Arizona Senate approves bill to eliminate city taxes on food and rent

Star Valley would lose an estimated $28,000 – about 5% of its sales tax..

In South County, Globe would lose about $931,000 and Miami about $13,000.

The votes Wednesday, Feb. 1 by the Senate Commerce Committee came despite objections from mayors and lobbyists for the majority of communities that have the levies. They told senators that their budgets depend on these revenues.

Many cities are actually in good shape at the moment – thanks in large measure to millions in federal pandemic relief money. Payson for 2022-23 adopted a $58 million budget, including a $28 million general fund. This represented a 15% increase in total spending over the previous year. The town received $3.4 million in various federal infrastructure and pandemic relief funding, providing it with a temporary cushion.

Payson would be especially hard hit by the measure because the council in 2017 increased the sales tax and applied the tax to food and grocery stores. Payson’s sales tax totals 9.48%, with 5.6% going to the state, 1% to Gila County and 2.88% to the town. The town added .88% to the tax in 2017 and included food in part to cover the cost of a huge increase in the town’s contribution to the statewide retirement fund for police and fire.

The mayors’ concerns about revenues drew derision from Sen. Anthony Kern, R-Glendale, who said most cities and towns have a surplus. And he rejected the claims that these are appropriate, even if the state itself has a “rainy day” fund, money set aside to protect against future economic downturns.

And Sen. Steve Kaiser, R-Phoenix, the sponsor of the measure to phase out the tax on rentals, said it is crafted in a way to ensure that tenants get the benefit of the mandated reduction.

But that drew a skeptical response from Sen. Mitzi Epstein, D-Tempe.

“Whatever the market price is, that’s what the rent will be,” she said. All SB 1184 will do, she said, is allow landlords to pocket what they no longer have to forward to cities in taxes.

Nick Ponder, lobbyist for the League of Arizona Cities and Towns, told lawmakers that SB 1063, the companion measure to eliminate local taxes on food purchased for home preparation and consumption, won’t reduce overall taxes.

He pointed out that state lawmakers, facing an initiative, voted in 1980 to exempt the state sales tax on food.

But three years later, facing a deficit, Ponder noted the Legislature raised the overall state sales tax on all remaining items from 4 percent to 5 percent, an increase that never was repealed. He suggested that cities facing a similar loss of one source of revenues, may have to follow suit.

And he said that cities where the decision was made to eliminate these taxes have a higher overall sales tax rate than others where the levies remain. He cited in particular Tucson, where shoppers pay 3.5% on everything else they buy.

Ponder said the decision on what to tax is best left to local elected officials and their voters.

Not all communities levy rent or food taxes.

But they can be a big part of what communities collect. And the impact is particularly great in the smallest towns.

In Nogales, for example, the tax on food is nearly 14% of total sales tax collections. It’s close to 16% in Cottonwood, 17.6% in Douglas, 18.5% in Safford, 19.9% in San Luis and 35.2% in Taylor.

Overall, the levy amounts to more than $161 million a year statewide.

Rental taxes are a smaller percentage of sales taxes in most communities, though they total nearly $180 million statewide for affected communities.

The food tax repeal is being proposed by Sen. Sonny Borrelli, R-Lake Havasu City.

“To be taxing food, essential items that are consumed at home, not only is it unreasonable, it’s outrageous,” he said.

But Globe Mayor Al Ganeros told lawmakers that the levy, which is paid not only by residents but folks from outside the city who drive into town, helps his community cover its costs. And he said there are costs, citing, for example, the $1.5 million to $2 million it will take to replace a 35-year-old ladder truck at the fire department.

Casa Grande Mayor Craig McFarland said revenues from the food tax amount to 7% of the total city budget.

“I struggle to understand why the Legislature feels the cities are the ones who are robbing from our citizens,” he testified.

“We are where the rubber meets the road,” McFarland continued. “We are where citizens rely on the services that we provide.”

One argument by proponents of both measures is that the cities are getting more money now from the state.

Ponder said it is true that lawmakers are now giving local communities 18% of the revenues they collect, up from 15%.

But he pointed out that occurred only when lawmakers voted two years ago to cut income taxes by more than $1 billion a year by enacting a flat income tax. All the higher share did, Ponder said, is keep the actual revenue sharing dollars from declining.

Lawmakers also approved a measure several years ago allowing the state and local sales tax to be levied on online and phone purchases. Ponder said, though, much of this simply makes up for the taxable sales no longer being made at brick-and-mortar stores.

Not every local official who testified was opposed.

“We have a regressive tax on a fundamental human need,” said Allen Skillcorn, a member of the Fountain Hills city council, speaking specifically about the rental tax. “That’s just mean.”

The party-line 4-3 votes by the Republican-controlled committee sends both measures to the full Senate.

Peter Aleshire contributed to this article.