Verde Valley residents may see some very slight rental relief in the next couple of years following the passage of Senate Bill 1131 by the Arizona Legislature, which prohibits municipalities from charging sales, transaction privilege or other taxes on residential rentals other than transient lodging after the end of 2024.

Gov. Katie Hobbs signed the bill into law on Aug. 1.

Municipalities in the Verde Valley, on the other hand, stand to lose approximately $1 million per year in revenue once the new law takes full effect.

SB1131 began as SB1184, which Hobbs vetoed on Feb. 23, calling it a “tax cut bill for landlords” and saying that the bill lacked “any enforceable mechanism to ensure relief will be provided to renters.”

She also objected to the bill’s inclusion of an extra-budgetary appropriation to fund the repeal.

Following Hobbs’ veto, the House reinserted the tax repeal language into SB1131, originally introduced to make a technical correction dealing with prepaid legal insurance, by using a strike-everything amendment. The amended bill passed the House by a vote of 35-3 on May 15 and the Senate by a vote of 17-11 on June 13.

The sole Republican to vote against the bill was Sen. Ken Bennett [District 1], who represents the Verde Valley, and who opposed it as a form of interference in local governments’ tax decisions.

Hobbs agreed to sign the revised version of the bill as part of a deal with the Legislature’s Republican leadership. In return for the rental tax repeal, legislative Republicans passed SB1102, authorizing Maricopa County to hold a referendum to continue its half-cent transportation sales tax.

Earlier this year, Hobbs also vetoed SB1063, which would have repealed the state sales tax on food for home consumption and saved Arizonans an estimated $182.9 million.

The revised language of SB1131 advanced the effective date of the repeal from the end of 2023, as originally proposed, to Dec. 31, 2024. It does not apply “to health care facilities, long-term care facilities or hotel, motel or other transient lodging businesses.”

The bill further provided that landlords “shall no longer charge the tenant the amount of the repealed transaction privilege tax on the business of renting or leading real property for residential purposes.”

SB1131 was not accompanied by a fiscal note, but the Joint Legislative Budget Committee previously prepared a fiscal note on SB1184’s anticipated economic consequences.

The JLBC report estimated that there were 868,623 rented residential units in Arizona in 2021, of which 67% had a monthly rent of less than $1,500 and 33% had a monthly rent greater than $1,500. Average monthly rent for an apartment in Arizona was estimated to be $1,365 while average monthly rent for a single-family home in Maricopa County was $2,123.

Local Consequences

The amount of tax revenue that each Verde Valley municipality will lose will vary, with Cottonwood standing to lose the largest amount.

Cottonwood Tourism and Economic Development Director Tricia Lewis said that rental tax revenues in FY 23 came to $629,366.

“While we are unable to ascertain the exact projected annual revenue loss at this early stage, we are committed to taking proactive measures and will adapt our plans accordingly,” Lewis added. “Our budgeting process has always incorporated considerations for anticipated revenue losses resulting from evolving legislation.”

“We did have a 2% residential rental tax, and we expect to collect approximately $227,000 in this current fiscal year 2024,” Camp Verde finance director Mike Showers said. “Next fiscal year [FY 25] we will lose half the year, an estimated $115,000, and then all will be gone for FY26.”

“The annual impact of SB1131 is approximately $125,000,” Clarkdale public information officer Chell Smart said. “Town staff and council are working to identify strategies to address this decrease in revenue.”

“We will lose approximately $13,000 annually, as we do, or did, charge rental sales tax,” Jerome town manager Brett Klein said.

Sedona imposes no rental tax on long-term rentals, while short-term rentals are taxed as transient lodging and are unaffected.