Taxation seminar no. 2 / tax impacts

              T X TO S MN R NO. 2 A AI N E I A



TAX I P C S MA T



presented t o the Arizona Legislature



July 30, 1979



PREFACE



This report i s designed t o present information and analysis of the following subjects:



1.



Impacts and issues of a Proposition 13 type measure in Arizona, A ternative property tax re1 i ef mechanisms , 1 Options f o r relieving the sales tax on food purchases, A ternative revenue sources. 1



2.

3.



4.



I t should be stressed t h a t the estimates of revenue impacts presented i n this report a r e prelirntnary and therefore subject t o further refinemen t



.



I.



OVERVIEW OF REVENUE RELIANCE*



Figure 1 d i s p l a y s the d i s t r i b u t i o n of revenue sources f o r a l l s t a t e and l o c a l governments i n 1977. I t shows t h a t property t a x e s comprise the l a r g e s t source of revenues f o r s t a t e and l o c a l governments, accounting f o r 31% of t o t a l revenue. FIGURE 1 1977 Combined S t a t e and Local Government Revenue



Figure 2 shows l o c a l governments' dependeqce on revenue sources. For a l l l o c a l governments i n Arizona, t h e property t a x accounts f o r 59%.



qhe ' discussion presented here is taken from Chapter I 1 I of Taxation i n Arizona :

An O v e r v L e ~



FIGURE 2



1977 Local Government Revenue



59% Property Taxes



Other Figure 3 ~ h o w sthe d i s t r i b u t i o n o f the s t a t e ' s revenue. the property tax f o r only 10% o f i t s t o t a l revenue. FIGURE 3,

4977 State Government Revenue



The s t a t e r e l i e s on



Arizona counties, in aggregate, a r e dependent upon the p r o p e r t . ~tax f o r almost , 47% of t ~ t a lrevenue (including federal t r a n s f e r s ) .

\



$epqol d i s t r i c t s i n Arizona a r e dependent upon the p r o ~ e r t ytax f o r about 45% of t o t a l revenue. S t a t e aid f o r schools accounts f o r another 45%, while the 10% of school revenues. federal government makes up a b ~ u t Arieona c i t i e s r e l y on the property tax f o r about 11% of tot41 revenue (including federal t r a n s f e r s ) ,



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11. ANALYSIS OF A PROPOSITION 13 LIMITATION I ARIZONA N

A.



INTRODUCTION



i Proposition 13, which added Article XIII(A) to the California C ~ n s ttution was passed by California citizens in June 1978, and became effective the following July 1. Proposition 13 was designed t o reduce the current burden of property taxes in C a l i f ~ r n i aa s well a s t o limit t h e i r future growth. More specifically, Proposition 13 provided f o r the following: --1 imit on total property tax collectjons of 1%of f u l l cash value, pl us an additional amount for retirement of p r e v i o u s l ~approved debt, ?-assessments frozen a t 1975 levels plus maxivum 2% annual increase t o be exceeded only by a change in ownership or new con$truction, --greater requirements for 1egis1 ative or voter approval of future tax inqreases ( i .e. s t a t e taxes can only be increased by 2f 3 vote of each house of the legislature and local taxes can only be increased w i t h approval of 2/3 of the voters of each governing d i s t r i c t ) . Proposi tiop 13 p ~ one of several tax and expenditure 1imitation proposals s t o gajn pub1 i c support i n recent years. I t s decisive a p p r ~ v a li n California, however, combined w i t h i t s ease of understanding and severity of approach ha$ led t o i t s increasing popularity among taxpayers i n other s t a t e s . In Arizona, two i n i t i a t i v e petitions similar t o Proposition 13 have been f i l e d with the Secretary of State and are currently being circulated f o r signature. In order t o be placed on the November 1980 ballot, the petitions would require 80,783 valid signatures by July 1 , 1980. The two Arizona i n i t i a t i v e s are compared w i t h Proposition 13 i n Appendix 4. The purpose of t h i s report is t o i l l ustrate the types and magnitudes of impacts t h a t would r e s u l t in Arizona w i t h the passage of a Proposition 13 type limitation. The report will also explore several of the issues t h a t the legislature would have t o resolve before a Proposition 13 amendment could be



imp1emen ted. The report, i t should be noted, is not intended as an analysis of e i t h e r of the two i n i t i a t i v e s presently being circulated in Arizona, but rather as an examination of the general type of fiscal 1imitation t h a t California 's Proposition 13 represents.



B.



REVENUE IMPACTS



In t h i s section, an analysis i s made of the potential revenue impacts t h a t could r e s u l t in Arizona with the passage of a Proposition 13 type pr0pert.y tax system. Before examining the specific revenue changes, however, i t i s useful t o understand the methodology used i n t h e i r calculation as well as the qua1 ifications and 1imitations of the data. Implementation of Proposition 13 requires t h a t property values be "rolled back" t o 1975 levels. From the 1975 base, valuations may be increased a maximum of 2% per year unless newly constructed, o r a change i n ownership has occurred. In order t o simplify the Arizona analysis, several modifications were made t o the methods actually employed by California in implementing Proposition 13. These modifications involve both the definition of the property base and the process f o r distributing the 1%collections. Although the differences between themaqners of treatment r e s u l t in s l i g h t l y different f i s c a l impacts, i t i s f e l t that the modificiations do not seriously a f f e c t the major conclusions of the analysis. A comparison of the procedures used i n t h i s analysis with those used in implementing California's Proposition 13 i s presented below: Arizona Analysis Valuation Base 1978 net f u l l cash value; includes personal property as we1 1 as real property. Present exemptions are allowed. Tax r a t e s e t a t 1%of net f u l l cash value p l u s additional r a t e t o cover outstanding debt. California Proposition 13 1975 f u l l cash value t o be brought up t o 1975 value i f underassessed; pl us 2% increase per year. If change in ownership, then 1975 base no longer applies. Tax r a t e s e t a t $4 per $100 of assessed value (25%assessment r a t i o ) plus additional r a t e t o cover outstanding debt.

1. Methodology and Data.



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Arizona Analysis Distributions of 1% collections Distribution of countywide collections t o dist r i c t s based on the percentage that each d i s t r i c t ' s 1978 property tax collections, less debt levy, bears t o total countywi de 1978 property tax collections 1ess total countywide debt levies.



California Proposition 13 Based on three-year average of property tax collections f o r c i t i e s , counties and special d i s t r i c t s . For schools, based on percentage of 1977-78 collections.



The California Proposition 13 stipulates that the property Valuation Base. tax base f o r taxation shall be the 1975 f u l l cash value, unless a change in ownership has occurred or the property has been constructed since 1975. In addition, provision i s made t o increase property values up t o t h e i r actual o 1975 f u l l cash value i f they had been underassessed i n 1975. N e x p l i c i t provision was made in Proposition 13 f o r properties declining i n value or those destroyed since 1975. In order t o remedy t h i s oversight, another Constitutional amendment, Proposition 8 , was approved by the Cal ifornia electorate i n November 1978. Proposition 8 provided f o r constitutional treatment of declining and destroyed properties. In generating the Arizona estimates of revenue impact, a 1978 f u l l cash value base, net of current exemptions was utilized. As a r e s u l t , the total amount of property tax collections allowed under the 1%limitation may be slightly greater than would be allowed under a s t r i c t interpretation of Proposition 13. A ternatively stated, the estimates of d i s t r i c t revenue loss may be understated 1 due t o the methods employed in the analysis. I t i s important, however, t o bear in mind t h a t the degree of variation will differ, among both particular taxing jurisdictions and particular property types. Jurisdictions experiencing substantial new construction and w i t h h i g h property turnover r a t i o s will more closely r e f l e c t the 1978 f u l l cash value base than will jurisdictions that are more stable. The same reasoning applies t o types of property. All revenue impact estimates show the potential impact that would have resulted in 1978 had the measure been i n effect.



Distribution of the 1%Collections. Proposition 13 i s essentially a l i m i t on the amount of taxes t h a t can be imposed on a particular parcel of property. I t would be extremely d i f f i c u l t f o r several taxing authorities t o independently levy taxes on a parcel of property and s t i l l remain within the 1% limitation. In California, following Proposition 13, tax assessment was central ized a t the county level. An allocation scheme was devised t o distribute the countywide collections among e l i g i b l e jurisdictions. The tax collections were distributed t o each local d i s t r i c t on a pro rata basis. The basis f o r the pro rata distribution f o r ~ i t i e s ,counties and special d i s t r i c t s was the average percentage of a l l property tax revenue collected (exclusive of taxes levied f o r debt retirement) w i t h i n the county which each such c i t y , county or d i s t r i c t collected over the prior three years. The pro rata distribution f o r schools was based only on the 1977-78 property tax revenue. In the Arizona analysis, i t was assumed t h a t the 1%property tax collections would be centralized a t the county level as was the case in Ca1 ifornia. In allncating the 1%col1ections, however, only one distribution i s made. Each d i ~ t r i c t s allocated a share of the countywide l%collectionsbased upon its i estimated 1978-79 property tax col 1ections under the existing property tax system. To be sure, this i s not the only allocation scheme possible. If a Proposition 13 were enacted i n Arizona, i t would be l e f t up t o the Legislature t o devel op an appropriate a1 location mechani sm. The property valuation data used in the analysis f o r a1 1 counties except Nqricopa County were taken from the 1978 State and County Abstract of the Assessment Roll, pub1 ished by the Arizona Department of Revenue. Data f o r Maricopa County were suppl ied by the Maricopa County Assessor's Off ice.

I



Estimated 1978 tax col lections were calculated based upon each d i s t r i c t ' s reported adjusted assessed valuation. A a r e s u l t , the property tax revenue s estimates presented i n t h i s report represent tax yield and may d i f f e r s l i g h t l y from the 1978-79 levy requirements reported by each d i s t r i c t .

2.



Aggregate Revenue Impacts.



During the 1978 tax year, taxing authorities



in Arizona collected an estimated $779 million in property taxes.* Under a Proposition 13 system, based on 1978 f u l l cash values, total statewide collections would be 1imited t o about $424 mil 1 ion. O the $424 mill ion i n property f tax collections,$307 million i s attributed t o the 1%tax r a t e levied on f u l l cash value, while the remaining $117 million i s levied f o r payment of outstanding debt service charges.** The reduction from $779 mill ion t o $424 million represents a statewide loss of property tax revenues of $355 million, or a reduction of 45.52%. Besides lowering the aggregate amount of property taxes collected, the Proposition 13 measure also results in the redistrlbution of property tax burdens among the present classes of property. The statewide changes in tax burden among property classes are i l l u s t r a t e d i n Table 1 on page 11-7. The present distribution of tax collections by property class i s shown i n column 3 of the table. Implementation of the Proposition 13 amendment results in the distribution shown in column 5 of the table. Comparing columns 3 and 5, the Proposition 1 3 measure would s h i f t a greater percentage burden of tax payments, a l b e i t lower absolute tax amounts, onto classes 4 and 5; while lowering the percentage burden of classes 1 , 2, 3 and 6. Alternatively stated, classes 4 and 5 would pay a larger percentage of a smaller tax pie, while classes 1 , 2, 3 qnd 6 would pay a smaller percentage of the smaller "pie." This i s graphically i l l u s t r a t e d in Figure 1 on page 11-8. From Figure 1 and Table 1, homes paid $218 mil 1ion (net of the homeowners' rebate) in property taxes, o r about 28% of total property tax collections i n 1978. total collections from homes decline b.y l e s s than,one perUnder Proposition 13, cent to $21 7 mil 1ion, b u t the tax burden of homes increases from 28% of the total to 51%. Mines and railroads would realize a 72% decrease in tax l i a b i l i t y , going from $52.8 million t o $15.0million. U t i l i t i e s realize a tax savinqs of about 71%. U t i l i t i e s drop from paying s l iqhtly over 21% of total property taxes collected under the present system to about 11% of total collections under Estimates prepared by the s t a f f of the Joint Select Committee on Tax Reform and School Finance. **Debt service levie s were taken from reports of the Count Boards of Supervjsors, ~nd syrvqys pre ared-by the League of Arizona Cities an Towns and the Arizona ssociation of ounties. 11-6 *Source:



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FIGURE 1



D i s t r i b u t i o n o f Property Tax C o l l e c t i o n s



1978 Tax C o l l e c t i o n s = $779 m i l l i o n



P r o p o s i t i o n 13 Tax Col l e c t i o n s = $424 m i l 1i o n



Mines and R a i l s 6,78% Rebate 7.38%



Mines and R a i l s



Agri c u l t u r e 8.32% Residential



R e s i d e n t i a l Renta 6.06%



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Proposi t i on 13. Commercial properties pay 55.19% fewer taxes under the Proposition 13 amendment and t h e i r share of taxes drops from 21.8% t o 17.7%. Agricultural properties pay about 32% fewer taxes under the Proposition 13 amendment, but the relative share of agricultural properties increases from about 8% t o over 10%.

3. District Revenue Impacts. Proposition 13 1imi ts property taxes t o 1% of the f u l l cash value of each parcel of property, plus an amount sufficient t o pay bonded debt approved prior t o passage of the amendment. In Arizona, a Proposition 13 type measure would cut aggregate property taxes by about 45.6% Each taxing jurisdiction would suffer 1osses in property tax revenue--the amount of each d i s t r i c t ' s loss would be dependent upon the current level of property tax re1 iance of each d i s t r i c t , the amount of outstanding general obligation debt relative to each d i s t r i c t ' s total property t a x collections, and the nature of the allocation mechanism used t o distribute the 1%collections.



e



The following i s a summary of property tax loss by jurisdiction type: Jurisdiction Type State Counties Cities a School s Comrnun i ty Col 1eges Other Districts Total Property Tax Loss (Millions)

$ 40.1 86.9 13-5 176.0 28.0 10.1 354 .'6



Percent Loss



Tables 2 through 4 present estimates of property tax revenue loss f o r selected jurisdictions. Table 2 shows the property tax loss of each of the fourteen counties. The reader should keep i n mind that the estimates of 1978 collections are based upon the valuations reported by the Department of Revenue f o r a l l counties except Maricopa County. A a r e s u l t , the figures reported i n Table 2 may s



a~ncludes1ieu tax.



TABLE 2



PROPOSITION 13 REVENUE IMPACTS



qount~ Apache Cochi se Coconi no

G i 1a



Est. 1978 Property ~ a x e t

$ 1,137,360



Prop. 13 Property Taxes

$



Difference

$-



Percent D i fference

-53.34% -61.39



530,685 2,727,032 2,027,509 1,722,438 856,190



606,675 4,336,178



7,063,210 3,918,029 4,573,639 1,599,435

Did not levy tax.



