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Republican lawmakers are looking to slash food and rental taxes in a bid to help Arizonans deal with spiking inflation, but city officials warn that doing so won’t help those in need — and will actually increase costs elsewhere.
Eliminating the taxes is part of the Republican majority’s priorities this session, and was included in the Senate GOP’s plan published last month. Several bills have been introduced in the state House of Representatives and Senate to fulfill both goals. A similar effort last year to repeal the rental tax was defeated.
But on Feb. 14, one of the new rental tax proposals succeeded in making it out of the legislature and GOP leaders quickly touted that achievement, calling on Gov. Katie Hobbs to approve it. As of Friday, however, the bill had not yet been sent to the Governor’s Office.
“The government has been doing very well, but the citizens of Arizona have been reeling from inflation,” Senate President Warren Petersen lamented during a Feb. 15 press conference.
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Arizona, and the Valley in particular, were hit hard by inflation in the past year. Phoenix topped the charts with the nation’s highest rate for metro cities, at 12%. While experts say the new year will ease some of that strain, they’re also projecting a recession.
And Republicans have championed tax cuts to keep more money in Arizonans’ pockets, pointing out that they have an outsized impact on those suffering the most in a state already grappling with skyrocketing housing costs. Arizona is ranked among the five worst states for affordable housing, with just 26 options available per 100 low income households.
“(The rental tax) is a very clear cost that is passed onto tenants, who overwhelmingly tend to be lower-income,” House Speaker Ben Toma said at the same press briefing. “I urge the governor to sign it and give relief to Arizonans, especially as housing prices continue to rise.”
But the League of Arizona Cities and Towns, which represents 91 municipalities across the state, argues that not all cities and towns benefit from those taxes, but those that do rely on that revenue.
Lee Grafstrom, an analyst for the League, said the rates themselves present a negligible impact on Arizonans. The average food tax rate is around 2.7%, which results in around a two-dollar addition on a $100 dollar grocery bill. The average rental tax rate is 2.5%, leading to a cost of about $30 on a monthly rent of about $1,200.
But the revenue generated for the cities that do charge them is high, and that money is used to provide a myriad of city services. Glendale, which has both taxes, generates $22 million a year from them.
“These are big ticket items,” Grafstrom said. “And they’re very important revenue streams to cities and towns.”
The League estimates that cutting both taxes will cost cities and towns across the state a combined total of more than $300 million. Some places, Grafstrom added, will feel the impact more acutely, especially in rural Arizona. In Taylor, a town of about 4,100 people in Navajo County, the food tax alone makes up 35% of all the sales tax revenues.
Critics of the tax cuts warn that the funding gap will force cities to scale back other essential services, like public safety — or raise other taxes to make up the cost, effectively canceling out any benefit eliminating them could provide.
GOP lawmakers have dismissed this as leftist fearmongering, but Glendale Assistant City Manager Vicki Rios said it’s a necessary discussion.
“Public safety is the largest part of our general fund budget, and these are revenues that support the general fund,” she said. “It would be very hard to envision a scenario in which you would have to make those cuts and could somehow leave public safety untouched.”
In Glendale, 73% of the general budget is allocated for the local police and fire departments.
Petersen has defended the cuts by noting that state and local governments have benefitted from high income and sales tax revenues in past years, which should provide a cushion for any funding loss. Those state-shared revenues are projected to increase in the coming years, he added.
But Rios said that ignores the rising costs cities, just like everyday Arizonans, are struggling with, as well as the looming recession. And it’s unclear, exactly, how long or how severe that economic downturn could be.
“While the tax revenue may be increasing, we all have increasing costs, as well,” she said. “Doing a cut to revenue at the same time that we’re thinking there will be a recession just makes it that much more difficult.”
Provisions in the rental tax bill delay its effects until next year, and direct the state treasurer to set aside and distribute $14.9 million from the state general fund through June 2025 to cities and towns who previously used the rental tax. The bill also includes a “legislative intent” clause that says cities should cut spending from non-essential spending — specifically out-of-state travel and expenses on lobbyists — to make up for any lost tax revenue.
“Really, there’s no excuse on why (cities) shouldn’t be able to provide relief right now,” said Sen. Steve Kaiser, R-Phoenix, who sponsored the Senate version of the bill.
Another argument from detractors that landlords could simply pocket the extra dollars without reducing the strain on their tenants was addressed in an amendment which mandates that landlords must lower the overall rent by the tax amount.
But Arizona laws are lax when it comes to protecting tenants from arbitrary rent increases, which means undermining the bill’s effort to provide tenants relief is easy. State law prohibits cities from imposing rent controls, and that has resulted in whopping spikes in recent years. Attempts to redress that from Democratic lawmakers have been summarily dismissed by the Republican majority.
Grafstrom added that Arizonans who are the most in need already benefit from federal and local aid. The federal Supplemental Nutrition Assistance Program helped more than 800,000 Arizonans in 2021 who live in households that lie at or below 130% of the poverty level. And low-income housing programs like Section 42 properties, which cap rent prices, and Section 8 housing, which is federally subsidized, already exist to mitigate severe housing insecurity and are often already exempt from rental taxes.
Local city initiatives increase the social safety net for struggling families through housing assistance programs, food banks and shelters. From March 2020 through this year, Glendale has spent more than $40 million aiding residents facing housing insecurity. Derek Diesner, a city spokesperson, noted in an email that investing in local initiatives would be one way lawmakers could help support Arizonans in need.
The rental tax bill won approval in the state House on Feb. 14, clearing it to be sent to Hobbs, and Petersen said he expects a version of the food tax exemption will be ready to go next week. Hobbs has vowed to support only bipartisan bills, and while the rental tax exemption was largely panned by Democrats, two Tucson representatives — Alma Hernandez and Consuelo Hernandez — voted to approve the measure. Tucson is among the cities that don’t have a rental tax.
Even with that limited support, however, Hobbs appears poised to reject the proposal. Josselyn Berry, the governor’s spokesperson, told the Arizona Mirror that Hobbs believes the bill isn’t where it needs to be and doesn’t currently provide savings that will benefit Arizonans who rent.
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