January 04, 2010

Tucson renters have seen falling rental costs overall in the last year, but a proposed 2 percent rent tax would take away much of that savings — at a time when many are struggling to make ends meet.

The issue will come to a head Tuesday evening, when the City Council will hold a public hearing expected to draw hundreds of people to the Tucson Convention Center.

City Manager Mike Letcher has proposed the 2 percent tax — which he has called a "landlord's tax" — which would raise an estimated $3.5 million this fiscal year as a part of a larger plan including pay and program cuts to plug an expected $32 million current-year budget deficit.

Letcher has said cuts in Police and Fire department positions may be necessary without the new rent tax, which would work out to $10 of every $500 in rent.

But the rent-tax proposal — similar to one floated and scrapped in April — has met stiff opposition from landlords and tenants who say the tax would hit them hard at a time when they can least afford it.

Rent taxes are not uncommon; most major Arizona cities and about three-quarters of the state's cities and towns impose them.

But the head of an Arizona non-profit group that advocates for tenants said the proposed Tucson tax is unfair and ill-timed, noting that most landlords are likely to pass along the tax to their renters.

"It was characterized as a tax on landlords but, of course, this is a tax on renters," said Ken Volk, president of Tempe-based Arizona Tenants Advocates.

For lower-income households, a rent increase of even $10 a month would be hard to take, particularly when many people have lost jobs or endured furloughs, pay freezes and salary cuts, Volk said.

"This is going to be onerous for tenants to absorb in this economy," he said, suggesting Tucson leaders at least put off any rent tax for a year or two.

Wayno Guerrini, a disabled retiree who rents a one-bedroom apartment on Tucson's west side for $493 a month, said the proposed rent tax may seem small to some people.

But Guerrini said it would force further cuts to a household budget already stretched thin by increases in utilities, food and medical costs.

"I live on a fixed income, so $10 is a lot," he said.

"I don't get to deficit-spend; I have to live within my means, and the city should, too," Guerrini said. "I've had to make drastic cuts in my budget."

While Guerrini said his rent rose $8 last year, average rents in Tucson are dropping amid rising vacancy rates.

Monthly rental costs in Tucson averaged $643 in the third quarter of 2009, down 3 percent from the same period last year, according to the California-based research firm RealFacts. The drop follows a nationwide trend of falling rents and apartment occupancy rates.

Based on those findings, if a 2 percent rental tax is passed on entirely to renters, it would cost Tucson tenants an average of about $13 a month, or roughly $155 per year.

Assuming landlords pass along all or part of the proposed tax, it would hit nearly half the city's population. In the city, 45.8 percent of households rent, compared with 32.7 percent of households nationwide.

While Tucson has historically had among the lowest rents among Western cities, incomes here also tend to be lower.

Tucson's median household annual income from 2006 through 2008 was $37,936, compared with $52,175 nationally, according to the latest estimates from the U.S. Census Bureau's American Community Survey.

And many Tucson renters already pay a big chunk of their incomes to keep roofs over their heads.

From 2006 through 2008, median gross rents represented an estimated 31.6 percent of Tucsonans' household income, the Census Bureau said.

But 41.6 percent of Tucson residents paid 35 percent or more of their incomes on rent, while nearly 26 percent paid 50 percent of their incomes or more, the Census Bureau estimated.

The state trade association representing major apartment owners has called the proposed tax an unfair move to balance the city budget on the backs of renters.

The Arizona Multihousing Association also lambasted Letcher for casting the tax as a "false choice" between the tax and police and fire layoffs.

"This is an example of political posturing to force the City Council into adopting new taxes on Tucson's renters — people who can least afford it right now," Barb Dolan, government-affairs liaison for the association, said in prepared remarks.

Some landlords say they will be hard-pressed to absorb the proposed tax, or even pass it along, amid the trends of declining market rents and occupancy.

"In 30 years, we've never seen a more challenging market than the last two years," said Brandt Hazen, president of Hazen Enterprises, a longtime local town-house-rental business. Hazen said his company has had to cut rents on its town houses — mostly two-bedroom homes with monthly rents of $600 to $900 — largely to compete with a "shadow market" of foreclosed homes turned into rentals.

Hazen said renters already pay their share toward local services in the form of property taxes paid by rental property owners and passed along with other costs to renters.

A rent tax would result in "double taxation," Hazen said.

Despite such protests, 70 of Arizona's 90 cities and towns impose a tax on residential rents, in most cases at their regular sales-tax rates, said Ken Strobeck, executive director of the Arizona League of Cities and Towns.

All but a few Arizona communities already impose taxes on commercial property rentals.

Cities and towns without rent taxes include Marana and Oro Valley in Pima County, as well as Flagstaff, Payson, Safford, Sedona and Willcox, the league says.

If the rent tax is approved, many landlords wouldn't be able to pass the cost along to renters immediately.

Under state law, landlords are required to give tenants 30 days' notice of any raise in rent due to increased taxes, and many leases lack the necessary clauses to collect the tax, tenant advocate Volk said.

Even so, "a lot of landlords are going to try and tack this on illegally," Volk said.

Hazen said he has been advised that his company would need to change its leases to legally collect a rent tax.

Over the year or so it will take to update the leases, Hazen said, his company stands to lose roughly the equivalent of two salaries by absorbing the tax cost.

The impact on small-scale landlords — those who rent a couple of houses — depends on how a final ordinance is drafted.

The rent-tax proposal the City Council considered in April would have applied only to landlords with three or more rental units.

If you go

• What: Tucson City Council public hearing on proposed rent tax.

• When: Tuesday, 5:30 p.m. (regular meeting start time)

• Where: Tucson Convention Center, 260 S. Church Ave.

How much wOULD RENTERS PAY?

Assuming the entire proposed 2 percent tax is approved and passed along by landlords, a tenant paying gross rent of $645 monthly (the Tucson average this year through the third quarter) would pay an additional $12.90 per month, or $154.80 per year.

Other sample tax amounts (monthly/ annual) by monthly rent payment: