JOINT LEGISLATIVE PROPERTY TAX
STUDY COMMITTEE
FINAL REPORT
December 1, 1995
CO- CHAIRS
Representative Lori S. Daniels Senator Marc Spitzer
MEMBERS
Representative Don Aldridge Senator Larry Chesley
Representative George Cunningham Senator Peter Goudinoff
Representative Jorge Luis Garcia Senator A. V. " Bill" Hardt
Representative Bill McGibbon Senator Carol Springer
COMMITTEE AUTHORIZATION
The Joint Legislative Property Tax Study Committee was established by Laws 1995,
First Special Session, Chapter 9 ( SB 1009). The committee membership consists of
the Chairman of the House of Representatives Ways and Means Committee and the
Chairman of the Senate Finance Committee, who serve as Cochairs. The Committee
also has four other members from the House of Representatives and the Senate. The
appointments are made by the Speaker of the House of Representatives by the
President of the Senate.
COMMITTEE DUTIES
The committee duties are to:
1. Study the property tax system in this state including:
( a) The levy and collection of property taxes by this state and its
political subdivisions.
( b) The distribution of responsibility for financing government
functions that are supported in whole or in part by property tax
revenues.
( c) The methods that are used to determine the value of property for
property tax purposes.
( dl The property tax classification system and the associated
assessment ratios.
2. Study the statewide distribution of property ownership, including
federal, state and local government ownership, private ownership and
the effect of such ownership on local government finances.
3. Study the feasibility and desirability of a statewide re- canvas of the
property that is taxable in this state.
4. Develop written recommendations concerning the property tax system
in this state and suggested legislation incorporating the
recommendations.
5. Present its report to the speaker of the house of representatives and the
president of the senate on or before December 1, 1995.
COMMITTEE SCHEDULE AND WORK PLAN
The Committee met six times over the interim. At the first meeting, the Committee
adopted a working outline of the issues to be discussed at future meetings. The
meetings covered the following work plan:
1. Review existing property tax system structure
primary and secondary taxes
limited and full cash value
property classifications
property tax assessment ratios
property tax levy limits
property tax rates
qualifying tax rate ( QTR) and minimum QTR
homeowners' rebate
2. Review existing property valuation
b standard valuation methods
Y special valuation methods
r county differentials
u relevant court decisions
3. Property tax burden and reliance
Y tax burden by class
u tax burden by taxing jurisdiction
u historical property tax burden trends
u distribution of property ownership
u effective tax burden comparisons
u appeals process overview
r uses of property tax revenue
4. Alternatives
r class consolidation
@ statewide recanvas program
5. Discussion of recommendations
COMMllTEE RECOMMENDATIONS
The Committee did not make any recommendations for a specific tax reform and
reduction plan. They did agree that property tax reform is necessary in conjunction
with any property tax relief plan.
Two specific plans were discussed during the final meeting. The plans are attached.
TAX REDUCTION AND REFORM
1996
During the past two legislative sessions, the Legislature has passed significant individual income tax
reductions. However, part of the package to reduce income taxes in the 1995 session, was a
provision for a permanent $ 200 million property tax reduction. How this reduction is to be achieved
is to be recommended by the Joint Legislative Property Tax Study Committee.
The basic conclusion of the Committee is that tax reform is essential, a tax cut is not enough. The
system is complex and desperately needs to be changed. Arizona has the second highest number of
property classifications in the nation. The most common number of classes is four. Under the current
classification system, two classes of property have no parcels. One class of property has three
parcels. Some classes have the same assessment ratios. Clearly, there is need for consolidation of
property classifications in Arizona.
The Committee discovered the following facts:
d Arizona state and local property tax comparisons show that we are average nationally.
However, business property taxes are extremely high due to the design of the system
that has evolved over the years.
Past studies have shown that Arizona is a high property tax state for business. In May, 1995, The
Utah State Tax Commission released an updated study of seven western states' tax burden for Fiscal
Year 1993- 94. The seven states included were: Arizona, California, Colorado, Idaho, Oregon, Utah
and Washington. This study confirmed that Arizona has the highest business taxes of the seven state
survey ( 4.6% of Gross State Product). The study noted that Arizona's high ranking primarily stems
from its heavy reliance on business property taxes. Significantly higher property tax assessment
ratios for business appear to be the main factor in Arizona's heavy business tax burden.
d The flaws in the current system have school finance implications.
