Phoenix, Mesa mayors rail against rent tax ban, call on Legislature for funding support
Arizona mayors from the East Valley to the West Valley are railing against a new ban on residential rental sales tax and asking lawmakers to help them fill the funding gap that will start in 2025.
Gov. Katie Hobbs, a Democrat, signed the Republican-backed Legislation on Aug. 1 in exchange for GOP support of Proposition 400, a ballot measure that asks Maricopa County voters to approve a half-cent sales tax to fund regional highways, public transit and roadways. Valley constituents will vote on the sales tax in November 2024.
The rent tax ban will prevent cities from collecting tax revenue from apartment renters — a move supporters say will help residents during the state's affordable housing crisis. Detractors say action in the Capitol will only curtail cities' abilities to adequately fund municipal services like police and fire.
The ban is expected to reduce Arizona cities' revenue by $230 million in the first full fiscal year, according to Arizona's Joint Legislative Budget Committee. The amount a renter saves will vary by city, with tax rates ranging between 1% and 3%.
As rental prices have soared across Maricopa County in recent years, the Valley's biggest cities saw massive increases in their rent tax revenue. Phoenix's rent tax collection grew 18% between 2021 and 2022. Mesa's grew 17% in the same time frame.
The rent tax is collected by the state and distributed to cities based on the rental activity in each area, so cities with more renters or cities with higher rents and rent tax rates will see a greater loss of revenue from Hobbs' signature. Most Valley cities hover between a 30% and 40% renter-occupied household rate.
For most big cities, the revenue makes up around 5% of their yearly sales tax collection — although that rate is higher in Tempe, at 9%, where 60% of households in the city are rented.
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Cities that do not charge rent taxes, such as Tucson and Flagstaff, will not be affected.
Phoenix Mayor Kate Gallego issued a statement rejecting the rent tax ban, saying the city uses that revenue to "fund public safety hiring, improvements to parks and preserves, and neighborhood public safety grants."
She added, "If the Legislature wishes to push forward attempts to effectively defund our police and firefighters, I strongly urge them to come to the table and discuss how they can help us recoup the lost funding.”
When former Gov. Doug Ducey proposed cutting the state's income tax rate in 2021, municipalities likewise lobbied the Legislature for solutions to fill the potential shortfall. Cities and towns stood to lose $225 million in annual revenue from the state. The Legislature ultimately agreed to increase the cities' shares of state revenue to 18% from 15%.
Mesa Mayor John Giles made similar statements to AZ Family Tuesday saying, “The proponents of this reduction in revenues to cities will give passionate speeches about ‘the evils of defunding the police department,’ but that’s exactly what they have done.”
Here's how much some of the Valley's cities stand to lose, and how leaders are reacting.
Phoenix
Residential rental sales tax rate: 2.3%.
Amount collected by city in 2022: $70 million. (About 5% of all sales tax collected by city.)
Amount city expected to collect in fiscal year 2025: $90 million.
Renter-occupied households: 41%, according to U.S. Census data.
Gallego said the rent tax repeal would affect several issues, from public safety hiring to transit and parks preservation.
The rent tax repeal would cut the city's general fund by $47 million in fiscal year 2025. But the tax also goes toward voter-approved initiatives, such as the Neighborhood Protection Fund, the Public Safety Expansion Fund, the Transportation 2050 fund and Phoenix's Parks and Preserve Initiative — meaning the missions of those programs will be weakened.
"We need the Arizona legislature to understand that our voters allocated these dollars for purposes they believe to be very important," Gallego said. "There are significant impacts to this decision."
She added that she would ask the Legislature to find a new source of funding to backfill cities' budgets in light of the rent tax repeal. She pointed to the Legislature increasing cities' state-shared revenues after Ducey's tax cut in 2021.
"Particularly on public safety, they should partner with us," Gallego said. "I don't believe the Arizona Legislature wants to defund the police, and they should step up and prove that."
