Hobbs vetoes bill to bar cities from taxing residential rentals

Calling it a flawed solution to the housing crisis, Gov. Katie Hobbs on Thursday vetoed legislation to bar cities from taxing residential rentals.

“I appreciate the Legislature’s interest in addressing rising housing costs, particularly for renters,” the governor said in her 14th veto since the session began last month. “Lowering costs for Arizona families is a priority of my administration.”

But Hobbs said the measure suffers from “defects.”

One of the biggest, she said, is there is no “enforceable mechanism” to ensure that landlords, who actually remit the tax to the cities, will pass along the savings to their tenants.

SB 1184 does have language which requires landlords by the end of the year to reduce the rent due by an amount equal to what they are no longer paying to cities. Hobbs claimed that even an attorney for lawmakers said that such a provision may not withstand a challenge under the state or federal constitutions.

And Sen. Mitzi Epstein, D-Tempe, said there’s a more practical problem.

“Whatever the market price is, that’s what the rent will be,” she said during debate on the measure, with landlords simply deciding that if tenants were willing to pay a certain amount for a unit including the tax, they can continue to charge the same amount even if there is no tax. All the measure would do, Epstein said, is allow landlords to pocket what they no longer have to forward to cities in taxes.

“If we are going to promise relief to renters, it’s important that we are able to ensure they actually receive it,” Hobbs wrote. “For working families faced with ever-increasing rental prices, this proposal just doesn’t fit the bill.

Sen. Steve Kaiser, R-Phoenix, who crafted SB 1184, said there was no legislative attorney who questioned the legality of forcing landlords to pass along the tax savings.

More to the point, he said that the nature of residential leases precludes landlords from pocketing the savings.

“When you have a landlord and a tenant, there’s a contract,” Kaiser said.

“It says ‘This is your rent and here’s the tax underneath it and this is your total rent,”’ he continued. “When the tax goes away, it just goes away for the renter.”

That, Kaiser said, makes it quite simple for tenants to determine that if they are not getting the financial benefit of the measure as his bill required.

He said it’s no different than if the state were to eliminate the ability of cities to levy a tax on groceries.

Kaiser said the tab at the register lists the cost of the items with the tax added at the bottom. And if that tax goes away — something lawmakers actually are considering — shoppers pay just for the groceries.

The question of whether tenants would get relief wasn’t the governor’s only stated reason for vetoing the measure.

She pointed out that lawmakers agreed to divide up nearly $270 million in state tax dollars to give to cities and towns over an 18-month period to help cushion their financial losses. And that, Hobbs said, is not acceptable.

“To approve of such an appropriation outside of a comprehensive budget agreement would be irresponsible,” Hobbs wrote in her veto message. She said if Republicans want to spend that kind of money it should become part of “bipartisan budget negotiations” rather than a stand-alone measure.

Not every city or town taxes residential rentals.

Chandler, for example, has a 1.5% levy, which raises about $9.8 million a year, equal to more than 5% of all sales taxes collected.

Bisbee’s 3.5% tax raises just $69,407, according to figures by the League of Arizona Cities and Towns, with a 1.8% tax in Casa Grande generating nearly $1.5 million, Glendale getting $11 million from its 2.2% tax, a 2.75 tax in Prescott producing more than $2.6 million, and Sahuarita adding $175,000 from its 2.0% levy.

To back up her decision, the governor said in a press release that she had been urged by cities and towns to veto the measure.

She cited a message from John Lewis, president and CEO of the PHX East Valley Partnership, which includes both elected officials and business leaders.

“It will not provide meaningful relief to renters,” he wrote. “It will force local government to weigh increasing other local taxes or reducing services, putting the vitality of our burgeoning region at risk.”

And Yuma Mayor Douglas Nicholls, who also is president of the League of Arizona Cities and Towns, echoed his belief that SB 1184 will not benefit renters “and will likely only accomplish providing a tax break for landlords.”