Hobbs rejects food tax ban championed by GOP

A Republican priority bill that sought to eliminate municipal food taxes was shot down by Gov. Katie Hobbs, who vetoed it Tuesday, siding with cities across the state that opposed the measure. 

Last week, the Republican-majority legislature passed Senate Bill 1063, which aimed to ban cities and towns from imposing sales taxes on food. The proposal was part of the party’s top priorities for the year, coupled with a rental tax prohibition that was also vetoed after vehement criticism from local governments. 

Both tax bans were part of failed gubernatorial candidate Kari Lake’s economic plan — which was widely panned by economists — and were adopted into the Republican legislative agenda shortly after her defeat.

Democrats in the legislature opposed SB1063. 

While the state no longer taxes food, having eliminated its tax in 1980, as many as 65 cities still collect sales taxes on groceries and other food items, and the League of Arizona Cities and Towns opposed the bill on their behalf. Hobbs cited the concerns of city officials as a key factor of her veto. 

“I’ve heard from dozens of local leaders about the impact this legislation would have on municipalities,” she wrote.  “From potential cuts to service — including public safety — to increased property taxes, it’s clear that this bill doesn’t actually eliminate costs for our residents. It simply moves those costs around.” 

Several cities warned that cutting them off from the revenue generated from food sales taxes would force them to raise taxes elsewhere or slash spending to mitigate the loss. A legislative analysis estimated that $182.9 million would be forfeited in fiscal year 2025, with rising inflation rates increasing that figure in subsequent years. 

The outlook was especially dire for rural communities. Taylor, a town of about 4,100 people in Navajo County, is the most dependent on the tax, which makes up 35% of its total revenue. 

Republican leadership defended the proposal as a solution for the rising cost of living in the state and a way to keep dollars in the pockets of Arizonans in the face of worsening economic straits. But, both the cities and Hobbs noted, the poorest of the poor are already exempt from food taxes through the Supplemental Nutrition Assistance Program, commonly known as food stamps. For others, eliminating the tax represents only a minimal aid. The average tax rate is 2.7%.

Senate GOP leadership slammed Hobbs’ veto as an unwillingness to help Arizonans struggling with inflation. The state, and the metro Phoenix area, in particular, were hard-hit by inflation last year, with Phoenix topping national charts at 12%. 

Phoenix is one of three cities in the Valley that doesn’t have a food sales tax. Litchfield Park, however, is heavily dependent on the tax, with it making up 16.8% of its budget.

“Senate Republicans have been working toward introducing legislation necessary to provide financial relief to all Arizonans, especially low-income families who are feeling the tremendous burden of inflation,” Senate President Warren Petersen said in a written statement after the veto. “It’s very clear the governor has no interest in helping with that financial burden.” 

Senate Majority Leader Sonny Borrelli, who sponsored the bill, argued that cities would be able to make up the difference with an increase in state-shared revenues projected for the next few years. That predicted new revenue, which comes from the state’s income tax collections, is unrelated to the bill ending municipal food taxes.

“Food is not a luxury; it is a necessity. A tax on our groceries is regressive and hurts everyone,” said the Lake Havasu Republican. “And yet the governor vetoed this bill, only padding cities’ bloated budgets instead of leaving more money in the wallets of hardworking taxpayers.” 

Economists are also predicting a recession, and cities warned that their ability to face the economic downturn would be negatively affected by eliminating a key revenue source. 

Hobbs dismissed the proposal as insufficient, and advocated for better solutions. 

“Let’s work together to provide real relief for Arizonans struggling with higher costs,” she wrote in her veto letter.