits. In 2022, GI sued the city over giving a $7.9 million tax break to a private real estate developer, the Hubbard Street Group. The developer constructed a luxury highrise apartment in downtown Phoenix, which the city took title over in order to exclude the developer from tax rolls. The city leases the building back to the developer, which GI said violates the Arizona Constitution since it “prohibits governments from giving special subsidies to preferred private parties and prevents the conveyance of private property for the purpose of evading taxation.”
Phoenix is run by Democratic Mayor Kate Gallego and mostly Democratic city council members.
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Rachel Alexander is a reporter at The Arizona Sun Times and The Star News Network. Follow Rachel on Twitter / X. Email tips to [email protected].
Photo “Phoenix City Hall” by the City of Phoenix.