-



Graham Greenlee Marl copaC Mohave Navajo Pi m a Pinal Santa Cruz Yavapai

Yu a m



76,402,006 4,399,873 3,389,671 54,082,175 10,772,455 2,142,618 4,495,296 3,716,378



44,319,664 2,029,593 1,848,981 27,048,108 3,063,014 1,009,906 1,989,345 1,563,480



aEst'imates of yield based on DOR abstract valuations. b1ncl udes taxes f o r bonded debt. CVal uations suppl ied by Maricopa County Assessor's Office.



d i f f e r slightly from the levy requirements reported by the county supervisors. From the table, county revenue losses var.y from 45.45%in Navajo County t o almost 72% in Pinal County. Maricopa County would lose almost 42% of i t s property tax revenues. Table 3 shows the property tax loss in nineteen selected c i t i e s . The losses vary from only 2.14% in Kingman t o 63.41 % in Coolidge. Cities losing relatively fewer revenues are generally those with the greatest outstanding general obligation debt, which may be levied in addition t o whatever may be allocated t o each d i s t r i c t . I t was assumed that a l l general obligation debt would be financed through an additional property tax levy. Table 4 presents property tax loss f o r selected school d i s t r i c t s . Again, the losses vary among individual d i s t r i c t s , depending primarily upon the level of outstanding bonded indebtedness. Table 5 shows revenue loss of the community col leges.

4. A Note on Bonded Debt. Proposition 13 provides t h a t property taxes f o r payment of principal and interest on bonds approved by the voters prior t o enactment o f Proposition 13, may be levied i n addition t o the 1%tax rate. In Arizona, i t i s not imediately clear t o which property valuation base ( i .e. adjusted assessed value or f u l l cash value) the debt levy would apply. T h i s i s because the bonds were approved and issued based upon the taxpayers' willingness t o accept a certain tax 1iabil i t y (given the propert-y classification system) t o pay f o r the bonds. Under Proposition 13, the valuation base would be a1 tered dramatically and, hence, the basis on which the bonds were originally Issued would seem no longer valid. The "covenant" of t h e i r passage would be broken.



A t the time of issuance of the bonds, Arizona's classified propert-y tax system gave preferential t r e a t m e n t t o certain types of properties over others. With the passage of a Proposition 13 measure, each dollar of property f u l l cash value, f o r a l l properties, would be treated equally f o r taxation. If the debt levy i s



TABLE 3 PROPOSITION 13 REVENUE IMPACTS SELECTED CITIES



City



Est. 1978 P r o p e r t y Taxesa



Prop. 13 Property ~ a x e s ~ Difference



Percent Difference



B i sbee Casa Grande Cool idge Doug1as Flagstaff G l endal e Globe Hol brook K i ngman Miami Phoenix Prescott Safford Scottsdale Sierra Vista Tucson W i l l iams Winslow Y uma



a ~ s t i m a t e so f y i e l d . b ~ n cudes taxes f o r o u t s t a n d i n g bonded debt. l



TABLE 4



PROPOSITION 13 REVENUE IMPACTS SELECTED SCHOOL DISTRICTS



District St. Johns E l . Window Rock El/HS Apache Co. H S S t . David U n i f . Sierra Vista E l . (Buena) Sierra Vista H S (Buena) Flagstaff Unif. Page U n i f . Tuba C i t v U n i f . Globe ~ n i f . Miami U n i f . Safford Unif. Thatcher U n i f . Duncan Unif. Morenci U n i f . Mesa Unif. Scottsdal e Uni f. Paradise Vly. U n i f . Phoenix E l . Washington E l Osborn E l . Bal sz E l . G l endal e El Roosevel t El A1 hambra El Glendale UHS Phoenix UHS Kingman E l Mohave UHS Winslow U n i f . Joseph City U n i f . Whiteriver Unif. Tucson Uni f Amphitheater U n i f . I n d i a n Oasis E l /HS



Prop. 13 Est. 1978 ~ P r o p e r t y ~ a x e s Property Taxes b



Difference



Percent Difference



.



.



.



.



.



.



District Catal ina Foothills El. Marana H S Fl orence Uni f . Oracle El El oy El Casa Grande UHS Nogal es Uni f . Santa Cruz Vly. Unif. Patagonia U S H Prescott Uni f . Camp Verde Uni f . Chino Val 1ey El . Yuma El. Sal ome El Y m UHS ua



Est. 1978 Property Taxesa



Prop 13 Property ~ a x e s b Difference



Percent Difference



.



.



.



a Estimates of yield

Includes taxes for bonded debt



TABLE 5 PROPOSITION 13 REVENUE IMPACTS COMMUNITY COLLEGES Communi t y Col 1ege Cochi se County J r . College Mari copa County J r . College Mohave Communi t y Col 1ege North1 and J r . College Pima County J r . College P i n a l County Jr. College Yavapai County J r . College Yuma County J r . College



a Est.1978 Property Taxes



Prop. 13 Property ~ a x e D



Difference



Percent D i fference



aEstimates o f production b ~ n c l u d e staxes for bonded debt



applied equally t o a l l classes of property, there will be a s h i f t in the tax l i a b i l i t y f o r payment of debt. The shift would be t o place a heavier debt burden on the low assessment r a t i o properties. T h i s is more f u l l y described in section D.2. of t h i s chapter. Clearly, Proposition 13 was not originally drafted with the classified property tax system in mind. Nevertheless, i t s intent would seem t o s h i f t a l l taxes t o a f u l l cash value basis, including debt. Therefore, the analysis presented in t h i s report uses the f u l l cash value base w i t h respect t o taxes f o r payment of outstanding debt.



C.



OTHER IMPACTS



Besides forcing the reduction i n revenues that was detailed in the preceding section, the implications of Proposition 13 will extend t o other areas. This section will explore some of the impacts that can be categorized as economic impacts, and the following section will out1 ine necessary legislative responses t o Proposition 13. The economic, or more properly, the socio-economic impacts of the limitation are both major and minor, measurable and immeasurable. This section will outline those impacts which will 1i kely occur under the 1 imitations. 1. Impacts on Private Investment. One of the primary effects of Proposition 13 i s the reduction of the property tax burdens of businesses and homeowners. Although the property tax cuts would diminish public sector revenues, i t could also result i n increased business investment and private sector employment. Proposition 13 could, therefore, spur economic growth. The business property tax cuts effectuated by Proposition 13 could be passed along t o consumers i n the form of lower prices. The existence of tax savings pass-throughs would be dependent upon the degree of market competition in each industry. Rents could be reduced i f the property tax savings of landlords were passed through t o renters. Changes in Tax Burden. Proposition 13 would dramatically a l t e r the property tax burden in Arizona. The alteration would be both immediate, a t the effective date of the limitation, and continuous, for as long as the limitation was in effect.

2.



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The immediate change in tax burden was discussed a t some length in the preceding section. The el imination of the preferential (or discriminatory) tax classification system and the movement t o a system where a1 1 properties a r e taxed on an equal basis will cause the f i r s t - or immediate change in burdens. A1 though taxes may be decreased for a l l (or most) classes of property, the percentage of the remaining property taxes paid by the various classes of property wi 11 be changed.



The c o n t i n u i n g changes i n t a x burdens a r e caused by t h e assessing p r o v i s i o n s contained i n t h e 1 i m i t a t i o n . Since, f o r a1 1 p r a c t i c a l purposes, t h e v a l u a t i o n o f a class o f p r o p e r t y can o n l y be increased due t o ownership changes o r new construction, those classes experiencing these phenomena t o t h e g r e a t e s t e x t e n t w i l l be t h e classes t h a t experience t h e g r e a t e s t growth i n t a x burden. This i s n o t t o say however, t h a t new c o n s t r u c t i o n would n o t a1 t e r t h e p r o p e r t y t a x burden under t h e e x i s t i n g system, f o r s u r e l y i t would. Class 2 p r o p e r t i e s presently. But under t h e P r o p o s i t i o n 1 3 approach t o assessing, t h e v a l u a t i o n of Palo Verde w i l l remain canstant so l o n g as ownership does n o t change. o f pub1 i c u t i l i t i e s does n o t change very o f t e n . Homes, on t h e o t h e r hand, change ownership q u i t e f r e q u e n t l y . This frequent The ownership The c o n s t r u c t i o n o f t h e Palo Verde Nuclear F a c i l i t y i s d e f i n i t e l y a1 t e r i n g t h e t a x burden of



ownership change w i l l cause frequent assessment changes, and,therefore,the v a l u a t i o n o f homes w i l l grow f a s t e r than t h e v a l u a t i o n o f o t h e r p r o p e r t i e s . The r e s u l t o f t h i s w i l l be t h a t a g r e a t e r share o f t h e p r o p e r t y taxes c o l l e c t e d i n Arizona w i l l come from homes.

3.



New Revenues.



P r o p o s i t i o n 13 w i 11 considerably c o n s t r a i n j u r i s d i c t i o n s The c o n s t r a i n t i s contained i n t h e



i n t h e i r a b i l i t y t o o b t a i n a d d i t i o n a l revenues from new taxes o r from changes i n r a t e s o r bases o f e x i s t i n g taxes. requirement o f t w o - t h i r d s vote i n each House o f t h e L e g i s l a t u r e f o r changes a t t h e s t a t e l e v e l , and t w o - t h i r d s vote of voters f o r changes a t t h e l o c a l l e v e l . The c o n s t r a i n t has impacts t h a t those who o b j e c t t o t h e qrowth i n t a x a t i o n consider laudatory; a r e s t r i c t i o n on t h e growth i n taxes. However, i t should be p o i n t e d o u t t h a t t h i s r e s t r i c t i o n could severely c u r t a i l government's a b i l i t y t o meet t h e demands o f t h e m a j o r i t y by g i v i n g t h e power t o defeat o r delay those demands t o t h e m i n o r i t y .



4.



Construction and Development. The patterns of construction and development in the s t a t e may be altered by local jurisdictions responding t o the effects of the implementation of Proposition 13. The responses of jurisdictions could take several forms, two of which are discussed below:



a. Fiscal Zoning. In order to maximize the amount of revenues accruing to them, jurisdictions may engage in fiscal zoning. Fiscal zoning means the use of powers of zoning to only allow development of high value improvements w i t h low service demands. For example, by only permitting the construction of 1 uxury r e t i rement communi t i es whose muni ci pal service demands (water, sewer, s t r e e t l i g h t s , e t c . ) would not be that much greater than modest t r a c t homes, b u t whose taxable value would be f a r greater, the municipality would have maximized revenues and decreased costs. Additionally, having retirement communities would minimize strains on the local education systems. Jurisdictions may also attempt to a t t r a c t residential development as opposed $0 commercial development. Realizing that residences change ownership - and therefore are reapprai red - more often than commerci a1 properties, commerci a1 developments may have a more d i f f i c u l t time locating. Establishment of Development Fees. B realizing t h a t new development y increases demands on a jurisdiction to strengthen i t s service delivery infrastructure, those jurisdictions may establish development fees t o finance those demands. Increased building permits, water, and sewer fees, fees for zoning variances, building inspections, subdivision approval, and assessments for school construction, f i r e protection and other services may be levied on a l l construction activity. The result of t h i s would, of course, be an increase in the price of a l l construction which presumably would impact demand.

b.



5. Intrastate Mobil it y , Proposition 13 requires t h a t valuations increase no more than 2 percent annually, unless newly constructed or a change i n ownership has occurred. Because a home newly purchased will bear a higher tax burden than



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a home that has not sold, PropositTon 13 may discourage i n t r a s t a t e mobility, A family, for example, would pay fewer taxes by remaining i n i t s present residence t h a n i f it roved t o an identical residence. Thfs provision would create a hardship on individuals and families transferred t o other locqtfons i n the s t a t e . The provision would, however, promote greater local s t a b i l i t y .



6.



Ownership Avoidance. I n order t o avoid an increase i n t a x l i a b i l i t y due The



t o a change i n ownership, t h e r e may be attempts t o circumvent t h e system. arrangements w i t h t h e new purchaser. c o r p o r a t i o n i n exchange f o r stock.



owner o f record may keep t h e p r o p e r t y i n h i s name and make o t h e r c o n t r a c t u a l One method being used i n C a l i f o r n i a i s f o r a p r o p e r t y owner t o i n c o r p o r a t e and t r a n s f e r t i t l e o f t h e p r o p e r t y t o t h e



7.



Impacts o f Federal Funds under P r o p o s i t i o n 13.



I f a P r o p o s i t i o n 13 type



l i m i t a t i o n were t o pass i n Arizona, i t can be assumed t h a t t h e p a t t e r n s o f federal t a x c o l l e c t i o n s from the s t a t e , as programs would be a1 tered. Federal t a x c o l l e c t i o n s would be a l t e r e d through t h e r e d u c t i o n i n t h e p r o p e r t y t a x deductions on t h e federal income t a x form. The e x t e n t o f t h e increase 1) the extent i n i n d i v i d u a l t a x c o l l e c t i o n s w i l l depend on several v a r i a b l e s : deduction); w e l l as f e d e r a l funding o f c e r t a i n



t h e deduction i s used by Arizona r e s i d e n t s (versus t h e use o f t h e standard

2 ) t h e e x t e n t t h a t s t a t e income taxes a r e increased through a s i m i l a r r e d u c t i o n i n deductions (because s t a t e income taxes are d e d u c t i b l e



on federal returns;



3)



t h e marginal f e d e r a l t a x r a t e s o f the r e s i d e n t s who



experience p r o p e r t y t a x reductions ; and f i n a l l y , taxes a r e reduced under t h e l i m i t a t i o n .



4)



t h e amount p r o p e r t y



The increase i n corporate federal t a x payments w i l l , t o a l a r g e measure, depend on the same v a r i a b l e s t h a t determine t h e increase i n i n d i v i d u a l 1i a b i l it y . However, t h e market e f f e c t s i n reducing t h e t a x savings w i l l a l s o p l a y an important r o l e , t h a t i s , t o t h e e x t e n t t h a t competing businesses reduce p r i c e s because of reduced costs (property, taxes), and income i s therefore reduced, federal income t a x l i a b i l i t y may n o t increase. I n t h e area o f federal assistance payments, a P r o p o s i t i o n 13 impact i s determined

by t h e decisions made by numerous independent a c t o r s responding t o i n d i v i d u a l



pressures.