The cuts to the general fund and public safety represent enough money for 300 sworn police officers or firefighters, Gallego said, adding that she is confident voters want these 300 public safety positions.
"Voters are generally not in favor of any high taxes, but they expect us to deliver," Gallego said. "I am confident that our voters want these 300 positions in public safety."
Arizona State Senate President Warren Petersen, a Republican who sponsored the rent tax repeal, said in a statement on Aug. 1 that state revenue distributed to cities is expected to grow $389 million in fiscal year 2025.
"The takeaway: cities and towns will be receiving more in state-shared revenues to offset these tax cuts," Petersen said.
Phoenix budget forecasts show the city expects to receive between $774 million and $825 million in state revenue by 2027, which would be an increase of between 0.4% and 7% from the current year. The general fund could see a deficit of $21 million or a surplus of $117 million — those projections do not account for the loss of rent tax revenue.
Mesa
Residential rental sales tax rate: 2%
Amount collected by city in 2022: $20.7 million, up 17% from 2021.
Amount city expected to collect in coming year: $22 million.
Renter-occupied households: 37%, according to Census Reporter.
Giles said he’s very concerned with the repeal and how the city’s budget will be affected by the funding gap.
“When you take $22 million out of that equation, it can’t help but impact public safety and these other essential services the city provides,” Giles said. Talks will continue with Hobbs and the state Legislature to look for ways to replace that revenue, he said.
About 37% of housing units in Mesa are renter-occupied, according to Census data. And that number is expected to grow. In the past year, Mesa issued more than 2,500 permits for rental developments and has another 3,700 in the pipeline, according to data from the city.
Almost 54% of the general fund's budget is spent on public safety, and of the city’s 2% rent tax rate, about 0.5% goes towards public safety positions, programs and projects, according to the city. And, 0.3% is dedicated to the local streets fund, which supports the operations and maintenance of local streets. Future projects and hiring could be at risk for public safety departments with this repeal, City Manager Chris Brady said.
“Let’s not minimize that ... it’s a huge impact for the city and across the whole region,” Brady told the Arizona Republic. “At some point in the future, it will mean less revenues for the city for public safety."
Scottsdale
Residential rental sales tax rate: 1.75%.
Amount collected annually: $14.7 million.
Percentage of overall city sales taxes: 5%.
Renter-occupied households: 33%.
By the spring of 2028, Scottsdale forecasts that it will have lost about $51 million because of the rental tax ban. That includes about $6 million that would have been dedicated to the McDowell Sonoran Preserve Fund and another $9 million that would have gone towards maintaining city streets.
The other $36 million that Scottsdale is slated to lose after four years without the rental tax would have gone to the city's general fund, where it could have helped pay for police officers, firefighters, parks maintenance, after-school programs, senior centers and libraries, according to a city news release.
Scottsdale's written statement went on to say that the new law "removes a substantial source of operating revenue, money that is needed to serve Scottsdale's residents, businesses and visitors" and that it may force the city to reassess what services it provides and at what level.
This statement didn't indicate, though, what specific services might be on the chopping block if Scottsdale isn't able to find a replacement source of cash.
Scottsdale's Mayor David Ortega vowed to challenge state lawmakers during the next session in order to regain the lost funding, saying the money is a "critical part of how municipal governments around the state deliver essential services."
"During the legislative session there was discussion about making cities 'whole' by increasing State Shared Revenues — which never materialized," Ortega continued. "Scottsdale contributes hugely to state revenues, and we will fight hard to restore our fair share in the next legislative session."
Tempe
Residential rental sales tax rate: 1.8%.
Amount that would have been collected in 2025: $20.8 million.
Percentage of overall city sales taxes: 9%.
Renter-occupied households: 58%.
Tempe will be hit especially hard because nearly 60% of its households are rented, which is by far the highest renter rate of any large city in the region. The Valley city with the next share of rentals is Phoenix with about 41% of its households being rented out — a rate 17 percentage points lower than Tempe's.
