TAXATION I N ARIZONA:
AN OVERVIEW
PREPARED FOR THE
ARIZONA LEGISLATURE
This report was prepared by the staff of the Joint Select Comnittee on Tax Refom and School Finance.
ERRATA Taxation i n Arizona : An Overview May 31, 1979 Section Three
p. 111-7, Figure 111-2, Income Taxes and Sales Taxes should be switched i n box i n s e r t . Should read:
1967 Sales Taxes Income Taxes 77.91 16.22
1977 264.07 105.57
Total Percent Increase (67- 77) 238.95 550.98
Average Annual Percent Increase 12.98 20.60
p. 111-8, Figure 111-3, Income Taxes and Sales Taxes should be switched i n box i n s e r t .
p. 111-31 through p. 111-56, Income Taxes and Sales Taxes should be switched i n t h e box i n s e r t .
Section Five p. V-10 p. V-13 S t r i k e "not" i n l a s t 1ine. Should read "The amounts shown a r e c o l l e c t i o n s a f t e r refunds. " Table V-4 t i t l e S t r i k e "Transaction Privilege" and insert "Sales". Should read "Distribution of S t a t e Sales Tax Col 1e c t i ons".
p. V-13
TABLE V-5 should read: TABLE V-5 Sales Tax Revenues A a s Percentage of Total S t a t e Revenue, 1977-78
Tax Transaction Privi 1ege Tax Education Excise Tax Special Education Excise Tax Use Tax* Rental Occupancy
Amount $247,570,254 240,563,322 81,056,526 8,577,759 169,562
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Percent of Total ** S t a t e Revenues 14.3% 13.9 4.7 .5 -01
(Corrections to p. V-13 TABLE V-5 cont'd) *One-half of the Use Tax i s earmarked for the Education Excise Tax fund. In total , $17,155,518 was col lected f o r tangible personal property purchased outside the state. *Total s t a t e revenues here include a l l s t a t e general and special revenue and aid collections before distribution t o local governments i n the amount of $1,725,466,329.
FOREWORD
T h i s report i s the f i r s t i n a series o f documents t o inform the Legislature about the present taxation and education finance structures in Arizona, in preparation f o r the 1979 Special Session on Tax Reform and School Finance.
"Taxation i n Arizona : an Overview" consists of several sections that describe: 'the major principles or tenets of taxation 'comparisons of tax burdens in Arizona and other s t a t e s i n the Western U.S. 'the administration and level of collections of the major taxes imposed by s t a t e and local governments i n Arizona In order t o best serve the interests of Arizona in arriving a t decisions t o a1 t e r the present tax and education finance structures, i t i s necessary that the Legislature give consideration t o a l l ideas, plans and options. I t i s hoped that legislators and other citizens who wish to have t h e i r ideas researched and examined by the Joint Select Comi t t e e , submit them as soon a s possible in accordance w i t h the procedures outlined,in t h i s report.
SENATOR RAY R T A OT S Coc ha i man JOINT SELECT C M I T E ON O MT E TAX REFORM AND S H O FINANCE COL
REPRESENTATIVE BURTON BARR Coc ha i man JOINT SELECT C M I T E ON O MT E TAX REFORM AND S H O FINANCE COL
SUBMISSION OF EDUCATION AND TAX PLAN ALTERNATIVES
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Each of you are encouraged t o submit any viable a1ternative plan in the areas of taxation o r school finance which you be1 ieve should be considered during the forthcoming special session of the Legislature. In order t o insure t h a t each proposal i s properly researched and investigated i n the most expeditious manner, the f o l l owing procedure has been establ ished.