The impact, i f f e l t , w i l l f a l l i n t o t h r e e broad categories o f



f e d e r a l assistance:



@



a. Federal assistance programs requiring matching funds or a maintenance of e f f o r t by the local jurisdictions, Federal compensation programs which reimburse the s t a t e and local governments because federal landholdings are exempt from s t a t e and local taxation, and

b.



c. Federal formula grant programs that use greater expenditures on taxing e f f o r t as factors in allocating funds. Hw 1 ocal governmenls decide to a1 1ocate avai 1able revenues, how and i f the o s t a t e can render financial assistance t o local governments, and whether federal agencies will issue waivers of program requirements,will a l l interact to determine the extent of the reduction of federal funding in Arizona should a Proposition 13 type measure be enacted.



D.



LEGISLATIVE ISSUES



I n t h i s s e c t i o n , an examination i s made o f t h e necessary l e g i s l a t i v e responses t o the adoption o f a P r o p o s i t i o n 13 c o u n t e r p a r t i n Arizona. have, however, a more general a p p l i c a t i o n . The a n a l y s i s does



I t provides an agenda t o t h e Legis-



l a t u r e f o r issues t h a t are i n h e r e n t i n t h e adoption o r c o n s i d e r a t i o n o f a p r o p e r t y t a x c u t t i n g o r l i m i t i n g measure t h a t i s s i m i l a r t o P r o p o s i t i o n 13.



A1 though an attempt has been made t o make t h i s a comprehensive a n a l y s i s , t h e f o l l o w i n g i s n o t intended as an exhaustive discussion o f t h e necessary l e g i s l a t i v e responses t o the adoption o f such a measure. Though much can be learned from t h e



C a l i f o r n i a experience w i t h P r o p o s i t i o n 13, Arizona i s a d i f f e r e n t s t a t e w i t h a d i f f e r e n t pub1 i c finance system.



The a n a l y s i s w i l l consider t h r e e broad areas t o which t h e L e g i s l a t u r e w i l l have t o respond. Those areas are:



1. The r o l l b a c k t o 1975 values; o r more g e n e r a l l y assessing p r o p e r t y under P r o p o s i t i o n 13.

2.

3. The apportionment o f the 1%l e v y . The e f f e c t i v e date o f the l i m i t a t i o n s .



1.



The 1975 Rollback o r Assessing Property Under P r o p o s i t i o n 13.



Proposition



13 and i t s Arizona counterpart, t h e H e u i s l e r i n i t i a t i v e , c a l l f o r t h e r o l l b a c k o f f u l l cash value o f a1 1 p r o p e r t y i n t h e s t a t e t o t h e 1975 f u l l cash value l e v e l . For p r o p e r t y improved o r constructed,since 1975, and f o r p r o p e r t y t h a t has changed



ownership since t h a t time, t h e measures c a l l f o r t h e a p p r a i s a l o f such p r o p e r t y and t h e e n t e r i n g o f t h a t appraised value as t h e f u l l cash value l e v e l on t h e t a x rolls. Property f u l l cash value l e v e l s may be increased by 2% p e r y e a r t o r e f l e c t



the r a t e o f i n f l a t i o n .



This s e c t i o n o f t h e a n a l y s i s w i l l examine t h i s p r o v i s i o n and t h e issues i n v o l v e d in: determining t h e 1975 assessment l e v e l s ; p r o v i d i n g f o r d e c l i n e s i n value;



assessing p r o p e r t i e s t h a t are n o t e n t i t l e d t o the 1975 v a l u a t i o n s ; t h e treatment o f exemptions; and w i l l f i n a l l y conclude w i t h a summary.



a.



Determining t h e 1975 Values.



The 1975 assessment The most obvious question r a i s e d by t h e i n i t i a t i v e i n terms o f implementat i o n i s , "Does the 1975 assessment r o l l e x i s t ? " P r e l i m i n a r y research has



l e d t h e s t a f f o f t h e JSC t o conclude t h a t i t would be extremely d i f f i c u l t t o r o l l a l l values back t o t h e 1975 l e v e l .



This conclusion i s based on t h e responses r e c e i v e d t o a l e t t e r sent by the Co-Chairmen o f t h e JSC t o t h e D i r e c t o r o f t h e Department o f Revenue requesting research data t o t e s t t h e impacts of t h e i n i t i a t i v e s .



Some samples o f t h e responses:



D i r e c t o r , Arizona Department o f Revenue There are no computer tapes f o r 1973 and 1975. A l l data would have t o be entered i n t o computer f i l e s from paper copy t o t h e e x t e n t records e x i s t a t a l l .



.Chief Deputy, Maricopa County Assessor's Office



.. .i t would probably be prohibitively expensive, i f not virtually impossible, to provide a proper and equitable valuation roll as of 1973, 1975 or 1977 without several years of hand calculation, property canvass of the entire county and computer massage of the r o l l s .

*County Assessor, Pima County (on meeting the rollback provisions of the Heuisler Amendment) "a nightmare"



A t some point in time, the Legislature should s a t i s f y i t s e l f as t o whether

the 1975 roll can or cannot be reproduced. If i t cannot, some a1 ternative



method will have to be devised that would meet the proposed constitutional provision that values be rolled back to the 1975 assessment r o l l , and that a1 ternative method would more than likely have t o withstand a court chal 1enge



.



Reval uation to r e f l e c t 1975 assessments More potential court challenges could stem from the Legislature's interpretation of another clause in Section 2 of the amendments. That



clause, which reads, "All taxable property not already valued to the 1975 tax levels may be revalued to r e f l e c t that valuation.'' adds confusion



to the clause which was discussed above ( i .e. full cash val ue means the value on the 1975 r o l l s ) .



I t seems that the Legislature could direct the county assessors down one of two roads with regard to t h i s provision: attempt to achieve i t .

1) ignore i t or 2 )



Although both paths have t h e i r advantages and



disadvantages, t h e L e g i s l a t u r e must adopt e i t h e r one o r t h e o t h e r t o assure consistency throughout t h e s t a t e .



The case f o r i g n o r i n g t h e phrase begins w i t h i t s p e r m i s s i v e s t r u c t u r e ("may"), has r o o t s i n t h e C a l i f o r n i a experience, and i s supported by t h e l a c k o f data.



C a l i f o r n i a , p r i o r t o 1978, a l l o w e d assessors t o r e v a l u e on a c y c l i c a l basis, e.g. a t h i r d o f t h e p r o p e r t y c o u l d be r e v a l u e d e v e r y year.



Therefore, t h e s u b j e c t phrase was needed so t h a t a l l p r o p e r t i e s would be on t h e 1975 b a s i s and n o t spread over several years. Since t h i s



c y c l i c a l v a l u a t i o n i s n o t p e r m i t t e d i n Arizona, t h e s u b j e c t phrase c o u l d p o s s i b l y be ignored.



The l a c k o f s u f f i c i e n t data t o make adjustments m i g h t a l s o make a case f o r i g n o r i n g t h e phrase.

I t can e a s i l y be assumed t h a t t h i s



p r o v i s i o n would a l l o w county assessors t o r a i s e t h e v a l u a t i o n s on p r o p e r t y t h a t was underassessed i n 1975. However, t h e r e may be such a



l a c k of s a l e s data t h a t t h i s clause would be i m p o s s i b l e t o execute equitably



.



Executing t h e p r o v i s i o n s The case f o r a t t e m p t i n g t o execute t h e p r o v i s i o n i s based on two p o i n t s : The f i r s t b e i n g t h a t i f p r o p e r t i e s a r e assessed a t t h e i r f u l l 1975 value, t h e amount o f f u l l cash v a l u e s u b j e c t t o t h e 1% would be maximized



and t h e r e f o r e t h e revenue s h o r t f a l l would be minimized.



The second



argument i n f a v o r o f e x e c u t i n g t h e p r o v i s i o n s o f t h e phrase, would be t h a t i f a l l p r o p e r t i e s a r e a t t h e i r f u l l 1975 value, a t l e a s t t h e 1975 assessment would be e q u i t a b l e and f a i r f o r a1 1 taxpayers.



Regardless o f t h e r e s o l u t i o n , t h e L e g i s l a t u r e should i n s t r u c t t h e county assessors one way o r t h e o t h e r t o assure assessment u n i f o r m i t y .



b.



Declines i n value



N e i t h e r o f t h e i n i t i a t i v e s a l l o w s f o r p r o p e r t i e s t o d e c l i n e i n value. This f a c t was q u i c k l y r e a l i z e d i n C a l i f o r n i a and a c o n s t i t u t i o n a l amendment was r e f e r r e d t o t h e v o t e r s b y t h e L e g i s l a t u r e immediately a f t e r P r o p o s i t i o n 1 3 ' s passage. Presumably t h i s would a l s o have t o be



done i n Arizona i f such a l i m i t a t i o n passed.



c.



Change i n ownership



The i n i t i a t i v e s r e q u i r e a r e a p p r a i s a l f o r a l l p a r c e l s when t h e y change ownership. Presumably t h i s p r o v i s i o n i s r e t r o s p e c t i v e t o 1975 as we1 1 The most obvious d i f f i c u l t y



as p r o s p e c t i v e from t h e date o f passage.



a s s o c i a t e d w i t h t h e p r o v i s i o n i s t h e d e f i n i t i o n o f change i n ownership, something t h a t i s l e f t t o t h e L e g i s l a t u r e .



Some o f t h e t r a n s f e r s t h a t w i l l have t o be d e f i n e d i n r e g a r d t o causing new assessments i n c l u d e : c r e a t i o n and d i s s o l u t i o n o f long-



term leases; r e v o c a t i o n o f j o i n t tenancy deeds; c r e a t i o n o r t e r m i n a t i o n



of tenancies i n common; l i f e e s t a t e s ; revocable and irrevocable t r u s t s ; partnerships dissolving or incorporating; corporate mergers; interspousal transfers due to death, divorce, dissolution and presumably several other p o s s i b i l i t i e s .



Once these definitions are determined, the process will have to begin to research records so t h a t reappraisals can be made.



For future change i n ownerships, the assessors will have to be given the power and tools necessary to follow up on property transfers, since presumably not a l l types of transfers are recorded in the county recorder's office.



d.



Newly constructed



Nw construction will also cause a reappraisal under the i n i t i a t i v e s . e In the simplest form of new construction, a new subdevelopment, t h i s will pose no great problem.



B u t , guidelines will have to be developed f o r the not-so-simple



situations.



Hw will the construction of a home by the owner of the o



land be handled? Will land be held constant and the improvement be added, or will the whole parcel be revalued? Hw will adding a o porch, a swimming pool, a room, o r a new wing t o a building be treated? Hw will the rebuilding of a building that has been destroyed o be treated? Will a large parcel that has been subdivided be considered



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These qu$s&i~~i;:;ahd;mahy~ mre;i:w31 Jafiag&t6 b~br&~Q~jj~~'!-tni'~pd@~:1~a2i't? assess property under PropositioallS[ +,i

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Will the price of copper a t a1 1 affect the valuation of a

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miitw? ? Mil 1 ..rate ;iricrease~~affgct - v a t $ ~ " ~ + R ~ ~ @he e$i?"t't'y?i.



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f.



Exemptions



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wquld, hava.&o-taka' into account curreAt'wT&&3"*and ~kt4;%ah3~~'@xkmpt'ions.

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. *.the total atssessment of such person does n o t e2eeed fi~ii~~thobsdhd!-



dol?,qr~.", If the LegisFature adopted f u l l cash value as



'the baii's: i t :



for assessi.ng, (and d i d not maintain some furnl of aksessment ~rAfi system) at1 .uid~ws and *veteransi'i exemptSVfiS wow1 d -113 k ~ l y " 5 ' cknc8l11&d.

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b



Summary.



I n summary, i f P r o p o s i t i o n 13 were t o pass i n



Arizona, t h e



L e g i s l a t u r e would have t o r e a c t t o t h e f o l l o w i n g items w i t h r e s p e c t t o assessing:



A.



The 1975 assessment l e v e l



1.



Define what i s t o be used f o r t h e 1975 assessment



2. Determine whether, and by what method, p a r c e l s are t o be revalued t o 1975 l e v e l s



B.



Provide f o r d e c l i n e s i n value



e



C.



Define changes i n ownership

1.



Provide t o o l s f o r assessors t o a c t r e t r o a c t i v e l y Provide t o o l s f o r assessors t o a c t i n t h e f u t u r e



2.



D.



Define "newly constructed" Issue g u i d e l i n e s f o r l o c a l and c e n t r a l l y assessed p r o p e r t i e s



E.



Design an assessment system t h a t does n o t revoke a l l widows' and veterans ' exemptions



2.



The Apportionment o f t h e 1% Levy.



The P r o p o s i t i o n 13 measures p r o v i d e



o t h a t t h e maximum p r o p e r t y t a x on any p a r c e l s h a l l n o t exceed 1% f i t s f u l l cash value. i The 1% s t o be c o l l e c t e d by the c o u n t i e s and d i s t r i b u t e d The 1%1i m i t a t i o n , however, does n o t apply t o taxes l e v i e d



according t o law.



f o r t h e r e t i r e m e n t o f debt p r e v i o u s l y approved by t h e v o t e r s .



T h i s p o r t i o n o f t h e a n a l y s i s w i l l examine t h e i n i t i a t i v e s i n terms o f necessary 1e g i s l a t i ve a c t i o n s t o l e v y and c o l 1e c t p r o p e r t y taxes.



a.



Col 1e c t i on mechanism



The f i r s t t h i n g t h e L e g i s l a t u r e must do i f t h e i n i t i a t i v e s a r e passed, i s e s t a b l i s h t h e mechanism f o r c o l l e c t i o n o f taxes.



Apparently, p r o p e r t y can be t a x e d i n any number o f ways ( f o r example:



1% f f u l l cash value o r a 25% assessment r a t i o w i t h a $4.00 t a x r a t e o

o r t h e c u r r e n t c l a s s i f i e d system w i t h c l a s s i f i e d r a t e s ) . As was



mentioned above, however, the method s e l e c t e d may have a v e r y l a r g e impact on widows' and veterans' exemptions.



A d d i t i o n a l l y , t h e L e g i s l a t u r e w i l l have t o p r o v i d e f o r payments t o counties o f t h e p r o p e r t y taxes now p a i d d i r e c t l y t o t h e s t a t e , e.g. a i r c r a f t companies and p r i v a t e c a r companies.



b.