Tempe is also slated to see the biggest dent in its revenue of any Valley city. The rental tax generated nearly a tenth of its total sales tax income and is equal to about 7% of the city's overall revenue for this fiscal year.
Tempe Spokesperson Nikki Ripley said a reduction in cash payments for large-scale capital projects might be an option for the city to address the loss. That would mean either passing on certain projects completely or taking on more bond debt to fund them.
The latter option might be difficult for Tempe given that it's already using 9% of its yearly budget to pay off existing debt, which is significantly higher than the 5% that both Scottsdale and Chandler dedicate to repayment each year.
"There are a number of options for measures that the city could implement to address revenue shortfalls — one such example is reducing cash payments for capital projects," Ripley wrote in an emailed statement. "Tempe will coordinate with the League of Arizona Cities and Towns on next steps. The City Council will discuss this topic in a public session at some point in the coming months."
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Peoria
Residential rental sales tax rate: 1.8%.
Amount collected annually: $5 million.
Percentage of overall city sales taxes: About 4%.
Renter-occupied households: 23%.
City spokesperson Diane Arthur said the $5 million hit would be "significant" for Peoria as it helps the city pay for services to meet the news of the growing city. The $5 million was projected to grow over time.
"By far the largest share of general fund expenditures goes toward public safety," Arthur wrote in an email. "The other $850,000 loss is in our transportation sales tax fund, so we will have that much less to pay for roadway construction and maintenance, traffic signals, transit, etc."
Arthur said Peoria has long been opposed to eliminating the rent tax "as it is a preemption of local decision-making." She said the city looks forward to working with Hobbs and the Legislature "to mitigate and offset this revenue loss as much as possible before it goes into effect in 2025."
Goodyear
Residential rental sales tax rate: 2.5%.
Amount collected annually: Nearly $5 million.
Projected increase in coming year: 2.5% increase.
Percentage of overall city sales taxes: About 6%.
Renter-occupied households: 22%, according to Census data.
Goodyear Finance Director Doug Sandstrom said the city's rent tax collection represents about 6% of the city's total sales tax collection but that it could have easily increased to 10%, thanks to Goodyear's rapid growth.
The city has been seeing a 20% to 25% increase each month in the number of residential rental units, he said.
"Long-term, it's a pretty significant impact to us," Sandstrom said.
The rent tax revenue went into the general fund, with 50% of that fund being allocated to public safety. While Sandstrom said it is yet to be determined how the city will make up for lost funds, Goodyear will look at constriction of growth rather than reductions. For example, implementing additional police squad units may have to be delayed, he said.
Goodyear Councilmember Bill Stipp similarly said that services will likely not be reduced since the community is growing so quickly. But those services may not be able to grow until the funds are made up.
Buckeye
Residential rental sales tax rate: 3%.
Amount collected annually: $1.2 million.
Percentage of overall city sales taxes: About 2%.
Renter-occupied households: 8%, according to Census data.
While Buckeye is one of the fastest-growing cities in the country, it hasn’t seen a significant increase in multifamily housing in nearly 20 years. But that’s changing, Buckeye Mayor Eric Orsborn said, with between 6,000 and 10,000 multifamily housing units in the pipeline.
The city could have eventually raked in about $10 million annually in rental taxes, Orsborn said, with the money going into the general fund to pay for essential services. Recurring revenues pay for things like public safety, the mayor said. He added that some of that money could have also been used toward road projects, such as to alleviate the traffic that comes with adding 500 new rental units in a certain area.
Buckeye will have to come up with the funds in other ways, Orsborn said. While residents might want a decrease in taxes, Orsborn said that opinion often changes when residents become aware of the services or infrastructure improvements that have to be pushed off.
Going forward, Orsborn said the city is hopeful residents won’t see an increase in taxes in other areas.