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Members of the Joint Select Committee on Tax Reform and School
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Research Co-Di rectors a ) Senator Ray Rottas b) Rep. Burton Barr
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Joint Select Committee Staff
The PUBLIC (1) prepares alternative education and tax plans, i n w r i t i n g , and submits these t o e i t h e r a member of the Joint Select Comnittee on Taxation and School Finance or the Research Co-Directors. LEGISLATORS ( 2 ) who a r e not members of the Joint Select Committee on Taxation and School Finance may submit t h e i r research requests and a1 ternative
taxation and school finance plans through a ( 3 ) STANDING COMMITTEE o r t o a member of the Joint Select Comittee o r the Research Co-Directors. STANDING COMMITTEES (3) should submit plans t o the Joint Select Committee. All requests submitted must be in writing. M M E S (4) of the Joint Select Comittee will submit t h e i r research requests E BR and a1 ternative taxation and school finance plans i n writing along w i t h requests received from the public or other legislators t o the Co-Directors. The RESEARCH CO-DIRECTORS (5) will compile a l l requests, determine the amount of time necessary f o r research and investigation and assign these t o the s t a f f , in priority order. P r i o r i t i e s will be established based upon the order in which requests are received, the amount of work estimated t o research and investigate the request and the availability of s t a f f time. A t the time the Research Co-Directors assign the request to the s t a f f they will notify the person making the request as t o when i t can reasonably be expected that the work will be completed. The Research Co-Directors will monitor the progress of the request to insure that i t i s returned t o the originat o r as rapidly a s possible. The STAFF (6) of the Joint Select Comi t t e e wi 11 perform the research tasks as assigned by the Research Co-Directors.
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TABLE OF C N E T O TNS
................................ i . . . . . . . . . . . . . . . . ii . . . . . . . . . . . . . . . . . . . . . . . . . . . iv . . . . . . . . . . . . . . . . . . . . . vi ... . . . . . . . . . . . . . . I- 1 . . . . . I- 2 . . . . . . . . . I- 3 SECTION TWO ...Criteria f o r Evaluating Taxes . . . . . . . . . . . . . . 11- 1 Revenue Generation . . . . . . . . . . . . . . . . . . . . . . . . 11- 1 Social Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 11- 2 Ease of Administration . . . . . . . . . . . . . . . . . . . . . . 11- 4 Consistency with State Goals . . . . . . . . . . . . . . . . . . . 11- 4 SECTION THREE ...Tax Burden and Reliance . . . . . . . . . . . . . . . .I1 I. 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . .I1 1. 1 Comparison of Eleven Western States . . . . . . . . . . . . . . . .I1 I. 2 TaxBurden . . . . . . . . . . . . . . . . . . . . . . . . . . .I1 I. 2 Tax Reliance . . . . . . . . . . . . . . . . . . . . . . . . . .I1 1.21 Appendix 111.1 . . . . . . . . . . . . . . . . . . . . . . . . .I1 1.30 Appendix 111.2 . . . . . . . . . . . . . . . . . . . . . . . . .I1 1.57 SECTION FOUR ...Property Tax . . . . . . . . . . . . . . . . . . . . . . IV- 1 Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1 Administration . . . . . . . . . . . . . . . . . . . . . . . . . . IV- 7 Incidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-14 Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-16 SECTION FIVE ...Sales and Use Taxes . . . . . . . . . . . . . . . . . . . V- 1 Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . V- 1 Use Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V- 6 Rental Occupancy Tax . . . . . . . . . . . . . . . . . . . . . . . V- 8 SECTION SIX ...Income Tax . . . . . . . . . . . . . . . . . . . . . . . . VI- 1 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI- 1 Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . V I - 1 Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VISECTION S V N ...Other Taxes . . . . . . . . . . . . . . . . . . . . . .V I- 1 EE I Fuel Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .VI I. 1 Vehicle License Tax . . . . . . . . . . . . . . . . . . . . . . . .VI 1 5 . Motor Carrier License Tax . . . . . . . . . . . . . . . . . . . . .VI I. 9 Luxury Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .VI 1.13 Insurance Premi urn Tax . . . . . . . . . . . . . . . . . . . . . . . VII-17
FOREWORD Procedures f o r Submitting Tax and Education Finance Alternatives and Research Requests TABLE OF C N E T O TNS LISTING OF FIGURES AND TABLES SECTION ONE Problems Leading t o Tax Reform Factors Contributing t o Increased Government Expenditures Factors Causing Problems within the Tax Structure