The flaws in the system were recently highlighted in the Arizona Supreme Court decision Roosevelt
1.. Hlshop. This decision noted that assessed valuation affects the ability of school districts to pass
bond elections. Homeowner's real value is not recognized.
The best created tax system is that which creates a direct link between the taxpayer and the tax
spender ( i e local elected officials). The way our property system is designed in Arizona, this link
is missing Homeowners comprise the largest block of hll cash value. Yet, when the assessment
ratios are applied against this full cash value, the value drops significantly. Since tax rates are applied
against all the assessed value, the burden of any voter approved taxes is shifted. The voters impose
the burden and then those properties with higher assessment ratios -- business properties -- bear the
highest burden. This is demonstrated by the growth in secondary levies.
School districts' secondary property tax burden has increased significantly over the
past five years.
In 1990, secondary school taxes ( statewide) were $ 349.8 million and accounted for 49.9% of the
secondary tax burden. By 1994, secondary school taxes grew to $ 44 1.4 million and accounted for
58% of the overall secondary tax burden.
There are a variety of reasons for this. Arizona capital needs continue to increase because of the
growing population. Additionally, many school districts manipulate the school hnding formula by
transferring capital monies to maintenance and operation needs. hen when capital funds are
required, they go to the voters for bond approval. These elections are not well publicized, are
generally held at times when there is no other ballot issue and often distort the true costs to the
voters. The lower assessment ratio on homeowner's property, compared with that of business, allows
school districts to advertise the " cost" to the homeowners as " a trip to McDonalds."
Commercial and industrial properties comprise 16.9% of the total property in Arizona,
yet pay 29.7% of the total primary and secondary taxes, while owner- occupied
properties comprise 45.9% of the total property in Arizona and pay 32.8% of the taxes.
In growing school districts, an inverse relationship is created between school needs and homeowners.
These districts have a lot of value - it's just in homeowner value that is recognized at a lower net
assessed value that commercial value. A good example of this is Kyrene Elementary District and
Riverside School District. In the Riverside School District, about 24% of the full cash value can be
used to tax against. However, in Kyrene, only 12.3% of it's hll cash value can be used. This is due
to the fact that Arizona's current system does not recognize the homeowner property value in the
same way as commercial and industrial properties.
PROPOSAL FOR IMPLEMENTING THE
ARIZONA 1996 PROPERTY TAX REFORM AND REDUCTION ACT
ESTABLISH ONE ASSESSMENT RATIO FOR SECONDARY PROPERTY TAXES:
The proposal will eliminate the varying assessment ratios for all classes of property for
SECONDARY taxes and establish one assessment ratio.
This solves the major flaw in the school finance system.
PROPERTY TAX REDUCTION FOR HOMEOWNERS:
The $ 200 million property tax reduction will be used to reduce homeowner's primary
property taxes to offset the effect of any increase in secondary property taxes.
This reduction can be accomplished by increasing the Homeowner's Rebate program ( also
known as additional state aid).
This tax reduction will also solve the problem that currently exists with the constitutional 1%
cap on homeowner's primary property taxes.
COLLAPSE PROPERTY CLASSIFICATIONS:
The current system of 12 classes of property can be phased- down to three classes over time.
The Committee has discussed various proposals and work can continue to determine a plan
that causes the least amount of shifts, while remaining revenue neutral.
CONSTITUTIONAL AMENDMENT FOR BUSINESS PERSONAL PROPERTY:
The reason that a certain amount of busiiess personal property can not be completely exempt
is due to the Arizona constitutional provision that all property is subject to taxation unless
otherwise allowed.
A resolution proposing a change to the Arizona constitution can be put on the ballot for the
November, 1996 general election which would allow the Legislature the option of exempting
the first $ 50,000 of business personal property from taxation. Since the first $ 50,000 of
business personal property is already scheduled for 1% assessment ratio in 1996, the fiscal
impact of this provision is approximately $ 1.1 million at the state level, with about $ 2 - $ 3
million shift in property taxes at the local level.
PROPERTY TAX REFORM
AN IDEA WHOSE TIME HAS COME
By Senator Carol Springer
Legislative District 1
TAX REFORM and TAX CUTS, hotly debated issues at both state and federal levels. It
is evident taxpayers across the nation are demanding that tax policies be changed and tax
burdens be reduced.
Arizona faces some unique issues with regard to current property tax policies which, I
believe, will ultimately demand sweeping reform.