Level o f t a x a t i o n



The i n i t i a t i v e s p r o v i d e t h a t th,e maximum r a t e o f t a x a t i o n i s t o be 1%' o f f u l l cash value. T h i s does n o t mean t h a t a1 1 p r o p e r t i e s n e c e s s a r i l y



l have t o be a t t h e 1% e v e l .



The L e g i s l a t u r e may f i n d (and p r o b a b l y w i l l ) t h a t some p r o p e r t i e s i n t h e



s t a t e a r e being taxed a t a l e v e l s u b s t a n t i a l l y below 1%. Are they t o be r a i s e d o r continued t o be taxed a t a lower r a t e ? This question



w i l l have t o be resolved.



c.



Apportionment



T h i r d l y , o f t h e revenues t h a t are c o l l e c t e d , a formula w i l l have t o be adopted t o spread the a v a i l a b l e l e v i e s .



Several options e x i s t w i t h regard t o d i s t r i b u t i o n formulas.



For



example, i t could be decided t h a t a l l j u r i s d i c t i o n s w i l l s u f f e r an equal percentage l o s s i n p r o p e r t y t a x revenues, o r i t could be decided t h a t some j u r i s d i c t i o n s , l i k e t h e s t a t e and c i t i e s , would no longer r e c e i v e general p r o p e r t y taxes and t h e l e v i e s a r e t o be d i s t r i b u t e d among the remaining j u r i s d i c t i o n s .



The formula decided upon c o u l d g r e a t l y impact s t a t e a i d f o r education. For example, i t might be decided t o remove l o c a l p r o p e r t y taxes f o r schools e n t i r e l y , and move t o f u l l s t a t e funding.



The apportionment question i s probably t h e sing1 e most d i f f i c u l t question t h a t would face t h e L e g i s l a t u r e .



d.



New p a r c e l s



The question a r i s e s as t o how new p a r c e l s a r e t o be t r e a t e d i n the apportionment formulas. Are t h e i r l e v i e s t o be added t o t h e " p o t "



collected by the counties and apportioned to a l l d i s t r i c t s , o r are the jurisdictions that provide services t o be the only jurisdictions receiving benefits? This question i s s t i l l being debated in California, as i s the apportionment formula question. The debate i s largely



focused on how the apportionment formulas are to take into account population increases, increases in mandated services and changing socio-economic conditions as indicators of jurisdictional need for revenues.



e.



Revenue losses The



The questions of revenue losses will also have t o be addressed.



f i r s t question to be raised i s , "Are the losses t o be made up?" I f yes, by whom, the s t a t e or the local jurisdictions?

up



If the s t a t e makes



the losses, how i s i t t o be done, the income tax, the sales tax or



some other mechanisms.



The Legislature will not only have to address these problems, b u t will also have to address the question of s t a t e control of local jurisdictions.



f.



Redemption of previously approved bonds



The issue t h a t will have the greatest impact on property taxpayers will be the resolution of the mechanism used t o redeem bonds. A s



outlined above, the limitation allows for taxes t o be levied in excess of the 1%1imitation to r e t i r e previously approved bonds. There are



several o p t i o n s open t o t h e L e g i s l a t u r e i n d e s i g n i n g such a p r o p e r t y t a x mechanism.



A l l of t h e o p t i o n s o u t l i n e d below stem from t h e f a c t t h a t A r i z o n a

has a p r o p e r t y t a x c l a s s i f i c a t i o n system. J u s t as t h e L e g i s l a t u r e



w i l l have t o consider t h e widows'and v e t e r a n s ' exemption i n d e s i g n i n g t h e mechanism t o c o l l e c t t h e t a x , so t o o w i l l i t have t o c o n s i d e r t h e bond s i t u a t i o n .



For illu s t r a t i o n purposes Table 1 below i s h e l p f u l . Assume: 1. 1978 Bond Levy Requirement = $1,000



2.



Two Classes of P r o p e r t y



A. B.



Class 2, assessment r a t i o 50% Class 5, assessment r a t i o 15%



1978 Full Cash

Value



1978 Assessed Val ue 50,000 15,000 65,800



11978 Tax Rate 1.54 1.54



1978 Bonci 1 1 1978 E f f e c t i v e Levy Rate on FCV 770 230 1,000



11



P o s s i b l e Tax Rate on FCV



Possible 1 3ond Levy



Class 2 100,000



.77



.50 .50



500 500 1,000



Class 3 100,000

TOTAL 200,000



-



.23



T h i s t a b l e assumes two classes o f p r o p e r t y i n a j u r i s d i c t i o n t h a t r e q u i r e s $1,000 t o be l e v i e d t o pay back bonds. Under t h e c u r r e n t



system (A) b o t h classes pay t h e same r a t e p e r $100 o f assessed val u a t i o n ($1.54). differently, Because t h e assessed v a l u a t i o n s are computed



however, t h e e f f e c t i v e t a x r a t e s p e r $100 o f f u l l cash



value are d i f f e r e n t ( B y .77 vs. .23).



I f the L e g i s l a t u r e collapses a l l p r o p e r t y i n t o a s i n g l e c l a s s f o r t h e



purpose o f l e v y i n g bonds, t h e taxes could s h i f t r a t h e r d r a m a t i c a l l y (c). This f a c t could f o r c e t h e L e g i s l a t u r e t o m a i n t a i n t h e p r e s e n t The i n i t i a -



c l a s s i f i c a t i o n system f o r t h e l e v y i n g o f bond payments.



t i v e s do n o t p r o h i b i t t h i s j u s t as t h e y do n o t p r o h i b i t t h e c o n t i n u a t i o n of the c u r r e n t v a l u a t i o n system (annual r e a p p r a i s a l ) f o r bonds.



A case can be made t h a t t h i s l a t t e r p o i n t ( c o n t i n u a t i o n of t h e p r e s e n t



system) should be mandated. e q u a l l y a t $50,000.



Assume t h e r e a r e two homes, v a l ued



One was purchased by t h e c u r r e n t owner i n 1974, Suppose b o t h voted



one was purchased by t h e c u r r e n t owner i n 1979.



f o r a bond proposal t h a t would i n c r e a s e taxes by $1 .OO p e r hundred of assessed v a l u a t i o n . Suppose t h e i n i t i a t i v e passes and homeowner A



(purchased i n 1974) has h i s value r o l l e d back t o t h e 1975 l e v e l ; homeowner B i s s t i l l a t $50,000. Presumably homeowner A c o u l d end



up paying s u b s t a n t i a l l y l e s s i n bond r e d u c t i o n taxes than homeowner

B.



g.



Pass backs



After witnessing the demands in California for rent control, the Legislature may wish to consider legislation t o effect pass throughs of tax savings from landlords and public u t i l i t i e s .



h.



School financing -



Depending on what i s adopted during the upcoming special session and depending upon the apportionment formula adopted i f the i n i t i a t i v e s are passrP1 the Legislature may C ' n 4 i t necessary to once again revamp the school finance formula in the s t a t e . i . Future bonds Proposition 13 poses an interesting series of choices in relation to the future of general obligation bonds in Arizona. The f i r s t choice



will be whether or not general obligation bonds are to continue to serve as a mechanism t o finance capital outlay expenditures of local jurisdictions. I f they are not, then an alternative must be found.



If bonds are t o continue to e x i s t and be used by jurisdictions, then they will e x i s t a t the expense of the property tax being used to finance operating budgets. The reason for t h i s either/or case i s the



provisions of Proposition 13 which specify t h a t the 1%taxing limit i s absolute except for previously approved bonds. Future bonds would



have to be financed from the 1%levy, displacing revenues that would otherwise be used f o r operations. I f operating revenues are displaced,



then the tremendous revenue s h o r t f a l l experienced by t h e 1% i m i t a t i o n 1 would be f u r t h e r aggravated.



From the present frame of reference, the amount of bonding c a p a c i t y a v a i l a b l e t o a j u r i s d i c t i o n would a l s o be r e s t r a i n e d . Ten percent



(twenty i n some instances) o f r o l l e d back assessed v a l u a t i o n would indeed be constraining; b u t the C o n s t i t u t i o n places t h e l i m i t on "taxable va1 ue" which, as was p o i n t e d out ear l i e r , c o u l d be whatever t h e L e g i s l a t u r e decided t o choose: o r whatever. increase f u l l cash va1 ue, 50% of f u l l cash



Some o f the options a v a i l a b l e t o t h e L e g i s l a t u r e c o u l d



bonding capacity.



Summary.



I n summary, i f the i n i t i a t i v e s were passed, the L e g i s l a t u r e would



probably have t o respond i n t h e f o l l o w i n g areas t o deal w i t h the l e v y l i m i t :



A.



Establ i s h a c o l l e c t i o n mechanism

1.



Assessed value versus f u l l cash value One r a t e versus many r a t e s



2.



6. Determine l e v e l o f t a x a t i o n (everybody a t 1% r some a t l e s s than 1%) o



C.



Apportion t h e l e v i e s t h a t a r e received



D.



Determine how t o t r e a t the revenues from new p a r c e l s



E.



Determine whether or not revenues are t o be made up and i f so h w o



F. Adopt a method to collect taxes to r e t i r e bonds



G.



Consider the issue of mandating pass backs from landlords and u t i l i t i e s



H.



Assess impacts on the school finance formula



I.



Determine the future of general obligation bonding or develop alternatives



3.



Effective Dates of the Initiatives.



This final section of the analysis



will attempt t o p u t into perspective the elements that relate to the effective dates of the initiatives.



Presented below i s a crude diagram t h a t offers a perspective to the situation.



Point A on the diagram i s roughly the date selected for the special session. Point B i s roughly the date a t which the Heuisler amendment would be on the ballot. Point C i s the prescribed effective date f o r the Heuisler amendment,



i f passed, and point D i s the f i r s t tax collections ( f o r secured property) that would be affected by the limitation. Presumably point C would also



represent the time frame when the personal property tax roll would be affected by the i n i t i a t i v e . years. Point E represented the beginning of the fiscal



The Legislature (actually two Legislatures; the 34th and the 35th) would have approximately seven and a half months to consider and effectuate a l l of the issues previously raised. Some of the issues would have to be resolved immediately



(assessing questions) so that enough lead time can be given for implementation. Other issues could take longer, b u t f o r preparation of 1981-82 budgets, lead time will also be necessary.



In short, there i s not an abundance of time in which the Legislature can act.



Conclusion.



A the fountainhead of a l l public finance policy in Arizona, the s



Legislature will have a great many issues to resolve should a measure such as Proposition 13 pass i n Arizona. The i n i t i a t i v e shakes the system that has There will



been b u i l t over the l a s t hundred years to i t s very foundation.



be several hard choices t o be made, and there will not be easy answers in a l l cases.



m



PHAW INITIATIVE Proposes to amend by initiative Article IX of the Arizona Constitution by adding Article IX A. INITIATIVE MEASUm TO



HEUISLER INITIATIVE Proposes to amend by initiative Article IX of the Arizona Constitution by adding Section 18.



CALIFORNIA PROPOSITION 13 Initiative measure adding Article XI11 A to the California Constitution.



BE SUBMITTED DIRECTLY TO

THE ELECTORS THE AMENDMENT



INITIAT,IVE MEASURE TO BE SUBMITTED DIRECTLY TO THE ELECTORS

SECTION 18. LIMITATION ON TAXATION; VALUATIONS OF PROPERTY; ENACTMENT OF STATE AND LOCAL TAXES.



THE AMENDMENT.



THAT ARTICLE IS ADDED TO THE CONSTITUTION OF THE STATE OF ARIZONA : Section 1. (a) The maximum of tax on property, land, and improvements shall not exceed (1%) one percent of the full cash value of such property, land and improvements. The (1%) one percent tax to be collected by the counties and apportioned according to law.

X

H



That Article XI11 A is added to the Constitution to read: (1) The maximum aggregate amount of all State and local ad valorem taxes on all taxable property, or payments in lieu of taxes, shall not exceed one percent (1%) of the full cash value of any such propsrty. The one percent (1%) tax to be collected by the Counties and apportioned according to law to the jurisdictions within the Counties. The limitation provided for in this subsection shall not apply to ad valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters prior to the time this section becomes effective. COMMENT Limits ad valorem taxes on all property of any nature, whether real or personal, to a maximum of one percent (1%) of full cash value. Also applies to payments in lieu of taxes Section 1. (a) The maximum amount of any ad valorem tax on real property shall not exceed One percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.



n

Z

LLI



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Q



a



C:l-ET O.iIN Limits property taxes on all property of any nature, whether real or personal, to a maximum of (1%) one percent of full cash value. It is assumed that the taxes referred



COMMENT Limited to real propeyty. Property taxes collected by counties are distributed to each local agency on a prorata basis. The basis for the Frorata distribution for cities, counties and



to are ad valorem. The counties would collect and apportion the (18) one percent tax. It is unclear how thi revenue collected would be apportioned. There is no law directing apportionment. No provision is made for taxes to pay . interest and redemption charges on voter-approved indebtedness prior to the effective date of the Act. Question arises as to the possible abrogation of prior indebtedness. A question also arises as to the application of this amendment regarding taxes such as those imposed for motor vehicle licenses which are ad valorem taxes. Section 2. (a) The full cash value means the county assessor's valuation of property, land, and improvements as shown in the 1973 tax under full cash value, after 1973 based on (Sl5.00) dollars per square foot, on new improvements, 1973 assessment, all property, land, and improvements not already assessed up to the 1973 tax levels may be reassessed to reflect that valuation.



made on property which is not otherwise subject to taxation. Provides for payment of pre-existing indehtedness. Counties collect and apportion taxes according to law to the jurisdictions within their boundaries. It is unclear as to what entities comprise the term *jurisdictionn or how the apportionment will be made. Question arises as t o the application of this amendment regarding taxes such as those imposed upon motor vehicles.



special districts is the average percentage of all property tax revenue collected (exclusive of taxes levied for debt retirement) within the county which each such city, county or special district has collected over the past three fiscal years. However, prorata distribution for school districts is based only on the preceeding year property tax revenues. Each county must levy the entire tax rate permitted.



Li



(2) As used in this Section, the "full cash value" means the full cash value of all taxable property determined for the 1975 assessment roll; or thereafter, the appraised value of all taxable property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment. All taxable property not already valued to the 1975 tax levels may be revalued to reflect that valuation. The full cash value base may reflect, from year to year, the inflationary rate, not to exceed two percent (2%) for any given year, or a reduction, as shown in the Consumer Price Index or comparable data for the area under taxing jurisdiction. COMMENT Freezes "full cash value" at 1975 county assessor's valuation. Also applies t o assessment of real and personal property. After 1975,



Section 2. (a) The full cash value means the County Assessors valuation of real property as shown on the 1975-76 tax bill under "full cash value", or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment. All real property not already assessed up to the 1975-76 tax levels may be reassessed to reflect that valuation.



