Overview: All residents of Arizona benefit from a robust revenue distribution system, commonly referred to as State Shared Revenue, that efficiently spreads certain statewide tax collections across all rural and urban communities. It should be noted that the counties and school districts also receive some state shared revenues to varying degrees. State Shared Revenue is a bit of a misnomer, implying that the state is “benevolently sharing” its revenue with local jurisdictions, when the reality is more nuanced. The shared revenue programs in effect today were created for various reasons, such as replacing a more cumbersome local taxing system; as a trade-off in exchange for cities and towns agreeing to forego some specific taxing authority; or as compensation for some other revenue reduction instituted by the State. Today’s system of state distributed revenue recognizes and preserves the symbiotic connection between rural and urban Arizona and ensures that one community’s success is everyone’s success.
“State Shared Revenue is a bit of a misnomer, implying that the state is ‘benevolently sharing’ its revenue with local jurisdictions, when the reality is more nuanced.”
This document is focused on the four taxes collected by the State that make up the shared revenues distributed to cities and towns: State sales tax or Transaction Privilege Tax (TPT), State income tax via Urban Revenue Sharing (URS), Vehicle License Tax (VLT), and the Highway Users Revenue Fund (HURF).
State Shared Revenues in General
State shared revenues typically make up about 1/3 of a city’s or town’s General Fund revenue, but they can easily represent more than 1/2 of total revenues if a city or town doesn’t have a primary property tax. It’s easy to understand why cities and towns protect shared revenues so zealously, given the impact these funds have on their day-to-day operations. Cities and towns are free to use their shared revenue distributions from TPT, URS, and VLT for any municipal public purpose, i.e., any General Fund expense. HURF is collected for a specific purpose that’s restricted by statute, meaning it can only be used for street and highway expenditures.
“It’s easy to understand why cities and towns protect shared revenues so zealously, given the impact these funds have on their day-to-day operations.”
Each shared tax type has a specific source and a detailed statutory formula. These statutes determine the total sharing distribution base for each tax type, the portion cities and towns collectively receive from the base, and an allocation method to determine how much an individual city/town receives from the aggregate city/town distribution. Allocations by city are generally based on the U.S. Census Bureau’s current estimate of a city’s population in relation to the population of all incorporated cities and towns. Finally, each tax type has its own distribution timing which determines when a city/town receives its share of the various funds.
State Transaction Privilege Tax (TPT)
Description: Cities and towns share in a portion of the total collections of TPT (sales tax) imposed at the State level. Each tax classification (i.e., Retail, Contracting, Utilities, etc.) has a designated sharing percentage that goes into the distribution base and cities and towns receive 25% of that base. These funds may be expended for any municipal public purpose.
Distribution: A municipality receives its share of the state shared sales tax based solely on its population in relation to the total population of all incorporated cities and towns. Distributions are made on a semi-monthly basis, consisting of State TPT collected since the last distribution.
Urban Revenue Sharing (URS)
Description: Originally enacted by the voters in 1972, URS provides that 15% of the net income tax collected during a given fiscal year is distributed to cities and towns. In exchange, cities and towns gave up the authority to assess local income taxes and local luxury taxes (liquor and tobacco). Beginning in FY 2024, cities and towns will receive 18% of the total state income tax collected. The increased share is the result of negotiations intended to minimize the negative impact on cities and towns when the State chose to create a flat 2.5% individual income tax rate. The annual amount of money distributed is based on the net income tax collections during the fiscal year two years prior to the year that a city or town receives the funds. These funds may be expended for any municipal public purpose.
Distribution: This money is distributed to a city or town based solely on its population in relation to the total population of all incorporated cities and towns. Distributions are made monthly and are based on 1/12 of the total distribution available for that fiscal year. (Note: the nine smallest cities and towns receive their shares of URS based on a designated minimum population figure of 1,500.)
Vehicle License Tax (VLT)
Description: VLT in Arizona is an in-lieu ad valorem tax. An ad valorem tax is one that is levied based on the assessed value of the item, such as a property tax. VLT is an in-lieu tax because it is levied in-lieu of a traditional property tax. Prior to enactment of the VLT system, the assessed value of personal vehicles appeared on the property tax rolls of the state, cities, counties, and school districts, making these amounts subject to ordinary property taxes. This is why VLT revenue is still distributed to those same entities today, and it’s also why, despite being largely vehicle-related, the use of VLT revenue is not restricted to street and highway expenses like HURF. Approximately 20% of the revenues collected by ADOT for the annual registration of motor vehicles are distributed to cities and towns. These funds may be expended for any municipal public purpose.
Distribution: A city or town receives its share of the vehicle license tax collections based on a formula that considers the “county of origin” where vehicles are registered, coupled with its population in relation to the total incorporated population in their county. Distributions are made on a semi-monthly basis, consisting of the amounts collected since the last distribution.
Highway User Revenue Fund (HURF)
Description: This is sometimes referred to as the “gas tax” but there are a number of additional sources that contribute to HURF including a portion of VLT revenues, a portion of the excise taxes collected on marijuana sales, and others. All HURF monies are statutorily restricted and can only be used by a city or town for street and highway expenditures.
Distribution: Cities and towns receive 27.5% of the total collected from all sources during a given fiscal year. One-half of the monies that an individual city or town receives is based on a statewide per capita figure that roughly equates to the municipality’s population in relation to the population of all incorporated cities and towns in the state. The remaining half is allocated based on a factor related to the “county of origin” of gasoline sales, coupled with the municipality’s population as compared to the population of all incorporated cities and towns in their county. The three largest cities also receive a separate distribution of 3% of the total collected, allocated based on their populations. Distributions are made monthly, consisting of the amounts collected since the last distribution.