Public v. Private Land
Approximately 15% of Arizona's land area is privately owned. The remaining 85% consists
of federal lands, including Forest Service, BLM, National Parks and Indian Reservations,
and property owned by the state, counties and cities, all of which are exempt from property
taxation. Recent attempts to enact possessory interest taxes on these public properties
have, so far, been unsuccessful.
Propertv Classifications
Anzona has a very complex property tax structure which includes a dozen classifications
of property. Property taxes are based on various percentages of the value with such
dtsparities as home owners' property tax based on 10% of the value and commercial
property based on 25% of the value. In addition, home owners' taxes are constitutionally
capped at loo/ f $ the assessed value and are subsidized up to 35% by what is referred to
as the ' home owners' rebate". It is apparent there are inherent inequities in the tax
burdens between business and residential properties.
Special Tax Treatments
For various reasons, over the years many tax payers have been afforded special tax
treatments. Exemptions have been allowed for widows, widowers, veterans, historical
properties and others. Other tax abatements have been offered as inducements for
business expansions or relocations to encourage economic development. These special
treatments serve to further shift tax burdens from one property owner to another,
penallz~ ngb usinesses that have historically supported Arizona's economy.
Personal Pro~ ertvT ax
Arizona's personal property tax is the highest of any state in the Western Region. This tax
on the furniture, fixtures and equipment of businesses is considered to be the most
detrimental factor to economic development in Arizona. The personal property tax also
creates additional burdens on businesses that are capital intensive. This tax generates
over $ 800 million in revenue annually, therefore, there is no simple solution to the
elimination of this tax without major property tax reform because of the current reliance on
this major revenue source.
Pro~ ertvV aluation & Deals
Disputes about property assessments generate thousands of property valuations appealed
each year. These numerous appeals are very costly and time consuming to process.
Also, many properties are undervalued or not placed on tax rolls in a timely manner.
Indian Gamina Revenues
A major issue just emerging is that of the impact of development on Indian Reservations,
which are exempt from property taxes. Gaming revenues will provide the necessary
capital for Tribal plans to develop shopping centers, resorts, industrial and other projects.
Tribes will be able to offer very beneficial terms to both developers and tenants who will
no longer have to incorporate property tax factors into their financial planning.
Pendinq Lawsuits
A number of property owners who have properties located in various school districts have
been assessed at different rates, which are being challenged on the basis that such
discrepancies are unconstitutional. In one case, the plaintiffs have now prevailed, which
will result in the need to change the statutes immediately in order to avoid further liability.
Roosevelt v. Bisho~
Arizona courts have held Arizona's system of funding schools' capital needs, based on
districts' assessed valuation, creates inequities in school districts' abilities to generate
capital funding. Since property taxes fund both Maintenance and Operation as well as
Capital funding, an equitable resolution should entail addressing the property tax system
in order to achieve a permanent solution.
Citizens' Initiatives
Taxpayers unhappy with the current policies are generating demands that the property tax
system be revised. Currently being circulated is a citizens' initiative that would completely
eliminate the authority of any jurisdiction to impose property taxes. Should such an
initiative reach the ballot and be approved by voters, it would create a chaotic situation for
all levels of government. The Arizona constitution requires a supermajority ( two- thirds) to
enact new taxes, which would be necessary in order to generate new tax revenues to
operate governments, pay for schools and special districts. Experience in Michigan has
proven this to be a difficult way to establish coherent tax policy.
In Summary
Outlined have been some of the reasons property tax reform is necessary. Any reform
within the current property tax structure will only involve shifting tax burdens, therefore, in
order to achieve the goal of a simple, fair and predictable tax policy we must " step out of
the box of property taxes" and consider other solutions.
My proposal is to eliminate the primary property tax for all property classifications for
school districts and broaden the base of consumption ( sales or transaction privilege) taxes
to include services. This plan would exclude taxes on medical and financial services as
well as food and advertising. This change would require increasing the current state sales
tax of 5% to 6% in order to be revenue neutral. Since most of the property taxes are used
to fund the educational system, the exchange of funding sources from property taxes to
sales taxes could create a more equitable funding base.
Statistical data proves that the sales tax base is more stable than property taxes and a
broader sales tax base would further enhance that stability. The additional contribution
of tourist dollars to the sales tax base would further reduce the tax burden on Arizona
citizens.
This proposal would have to be submitted to the voters since there would be constitutional
changes ~ nvolved.
