Payson projects 12% revenue drop for FY26 and flags state ballot measures that could cut food tax receipts

Finance staff presented the town—s revenue outlook for fiscal year 2026 at a council work study on April 1, telling the council the town is projecting roughly $35.1 million in total revenues, about a 12% reduction from the current fiscal-year budget.

The largest single change is in general-fund taxes: staff said sales-tax receipts are about $3 million lower than the amount budgeted for the current year and that the town is conservatively projecting roughly $22 million in town sales tax next year, down from the $25 million figure that had been budgeted earlier this year.

Town staff attributed the gap to weaker-than-expected sales in some business categories and to the fact that the prior budget included large grant assumptions that did not materialize. Intergovernmental revenue is also lower because large grants previously budgeted were not received; those grants are now accounted for in separate funds, staff said.

Finance staff highlighted several revenue items and assumptions: - State-shared revenues: projections from the League of Arizona Cities and Towns are being used to set vehicle-license and other state-shared figures. Staff said state-shared income tax receipts to towns have declined in recent years and remain uncertain. - Highway-user and transportation taxes: staff expects modest increases (staff cited a roughly 4% increase in the highway-user tax and about 2% from a county transportation tax). An anticipated ADOT grant of about $1 million for the Bee Line bus route was listed as a revenue driver. - Water enterprise: staff projects about a 24% increase in water revenues for FY26, driven by rate/usage changes and anticipated reimbursement from a WIFA grant for an automated meter reading project (about $1.8 million); that grant is a reimbursement-type payment that will not be recurring once the project completes.

State-level legislation could further affect local revenue. Staff described a proposal that, if it reaches voters and passes, would cap the municipal tax rate on groceries at 2.0% and — as drafted at the time of the meeting — could be applied retroactively to January 2025. Finance staff estimated Payson—s current food-tax receipts at roughly $3.8 million annually and said reducing the local food rate to 2% could cut about half of that amount (approximately $1.8to $1.9 million) from town revenue.

Staff also flagged other bills under review that would reduce the state—s transaction privilege (sales) tax or change the state—s income-tax formula; those changes could alter the amounts that cities and towns receive in state-shared distributions.

Why it matters: the combination of lower local sales-tax collections, reduced one-time grant assumptions, and potentially sweeping state-level tax changes leaves Payson with less discretionary revenue as it builds the FY26 operating and capital budget. Council members asked for more granular sales-tax breakdowns by business category and for comparisons that adjust for the change in tax rate base used between years.

Staff next steps: finance will provide a business-category breakdown of sales-tax receipts (subject to any confidentiality limits), finalize revenue assumptions for proposed departmental operating budgets, and return to the council in May with expenditure requests and refined projections for council direction.