Confusion surrounds the utility-tax increase recently adopted by the
City Council—and that confusion over the apparent doubling of the
present 2 percent levy, to 4 percent, extends to some in the local
media.

The Arizona Daily Star wrote on June 10 that the increase
“includes 2 percent more on home phone bills, cell-phone bills,
electric bills and gas bills.”

That isn’t exactly the case.

“We pay a franchise tax (to the city) of 3 percent,” notes Libby
Howell, spokeswoman for Southwest Gas. “So our city customers will see
a 1 percent utility-tax increase.”

When the City Council originally adopted this revenue source back in
1968, it imposed a 2 percent tax on utility company gross sales within
the city limits. It also included a provision which states: “Any
franchise payments made by such (company) to the city shall be credited
toward the payment of the (utility tax).”

According to Silvia Amparano, the city’s acting finance director,
Tucson Electric Power (TEP) has a 2.25 percent franchise fee. They’ll
have to add on 1.75 percent to cover the utility-tax increase.

Tucson Water presently pays a 2 percent utility tax, so that rate
will double.

Amparano says the city will start charging the higher amounts on
July 1. The rate hike will bring in an estimated $14.3 million more
over the next 12 months to City Hall’s seriously depleted general
fund.

City estimates show a monthly TEP bill of $100 increasing by $1.75.
Those with an average monthly Southwest Gas bill of $70 will see about
a 70-cent increase.

The average Tucson Water customer, who now pays just less than $20 a
month, according to the company, will see a 13-cent rise.

But these same Tucson Water customers will eventually be paying even
more, because Tucson Water’s electrical and gas bills—which run
around $16 million a year combined—will also be going up because
of the utility-tax hike.

The percentage increase in the tax hike isn’t the only tax-related
difference between the three utility companies. While TEP spells out in
detail what taxes their customers pay on each bill, monthly statements
from Tucson Water show nothing regarding the public utility tax. That’s
because the tax isn’t paid directly, but is embedded in the water
rates. Thus, the City Council’s decision earlier this year to approve a
10 percent increase in water rates will include the utility-tax
hike.

While that may be confusing to customers, Chris Avery of Tucson
Water compares it to shopping.

“It’s like someone buying a suit from a department store,” he
explains. “They pay the sales tax, which is shown on the receipt, but
they also pay part of the store’s property tax through their
purchase.

“I don’t know why that decision was made,” Avery says about
including the tax in the rate structure. “It was made a long time
ago.”

Also confusing the issue is a city policy decision made long ago to
impose the utility tax on non-city residents in Pima County who use
Tucson Water.

After the 1977 recall vote (see “Down the Drain,” Jan. 16, 1997),
Tucson City Council members decided to equalize rates across Tucson
Water’s service area. Thus, according to a Star article in
February 1977: “All residential customers (will) pay the same amount
for water, whether they live in or out of the city.”

That policy remains in place. Because of that, Avery says the
increased utility tax will be applied to the sale of water inside the
city limits, which represents about 60 percent of the company’s total
customers. That required tax will then be spread out equally to all
Tucson Water ratepayers, wherever they live.

Both Avery and Amparano acknowledge that Tucson Water customers
living in unincorporated Pima County help pay the company’s city
utility-tax bill. But that isn’t exactly what the City Council was told
a few months ago.

“The public utility tax is only imposed on customers located inside
the city,” the council was informed in a memorandum. But then the memo
quickly contradicts itself by stating, “all customers now contribute
(through water rates) to payments of the tax.”

While Tucson Water’s recent 10 percent rate hike was established
before the City Council’s recent utility-tax decision, the latter vote
will almost certainly impact water increases in years to come.

“Future year rates,” the council has been told of Tucson Water
charges, “would then factor in the additional tax, and ratepayers would
be impacted at that point.”

Thus, both the higher utility tax and the company’s increased
electrical and gas bills will eventually make their way to customers.
As a result, the 10 percent water-rate increase already predicted for
2011 may be even larger.

About $1.7 million in new city revenue is anticipated to come from
the utility tax increase imposed on Tucson Water customers. But that’s
assuming customers continue to use the same amount of water they did in
2008.

The utility company saw a historic drop-off in usage last fall,
which caused Tucson Water to significantly revise its revenue
projections downward.

“We expect to sell the same amount of water this year as last,”
Avery reports. If that doesn’t happen, even with the rate increase, the
Tucson utility tax could come up short of revenue projections.

That could really cause some confusion at City Hall.

This article appears in Jun 25 – Jul 1, 2009.