Tax 1, aw C h a wt o Promote Sim~ licitvF. airness. and Predictabilitv
I ROPERTY TAX
Simplify through reduction of taxes, appraisals and appeals:
Primary property taxes eliminated on all classes for school districts. Secondary taxes are unaffected.
The 47 cent state property tax and the 53 cent county equalization rates are eliminated.
Eliminate the Minimum QTR for all applicable classes.
Valuation of locally assessed property for primary and secondary purposes will be based on a price index
until sold, when value would be reset based on sales price.
Desegregation expenditures are shifted from primary to secondary property taxes.
SALES TAX
Broaden tax base to include services not currently taxed, except medical, advertising & finance.
There is no sales tax on food.
State sales tax increased rate from 5 % to 6% and constitutionally limited to 6%.
Total yield of the 6% tax would be earmarked as follows:
( 1 ) 63 % for K- 12 Education ( deposited in new School Aid Fund, which will also include the permanent
school fund endowment earnings)
( 2) 15.5 % for cities/ counties.
( 3) 2 1.5 % for state General Fund.
FISCAL IMPACT SUMMARY
Primary property taxes decreased by $( 1,324.4) million.
Secondary property taxes increased by $ 1 15 million due to shift of desegregation costs.
Total property taxes reduced by $( 1.209.4) million.
Sales taxes increased by $ 1,209.4 million.
Net tax impact is zero or revenue neutral.
Net state budget impact is $( 1.3) million.
JLBC Staff
1 1! 30/ 95
REVISED
- P ROPERTY TAXES
Simplify through reduction of taxes, appraisals and appeals:
( a) Primary property taxes are eliminated on all classes for school districts.
( b) The 47C state property tax and the 53C county equalization rates are eliminated.
( c) The Minimun~ QTR tax is eliminated.
( d) Valuation of locally assessed property for primary and secondary purposes will be based on a price index until sold, when value
would be reset based on sales price.
( e) Desegregation expenditures are shifted from primary to secondary property taxes.
Current vs Pro~ osal- FY 1992
($ in Millions)
State Revenue Local Revenue
Current ! 3! UXid Change Current Prooosal Chanee
Sw2
47C State Rate
Minimum QTR
Unorganized Tax
School Districts
School Dist. Primary Taxes
School Dist. Secondary Taxes
53C County Equalization Rate
QhX
Counties 360.6 360.6 0.0
Cities 81.0 81 .0 0.0
Community Colleges 209.9 209.9 0.0
Secondary Taxes. except School Districts 297.3 297.3 00
EXPENDITURES
Proposal Sunl~ nary- Expencliture~
Since pririlary property taxes for school districts are eli~ nirlated on all classes of property, school districts in the aggregate will be
held Ilarriiless, as local scllool districts wotild receive Iligher scliool aid payments froni tlie state. Community colleges, cities, and coiirnties are
unaffected by this proposal as their tax rates can be adjusted to offset any loss of value associated with the indexing of real property values to the
rate of itiflation.
Desegregation expenditures are shifted from primary to secondary property taxes.
Current vs Proposal - FY 1997
($ in Millions)
Assistance to Schools
Basic State Aid
Homeowner's Rebate
Community College Districts L'
Cities "
Counties 1'
State
- 11 Impose own Primary Levies, i. e. no change.
Current JkQm. d Chanee
Tax Category
I . Property Tax - Primary Taxes:
Class I - Mines
Class 2 - Utilities
Class 3 ( R) - Commercial
Class 3 ( P) - Commercial
Class 4 ( R) - AgricultureIVacant
Class 4 ( P) - Agricultural/ Vacant
Class 5 - Residential- Owners
Class 6 - Rented Resid.. Dav Care
Class 7 - Railroads, Airlines
Class 8 - S~ eciaEl xem~ tions
Class 9 - Historic - Class 3
Class 10 - Historic - Class 6
Class 1 1 - Improvements on
~ o s ~ e s sIonrte~ re sts
Class C - Producine Oil & Gas
SUBTOTAL - PRIMARY PROPERTY 2'
- I/ State Revenues includes $ 0.47 state rate, unorganized school tax, and minimum QTR on Class 1 and 2.
- 21 Now includes only primary property taxes for community colleges, counties, and cities.
21 The state will offset local revenue shortfalls by increases in basic state aid except for the desegregation expenditures. See page 5 for details.
.
