Attempts to curb rents cut city finances

By Jason W. Brooks
Mail | X: @JasonWBrooks2

​Views of the planned sunset of property rental tax in Arizona depend on whether one is a renter or a municipality that is losing revenue.

The organization that represents those municipalities, not surprisingly, sees the change not only as a negative, but also one that won’t solve and targeted problems.

A year ago, Gov. Katie Hobbs signed into law legislation to eliminate the right of cities and towns to impose a local sales tax on residential rentals.

Capitol Media Services reported not all communities have such a levy — Tucson for example, does not — but 75 of the 91 towns and cities in the state have one, at rates ranging from 1% to 4%.

Lee Grafstrom, a tax policy analyst for the League of Arizona Cities and Towns, said in terms of housing costs, the real problem renters continue to face is the “astronomical” annual rent increases Arizonans have seen over the past several years.

“Tax rates have not changed at all,” he said. “ When the rent goes from $1,000 per month plus $24.20 in taxes to $1,500 per month plus $36.30 in taxes, the reason you’re having trouble paying the rent is not because of the extra $12 a month in taxes.”

When Hobbs signed the bill last year, the League of Cities and Towns estimated a city like Chandler, with almost 300,000 residents and a rental tax rate of 1.5%, would lose about $11 million per year in revenue. In a more recent estimate, the league estimates Chandler would take in nearly $15 million in fiscal 2025 if the rental tax weren’t ending on Jan. 1, in the middle of the fiscal year.

Some cities will lose more in dollars — Phoenix could lose out on more than $100 million per year —and some cities are more rental-heavy than others. For example, Scottsdale, with its tourism, and Tempe, with its college student population, have been taking in considerably more rental tax revenue than Chandler, despite being smaller in overall population.
Grafstrom said the winners in the sunset of the tax won’t be renters.

“While this was promoted as a solution to help renters with the high cost of housing, remember the real beneficiaries are the ones actually subject to the tax: the landlords,” Grafstrom said. “While they almost universally pass their tax liability on to their tenants, this exemption applies to the landlord’s business activity; the renter is just the one who gets stuck paying for it.”

Grafstrom said there’s no way to know if renters will see any benefits — or whether they’d spend that extra few dollars locally.

“Assuming a base rent of $1,500 per month and an average tax rate of 2.42%, the typical renter will save about $36.30 each month, freeing up that amount for discretionary spending,” Grafstrom said. “However, there is no reasonably accurate method to determine how much benefit renters will actually receive, or how long that benefit will really last."

Grafstrom said while the bill requires landlords to stop charging their tenants for the tax after Jan. 1 — something their leases almost certainly require as well — there is no prohibition against the landlord increasing the base rate the next time the lease is due for renewal.

“Landlords base rents on the amount the market will bear and how much their tenants can afford to pay,” Grafstrom said. “Knowing their tenants now have an additional $36 available — and which they used to pay for rent anyway — it would be bad business not to increase the base rent on the next lease renewal by at least $36 per month, thereby erasing any relief the tenants may have received while leaving many cities and towns with large holes in their budget.”

Chandler budget director Matt Dunbar agrees.

“There really isn’t a good way to anticipate any possible additional revenues in other categories because of the reduced revenue in the residential rental category,” Dunbar said. “There is no requirement in the law that will require a property owner to reduce rents if their monthly rental amount did not specifically calculate the tax separately. Some rentals do ‘add’ the tax as a separate cost, and that will be a savings to the renter which could then be used on other taxable goods and services.”

Also, Dunbar said, even if a Chandler resident spent every cent that used to go to rental tax on taxable goods or services within the city, the city wouldn’t be getting the same dollar total in revenue.

““For example, if my rent was $2,000 per month and my landlord just collects $2,000 (as the rental agreement didn’t specify a tax amount), they would not need to reduce my rent,” Dunbar said. “If the landlord ‘adds’ the tax, then my $2,000 payment (I will see on my rental bill $1,970.44 rent plus $29.66 tax) would adjust to be $1,970.44. That $29.66 could then be used for additional goods or services, but the city only gets 1.5% as our sales tax, so that $29.66 payment that used to go in full toward general operations of the city to provide services to residents may only come back as $0.45 worth of tax on an additional purchase of goods ($29.44 x 1.5%= $0.45).”

As for municipalities, much depends on the size and diversity of a city’s revenue streams. Chandler’s projected $15 million shortfall is relatively easy to overcome in its budget, which is still well above $1.6 billion for fiscal 2025 despite shrinking from the year prior.

“Regular operations of the city will continue as we move forward,” Chandler budget director Matt Dunbar said. “However, this revenue reduction means that as needs arise in our community we have less revenue to meet the expectations of our residents.”

Dunbar points out it’s an ongoing reduction, so while budget studies might show the impact, budget planning doesn’t involve constantly lamenting revenue streams that no longer exist.

“The actual impact will not be known until the exclusion is in effect,” Dunbar said. “Our five-year general fund forecast included the full impact by FY 2025-26.”

Dunbar said Chandler and other cities that had both the means and willingness to pay down or pay off their public safety retirement debts are relieved they took such steps. Chandler recently put $75 million into paying off that debt.

“We anticipate a public safety employer contribution expenditure reduction of about $8 million to $10 million that will, in effect, allow for our operating budget to remain where it is, even with the (rental tax) revenue reduction,” Dunbar said.

Contractors, vendors and suppliers raising prices and fees has a much bigger impact, Dunbar said.

“It is getting more difficult, as inflation continues to impact budgets,” Dunbar said.

Arizona Gov. Katie Hobbs speaks to reporters at the state Capitol in April. In August of last year, Hobbs signed into law a rental tax sunset that goes into effect Jan. 1, 2025.

The Associated Press/Jonathan Copper

We’d like to invite our readers to submit their civil comments on this topic.  Email AZOpinions@iniusa.org.  Email Jason W. Brooks at jbrooks@iniusa.org.

Jason W. Brooks
News Editor | Chandler Independent

Jason W. Brooks joined Independent Newsmedia, Inc., USA, in July 2021 as an associate editor. After a year covering Buckeye, he has covered Chandler since the fall of 2022, in addition to assisting the Daily Independent throughout his time at INI.

Education: University of New Mexico, bachelor of arts in journalism and mass communication, print emphasis, English minor.

Random Fact: He and his siblings witnessed a Space Shuttle launch and landing in the same year in person, on opposite coasts.

Hobbies: Karaoke, bicycling and American Sign Language.

Community: He supports animal shelters.