While Orsborn said he’s grateful that Proposition 400 will go before voters, comparing it to the rental sales tax is like comparing apples to oranges.
“Those are the recurring revenues that pay for the police, the fire, the parks, roads, upkeep, the maintenance and it’s a like-to-like,” Orsborn said.
Avondale
Residential rental sales tax rate: 2.5%.
Amount collected annually: Between $4 million and $5 million.
Percentage of overall city sales taxes: 3% to 4%.
Renter-occupied households: 40%, according to Census figures.
Avondale Mayor Kenn Weise said the city's rent tax goes solely to the general fund for mostly the police and fire departments, and that those departments might see the most immediate impacts. For example, a sixth fire station that the city was hoping to build in Alamar may have to wait until the funds can be allocated.
The rent tax repeal, Weise said, went against Avondale voters' wishes, since the city's constituents directly approved a rent tax in a 1980 election. The city has charged the rent tax since 1987.
"If the Legislature was looking to give a voice to the people, they took our residents' voice away," Weise said.
The city also had more rentals under construction, meaning the tax would have eventually become even more significant, he said.
Weise said he hopes to avoid increasing property taxes for residents. The city still will need to determine how to make up the lost funds, Weise said, but he added that he would explore other options because hiking property taxes is the last thing he wants to do.
Chandler
Residential rental sales tax rate: 1.5%.
Amount collected annually: $11 million.
Percentage of overall city sales taxes: 5%.
Renter-occupied households: 40%, according to Census data.
Compared to some other Valley communities, Chandler may be particularly well-prepared to cope with the lost revenue because of its cautious and conservative budget policies.
The city has a requirement that officials keep at least four months of their ongoing operating revenues on hand, for example. This year, that minimum reserve balance equals more than $92 million, or about eight times the amount of cash Chandler is expected to lose because of the rental tax ban.
Chandler has several other, similar savings-focused rules for specific budget categories. In total, the city is setting aside nearly $150 million this year, most of which can be used for "emergencies, or unforeseen expenditures not otherwise budgeted."
On top of that, Chandler became the first city to pay off its public safety pension debt in July. Staffers expect that will save the city between $8 million and $10 million annually because the pension fund generates interest, so the sooner they are fully funded the less they have to put in overall.
Nevertheless, fewer funding sources means less money, and Chandler still needs to craft a strategy to deal with that.
"We continue to oppose state interference with our local revenue authority to fund city services," City spokesperson Matt Burdick told The Republic. "It’s too soon to know how we plan to address the revenue loss."
Gilbert
Residential rental sales tax rate: 1.5%
Amount collected annually: $7.6 million
Renter-occupied households: 25%, according to Census data.
Gilbert Mayor Bridgette Peterson said in a statement to The Republic that without an offset for the lost revenue, “there will be difficult discussions and decisions coming related to the services Gilbert provides.”
Peterson said the town believes in self-governance and the ability to make its own decisions on what’s best for the community. “We remain concerned any time the state pre-empts local governance, no different than when the state takes issue with the federal government making decisions that limit a state’s ability to make decisions,” she said.
Rental tax revenue increased by 27% from fiscal years 2021 to 2022. The town has a significant number of single-family homes that are rented, said Jennifer Harrison, a town spokesperson. With the coming decrease in the budget, the town will need to “decide what needs can be funded and what needs have to wait (or go without),” Harrison said in an email to The Republic.
Queen Creek
Residential rental sales tax rate: 2.25%.
Amount collected annually: $720,000.
Amount city expected to collect in coming year: $1.2 million.
Renter-occupied households: 12%, according to Census data.
In Queen Creek, revenue from rent taxes is not assigned to a specific program, town spokesperson Constance Halonen?Wilson told The Republic?. Although the repeal will affect Queen Creek's budget, the lead time before the ban is implemented gives Queen Creek sufficient time to adjust without affecting its ability to provide programs and services, Halonen?Wilson said in an email to the Republic.