.,



**



.

<



d



-F I;



COMMENT Freezes "full cash value* at 1973 county assessor's valuation. Assumes that all property, real or personal, can be assessed as of



COMMENT



.



Subsequent to the.passage of this amendment, this section has been implemented by re-defining assessments. This section has been implemented t o



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(b) The full cash value base may reflect from year to year the inflationary rate not to exceed (2%) two percent for any given year or reduction as shown in the consumer price index or comparable data for the area under taxing jurisdiction.



(b) The Fair market value basb may reflect from year to year the 3 inflation'xy rate not to $exceed two percent (2%) for any given year or reduction as.shown in the consumer price index or comparable data for the area under taxing jurisdiction.

COMMENT



The full cash value base may be increased only by a change in the consumer price index or comparable data within the area comprising the comparable jurisdiction but apparently may be decreased by any reduction in the CPI without limit. No provision is made for circumstances reflecting damage, destruction or other factors causifig a decline in value. Section 3. From and after the effective date of this article, any changes in state, county or cities for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than (2/3) two thirds of all members elected to each 3f the two houses of the legislature by their recorded vote except that new property, land improvements or privilege transaction taxes (i.e. sale. taxes), property transaction taxes o n property, land and improvements or real property, income taxes or other types of taxes for the recovery of (3) From and after the effective date of this Amendment, any changes in State taxation enacted for the purpose of increasing revenues collected pursuant thereto, whether by increased rates or changes in methods of computation, must be imposed by an act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorem taxes on taxable property, or sales or transaction taxes on the sales of taxable property, may be imposed.



This section has been implemented to allow the assessor to reduce the assessed value of property which declines in value while it is still owned by the same tax payer. Reductions may be made when property has been substantially damaged or its value has been reduced by other factors, such as economic conditions.



Section 3. From and after the effeCtive date of this article, any changes in State taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorem taxes on real property, o r aales or transaction taxes on the sales of real property may be imposed.



C PW T OL N Any change f o r t h e purposes of i n c r e a s i n g revenues by i n c r e a s e d r a t e s . o r changes i n methods of computation, whether s t a t e o r l o c a l , must be passed by 2/3 of t h e e l e c t e d members of each house of t h e l e g i s l a t u r e . Other new t a x e s may n o t be imposed. Q u e s t i o n a r i s e s a s t o r i g h t s of c h a r t e r c i t i e s gcverning t h e i r f i n a n c i a l a f f a i r s with respect t o t h e requirement of l e g i s l a t i v e approval i n t h i s s e c t i o n . I t i s a l s o u n c l e a r t o what e x t e n t t h e S t a t e may modify e x i s t i n g t a x p r o v i s i o n s , such a s i n t h e a r e a of d e p r e c i a t i o n . Section 4 . C i t i e s , c o u n t i e s and s p e c i a l d i s t r i c t s , by a (2/3) two t h i r d s v o t e of t h e q u a l i f i e d e l e c t o r s of such d i s t r i c t v o t i n g may impose s p e c i a l t a x e s on such d i s t r i c t , . except p r o p e r t y , l a n d , .and improvements t a x e s , o r s a l e s t a x e s , on t h e s a l e of p r o p e r t y , l a n d and improvements w i t h i n such c i t y , county o r s p e c i a l d i s t r i c t .

COMMENT



COMMENT



Any i n c r e a s e i n s t a t e t a x e s must be approved by a two-thirds (2/3) v o t e of a l l e l e c t e d members of each house of t h e L e g i s l a t u r e . N new ad valorem o t a x e s on any t y p e of t a x a b l e p r o p e r t y , whether r e a l o r p e r s o n a l , o r t a x e s involving s a l e s o r t r a n s a c t i o n t a x e s may be imposed. I t i s u n c l e a r whether o r n o t o t h e r t y p e s of t a x e s a r e prohibited. It i s a l s o unclear a s t o what e x t e n t t h e S t a t e may modify e x i s t i n g t a x provisions.



( 4 ) C i t i e s , Counties and S p e c i a l D i s t r i c t s may, by a t w o - t h i r d s v o t e of t h e r e g i s t e r e d v o t i n g e l e c t o r s of such j u r i s d i c t i o n , impose s p e c i a l t a x e s w i t h i n such j u r i s d i c t i o n , except new ad valorem t a x e s on t a x a b l e p r o p e r t y , t r a n s a c t i o n t a x e s , o r s a l e s t a x e s on s a l e of t a x a b l e p r o p e r t y w i t h i n such C i t y , County, o r S p e c i a l D i s t r i c t . ,



Section 4. C i t i e s , Counties and s p e c i a l d i s t r i c t s , by a t w o - t h i r d s v o t e of t h e q u a l i f i e d e l e c t o r s of such d i s t r i c t , may impose s p e c i a l t a x e s ode such d i s t r i c t , except ad valorem t a x e s on r e a l p r o p e r t y o r a t r a n s a c t i o n t a x o r s a l e s t a x on t h e s a I e of r e a l p r o p e r t y w i t h i n such C i t y , = County or s p e c i a l d i s t r i c t .

' 1



COMMENT



Provides t h a t c i t i e s , c o u n t i e s and s p e c i a l d i s t r i c t s r e q u i r e a 2/3 v o t e of q u a l i f i e d e l e c t o r s and n o t merely 2/3 of t h o s e v o t i n g i n a n e l e c t i o n f o r t h a t purpose t o impose s p e c i a l t a x a t i o n ( o t h e r than ad valorem taxes). T h i s



" S p e c i a l t a x e s " o t h e r t h a n ad valorem p r o p e r t y t a x e s o r s a l e s o r t r a n s a c t i o n t a x e s , may be l e v i e d by c o u n t i e s o r s p e c i a l d i s t r i c t s upon approval o f t w o - t h i r d s (2/3) of t h e registered voting electors. This provision does not i n d i c a t e t h e nature



provision does not indicate the nature of such special taxes. New taxes may not be imposed upon property (apparently of any kind), land improvements, sales (apparently of any kind), or on the sale of property, land or improvements. Section 5. Property, land, and improvements shall not be held for public or private sale to satisfy any type of tax liability filed by any state, city, county or special district or any other public entities for the recovery of tax or bond tax lien or other revenues.



of such special taxes. Question also arises as to whether or not this provision expands the authority of these entitles with respect to taxing power not presently authorized by law with respect t o "special taxes".



COMMENT

Prohibits the enforcement of the payment of taxes by execution on any type of property. The prohibition apparently applies even to private or non-public agreement where one party may have defaulted with respect to an obligation to pay taxes. Recovery of taxes would be limited to a personal judgment obtained against the tax debtor. A question arises as to whether any judgment for taxes could be enforced since all property is exempted from execution for sale.

. Section 6

(5) This Section shall take effect for the tax year beginning on January 1 following the passage of this Amendment, and each year thereafter, except subsection (3) which shall become effective upon the passage of this Amendment.



Section 5. This article shall take effect for the tax year beginning on July 1 following the passage of this Amendment, except Section 3 which shall



This article shall take effect for the tax year beginning on January 1, following the passage of this Amendmant, except Section 3



I



. -'



whieh shall become effective upon passage of this article. COMMENT The effective date of these initiative measures are the same. Time within which an amendment is to take effect may result in differing interpretations by the various counties.



become effective upon the passage of this article. COMMENT Time for compliance by counties has been delayed by the following functions: Preparation of the assessment roll; reassessment or assessment of property which escaped taxation or which was under-assessed for the 1975-76 fiscal year; assessment roll corrections and appeal provisions.



Section 7 . This article includes all commercial, industrial and private lands and improvements. COMMENT

*



This provision is apparently intended to apply to all types of property ownership in the nonpublic sector. Section 8. If any section, part, clause or phrase hereof is for any reason he'ld to be invalid or unconstitutional, the remaining sections shall not be affected but will remain in full force and effect.

(6) If any Subsection, part, clause, or phrase hereof is, for any reason, held to be invalid or unconstitutional, the remaining components t shall not be affected, ~ u will remain in full force and effect.



Section 6 If any section, part, clause or phrase hereof is for any reason held to be invalid or unconstitutional, the remaining sections shall not be affected but will remain in full force and effect.



This provision attempts to protect the amendment in the event that any provisions are found to be unconstitutional.



111.



ALTERNATIVES FOR PROPERTY TAX RELIEF

A.



@



Limiting Property Tax Collections t o a Percentage of the Full Cash Value of Properties One method of limiting the amount of property tax collections i s the imposition of a limitation based upon a fixed percentage of a property's f u l l cash value. This i s e s s e n t i a l l y the approach used i n Cal ifornia ' s Proposition 13. In t h a t p a r t i c u l a r proposition, property taxes were limited t o a maximum of of 1% a property's f u l l cash value. Thus, i f a property were worth $100,000, the maximum amount of property tax t h a t could be collected from t h a t property i n each year, would be $1,000. The preceding chapter in t h i s report out1 ines the impact t h a t t h i s type of limitation would have in Arizona. The property c l a s s i f i c a t i o n system in Arizona, when combined w i t h a limitation of t h i s s o r t , would r e s u l t i n c e r t a i n classes of property getting a greater percentage reduction i n their property tax l i a b i l i t y than other classes of property. The essential reason f o r t h i s d i s p a r i t y in percentage of reduction i s due t o the imposition of an equal 1imitation upon a l l classes o f property. An a1 teration i n the percentage 1imitation could substantial l y reduce the disparity i n the percentage reduction provided by t h i s type of 1imitation. In other words, i f d i f f e r e n t percentages were used to 1imit the tax collections on d i f f e r e n t classes of property, the percentage reduction could be equal ized. In f a c t , by applying a s p e c i f i c percentage t o each separate c l a s s of property, the amount of property tax re1 i e f could be t o t a l l y regulated. For example, i f i t was determined t h a t a l l classes of property should receive a 30% reduction i n t h e i r property tax l i a b i l i t i e s , i t would be possible t o establish a fixed percentage limitation f o r each c l a s s of property t h a t would r e s u l t i n a 30% reduction in t h e property tax l i a b i l i t i e s of t h a t c l a s s of property. Further, i f i t was decided t h a t a l l classes of property should be maintained a t t h e i r current l i a b i l i t y but a limitation should be imposed t o prevent t h e i r property tax l i a b i l i t y from increasing, a fixed percentage limitation could be established f o r each c l a s s of property t o prevent any



future increases i n the property tax l i a b i l i t y of t h a t c l a s s , as a percent of t h a t c l a s s 1 f u l l cash value. Based upon 1978 property tax data, i f a limitation were imposed on property tax collections based on a percentage of f u l l cash value, such that: property tax collections on Class 1 properties (mines and railroads) were limited t o 4.45% of f u l l cash value; property tax collections on Class 2 properties ( u t i l i t i e s ) were limited t o 4.40% of f u l l cash value; property tax collections on Class 3 property (general commercial property) were limited t o 2.70% of f u l l cash value; property tax collection on Class 4 property (agriculture) were 1imited t o 1.65% of f u l l cash value; property tax collections on Class 5 property (owner-occupied homes) were limited t o 1.00% of f u l l cash value; and property tax col 1ections on Glass 6 property (rental residential properties) were limited t o 2.30% of f u l l cash value; the property tax l i a b i l i t i e s of each of the classes of property would remain almost exactly what they were i n 1978. Thus, while the imposition of a single percentage 1 imitation upon a l l the classes of property will ultimately r e s u l t in differing percentage reductions t o d i f f e r e n t classes of property, t h i s does not eliminate the concept of a limitation on property tax collections based on a percentage of f u l l cash value. Rather, such a limitation imposed separately on each c l a s s of property, may be used t o carefully control the amount of property tax reduction t h a t i s received by each c l a s s of property. California's Proposition 13 did not contain mu1 tip1 e percentage 1imitations because California does not assess d i f f e r e n t classes of property a t d i f f e r e n t levels. An Arizona version of Proposition 13 could contain d i f f e r e n t percentage limitations f o r each c l a s s of property i n order t o preserve the property c l a s s i f i c a t i o n system as i t e x i s t s i n Arizona. Finally, the percentage 1imitation could be used t o modify the Arizona property c l a s s i f i c a t i o n system by combining two or more classes i n t o a s i n g l e c l a s s f o r the imposition of a percentage limitation on property c l a s s collections from those classes. The second p a r t , and possibly the most important p a r t , of any percentage 1 imitation on property tax collections i s the limitation on the growth in f u l l cash value. As discussed in the preceding chapter, California's Proposition 13 contained a second,crucial provision t h a t limited the r a t e of increase of a property's f u l l cash value t o 2% per year. This provision worked in combination

w i t h the percentage 1imitation on property tax coll e c t i ons t o completely 1imi t the level of property tax 1 i a b i l i t y . F i r s t , the percentage of f u l l cash value t h a t could be collected through property tax was 1imi ted and then secondly,



111-2



@



the r a t e a t which f u l l cash value (and therefore property tax l i a b i l i t i e s ) could increase was limited. I t i s t h i s second provision of Proposition 13 t h a t insures that increases in taxpayer's property tax b i l l s will not be more than 2% per year, under normal circumstances. I t i s t h i s 1imitation, caused by the second provision of California's Proposition 13, that makes the concept of Proposition 13 so a t t r a c t i v e to taxpayers. The concept of a predictable and 1imited increase in property tax l i a b i l i t i e s i s a very desirable result of any property tax re1 ief a1 ternative. A t the same time, that the second provision of California's Proposition 13 insures a limitation on the r a t e that property tax b i l l s would increase, i t creates substantial problems regarding the "fairness" or "equity" of the resulting property tax system. The fixed percentage 1imitation on increases in a1 1 property's f u l l cash val ue4-result s in different effective property tax reductions to different properties. For example, i f under normal circumstances one property would increase by 1%per year while another property would increase by 5% per year, the imposition of the 2% limitation on the increase in f u l l cash values would r e s u l t in no reduction for the f i r s t property and a 3% reduction for the second property. Thus, the property with the greater increase i n value will receive a greater percentage re1 ief than the more stable property. In summary, while an Arizonan Proposition 13 would r e s u l t i n greater property tax reductions f o r some classes of property vis a vis other classes of property, the fundamental principal of 1imi t i ng property tax collections t o a percentage of f u l l cash value, can be modified to meet the conditions of the Arizona property classification system. The imposition of different percentage limitations on different classes of property would r e s u l t in the same type of 1imitation as Proposition 13 created in California, without the destruction of the Arizona Property Classification System. However, the second provision of California's Proposition 13, which limits the annual increases in f u l l cash value and 1irni t s the annual increases i n taxpayers' property tax 1i a b i l i t y , has created substantial questions as to the "fairness" and "equity" of the California property tax system. The imposition of a limitation on the growth of f u l l cash values in Arizona, would create similar questions about the "fairness" of the resulting property tax system i n Arizona.



