Lake Havasu City took a step towards shoring up its long term finances at the Budget Work Session last week, as the city council directed city staff by consensus to prepare an agenda item for a future meeting to discuss implementing a commercial lease tax that would take effect sometime towards the end of next fiscal year.
While the coronavirus pandemic has created a cloud of uncertainty surrounding Havasu’s immediate financial future, finding a way to produce more revenue has been on the minds of city officials for many months before terms like “covid” or “social distancing” became part of the national lexicon.
“Even before the pandemic we had a structural deficit – in particular in the general fund but it is not exclusive to the general fund – where our revenues are not exceeding our expenditures just on an annual basis,” Lake Havasu City Administrative Services Director Jill Olsen said during the work session. “We do not cover the cost of our services at the current level by the current revenues that we are bringing in. It is important that we at least consider identifying additional revenue sources so that we can provide our services at the existing level.”
While particular attention was paid to examining the commercial lease tax, city staff also examined the city’s property tax rate, bed tax, and city sales tax. Olsen shared information about each of those taxes with the council during the work session, comparing each local tax rate with the rates of 10 “comparable” cities in Arizona. Those cities include Yuma, Flagstaff, Goodyear, Prescott and Yuma, among others.
According to Olsen, the average commercial lease tax rate in Arizona is 2 percent. Currently Lake Havasu City is one of only three cities in the entire state that does not assess any commercial lease tax.
“That sticks out like a sore thumb in terms of our ability to identify that as a possible revenue source,” said City Manager Jess Knudson. “In Lake Havasu City we have an abundant number of storage units. So the commercial lease tax would allow for revenues to be derived from the rental of those facilities. The third reason that tax was identified and looked at more closely than any other option that’s out there, as far as revenue streams, is that this had the least amount of impact on the working family and on the individuals throughout the community as a whole.”
Olsen also noted during the presentation that Havasu’s property tax rate of 0.6718 percent was blow the state average of 1.277 percent, the city’s bed tax of 3 percent was slightly above the state average of 2.85, and the city sales tax rate of 2 percent is 0.32 below the state average.
Originally, the city had hoped to move a little more quickly on assessing the need for the tax, with the hopes of implementing it at the start of the fiscal year in July. But the pandemic has pushed back the suggested timeline and the tax is now being recommended for implementation sometime during the fourth quarter – April to June of 2021.
“The reason for the delay in the implementation of the commercial lease tax and when it goes into effect is because now is not the right time to put more unknowns on our business community,” Knudson said. “So this would allow some time between now and then to assess the health of the economy, the unknowns with regards to small businesses in Lake Havasu City, and be able to make a determination at that time that that is something that still makes sense for the community to move forward with.”
The commercial lease tax will still need to be presented to the city council as an agenda item at a regular meeting and will go through the public hearing process before the council votes on implementing the tax.
Reaction for the council
While discussing the commercial lease tax during the work session, city council members who spoke all seemed supportive of the tax, and the need to increase city revenues. Councilmembers did acknowledge, however, that a proposal to increase any tax is likely to be met with some pushback.
“The public is telling us all the time they want better roads, they want more fire, they want more police, they want more this and they want more that,” said councilmember David Lane. “Well we have to pay for it and nobody wants to have those really tough decisions, but we are going to have to have those tough decisions. We are going to upset some people, undoubtedly.”
McCoy said she has heard from local business and property owners who are concerned about how a commercial lease tax would affect their tenants who are currently struggling. But she noted that the money has to come from somewhere.
“They are trying to give discounts to the individuals that rent from them, and I understand that,” McCoy said. “But it is one of those things that has hurt us all. There are certain things we have to do to keep our city running… There are certain things that we just can’t put off. We have to have new revenue from someplace, and I don’t know where. I don’t want to be the person to point them out but I think it is going to take us all coming together to say that we all have to pull our part in this.”
Councilmember Jim Dolan also acknowledged that increases and generally an unpopular prospect, but noted, “you get what you pay for.”
“Our number one priority is to provide public safety and we are having issues meeting that goal right now with staffing and equipment,” Dolan said. “We need to spend more money in that area to be where we need to be, and we don’t have that money.”
Knudson also told the council some of the more frequent requests for additional service the city receives from residents are to pick up trash in the parks more frequently, increase street sweeping, improve roads, additional police patrols, and compensating city employees at the market rate.