Renters across the state received a sizable tax cut this year when the Legislature eliminated the rental tax imposed by a variety of cities.
Many cities targeted renters to fill their coffers by assessing a regressive transaction privilege tax on rent. Arizona being only one of two states that allowed cities and towns to impose a rent tax on long term rentals.
In 2023 the Legislature passed and the Governor signed the elimination of sales tax on rent effective January 1, 20205.
Now, cities claim to face budget shortfalls. Not only are they raising general taxes, but one municipality is challenging the law by seeking voter approval to give its City Council the power to institute a new, and likely illegal, rental tax.
New Law Saves Renters $230 Million Per Year
Previously, the tax hit renters to the tune of about $230 million per year that went to Arizona cities and towns. Local governments may still levy a property tax on residential properties, including rental units.
While cities have been loudly proclaiming the rental tax elimination threatens city services, the truth is that budgets of many cities exploded during the pandemic years, with some seeing 50% increases in spending. That sort of spending trajectory could not be sustained, regardless of the rental tax.
According to the Arizona Tax Research Association, Phoenix recently raised its sales tax by a half-percent and is expected to bring in about $300 million. However, the rental tax only brought in an estimated $85 million a year.
A similar story is happening in Gilbert. The town received $8.5 million from the rental tax. But a half-cent sales tax increase approved by the town council will bring in about $55 million a year.
According to Kevin McCarthy, president of the Arizona Tax Research Association: “Arizona cities are flush with cash.”
“Renters across Arizona received a significant tax break, and cities now want to blame them for a loss of revenue,” he continued. “The real issue here is, most cities have a spending problem, not a revenue problem.”
Goodyear Voters Pass Change to the Law
In May, the City of Goodyear asked voters to allow the city council to implement tax increases in the future without voter approval. The vote – which passed by a narrow margin – authorized the council to levy and collect taxes for residential property despite the outright prohibition by the state.
“The rental tax was unfair and a double taxation on people who already pay property taxes as part of the monthly rent,” said Courtney LeVinus, president and CEO of the Arizona Multihousing Association. “The AMA works with policy leaders around the state to reduce the cost of housing and increase supply. The elimination of the rental tax is one step to help bring down the cost of housing in Arizona.”