Limiting Property Tax Collections Through a Coll ections Limit. An a1 ternative method for accompl ishi ng primary goals of the 1imitation discussed above, i s the imposition of a fixed dollar l i m i t on the amount of property taxes that may be collected by any taxing authority. Essentially, the limitation on property tax collections as a percentage of f u l l cash value when combined with the limitation on the r a t e a t which f u l l cash values may grow, produces a limitation on the amount of property taxes that any taxing authority may collect. The result of that limitation i s a stabilization of individual taxpayer's property tax b i l l s . The direct imposition of a limitation on the amount of revenues that a taxing authority may collect through the property tax will have t h i s same basic effect. Such a limitation would require that a taxing authority could collect no more through property taxes than the amount i t collected during the preceding year. Thus, because the total amount collected by the authority would be limited, the l i a b i l i t y of each individual taxpayer would be similarly limited. However, because the total amount that can be collected through the property tax i s limited, there i s no need to limit the r a t e a t which f u l l cash values may increase. Because f u l l cash values would be allowed to increase freely while property tax collections were limited, the property tax r a t e would be forced to decrease each year. Thus, property tax collections would be limited j u s t as in Proposition 13, except the "fairness" or "equity" of the property tax system would be maintained because of the lack of restrictions on f u l l cash value. The following chart i l l u s t r a t e s the impact of a Proposition 13 type percentage limitation and the impact of a collections limitation over three years on a sample $50,000 home. I t i s assumed that the f u l l cash value of the home would increase by 10% per year in the absence of the Proposition 13 type

B.



limitation on increases in f u l l cash value. I t i s also assumed t h a t total property tax collection would be allowed to increase by 2% per year, similar to the 2% increase allowed for Proposition 13.



PERCENTAGE LIMITATION YEAR 1 $50,000 7,500 X 6.67 F u l l Cash Value Assessed Value TaxRate Tax B i l l (1% o f F.C.V.) F u l l Cash Value (50,000 + 2 % ) Assessed Value (1% o f F.C.V.)



COLLECTIONS LIMITATION F u l l Cash Value Assessed Value Tax Rate $ Tax B i l l (1% o f F.C.V.) $55,000 8,250 F u l l Cash Value (50,000 + 10%) Assessed Value (500 + 2%) $50,000 7,500 X 6,67



$500

YEAR 2 $51,000 7,650



' ::;:::? &

YEAR 3 $52,020 7,803 X 6-67



pdi

$520.20

$60,500 9,075 X 5.73



:;;;:f! :



$520,20



F u l l Cash Val ue (51,000 + 2%) Assessed Value Tax Rate Tax B i l l (1% o f F.C.V.)



F u l l Cash Value (55,000 + 10%) Assessed Val ue Tax Rate Tax B i l l ( 5 1 0 + 2%)



I n t h e f i r s t y e a r depicted above i n both instances, the f u l l cash value o f t h e home i s $50,000 and t h e assessed value o f t h e home i s $7,500. The t a x r a t e a p p l i e d a g a i n s t the assessed v a l u a t i o n i s $6.67 per $100 o f assessed o v a l u a t i o n and the r e s u l t i n g t a x b i l l i s $500 ( o r 1% f the homes f u l l cash value). I n the second y e a r depicted above, under t h e percentage l i m i t a t i o n , t h e -Full cash value o f t h e home i s allowed t o increase by 2% t o $51,000 and the home's assessed v a l u a t i o n increases t o $7,650. i s $510 (1% o f t h e p r o p e r t y ' s f u l l cash value). Once again, the t a x r a t e o f During t h e same year, under $6.67 i s a p p l i e d a g a i n s t t h e assessed v a l u a t i o n and t h e r e s u l t i n g t a x b i l l t h e c o l l e c t i o n s l i m i t a t i o n , t h e f u l l cash value o f t h e home i s assumed t o increase by the average r a t e o f increase w i t h i n t h e t a x i n g d i s t r i c t o f 10% and, t h e r e f o r e , t h e home's f u l l cash value increases from $50,000 t o $55,000 and t h e p r o p e r t y ' s assessed v a l u a t i o n increases from $7,500 t o $8,250. t o approximately $6.18. Because o f t h e increase i n t h e f u l l cash values o f t h e p r o p e r t i e s , the t a x r a t e i s f o r c e d down from $6.67 When t h e t a x r a t e o f $6.18 per $100 o f assessed v a l u a t i o n i s l e v i e d a g a i n s t t h e assessed v a l u a t i o n o f t h e home, t h e r e s u l t i n g t a x b i l l i s $510, e x a c t l y equal t o the b i l l under t h e percentage l i m i t a t i o n . o However, t h e b i 11 i s no l o n g e r 1% f t h e f u l l cash value o f t h e home, b u t r a t h e r i s now l e s s than 1%. I n t h e t h i r d year, under t h e percentage 1i m i t a t i o n t h e f u l l cash value of t h e p r o p e r t y i s once again a1 lowed t o increase by 2% t o $52,020 and the assessed v a l u a t i o n increases t o $7,803. The t a x r a t e o f $6.67 i s then a p p l i e d t o t h e assessed v a l u a t i o n o f the home and t h e t a x b i l l i s equal t o $520.20 (1% of



*



t h e f u l l cash value).



Under the c o l l e c t i o n s l i m i t a t i o n , t h e f u l l cash value Again, because o f t h e increases i n



of the home i s once again assumed t o increase by 10% t o $60,500 and t h e assessed v a l u a t i o n increases t o $9,075. approximately $5.73. t h e f u l l cash value, t h e p r o p e r t y t a x r a t e i s f o r c e d down from $6.18 t o Applying the t a x r a t e $5.73 t o t h e home's assessed E x a c t l y the same as v a l u a t i o n r e s u l t s i n a p r o p e r t y t a x b i l l o f $520.20. t h e p r o p e r t y t a x b i l l under t h e percentage 1 i m i t a t i o n . Thus, a c o l l e c t i o n s 1 i m i t a t i o n can be seen t o r e s u l t i n a 1i m i t a t i o n on increases i n p r o p e r t y t a x b i l l s s i m i l a r t o t h e l i m i t a t i o n t h a t r e s u l t s from a P r o p o s i t i o n 13 type l i m i t a t i o n . The major advantage o f a c o l l e c t i o n s 1 i m i t a t i o n over a percentage 1 i m i t a t i o n on p r o p e r t y t a x c o l l e c t i o n s i s t h e p r e s e r v a t i o n o f t h e f u l l cash value basis f o r determining p r o p e r t y t a x liabilities. The f u l l cash value b a s i s f o r determining p r o p e r t y t a x l i a b i l i t y insures t h e c o n t i n u a t i o n o f t h e " e q u i t y " o f t h e p r o p e r t y t a x system. The use insures t h a t t h e owners of h i g h value p r o p e r t i e s pay more p r o p e r t y taxes than t h e owners o f low value p r o p e r t i e s . Because t h e c o l l e c t i o n s 1i m i t a t i o n appl i e s t o the t o t a l amount c o l l e c t e d by the t a x i n g a u t h o r i t y , some differences i n t h e annual percentage increase i n p r o p e r t y t a x b i l l s may occur between s p e c i f i c parcels. the taxing a u t h o r i t y property tax rate. Essentially, the c o l l e c t i o n s l i m i t a t i o n l i m i t s i n d i v i d u a l p r o p e r t y t a x b i l l s by f o r c i n g down However, t h e same r a t e i s a p p l i e d t o a1 1 p r o p e r t i e s w i t h i n t h e j u r i s d i c t i o n and t h e r e f o r e p r o p e r t i e s t h a t have increased a t a r a t e g r e a t e r than the average r a t e o f increase w i l l r e c e i v e more than a 2% increase i n t h e i r p r o p e r t y t a x b i 11 , whi 1e p r o p e r t i e s t h a t have increased a t a r a t e l e s s than t h e average r a t e o f increase w i l l r e c e i v e l e s s than a 2% increase i n t h e i r p r o p e r t y t a x b i 11



o f f u l l cash value as the b a s i s f o r determining p r o p e r t y t a x l i a b i l i t y



.



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Limiting Property Tax Col lections from Specific Groups of Taxpayers The two a1 ternative methods of 1 imi t i ng property taxes discussed above, are designed to provide property tax r e l i e f to a l l taxpayers in a similar manner. In addition to general taxpayer re1 i e f , there may be a desire to grant additional re1 ief t o certain categories of taxpayers. The re1 ief granted to certain categories of taxpayers may be in addition to the general property tax re1 ief discussed in the preceding sections. There are two primary mechanisms available for granting r e l i e f to specific groups of taxpayers. These two methods are exemptions and credits. Currently, the State of Arizona provides exemptions from property taxes, on a limited basis, t o widows and certain veterans. These exemptions are established in the Constitution and exempt a fixed dollar amount of the value of the taxpayers' property from property taxes. Another type of exemption, which i s used in several s t a t e s , i s a residence exemption, commonly referred to as a homestead exemption. Typically, a residence exemption protects a certain portion of the taxable value of a taxpayers' principle place of residence from property taxation. The amount of value exempted by the residence exemption can be determined using e i t h e r a percentage of the total value of the property or by a fixed dollar amount. If the exemption i s established as a fixed dollar amount, i t will r e s u l t in relatively more r e l i e f being granted to lower valued properties. For example, i f a $2,000 assessed valuation residence exemption were enacted, a $15,000 f u l l cash value house would receive a 13.3% exemption whereas, a $50,000 f u l l cash value house would receive a 4% exemption. Thus, assuming an equal tax r a t e for both properties, the property with the lower value will receive a greater percentage reduction. On the other hand, i f the exemption i s granted based upon a specified percentage of the property's total value, the exemption will result in an equal percentage re1 ief being granted to a1 1 property owners. For example, i f a residence exemption were enacted such that 15%of a primary residence would be exempt from property taxes, the impact on a l l residences would be approximately equal. 111-7

C.



All exemptions generally r e s u l t in a tax s h i f t , rather than an actual tax reduction. This i s because, typically, the loss i n value within the jursidiction due to the exemption, results in a higher tax r a t e being levied on a1 1 properties and therefore a11 non-exempt properties a r e taxed more than they would have been in the absence of the exemption. This i s particularly important f o r d i s t r i c t s that are primarily composed of r e s i dential property. The more residential property there i s in a given d i s t r i c t , the less impact any type of residence exemption will have. A t the extreme, i f a d i s t r i c t were composed of 100%residential property, the imposition of a 90% residence exemption would have no impact on the property tax l i a b i l i t y of the residents of the d i s t r i c t . This i s because the exemption would merely force the tax rate up t o fully compensate f o r the decrease in taxable property. One of the significant problems with exemptions t h a t a r e based on a fixed dollar amount i s inflation. If the amount exempted i s a fixed amount, as the value of properties continue to increase over time, the relative worth of the exemption will diminish. In other words, the $2,000 assessed valuation exemption for widows represented substantial r e l i e f in 1960 when the average value of a home was $1 5,000, b u t that same $2,000 exemption provides very l i t t l e r e l i e f in 1979 when the average value of a home has risen to almost $50,000. In order t o prevent increasing home values from eliminating the impact of a fixed amount residence exemption, i t i s necessary to "index" the exemption in some way so t h a t i t will keep pace with rising property values. A second way of granting specific r e l i e f to certain groups of taxpayers i s a credit of one type or another. Credits for property taxes paid are the most specific of a l l types of property tax r e l i e f . This i s because very specific qualifications can be developed to limit the applicability of the c r e d i t t o very specific roots. The State of Arizona currently grants an elderly tax c r e d i t on the income tax to partially o f f s e t property tax payments by certain elderly residents. However, the c r e d i t i s not available to a l l elderly residents because in order to qualify, certain income c r i t e r i a must be met. Thus, credits can be employed to insure that only those individuals who a r e paying



a disproportionate part of t h e i r income in property taxes receive re1 i e f . This type of a c r e d i t i s commonly referred t o as a "circuit-breaker". Typically, ci rcui t-breakers provide t h a t i f property taxes exceed a certain predetermined percentage of a household's income, the excess burden i s re1 i eved Generally, circuit-breakers are administered through the income tax process and the applying individual receives a credit against their income tax l i a b i l i t y or a refund in those instances where the c r e d i t exceeds t h e i r income tax l i a b i l i t y . Because "ci rcui t-breakers" provide property tax re1 i ef only to those individuals who meet the income o r other qua1 i f i c a t i o n s , re1 ief can be provided a t relatively lower costs than through other more general r e l i e f mechanisms. Further, circuit-breakers can be used t o provide property tax r e l i e f to renters as well as homeowners. Because circuit-breakers a r e typically administered through the income tax, renters a r e guaranteed the r e l i e f provided through a circuit-breaker whereas they might not benefit from property tax reductions given to 1and1 ords. In summary, in addition to the general property tax r e l i e f mechanisms t h a t were described in the f i r s t two sections o f t h i s chapter, several specific r e l i e f mechanisms e x i s t that can be implemented i n lieu of o r in conjunction with the more general mechanisms. These specific r e l i e f mechanisms include the residence exemption which i s designed to provide r e l i e f only to homeowners based e i t h e r on a fixed dollar amount of property value (which must be indexed to prevent i t s erosion due to increased home values) or based upon a fixed percentage of the property's total value. In addition to the residence exemptions, credits f o r property taxes paid may be provided t o reduce the burden of property taxes in those cases where i t becomes excessive.



.



