Shoppers in Surprise could soon pay a higher tax rate at the register

A proposal in Surprise to offset a nearly $7 million shortfall from the upcoming ban on the residential rental tax could have shoppers paying more at the register.

City leaders Tuesday will consider raising Surprise’s sales tax rate on certain services from 2.2% to 2.7%. If approved, the tax hike would go into effect July 1 for retail, utility, commercial real estate, arts and entertainment and lodging sales, among other things.

Restaurants and bars, which charge a 3.2% tax on customers, are excluded from the proposed increase.

The vote on the increase is part of the city’s effort to restructure tax rates, including one levied on property owners. Councilmembers in June will decide on cutting that rate in half to ease homeowners' living expenses.

The restructuring also comes as Arizona cities brace for the loss of revenue generated from taxes on renters. Starting Jan. 1, municipalities will be prohibited from levying those taxes.

Tax rates vary by city, ranging between 1% and 3%. Renters in Surprise are charged a 2.2% tax for their leases.

The state’s Joint Legislative Budget Committee forecast a $230 million revenue loss for Arizona cities in the first full fiscal year. For Surprise, that means a projected loss of $6.6 million.

Gov. Katie Hobbs signed the measure, Senate Bill 1131, in August to secure support for Proposition 479, the ballot measure asking Maricopa County voters to extend the half-cent sales tax for transportation projects.

Supporters of the bill argued it will help renters amid the state’s affordable housing crisis.

Opponents contend that cities will have a tougher time funding services, notably public safety.

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Why is this being proposed?

With the ban looming, Surprise faces that very predicament: Either cut services or fill in the gap from other sources.

Increasing the sales tax, the city said, will keep rates competitive with neighboring cities, offset the revenue loss and maintain current service levels.

Glendale’s sales tax rate varies by industry. For most services, including retail, lodging and entertainment, customers are charged 2.9%. Restaurants and bars have a 3.9% tax rate.

Over in Peoria, the city’s sales tax rate for most services is 1.8%. At restaurants and bars, customers are taxed 2.8%.

As a staunch opponent of any tax increase, Councilmember Jack Hastings said he would prefer to see the city make spending cuts.

“The prices of everything are going up, so to ask our residents to pay more is just not something I want to do,” Hastings said of the rising costs for goods and services since the pandemic.

He pointed to this fiscal year’s budget that set expenditures just north of $771 million, up 76% from Fiscal Year 2022, when spending was capped at $437.8 million.

“That’s a huge increase in spending in my opinion,” Hastings said.

He later added, “We’re increasing spending so much, I’d at least like to have the conversation about making cuts.”

The city’s budgets in recent years note Surprise’s ongoing economic expansion and population growth, and the need to have services keep up.

In addition to the rental tax ban, the city also faces a roughly $7 million shortfall following the 2021 decision to cut the income tax rate to a flat 2.5%. It was previously set at 4.5%.

Those measures had Councilmember Ken Remley lambasting the state.

“It’s really unfortunate the state is trying to figure out ways to make it tougher on cities to pay their bills,” Remley said.

To him though, there’s no other way around the situation, the city must increase the taxes.

“We have no other way to do it,” he said, later adding, “The bottom line is, our changes will not result in a decrease of services to our people.”

Mayor Skip Hall and other councilmembers did not immediately respond to phone calls requesting comment Friday.

What other tax rates are being restructured?

After city leaders vote on whether to approve the sales tax increase, they’ll next decide on a proposal to drop Surprise’s property tax rate by 50%.

Property owners pay a roughly three-quarter-cent tax per $100 of assessed value.

The council will consider reducing the rate of $0.7591 per $100 to $0.3795.

According to Andrea Davis, Surprise’s deputy city manager and chief financial officer, that cut would give the city an estimated $6.5 million in general fund revenue next fiscal year — down from this year’s projection of nearly $12 million.

This fiscal year, which ends June 30, the city budgeted $881 million in overall revenue, with $212.5 million going to the general fund, the city’s primary pot for supporting operations.

In addition to sales and property taxes, general fund monies come from multiple sources like service charges, fees and state-shared taxes.

Revenue from sales taxes this year is anticipated to reach $86 million. That's 40.5% of the general fund revenue, the largest share.

Another 5.5% is derived from property taxes, which is projected to give the city $11.8 million.

Asked why the city is proposing to increase sales taxes while cutting property taxes, Davis said the city wanted to give homeowners some relief after acknowledging the effect shoppers will feel at stores.

“Since the increase is being contemplated because of the loss of residential rental sales tax,” she stated in an email, “the reduction in the property tax is to give homeowners a reduction in their living expenses.”

Shawn Raymundo covers the West Valley cities of Glendale, Peoria and Surprise. Reach him at sraymundo@gannett.com or follow him on X @ShawnzyTsunami.

This article originally appeared on Arizona Republic: Surprise considering sales tax increase as ban on taxing renters looms