LIST O FIGURES F Figure Number 111- 1 111- 2 111- 3 111- 4 111- 5 111- 6 111- 7 111- 8 111- 9 The Burden of Taxation Per Capita O n Source Revenue, Arizona, Current $$ w Per Capita Own Source Revenue, Arizona, Constant 1967 $$ Major S t a t e and Local Taxes as Percentage of Family Income Tax Revenue by Sources 1967, Arizona Tax Revenue by Sources 1977, Western States Sources of Arizona S t a t e Revenue, before Distribution t o Local Governments, 1977-78 County Revenue Sources, Ari zona Counties , 1975-76 Municipal Revenue Sources, Arizona C i t i e s , 1975-76 Page 111- 3
LIST OF TABLES Table Number 111- 1 111- 2 Per Capita O n Source General Revenue w Total Direct Tax Burdens Eleven Western S t a t e s Effective 1977 Income Tax Rates Eleven Western S t a t e s Effective Income Tax Rates Arizona 1977 Taxable A c t i v i t i e s Collections by Classification f o r 1977-78 Sales Tax Collections 1967-68 and 1977-78 Distribution of S t a t e Transaction Privilege Tax Collections Transaction Privilege Tax Revenues as a Percentage of Total S t a t e Revenue, 1978 Distribution of S t a t e Transaction Privilege Taxes t o Counties Distribution of Sales Tax Collections f o r 1977-78 Arizona Income Tax Rates Page
V- 14 V- 15 VI-
SECTION ONE P O L M LEADING TO TAX REFORM R BE S One of the major purposes of the special session is t o address the issue of tax reform. In order t o deal with t h i s issue, i t i s important t o understand some of the reasons why tax reform has become a major issue. The diagram that follows i l l u s t r a t e s the chain of causes which has culminated in the need for a special session on tax reform.
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Increase i n Government
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Inflation Expanded demand f o r basic services Demands f o r additional types of services Waste Taxes which generate excessive or inadequate revenues Taxes which are unfair or unaffordable t o individual taxpayers Taxes which present administ r a t i v e problems Taxes which have negative effects on s t a t e growth and devel opment
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i t h i n the
[I.
The immediate reason f o r the proposed special session on tax reform i s t o improve the current tax structure i n order t o eliminate the need f o r temporary tax r e l i e f measures such as the rebate. The rebate and other temporary tax r e l i e f measures were enacted i n order t o relieve taxpayers from the effects of continued increases in government expenditures and problems within the tax structure. The underlying factors which have contributed t o the increase in government expenditures and the underlying factors which cause problems w i t h i n the tax structure are shown in the right portion of the diagram. These factors are discussed be1 ow:
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FACTORS CONTRIBUTING TO INCREASED GOVERNMENT EXPENDITURES
1. INFLATION - According t o the Bureau of Business and Economic Research a t the Arizona State University, the inflation r a t e i n the Phoenix area during 1978 was greater than 10%. T h i s means t h a t the amount of money required t o pay f o r services provided by the government during 1978 was 10%higher than the amount of money required t o pay f o r the same services i n 1977. This added funding requirement i s further translated into an increase in government expenditures. For example, teachers may demand a salary increase of 10% in order t o maintain the purchasing power of t h e i r incomes. If t h i s increase is granted, schools will be required t o r a i s e the salary portion of t h e i r budgets by 10% i n order to retain the current s t a f f .
2. EXPANDED DEMAND FOR BASIC SERVICES - The Department of Economic Security has estimated t h a t the population i n the State of Arizona increased by about 4.6% between July 1, 1977 and July 1, 1978. Individuals moving into the s t a t e will expect t o receive the same government services currently provided t o residents. In order t o provide services t o more individuals, government enti t i e s may increase staffing and may require larger f a c i l i t i e s . To pay f o r the e x p a n s i o e government expenditure will have t o increase. For example, new schools may have t o be b u i l t and staffed in order to accommodate children moving into the d i s t r i c t . This may r e s u l t in a substantial increase i n the school d i s t r i c t budget.
3. D M N S FOR ADDITIONAL TYPES OF SERVICES Taxpayers who a r e unsatisE AD fied w i t h the types of services currently provided by the government, may demand t h a t new programs be i n i t i a t e d which will better meet t h e i r particular needs. If additional programs a r e i n i t i a t e d , government expenditures are l i k e l y t o increase i n order t o meet the resource requirements of the new program. For example, the Department of Economic Security during the current operating year i n i t i a t e d a major program t o deinstitutional ize the care of the mentally retarded. In order t o implement this program, the D S budget was increased E substantially.
