We report our investigation of phase transition of AlxGa1-xN thin films on GaN made by employing first-principles calculations. A critical thickness of two AlGaN molecular layers is determined for the wurtzite-to-zinc blende structural transition under compressive strains, which is associated with the second-nearest-neighbor interaction of electron bonds. Higher AlN mole fractions are found to favor the phase transition because of strong push toward covalency of the Al-N bonds under strains. Electronic structure results show that, after the phase transition, the spontaneous and piezoelectric polarizations of the AlGaN films are significantly reduced.