EXECUTIVE S M A Y OF : U MR T E SALES TAX ON FOOD H OPTIONS F R REDUCING THE TAX BURDEW O



INTRODUCTION Many s t a t e s have attempted t o reduce the burden of t h e s a l e s tax on individuals by eliminating the s a l e s tax on food o r providing an income tax c r e d i t f o r s a l e s taxes paid. Of f o r t y - s i x s t a t e s which levy a general s a l e s tax, twenty-three s t a t e s exempt s a l e s of food from the tax. The D i s t r i c t of Columbia a l s o exempts food from i t s general s a l e s tax. In addition, four s t a t e s provide an income tax c r e d i t f o r s a l e s taxes paid on food items and three s t a t e s provide an income tax c r e d i t f o r s a l e s taxes (See Exhibit 1 ) paid i n general



.'



T h i s report will describe the potential impacts i f similar provisions were implemented in the S t a t e of Arizona. The executive summary will be limited t o a discussion of the three most common options. The report i s divided i n t o the following sections:

1. a description of the current food s a l e s tax 2. a description and analysis of the three options 3. a comparison of food s a l e s tax exemptions and income tax c r e d i t s



f o r s a l e s taxes paid T E CURRENT FOOD SALES TAE H Under current Arizona law, s a l e s of food and food products a r e taxable a s follows:



'sources : Significant Features of Fiscal Federal ism, 1976-77 Edition, Vol I1 and Commerce Clearing House S t a t e Tax Reporters *a f u l l report on the food s a l e s tax will be forthcoming in the near future.



.



EXHIBIT 1 F O TAX POLICIES IN OTHER STATES OD



State A1abama Alaska Arizona Arkansas Cal i f o r n i a Col orado Connecticut Delaware Florida Georgia Hawaii Idaho I 11i n o i s Indiana Iowa Kansas Kentucky Louisiana Maine Mary1and Massachusetts Michigan Minnesota Mississippi Missouri



Food Exempt



Income Tax C r e d i t



State Nebraska Nevada New Jersey New Mexico New York North Carol i n a North Dakota Ohio 0 k l a homa Oregon Pennsylvania Rhode I s l a n d South Carol ina South Dakota Tennessee Texas Utah Vermon t Virginia Washington West V i r g i n i a Wisconsin Wyoming D i s t r i c t o f Columbia



Food Exempt



Income Tax C r e d i t



x



IU



7



x x



1.



S a l e s of food and d r i n k by r e s t a u r a n t s and s i m i l a r e s t a b l i s h ments f o r consumption on t h e premises a r e s u b j e c t t o t h e s a l e s t a x on r e s t a u r a n t s and bars.



2.



All o t h e r food products s o l d t o consumers a r e t a x a b l e under t h e s t a t e ' s r e t a i l s a l e s tax.



S a l e s i n both c a t e g o r i e s a r e taxed by t h e s t a t e a t a cumulative r a t e o f 4%. This includes a 2% t r a n s a c t i o n p r i v i l e g e t a x and a 2% education e x c i s e tax. In a d d i t i o n , l o c a l s a l e s t a x e s a r e o f t e n imposed on t h e s a l e o f food and food products. Local s a l e s t a x e s a r e u s u a l l y l e v i e d a t a r a t e o f 1-2% where appl i c a b l e . OPTIONS FOR REDUCING THE SALES T X BURDEN: A DESCRIPTION AND ANALYSIS



A mentioned before, t h e r e a r e two g e n e r a l l y accepted approaches f o r reducing s t h e t a x burden a s s o c i a t e d with t h e sal es t a x on food. The f i r s t approach i s t o el iminate t h e s a l e s t a x on food and p r o h i b i t t h e levy of new s a l e s t a x e s on such products. The second a9proach is t o r e t u r n a l l o r a portion of t h e r e c e i p t s c o l l e c t e d from s a l e s t a x e s on food t o taxpayers i n t h e form of an income t a x c r e d i t . Several o p t i o n s a r e a v a i l a b l e f o r reducing t h e t a x burden under each of t h e s e approaches. Three of t h e most conmon o p t i o n s a r e analyzed be1 ow.

A OPTION 1: ELIMINATING THE STATE SALES T X ON FOOD

A.



Description



Under t h i s o p t i o n , the 4% s t a t e t a x on s a l e s of r e t a i l food items would be removed. I t i s assumed t h a t food products s o l d i n r e s t a u r a n t s and s i m i l a r establishments would remain t a x a b l e whether prepared f o r on-premise consumption o r f o r off-premise consumption.



B.



Revenue Impacts



I t has been estimated that 26-303 of Arizona's r e t a i l sales tax collections are derived from the sales tax on food. During 1978, 26-30% of s t a t e r e t a i l sales tax coll ections represented $89,532,216 t o $103,306,403. T h i s i s the potential revenue loss which would have resulted i f the s t a t e sales tax on food had been removed beginning i n 1978. Collections from the s t a t e ' s r e t a i l sales tax are distributed a s follows: State 70.7% Cities 12.5% Counties 16.8%



Therefore, a revenue loss of $89,532,216 t o $103,306,403 would be borne by each type of jurisdiction a s shown below: Loss t o State 1OW high

C.



Loss t o 2 Cities $11,191,52712,913,300



Loss t o 3 Counties $15,041,41217,355,476



$63,299,27773,037,627



Equity Impacts



The graphs i n exhibit 2 i l l u s t r a t e the change in the sales tax burden which would result from removing the s t a t e sales tax on food. The top graph shows the change in the sales tax burden borne by families of one (a single individual ) and the bottom graph shows the change i n the sales tax burden borne by families of four. The sales tax burden is defined a s the percent of income used by each family t o pay sales taxes. The long-dashed l i n e (top) in each of the graphs shows the percent of income currently used by familes a t different income levels t o pay s t a t e and local



or a breakdown of the estimated loss t o each c i t y , see Table 1. or a breakdown of the estimated loss t o each county, see Table 2.



TABLE 1 BREAKDOWN OF CITY REVENUE LOSS UNDER OPTION 1 Low Estimate High Estimate



County Apache



City



Eager S p r i n g e r v i 1l e S t . Johns Benson B i sbee Doug1as Huachuca City Sierra Vista Tombs tone W i 1l c o x Flagstaff Fredon ia Page Willaims Globe Hayden M i ami Payson Winkleman P i ma Safford Thatcher

C li ton f Duncan



$



13,206 7,745 12,367 22,965 56,036 83,847 11,371 135,373 8,349 18,197



Cochise



Coconi no



@



Gila



Graham



Green 1ee Mari copa



Avondale Buckeye Chandler E l Mirage G i l a Bend G i 1b e r t G l endal e Goodyear Guadal upe



TABLE 1 ( c o n t ' d ) Low Estimate High Estimate



County Mari copa



City



Mesa Paradise Val 1ey Peoria Phoenix Scottsdale Surprise Tempe To1 1eson Wickenburg Youngtown K i ngman Hol brook Show Low Snowflake Tayl o r Winslow Marana Oro Val l e y South Tucson Tucson 53,988



Mohave Navajo



Pinal



Casa Grande Cool idge E l oy Florence Kearny Mammoth Superior Noga 1es Patagoni a Chino Val l e y Clarkdale Cottonwood Jerome Prescott Parker Somerton



Santa Cruz Yavapai



Y uma



TABLE 1 (cont'd)

Low Estimate

High Estimate



County

Y uma



City



We1 1ton Y uma



$



6,502 202,399



Total



TABLE 2 BREAKDOWN OF REVENUE LOSS TO COUNTIES UNDER OPTION 1



County Apache Cochi se Coconi no Gila Graham Greenlee Mari copa Mohave Navajo P i ma P in a l Santa Cruz Yavapai



Low Estimate



High Estimate



Y uma



EXHIBIT 2

COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 1



TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION



-----------.



----.



0



7000



14008



.



21000



28000



35000



FAMILY INCOME



(FAMILY SIZE= 4) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION



-- -- .

-----------a



0



,



7000



14080



21080



28000



35000



FAMILY INCOME



sales taxes on a1 l i tems (food and non-food) A shown i n the graphs, low s income families devote a larqer portion of t h e i r total incomes t o sales taxes than families of the same size with higher levels of income. The short-dashed 1ine i n each of the graphs i s included t o show which portion of the sales tax burden results from the tax on food items and which portion of the sales tax burden results from the tax on non-food items. The distance below this l i n e represents the percent of income used t o pay sales taxes on non-food purchases. The distance between t h i s 1ine and the long-dashed 1ine represents the percent of income used f o r food sales taxes (the food sales tax burden)



.



.



The sol i d 1ine in each of the graphs shows the percent of income which would be used t o pay a l l sales taxes a f t e r removing the s t a t e sales tax on food. The distance between the long-dashed l i n e and the solid l i n e i s the amount of tax re1 ief which would be received by individuals a t each income level i f the s t a t e sales tax on food were removed. I t i s obvious from the graphs that individuals a t a l l levels of income will receive a siqnificant reduction in sales tax 1iabilit.y i f the s t a t e tax on food sales is removed. B prohibiting collection of the tax, t h i s option assures y that a l l individuals receive tax r e l i e f which i s exactly equal t o t h e i r original s t a t e food sales tax l i a b i l i t y (approximately 4/5 of the total food sales tax burden). Because the food sales tax burden is greater a t low levels of income, low income familes will benefit most if the tax i s removed. OPTION 2:

A.



ELIMINATING STATE AND LOCAL SALES T X S ON FOOD AE



Description



Under t h i s option, s t a t e and local taxes on the sale of r e t a i l food items would be removed. Again, i t i s assumed t h a t food products sold i n restaurants



and similar establ ishments woul d remain taxable whether prepared f o r onpremise consumption on f o r off-premise consumption.



B.



Revenue Impacts



Estimated collections from the local s a l e s tax on food were $15,089,533 t o $1 7,311,232 during 1978. This i s the estimated revenue l o s s which would have occurred i f local s a l e s taxes on food had been removed during t h a t period. When added t o the revenue l o s s from a s t a t e food s a l e s tax exemption, the t o t a l l o s s would range from $104,621,749 t o $120,617,635. The t o t a l l o s s t o each type of jurisdiction is shown below. Loss t o State State Tax Local Tax Total $63,299,27773,037,627 -0$63,299,27773,037,627 Loss t o 4 Cities $1 1,191,52712,913,300 $1 5,089,53317,311,232 $26,281,06030,224,532 Loss t o Counties $1 5,041,41217,355,476 -0$15,041,41217,355,476



C.



Equity Impacts



The graphs i n e x h i b i t 3 i l l u s t r a t e the change i n t h e s a l e s tax burden which 1ocal s a l e s taxes on food were el iminated. Under woul d r e s u l t i f s t a t e this option, a l s o , the s a l e s tax burden will be reduced f o r individuals a t a l l l e v e l s of income. The amount of tax r e l i e f received by each family will be exactly equal t o i t s original food s a l e s tax l i a b i l i t y ( s t a t e and l o c a l ) . re1 ief received by each family is represented i n t h e qraphs by the distance between the long-dashed l i n e and the s o l i d l i n e . The remaining s a l e s tax 4 ~ a b l e3 shows the estimated l o s s t o selected c i t i e s under option 2.



The



TABLE 3



BREAKDOWN OF REVENUE LOSS TO CITIES UNDER OPTION 2



County



Cities Eager Springervil l e St. Johns Benson B i sbee Doug1a s Hauchuca City Sierra Vista Tombstone willcox Flagstaff Fredon ia Page Will iams

G l obe Hayden Miami Payson Mink1eman



APACHE



1



L w Estimate o $



High Estimate $ 89,968



77.973



COCH ISE



t J



1

632,418



COCON IN0



GILA



GRAHAM



Pi ma Saf f ord Thatcher Clifton Duncan



GREENLEE



TABLE 3 (cont Id)

County MRICOPA Cities Phoenix Mesa Tempe Scottsdal e Avondal e Buckeye C hand1 e r E l Mirage Gila Bend Gilbert G enda 1e l Good Year Guadal upe Paradise Val 1ey Peoria Surpri se To1 1eson Wickenburg Youngtown Kingman Hol brook Show L w o Snowf 1a ke Tayl or Wins1ow Tucson Marana Oro Valley South Tucson PINAL Casa Grande Cool i dge El oy Fl orence Kearney Mammoth Superior Nogal es Pa tagon i a 115,955 L w Estimate o High Estimate



MOHAVE

NVJ A AO



273,317



2,057,987



S N A CRUZ AT



I

3



I



196,815



404,721



199,960



TABLE 3 (cont ' d )



County YAVAPAI



Cities Chino Valley Cl arkdal e Cottonwood Jerome Prescott Parker Somerton We1 1ton Y uma



Low Estimate -



High Estimate



I

7



$



261,821



585,067



TOTAL



EXHIBIT 3



COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 2

(FAMILY S I Z E = 1 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION



----.



-----------.



0



7008



14008 21080 FAMILY INCOME

t



28000



35008



(FAMILY SIZE- 4 TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL WITH OPTION



----. -----------.



0



7000



14008 21000 FAMILY INCOME



28800



35000



burden will equal the percent of income used to pay sales taxes f o r non-food purchases (represented by the sol id and short-dashed 1ines)



.



@



OPTION 3:

A.



FIXED PER CAPITA TAX CREDITS



Description



Under this option, each individual i n the s t a t e would be e l i g i b l e t o receive a n income tax credit as compensation for sales taxes paid. The amount of the credit would be the same for each individual in the state.

B.



Revenue Impacts



The revenue loss from a f l a t rate per capita tax c r e d i t depends on the s i z e



of the credit which i s granted. The estimated revenue loss which would r e s u l t froni several different levels of c r e d i t i s shown below f o r 1978: Per Capita Tax Credit Estimated Revenue Loss



The h i g h estimate i s the revenue loss which would have resulted i f a l l individuals eligible f o r the credit i n 1978 had actually received i t . The low estimate i s the revenue loss which would have resulted i f the c r e d i t had been granted only to individuals claimed as exemptions on 1978 tax returns. Net collections from the s t a t e income tax a r e divided between the s t a t e and the c i t i e s . The c i t i e s ' share i s equal t o 15%of the net proceeds collected from the income tax two years prior t o the current f i s c a l year.



Thus, the c i t i e s would not receive a reduction i n t h e i r share of income tax collections until two years a f t e r the income tax c r e d i t was f i r s t granted



and the revenue loss associated with the tax credit would be borne entirely by the s t a t e for the f i r s t two years that the c r e d i t was i n effect.

C.