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4. W S E - Waste occurs whenever resources a r e expended unnecessarily AT i n providing services t o the pub1 i c . For example, the assessment process, which takes place a t the county l e v e l , must occassionally be repeated because of errors which occur in compil ing the tax r o l l s .
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Additional funds may be required t o pay f o r resources expended i n repeating this process, which woul d otherwise have been unnecessary. FACTORS CAUSING PROBLEMS WITHIN THE TAX STRUCTURE
1. TAXES W I H GENERATE EXCESSIVE OR INADEQUATE REVENUES - Taxes are HC levied in order t o fund government services demanded by the taxpayer. If the revenues raised from taxes exceed the amount required t o pay f o r government services, the burden on the individual taxpayer will be unnecessarily high. If the revenues raised from taxes are not sufficient t o cover the cost of government services, cutbacks i n the services provided t o taxpayers may be necessary. In Arizona, the current tax structure would appear t o generate revenues in excess of those required t o pay f o r government services. In order t o prevent the individual taxpayers from paying taxes which are unnecessarily high, revenues not used t o provide government services a r e returned t o taxpayers i n the form of a rebate.
TAXES W I H ARE UNFAIR OR UNAFFORDABLE TO INDIVIDUAL TAXPAYERS HC Individuals with limited incomes may have difficulty paying taxes t o which they are subject. Thus, taxes which are levied without reference t o personal income may place an undue hardship on individuals in the lower income ranges. The property tax i s an example of a tax which may be unaffordable t o the individual. In Arizona, individuals above the age of 65 who have low incomes, are given an income tax c r e d i t f o r property taxes paid in recognition of the burden which i s placed on 1ow-income individuals by the property tax.
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3. TAXES W I H PRESENT ADMINISTRATIVE PROBLEMS - Substantial amounts HC of resources may be expended in the administration of taxes. The amount of resources required will increase as the tax becomes more d i f f i c u l t t o administer. An example of a tax which i s d i f f i c u l t t o administer i s the property tax. The Department of Revenue was given an additional appropriation f o r the current operating year to improve the administration of the tax.
TAXES W I H HAVE NEGATIVE EFFECTS ON STATE GROWTH AND DEVELOPMENT HC Because taxes reduce the amount of funds which are available t o the taxpayer f o r expenditure, taxes which are 1evied a t excessive r a t e s may substantially
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decrease the 1eve1 of economic a c t i v i t y within the s t a t e . Individuals overburdened by taxes may lose t h e i r incentive t o work o r may be forced t o curb t h e i r spending, and businesses overburdened by taxes may become unprof i tab1 e. The problem may be compounded if businesses also suffer the effects of reduced demand by individuals who a r e overtaxed. In Arizona, the s t a t e ' s portion of the parimutuel tax was recently reduced in order t o increase the p r o f i t a b i l i t y of the racing industry and allow i t t o expand.
SECTION TWO CRITERIA FOR EVALUATING TAXES The objective of tax reform i s t o produce a tax structure which i s an improvement over the current system. In order to achieve t h i s objective, i t i s important t o establish c r i t e r i a which can be used t o evaluate both the current tax structure and any new alternatives under consideration. Because these c r i t e r i a serve as a basis f o r determining whether a given tax will better meet the demands of the taxpayer, i t i s important t o identify exactly what i t i s that the taxpayer expects from a tax and incorporate these demands within the c r i t e r i a . Basically, these demands can be narrowed t o the four major objectives out1 ined be1 ow: 1) Revenue Generation - The revenues produced by the tax should be sufficient to pay f o r the services demanded by the taxpayer.
2)
Social Equity - The tax should be f a i r and should not become too great a burden to the individual taxpayer. Ease of Administration - The tax t o be paid by the individual taxpayer should be easy t o determine.