The town issued five permits for multi-family developments in the last year, according to data provided by the town. The town saw a 22% increase from 2021 to 2022 in rental tax revenues.
“We recognize the impact of the prohibition affects communities at varying degrees based on budgetary composition and would support the exploration of opportunities to seek future revenue replacement offsets,” Halonen?Wilson said.
Tolleson
Residential rental sales tax rate: 2.5%.
Amount collected annually: About $500,000.
Percentage of overall city sales taxes: about 1%.
Renter-occupied households: 50%, according to Census figures.
For the smaller city of Tolleson, the loss to the general fund will be about $400,00 to $500,000, said Mayor Juan Rodriguez. The city has a public safety tax to supplement public safety expenses, Rodriguez said.
Because the rental tax ban has been in talks for several years, the city was prepared with a plan already in place. Residents won't be taxed, said Rodriguez, with the taxes from several new restaurants and hotels coming to the city helping to make up for lost funds, as well as industry and warehouses.
"They understand that part of being a part of the community is to give back to the betterment of it," Rodriguez said.
Litchfield Park
Residential rental sales tax rate: 2.8%.
Amount collected annually: About $100,000.
Percentage of overall city sales taxes: About 1.3%.
Renter-occupied households: 17%, according to Census figures.
In Litchfield Park, Mayor Tom Schoaf said the change in revenue won't be significant enough to notice a change that can be traced back to the rental tax ban.
Like other cities, the revenue from the rental tax went into the city's general fund, with the largest component of that being public safety like fire and police. While the city will be looking for ways to replace the money, Schoaf said the city likely won't be changing tax rates in order to recover that specific amount.
Schoaf said it's inappropriate for the Legislature to make decisions that only impact municipalities — the state doesn't take any revenue from the rental tax, he said.
"It is an unusually unacceptable thing for the Legislature to take revenue away from municipalities for something that they don't receive any revenue from," Schoaf said.
Schoaf said he also doesn't view the rental tax ban as a trade for allowing Proposition 400 to go before voters, which would, if passed, help pay for transportation improvements needed by residents. The two are completely unrelated, Schoaf said.
Glendale
Residential rental sales tax rate: 2.2%.
Amount collected in 2022: $ 11.1 million.
Percentage of overall city sales taxes: 4.4%.
Renter-occupied households: 42%, according to Census data.
Preliminary estimates show Glendale is set to bring in $13 million from rent tax collections in 2023, up from $11 million the year before, making up between 4% and 5% of overall sales tax collections.
A city spokesperson said the impact was not yet known and that the city was watching for what the Legislature might to do offset the revenue loss.
Surprise
Residential rental sales tax rate: 2.2%.Amount collected annually: $3.8 million.Projected increase in coming year: $4.6 million.Percentage of overall city sales taxes: About 4%.Renter-occupied households: 22%, according to Census data.
City manager Bob Wingenroth said City Council has not yet had a chance to discuss a response but that the loss would have "a significant effect on our city revenues."
City data show rent tax collections in Surprise were projected to increase 55% by 2025.
Surprise Mayor Skip Hall said the city has come to rely on that revenue stream, especially given the city doesn't charge a food tax, like most other Maricopa County cities.
"It's either we cut back on services or we add some kind of revenue stream. So we're in that mode right now," Hall told The Republic. He added, the city is seeing immense population growth and needs to continue adding police and fire to keep up.
But asked whether cities might really cut public safety due to revenue loss, he said, "It could. ... It's a lot of money."
Reporter Taylor Seely covers Phoenix for The Arizona Republic and azcentral.com. Maritza Dominguez covers Mesa, Gilbert and Queen Creek. Alexandra Hardle covers Buckeye, Goodyear, Avondale, Tolleson and Litchfield Park. Sam Kmack covers Chandler, Tempe and Scottsdale.
This article originally appeared on Arizona Republic: Arizona mayors rail against rent tax ban, ask Legislature for help
