An important partnership exists in Arizona where cities and towns in Arizona are partners with the State in a shared revenue program, which passes funds through to Arizona municipalities from a few state revenue sources. 
 
Cities and towns are able to establish and maintain relationships with their residents, because citizens are able to participate in local government decisions and cities have an understanding of the priorities of their residents. Shared revenues are an important tool because it provides the residents of our state direct services based on their priorities and specific needs.  

There are several components of state shared revenue, and below is an explanation of some of the sources of shared funds.

Urban Revenue Sharing (State Income Tax)
A 1972 citizen’s initiative gave the cities and towns a 15% share of the state income tax. This source of money is officially called urban revenue sharing. With the implementation of the 2.5% flat income tax in 2022, the state legislature agreed to increase the share of the state income tax that cities and towns receive from 15% to 18% to offset the impact of revenue loss associated with the overall decreased level of income taxes paid.

This money is distributed to a city or town based on its population in relation to the total population of all incorporated cities and towns according to the U.S. Census Bureau population estimates as of July 1 of the prior year. The annual amount of urban revenue sharing money distributed is based on income tax collections from two years prior to the fiscal year in which the city or town receives these funds. There is no restriction on the expenditure of urban revenue sharing funds, except that they must be expended for a municipal public purpose. 

State Transaction Privilege Tax (Sales Tax)
The current rate of the State sales tax is five and six-tenths percent (5.6%). Cities and towns share in a portion of the collection total. A municipality receives its share of the State shared sales tax based on the relation of its population to the total population of all incorporated cities and towns in the State according to the U.S. Census Bureau population estimates as of July 1 of the prior year. This money may be expended for any municipal public purpose; outside of this stipulation, there is no restriction on the expenditure of these revenues. 

Highway User Revenues
This revenue source is commonly referred to as the gasoline tax; however, there are a number of additional transportation related fees including a portion of vehicle license taxes which are placed in the highway user revenue fund. Cities and towns receive 27.5 % of the highway user revenues. One-half of the monies which a city or town receives under this formula is distributed on the basis of the municipality's population in relation to the population of all incorporated cities and towns in the State according to the U.S. Census Bureau population estimates as of July 1 of the prior year. The remaining half of the highway user revenue monies is allocated on the basis of “county of origin” of gasoline sales and the relation of a municipality's population to the population of all incorporated cities and towns in the county. (The “county of origin” factor used in the formula is determined on the basis of the gasoline and other fuel sales in a county in relation to the sale of gasoline and other fuels in other counties in the State). The intent of the distribution formula is to spread a portion of the money across the state solely on the basis of population while the remaining money flows to those areas with the highest gasoline and other fuel sales. 3% of the state portion of this fund is directed to cities with a population of over 300,000. Also, 7.67% of the state portion is allocated to certain projects in Maricopa and Pima Counties. 

Vehicle License Tax
Approximately 20 percent of the revenues collected for the licensing of motor vehicles are distributed to incorporated cities and towns. A city or town receives its share of the vehicle license tax collections based on the county of origin in which a vehicle is registered, coupled with its population in relation to the total incorporated population of the county. The only stipulation on the use of this revenue is that it must be expended for a municipal public purpose.