Reversal of Regressive Rental Tax: A Potential Lifeline for Housing Crisis

On January 1, 2025, the repeal of the regressive rental tax took effect in numerous municipalities across Arizona, responding to growing concerns over housing affordability. The tax, which affected renters in over 80% of the state’s cities, was designed to generate revenue but ultimately hindered economic access for low-income families. The Arizona REALTORS® actively campaigned against this tax, culminating in its repeal in 2023. With only Hawaii sharing this regressive tax structure, the repeal represents a significant shift in local housing policy.

Arizona’s housing landscape has faced severe challenges in recent years, characterized by limited supply and surging prices. As of August 2023, the median rent in the Phoenix metro area soared to $2,179, a staggering $595 increase from four years earlier. This figure doesn’t account for the additional burden of varying residential transaction privilege tax rates, which could add between $100 and $250 annually, inflating costs for renters even further.

The influx of new jobs and businesses in Arizona has exacerbated housing shortages, creating a dire need for affordable options. To sustain the growing workforce, especially amid rising demand, it is crucial to increase housing supply. However, this process is not immediate. While officials work toward expansion, strategies to combat rising costs are essential.

Inflation strains household budgets, forcing families to allocate more to groceries, gas, and utilities. The repeal of the rental tax alleviates some of this financial pressure, enabling households to redirect their resources toward savings and potentially homeownership. The hope is to make the American dream more attainable for those burdened by escalating living expenses.

Some city officials claim that taxing renters is necessary for funding essential services. However, research indicates that many cities utilizing this tax have maintained budget surpluses that exceed rental tax revenue. The legislature allowed for a delayed implementation, giving local governments over a year to adapt to the tax’s removal. If such taxes were crucial for service funding, it raises the question of why many Arizona cities, like Bullhead City and Flagstaff, chose not to implement them in the first place.

Implementing the rental tax proved cumbersome and ineffective. Feedback from property managers highlighted persistent issues with the collection system, leading to inaccurate records of payments and unnecessary fines. These complications discouraged property owners from renting out affordable units, further constraining Arizona’s housing stock.

The Arizona REALTORS® is a nonprofit trade organization dedicated to advocating for policies that enhance housing affordability and protect property rights. Following the repeal of the rental tax, there is a cautious optimism that more rental units may soon enter the market, which could help mitigate the pressing housing affordability crisis in the state.

Tim Beaubien serves as the senior director of government affairs for the Arizona REALTORS®.