3)
4) Consistency with State Goals - To the greatest extent possible, taxes should be exported and should promote a rational pattern of development within the s t a t e . Taking each of these in t u r n , i t i s helpful t o identify the characteristics which a tax must possess i n order t o meet the objectives outlined above. Revenue Genera t i on In the case of revenue generation, a tax must s a t i s f y two characteristics in order t o consistently produce enough revenues t o pay f o r the services demanded by the taxpayer. F i r s t , the revenues produced by the tax must expand over time as the demand f o r services increases. A good i l l u s t r a t i o n of a tax which possesses t h i s characteristic i s the local property tax. Ordinarily, property taxes are levied a t the local level primarily f o r the purpose of financing school expenditures. Nw families w i t h school age children t h a t move into the e d i s t r i c t will raise the total level of school expenditures, thereby increasing the need f o r addi tonal revenues. However, the in-mi grant fami 1i e s may require
new housing, thereby adding property value to the tax base and generating additional revenues. The individual income tax, on the other hand, does not possess t h i s characteristic. W i t h the income tax, increases in the demand f o r government services and increases i n the tax base tend t o follow different cycles. During a recession, f o r example, the level of unemployment will increase and the number of individuals demanding welfare services is 1i kely t o expand. A t the same time, however, the level of income may be f a l l i n g and the amount of revenues produced by the income tax may a1 so decl i ne. A second characteristic which a tax must possess i n order t o continually produce enough revenues t o pay f o r the services demanded by the taxpayer is t h a t the revenues must expand over time as the price of the service demanded increases. The sales tax is a good example of a tax which possesses t h i s charqcteristic. Because a sales tax i s levied on the gross receipts from the sale o f goods, a general increase in the price of goods will r e s u l t in ap increase i n the revenues produced by the sales tax. T h i s increase i n revenues can then be used t o pay f o r the higher cost of government services associated with a general increase in the price of goods. which i s a l ~ o A goad example of a tax t h a t does not possess this characteristic i s the fuel tax. Currently, the Arizona fuel tax i s levied on the number of gallons of gasoline purchased, not on the receipts from the sale of gasoline. Therefore, a general increase i n the price of goods, which will increase the cost of government services, will not necessarily r e s u l t i n an increase in revenues from the fuel tax. Soci a1 Equity In the case of social equity, three characteristics must be present i f taxes are t o be f a i r and are not t o become too great a burden t o the individual taxpayer. First, the tax burden borne by the individual taxpayer should be affordable from current cash flow without undue hardship. The best example of a tax t h a t possesses t h i s characteristic i s the individual income tax. Because a percentage of income i s withheld from each individual's paycheck a t the time of receipt, the bulk of the individual's total tax l i a b i l i t y i s automatically paid from current cash flow.
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The property tax, on the other hand, may not possess this characteristic. If an individual who owns property i s unemployed a t the time when property taxes become due, he will be l i a b l e f o r payment of the tax regardless of the f a c t that he may be unable to pay the tax from current cash flow. A second characteristic t h a t a tax must possess in order t o meet the objective outlined f o r social equity i s t h a t the tax burden borne by individuals w i t h common circumstances must be equivalent. Again, the individual income tax i s a good example of a tax t h a t possesses t h i s characteristic. Because income i s general ly regarded as a f a i r l y good measure of circumstance and individuals f a l l i n g within the same income range are taxed a t the same r a t e , i t i s relatively safe t o assume t h a t individuals w i t h common circumstances have roughly equivalent income tax burdens. The school d i s t r i c t property tax i s a prime example of a tax which does not possess t h i s characteristic. Because the tax r a t e levied on a given property depends upon the level of school expenditures and i n particular on the total amount of assessed valuation subject t o tax within the d i s t r i c t , two parcels of equal value located within separate school d i s t r i c t s may have total ly different tax burdens. Differences in appraisal techniques may a1 so r e s u l t in two property parcels of comparable value being subjected t o different tax l i a b i l i t i e s . The third characteristic that taxes should possess i f they are t o be considered equitable, i s t h a t , a l l other things being equal and given t h a t an individual can afford t o pay a tax, the