Tax Breaks for Renters: A Boon for Them, But a Setback for Cities

Arizona renters may soon see a decrease in their monthly payments due to a new law eliminating sales taxes on residential rentals, set to take effect on January 1.

Currently, 75 of the 91 cities in Arizona impose such taxes, varying between 1% and 4%, while Tucson is among those without this levy. The statewide repeal is projected to cost cities around $230 million annually in lost revenue.

Governor Katie Hobbs initially vetoed the repeal in 2023, citing concerns over an enforceable mechanism that would ensure landlords pass the tax savings to tenants. She highlighted that landlords could continue charging the same rents, pocketing the differences instead of lowering prices for renters.

While the previous version mandated rent reductions equal to the tax savings, Hobbs expressed doubts about its constitutionality. However, by August, her stance shifted, leading to a reconsideration of the repeal.

The revised measure retains the requirement for landlords to share tax savings but adds a significant provision: if a tenant believes they are being overcharged, the landlord must demonstrate that the rent reflects the absence of the tax.

Timing also played a role. The law includes a delay to allow cities to strategize revenue replacement or budget adjustments, giving them a chance to adapt to the upcoming changes.

An additional factor influencing the decision involved the transit tax for Maricopa County. Republican leaders agreed to support an extension of this tax in exchange for Hobbs’s approval of the rental tax repeal.

Despite the law’s passage, cities will not receive state compensation for the anticipated revenue loss. Senate Republicans, however, believe municipalities possess sufficient funds to manage the shortfall, arguing that the tax elimination is crucial for assisting low-income renters amid rising living costs.

Senate President Warren Petersen emphasized that the financial relief is vital for helping families. Similarly, House Majority Whip Teresa Martinez acknowledged the mixed emotions surrounding the legislation but ultimately supported it for its potential benefits to renters.

Martinez recognized that cities like Casa Grande, which faces a $1.2 million revenue impact, may feel significant pressure, but expressed willingness to engage in discussions with local leaders to address concerns.

In summary, the proposed changes aim to provide some financial relief for renters, though cities now face the challenge of adjusting to the substantial revenue losses incurred by this new law.