A bill that would have frozen impact fees on new residential development in Arizona for two years did not make the final version of the $8.4 billion budget that the Arizona Legislature passed on Wednesday.

Only days before, lawmakers and Gov. Janice Brewer reportedly had reached a compromise for a freeze on the amount of fees that city governments could impose on builders and developers. That compromise also included a two-year freeze on construction sales taxes and on the adoption of new building codes. Some municipalities were so certain that the impact-fee freeze was a done deal that they already had crafted new tax provisions to make up for the anticipated revenue shortfall.

However, Brewer and lawmakers are still at odds over a one-cent sales tax increase, which proved a problem for the expected impact-fee freeze. The governor favors this one-cent tax increase, but she was unable to muster enough legislative support. So while Brewer signed off on those elements of the budget required to keep the government functioning, she vetoed all “nonessential” parts of the budget, which included the impact-fee provision.

The League of Arizona Cities and Towns applauded Brewer’s decision. “Throughout this extraordinarily difficult budget process, Governor Brewer has proven to be a strong friend of local government,” said the league’s president Boyd Dunn, who is also mayor of Chandler, Ariz. “She refused to shift the state budget problems onto cities and towns and stood up to the special interests that wanted to give bailouts to developers at the expense of local taxpayers.”

This late-breaking, selective veto of the measure simply represents the latest unsuccessful development in Arizona builders' effort to get a break from impact fees during this recession. Last month, the Arizona Legislature did pass a budget that included a three-year moratorium on the collection of impact fees. (The Southern Arizona Home Builders Association helped craft that bill.) But this version of the budget was never sent to the governor, who has expressed opposition to measures that would reduce revenue.

A moratorium or freeze could certainly provide a boost to Arizona builders at a time when many are struggling with profitability and have greatly curtailed their construction activities. The Census Bureau reports that the state issued 4,682 building permits through the first five months of 2009, which is 63% fewer than the same period a year earlier. Single-family permits were down 56% to 4,062.

Now the fate of the impact-fee freeze is uncertain. Brewer ordered Arizona lawmakers to return to the Capitol for a special session next Monday to fix a budget she calls “fatally flawed” and “short-sighted.” (For one thing, she wants lawmakers to increase the $3.2 billion they approved for aid to public schools.) But David Godlewski, the Southern Arizona HBA’s government liaison, thinks the sales tax increase “or some other revenue-generating measure” will get most of the attention during this session and could prove to be a “sticking point” to reinserting other vetoed measures.

“I don’t have an idea yet if there’s the political will to put back those bills that have merit, like the freeze,” Godlewski told BUILDER. Nevertheless, he said he would continue to lobby lawmakers and the governor’s office over the weekend for impact fee reform.

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Phoenix, AZ.