Equity Impacts



4 The graphs i n e ~ h i b i t i l l u s t r a t e the change in the sales tax burden which would result i f taxpayers received a $35 per capita income tax c r e d i t f o r sales taxes paid. Under this option, a s we1 1 , the sales tax burden will be reduced f o r individuals a t a l l levels of income. Individuals a t lower levels of income will generally receive tax r e l i e f which is somewhat greater than t h e i r original s t a t e food sales tax burden, and i n the case of larger famil i e s , will receive tax relief which exceeds t h e i r combined s t a t e and local food sales tax l i a b i l i t y . Individuals a t higher income levels w i l l , i n most cases, receive tax r e l i e f which is equal t o or slightly l e s s than t h e i r original food sales tax l i a b i l i t y . In each of the graphs, the amount of tax re1 ief received by individuals a t each income level i s represented by the distance between the long-dashed 1ine and the solid line.



EXHIBIT 4

COMPARISON OF SALES TAX BURDEN UNDER CURRENT LAW AND UNDER OPTION 3

5

r



(FAMILV SIZE- 1 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FOOD TOTAL UITH OPTION



-----



_______----.



0 0



7080



FAMILY INCOME



14000



21000



28000



35080



(FAMILY SIZE= 4 ) TOTAL SALES TAX BURDEN TOTAL EXCEPT FGOD TOTAL WITH OPTION



-- - - ________---.

.



0



8



7000



14000



21000



28000



35000



FAMILY INCOME



C M A I O OF REVENUE AND EQUITY IMPACTS: O P RS N I. S M A Y AND C M A I O OF REVENUE IMPACTS U MR O P RS N



EXEMPTIONS vs. CREDITS



When comparing the revenue impacts of the three options f o r reducing the sales tax burden, the following questions should be considered.



1) Hw much revenue i s t o be returned t o the taxpayers? o 2) Which jurisdictions will bear the revenue loss?

In considering each of these questions, i t i s helpful t o look separately a t food sales tax exemptions and income tax credits f o r sales taxes paid. The distinct characteristics of each approach are considered be1 ow.



A.



TOTAL R V N E RETURNED TO TAXPAYERS E E US



1. Food Sales Tax Exemptions

With a food sales tax exemption, the total amount of revenue which is returned t o the taxpayers will be determined by the amount of revenues which would be collected by each jurisdiction i f the exemption were not in effect. Option 1 , for example, involves removing the s t a t e tax on food. Therefore, the total amount of revenue retained by the taxpayers under t h i s option would equal the total amount collected by the s t a t e from the sales tax on food (estimated a t $89,532,216-$103,306,403). Similarly, Option 2 provides f o r a food sales tax exemption a t the s t a t e and local level. Thus, the total tax loss under t h i s option would equal the amount of taxes collected by s t a t e _a@ local jurisdictions. ($89,532,216-$103,306,403 collected by the s t a t e plus $1 5,089,533-$17,311,232 collected by the c i t i e s . ) Because no tax revenues will be collected on food sales i f an exemption is i n effect, the a b i l i t y of the legislature t o control the total amount of the revenue loss will be somewhat 1imi ted under t h i s approach. However, i t would



be possible t o exercise more control over the total revenue loss from this type of a1 ternative by reducing the tax r a t e on food sales instead of eliminating the tax a1 together.

2.



Income Tax Credits f o r Sales Taxes Paid



Income tax credits offer considerable f l e x i b i l i t y in determining the amount of revenue t o be returned t o the taxpayers. With an income tax credit, the total amount returned will depend on the amount of the c r e d i t granted t o each individual or household. An income tax c r e d i t may be designed t o return a l l of the revenues collected from the food sales tax or only a portion of these revenues. For example, the amount of revenue returned t o taxpayers with a $30 per capita tax c r e d i t i s considerably smaller than the amount returned with a $45 per capita credit.

B.



DISTRIBUTION OF REVENUE LOSS AMONG JURISDICTIONS



1. Food Sales Tax Exemptions



Exempting food from the sales tax would r e s u l t in a reduction in total sales tax collections. Under current law, s t a t e sales tax collections are divided between the s t a t e , the c i t i e s and the counties. City sales tax collections are retained by the c i t i e s which levy a tax. Thus, the revenue loss from a s t a t e food sales tax exemption would be shared by the s t a t e , c i t i e s , and counties, while the revenue loss from a local food sales tax exemption would be borne entirely by the c i t i e s .

2.



Income Tax Credits f o r Sales Taxes Paid tax c r e d i t f o r sales taxes paid would r e s u l t i n a reduction collections. Net collections from the s t a t e income tax the s t a t e and c i t i e s . The c i t i e s ' share is equal to 15% collected from the income tax two years prior t o the current the revenue loss resulting from an income tax c r e d i t would



Providing an income in s t a t e income tax are divided between of the net proceeds f i s c a l year. Thus,



be borne entirely by the s t a t e during the f i r s t two years the c r e d i t is in effect, and the c i t i e s would not experience a reduction in t h e i r share of tax collections until the t h i r d year 11. S M A Y AND C M A I O OF EQUITY IMPACTS U MR O P RS N Two questions must also be addressed when comparing the equity impacts of the three options f o r reducing the sales tax burden. These questions are:

1) Will families a t a l l levels of income receive a reduction i n sales



tax l i a b i l i t y ?



(What is the scope of the tax r e l i e f ? )



2)



Hw does the amount of reduction in taxes compare w i t h the amount of o taxes paid a t each level of income? (What i s the degree of tax re1 i e f ? )



Again, i t i s helpful t o look separately a t food sales tax exemptions and income tax credits f o r sales taxes paid i n considering each of these questions.

A.



THE SCOPE OF TAX RELIEF



1. Food Sales Tax Exemptions



Food sales tax exemptions are intended t o provide tax re1 ief t o a l l individuals affected by the food sales tax. Because the food tax i s eliminated on a l l r e t a i l food i tems, any individual purchasing food a t r e t a i l will benefit regard1 ess of income 1eve1



.



2.



Income Tax Credits f o r Sales Taxes Paid



Income tax credits f o r sales taxes paid may be granted t o a l l individuals . regardless of income or may be granted only t o individuals a t specified income levels. The f l a t rate per capita tax credit examined in this report will reduce the tax burden of individuals a t a l l levels of income.



B. THE DEGREE OF TAX RELIEF

1. Food Sales Tax Exemptions



B prohibiting collection of the tax, food sales tax exemptions assure t h a t y a l l individuals receive tax r e l i e f which i s exactly equal t o t h e i r original food sales tax l i a b i l i t y . Because no tax i s collected on food items when an exemption i s i n e f f e c t , the food sales tax burden of individuals a t a l l levels of income i s reduced t o zero f o r each jurisdiction exempting food.

2.



Income Tax Credits f o r Sales Taxes Paid



With an income tax c r e d i t , the degree of tax r e l i e f available t o individuals a t each level of income will depend on the type of tax c r e d i t used. With a $35 per capita tax credit, individuals in larger families and individuals w i t h lower levels of income may receive tax re1 ief which exceeds t h e i r food sales tax l i a b i l i t y while individuals a t higher income levels and from smaller family sizes will receive tax r e l i e f which, i n most cases, is equal t o or slightly l e s s than t h e i r food sales tax l i a b i l i t y . Tax credits may also be designed which concentrate tax re1 ief a t low income levels and provide no r e l i e f t o families a t high income levels or which dupl icate the effects of an exemption by providing tax re1 ief t o each household which i s approximately equal t o i t s food sales tax l i a b i l i t y .



V



.



POTENTIAL SOURCES OF REPLACEMENT R V N E E E US INTRODUCTION



A.



In t h i s section, a description of several a1 ternative revenue sources i s presented. I t should be noted that the revenue estimates presented f o r each of the alternatives are preliminary and are subject t o refinement. The 1i s t of a1 ternatives i s not intended t o be exhaustive of a l l possibilities, b u t rather to identify several of the major revenue a1 ternatives.

B.



SALES TAX SOURCES



1. Sales Tax Rate Increase



The following table shows a breakdown by taxable activity of the expected increase i n revenues i f the sales tax r a t e was increased by 1%.



e



Taxable Activity Transportation Mining Timbering Util i t i e s Comun icati on RR and Aircraft Priv. Cars-Pipel ines Pub1 i shing Job Printing-Advert. Restaurants-Bars Amusements Rental s-Real Prop. Rental s-Pers. Prop. Contracting h1 Feed- W o esal e Retail Total



Current Tax Rate



Nw Tax e Rate



Increase in Col lectZons



These figures are calculated based on 1978 calendar year collections.



2.



New Sales Tax on Services



Gross r e c e i p t s from s a l e s of services a r e not taxable under current Arizona law. Collections from a 4% tax r a t e levied on t h e gross receipts of service industries a r e estimated a t $89,528,888. This estimate i s based on the gross s a l e s of service industries during calendar year 1978 and does not include collections from health services, banking and c r e d i t services o r real e s t a t e t i t l e services and brokerage fees. 3. New Tax on Casual Sales of Vehicles



Casual s a l e s a r e s a l e s by individuals who a r e not regularly engaged i n the business of s e l l ing property. If a tax were levied on casual s a l e s of vehicles, individuals would be required t o Day this tax on t h e s a l e price of privately purchased vehicles before the vehicle could be registered. Estimated revenue collections from a 4% tax on casual s a l e s of vehicles a r e $8,502,783 f o r calendar year 1978.

C.



I C M TAX SOURCES NO E Individual Income Tax: Addition of a 9% and 10%Bracket t o the Current Rate Structure



1.



The following t a b l e s show the current individual income tax r a t e structure and a proposed r a t e s t r u c t u r e a f t e r adding a 9% and 10% income tax bracket. Current Rate Structure Taxable Income Sing1 e Married $ 0-$1,000 1,001- 2,000 2,001- 3,000 3,001- 4,000 4,001- 5,000 5,001- 6,000 over $6,000

$



Rate 2% 3% 4% 5% 6% 7% 8%



R ta a

2% 3% 4%



Proposed Rate Structure Taxabl e Income Sing1 e Married

$



0-$ 2,000 2,001- 4,000 4,001- 6,000 6,001- 8,000 8,001- 10,000 10,001- 12,000 over $1 2,000



5% 6% 7% 8% 9%



0-$1,000 1,001- 2,000 2,001- 3,000 3,001- 4,000 4,001- 5,000 5,001- 6,000 6,001- 7,000 7,001- 8,000 over $8,000



$



0-$ 2,000 2,001- 4,000 4,001- 6,000 6,001- 8,000 8,001- 10,000 10,001- 12,000 12,001- 14,OO 14,001- 16,O



The increase i n revenues i f the proposed r a t e s t r u c t u r e had been i n e f f e c t during the 1977 income tax year is estimated a t $14,400,000.



2.



Individual Income Tax:



Addition of Brackets with Rates up t o 31 %



The following tables show the current individual income tax r a t e s t r u c t u r e and a proposed r a t e structure a f t e r adding new income tax brackets w i t h r a t e s up t o 31%.



Current Rate Structure



Rate



Taxable Income Single $ 0-$1,000 1,001- 2,000 2,001- 3,000 3,001- 4,000 4,001- 5,000 5,001- 6,000 over $6,000 Married $ 0-$ 2,000 2,001- 4,000 4,001- 6,000 6,001- 8,000 8,001- 10,000 10,001- 12,000 over $12,000



Proposed Rate Structure Rate Taxa bl e Income Si ngl e $ Married Rate Taxabl e Income Sing1 e Married



0-$ 1,000 $ 0-$ 2,000 1,001- 2,000 2,001- 4,000 2,001- 3,000 4,001- 6,000 3,001- 4,000 6,001- 8,000 4,001- 5,000 8,001-10,000 5,001- 6,000 70,001- 12,000 6,001- 7,000 12,001- 14,000 7,001- 8,000 14,001- 16,000 8,001- 9,000 16,001- 18,000 9,001- 10,000 18,001- 20,000 10,001- 11,000 20,001- 22,000 11,001- 12,000 22,001- 24,000 12,001- 13,000 24,001- 26,000 13,001- 14,000 26,001- 28,000 14,001- 15,000 28,001- 30,000



$15,001-$16,000 $30,001-$32,000 16,001- 17,000 32,001- 34,000 17,001- 18,000 34,001- 36,000 18,001- 19,000 36,001- 38,000 19,001- 20,000 38,001- 40,000 20,001- 21,000 40,001- 42,000 21,001- 22,000 42,001- 44,000 22,001- 23,000 44,001- 46,000 23,001 24,000 46,001 48,000 24,001- 25,000 48,001- 50,000 25,001- 26,000 50,001- 52,000 26,001- 27,000 52,001- 54,000 27,001- 28,000 54,001- 56,000 28,001- 29,000 56,001- 58,000 over $29,000 over $58,000



-



-



I f the proposed r a t e s t r u c t u r e had been i n e f f e c t during the 1977 income tax year, the increase i n income tax collections is estimated a t $42,800,000.



D.



O H R T X SOURCES TE A



1. Property Transfer Taxes A property t r a n s f e r tax is a tax levied on the s a l e value of real e s t a t e a t the time of s a l e or t r a n s f e r . Total collections from a 1 %property t r a n s f e r tax imposed during the 1977-78 f i s c a l year a r e estimated a t $19,214,000. I t is assumed t h a t a l l property s a l e s would be subject t o the 1% tax.

2. Luxury Taxes



-



Rate Increase



The following t a b l e shows t h e estimated increase i n collections which would r e s u l t from an increase i n existing 1uxur.y tax rates. The estimates a r e based on 1978 collections.



Luxury Item Cigarettes



e Current R



Proposed Rate Increase



Increase of Collections $2,841,946



134 on each 20 cigarettes 1C per 20 cigarettes or fractional part thereof. $2.50 per gallon w i t h a proportionate rate f o r greater or lesser quantities. 42C per gallon with a proportionate rate f o r greater or 1esser quantities. 84 per gallon

$.50 per gallon



Spiri tous Liquor



$2,432,496



Vinuous Liquor (alcohol content less than 24%) M1 t Liquor a TOTAL



1Q per gallon



$ 604,359



1$ per gal 1on



$ 715,351



$6,594,152



3.



Vehicle Fuel Taxes



-



Rate Increase



Under current law, gasoline and use fuel taxes are levied a t a r a t e of 84 per gallon. The increase i n collections which would r e s u l t from-a 1& increase i n the tax rate is estimated a t $15,703,825. T h i s estimate i s based on fuel tax collections during calendar year 1978. 4. Vehicle License Taxes



-



Rate Increase



Vehicle 1icense taxes are currently levied a t a rate of 4%of the assessed valuation of the vehicle. A 1% increase in this r a t e would produce an estimated $14,248,284 i n additional revenues. T h i s estimate i s