As Gov. Katie Hobbs and Republican lawmakers negotiate the next state budget, dozens of local officials throughout the state are calling on them to include a new tax incentive to boost affordable housing in rural communities.
Late last month, Flagstaff Mayor Becky Daggett sent a letter cosigned by 31 mayors and county elected officials from every corner of the state asking Hobbs and legislators to include a new rural affordable housing tax credit in the next state budget.
“So Flagstaff isn't alone in this, but the lack of housing that's affordable for our residents threatens our economy and our workforce stability and just long-term well-being of our community,” Daggett told KJZZ. “And we're seeing it impacting our workforce and their families.”
Legislation approving the new tax credit is already moving through the Arizona legislature, though it has stalled since passing out of the Arizona House in February.
That bill, sponsored by Rep. Teresa Martinez (R-Casa Grande), would have developers building housing projects in counties with populations under 800,000 to claim a tax credit. That would cover every county in the state except Maricopa and Pima.
To qualify for the credit, projects would also have to eligibility requirements listed for the federal Low-Income Housing Tax Credit, or LIHTC, which requires that a portion of units be rented out to low-income households.
Daggett said that incentive would provide $120 million over 10 years to incentivize the creation of affordable housing that serves people making below the average median income in the area.
“Up to 60% and sometimes up to 80% of the area median income,” she said. “We're talking about people with good paying jobs, but still housing is out of reach in order for them to live comfortably in our community.”
History
It’s not the first time Arizona has considered adopting a tax credit to boost affordable housing development.
In fact, in 2021, former Republican Gov. Doug Ducey signed Arizona’s Low-Income Housing Tax Credit, which was modeled after its federal counterpart, into law.
The Hobbs administration said the program has been a success and led to the development of thousands of affordable housing units.
“Over the last three years, we have been able to create more than 10,000 units using the low income housing tax credit program, which then creates the opportunity in that middle segment of the housing continuum to have more Arizonans housed in affordable housing before they take that next step,” Ruby Dhillon-Williams, Arizona Department of Housing director, told lawmakers earlier this year.
Daggett said several affordable housing projects were built in Flagstaff using LIHTC incentives combined with funds from the city, including a 221-unit apartment complex on Old Route 66 that opened last year.
But the state’s version of LIHTC expired at the end of 2025 after efforts to extend it failed to gain traction at the legislature, making Arizona the first state to adopt its own LIHTC and then let it lapse.
A tall task
But convincing state leaders to include the credit in the next budget could prove difficult.
Republicans are already backing a plan to fully adopt massive cuts mirroring the federal tax cut package backed by President Donald Trump that Congress passed last year.
Martinez’s rural tax credit bill stalled out in the Arizona Senate this year, where Republican leaders never even let it go before a committee hearing.
Senate President Warren Petersen (R-Gilbert), who is part of the Republican leadership team negotiating with Hobbs, did not respond to requests for comments on whether he would support including the credit in budget talks.
But, notably, Petersen opposed the LIHTC renewal last year, saying he prefers broad tax cuts that help everyone.
And, though the rural credit legislation is sponsored by a Republican and already passed out of the House, most support came from Democratic lawmakers. Of the 33 GOP legislators in the House, only nine voted for the bill.
And one of the no votes came from House Speaker Steve Montenegro (R-Surprise), who is also a key player in budget negotiations.
Daggett, the Flagstaff mayor, said that’s why a coalition of rural mayors came together to support the proposal.
She said the hope is that broad representation will convince more Republican lawmakers that a new rural housing tax credit will benefit their constituents.
“We're hoping also that the bipartisan nature — you know, mayors, we work together to get stuff done, and I don't even necessarily know what party affiliation other mayors have,” she said. “We just want to serve the people in our communities.”
A spokesman for Hobbs did not respond to questions about whether the governor supports adding a new rural tax credit to the next state budget. But Hobbs did call on lawmakers to extend the larger statewide credit last year.
And, though Hobbs supported extending the LIHTC last year, it's unclear whether the governor believes there is enough room in the budget to add another tax credit as state revenues continue to come in below expectations.
A spokesman for Hobbs did not respond to questions about whether the governor supports adding a new rural tax credit to the next state budget.
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