TAX K'E: FOKR1 PROPOSAI,
( PY 1997 ES'l'lhlA'I'EI) FIGUKES)
Current
Assessment Ratio
28 %
28 %
25 %
1% up to $ 50K, 25 %
thereafter
16%
1% up to $ 50K, 16%
thereafter
10%
10%
25 %
5%
25 %
10%
1%
100%
1) cscript ion
Proposal
Eliminate for school districts
& minimum QTR
Eliminate for school districts
& minimum QTR
Eliminate for school
districts.
Eliminate " " "
Eliminate " " "
Eliminate " " "
Eliminate " " "
Eliminate " " "
Eliminate " " "
Eliminate " " "
Eliminate " " "
Eliminate " " "
$ In hlillions
State
Current I'
5.5
96.5
33.1
10.6
45.9
6.6
0.3
0.0
0.0
0.0
0.0
0.0
$ 198.5
$ In Millions
Keveriues
Proposal
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
$ 0.0
Local
Current
38.9
258.4
637.9
168.4
545.5
121.9
5.6
0.7
0.1
0.0
0.0
0.0
$ 1,777.4
Revenues
Proposal 2'
17.1
107.6
21 1.2
61.9
214.5
37.3
1.7
0.2
0.0
0.0
0.0
0.0
651.5
Tax Category
3. S; lles T; 1ut5
Services not currently t:~ xed 1
Utilities
Retail
Construction
Restaurants and Bars
Other
Revenue Sharing Program
SUBTOTAL - NET REVENUE
- 11 These are amounts received by local governments from state shared sales tax revenues only.
21 Data availabil~ ty on which to base an estimate is limited, and is suh. ject to error. Does not iliclude advertising, finance, and tnedical services.
- 31 Includes commercial lease tax at $ 34.0 million for FY 1997. This tax will continue to be phased out under the proposal. The tax on Feed is eliminated.
41 This is the total from all the amounts listed above.
Currerit
None
Tax rate @ 5.0%
Tax rate @ 5.0 %
Tax rate @ 5.0%
Tax Rate @ 5.0%
All other categories,
generally @ 5.0%.
Includes jet fuel tax,
commercial lease,
non- tax collections
and estimated
payments. Also
includes severance
taxes at current rates.
Distribution Base &
Non- Shared Formulas
$ 111 Rlillic, tis
I) t% criplio~~
l'ropos:~ l
Added to tax bast: @ 6%
Tax rate @ 6 %
Tax rate @ 6 %
Tax rate @ 6 %
Tax rate @ 6 %
All other categories,
generally @ 6 %. Includes
jet fuel tax, commercial
lease, nontax collections
and estimated payments.
Also includes severance
taxes at current rates.
15.5% of Gross Collections
Sli~ tr
Current
0.0
316.3
1,364.1
364.1
234.5
483.4
$( 614.3)
$ 2,148.1
$ In Rlillioes
Relenur~
Proposal
701.8
377.7
1,628.6
434.7
280.0
549.0
$( 615.6)
$ 3,356.2
Local
Current
0.0
41.4
357.4
47.7
61.5
106.3
$ 614.3 ?'
$ 614.3
Rr1enur5 1
Proposal
0.0
0.0
0.0
0.0
0.0
0.0
$ 615.6
$ 615.6
! $ In hIiIIions I $ In Millions
1) escriptiun
Totals Category
I I I 1 I
State Revenues
I I I I I
I I
REVENUE INCREASE ( DECREASE) I I I $ 1,009.6 I $( 1,009.6)
1mal Revenues 1'
Current
Property Tax I
Sales Taxes
REVENUE SUBTOTALS
EXPENDITURE SUBTOTALS
EXPENDITURE INCREASE ( DECREASE) 1 $ 1,010.9 1 $( I ,010.9)
$ 198.5 $ 0.0 $ 2,538.2 1.527.3
NET CHANGE 1 I I 1 ( 1.3) I $ 1.3 g
Proposal
2,148.1
$ 2,346.6
$ 1,756.4
dl All figures are FY 1997 estimates.
21 These estimates have been prepared with care, but they may need to be revised when the JLBC revenue forecast is rel'eased in conjunction with the FY 1997 JLBC
budget recommendations at the start of the upcoming regular legislative session. In addition, data is limited and not current in some areas, which has placed
limitations on our analysis.
21 This includes Primary and Secondary property taxes.
4/ This is the additional amount given to citieslcounties from the new revenue sharing program.
Current
3.356.2
$ 3,356.2
$ 2,761.7
Proposal
614.3
$ 3,152.5
615.6
$ 2,142.9
Current Proposal
Arizona State Government Publications