taxpayer receiving more services should be taxed a t a higher level. Economists refer t o t h i s tenet of taxation as the "benefits of taxation." Some caution must be used i n evaluating taxes according t o t h i s characteristic because of the d i f f i c u l t y of identifying specific benefits which a r e derived from the levy of a given tax. Particularly i n the case of taxes which are designed t o raise large amounts of general revenue, i t i s d i f f i c u l t t o determine the relationship between costs t o the taxpayer and benefits received. The fuel tax i s a good example of a tax t h a t possesses t h i s characteristic. Receipts from fuel taxes a r e generally used f o r road maintenance and construction. W can probably assume t h a t individuals who travel a greater number of miles e will ordinarily demand more road construction and maintenance services. Because the fuel tax i s levied on gallons of gasoline sold, these same individuals
wjll 1ikely pay greater fuel taxes as we1 1, as the number of gallons purchased increases, Conversely, the individual iqcome tax does not possess t h i s characteri stic. Ordinarily, individuals w i t h 1ower incomes require more government service5 (we1fare, unemployment compensation, etc. ) These individuals will not be required t o pay greater income taxes t o finance these services, because the income tax i s designed so t h a t individuals w i t h lower incomes will pay lower income taxes. Ease of Admfnistration Basicp7ly, pnly one characteristic must be present i f a tax i s t o s a t i s f y the o $ J e ~ t i v eoutlined f o r ease of administration - the value of the tax base qhould be relatively easy t o determine. The sales tax i s a good example of a tax which possesses t h i s characteristic. The salea t q i~s a d i r e c t tax on the gross s e l l i n g price of a good. Because this price is fixed prior t o sale, no discretion i s necessary i n determining the value of the tax base. The property tax, on the other hand, is levied on the assessed valuation of a Rroperty which i s based on the property's current market value. If t h g p r ~ p e r t yhas not been sold recently, no d i r e c t measure of the current market yalue of the property will be readily available and therefore, the e x a ~ value of the tax base will be somewhat d i f f i c u l t to determine. t C ~ n isstency wi t h State Goal s The final c r i t e r i a establ ished f o r evaluating taxes i s consistency with s t a t e goals. If a tax i s t o meet the objective outlined f o r t h i s c r i t e r i a , two chgracteristics will ideally be present. F i r s t , a substantial portion of the total tax levy will be paid by the residents of other s t a t e s . A good example of a tax which possesses this characteristic i s the sales tax on hotels. The sales tax on hotels represents an added cost t o the business which will probably be recouped i n the form of ap increqse i n the price of the accommodations. Because hotels a r e normally frequented by the residents of other s t a t e s and these individuals will pay the price of the accommodations, a substantial portion of the sales tax on hotels will be paid by non-residents. The individual income tax i s a good example of a tax which does not possess t h i s characteristic. Non-residents a r e taxed IQ inqme only t o the extent that t h a t income was derived from I
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sources within the state. In addition t o this characteristic, a tax should not inhibit the growth of business or discourage new businesses from locating i n the s t a t e , i f i t i s t o be consistent w i t h s t a t e goals. A good example of a tax which possesses this characteristic i s the e s t a t e tax. T h i s tax is levied on the personal possessions of deceased individuals and therefore, has no d i r e c t e f f e c t on the growth of business. Other taxes such a s the unemployment insurance tax, are paid directly from the proceeds of businesses subject t o the tax and, therefore, may serve t o inhibit the growth of the business i f they become excessive. Although i t is unlikely t h a t any given tax will s a t i s f y a l l of the above c r i t e r i a , i t i s nevertheless helpful t o evaluate tax a1 ternatives i n terms of these c r i t e r i a i n order t o identify strengths and weaknesses of the options under consideration. In so doing, i t may be possible a t times t o eliminate elements of a tax which are contrary t o the objectives of the taxpayer. B y levying the fuel tax on gross receipts from the sales of fuel instead of levying the tax on gallons sold, f o r example, i t may be possible t o assure t h a t revenues from the fuel tax will expand over time as prices of government services continue t o increase. I t i s also possible t h a t a tax which s a t i s f i e s a given s e t of c r i t e r i a may be more suitable f o r certain purposes, and evaluating a l l tax a1 ternatives iq terns of a standard s e t of c r i t e r i a will provide some basis f o r selecting the best tax f o r the purposes a t hand. For example, i f a tax i s needed f o r t h o primary purpose of raising large amounts of general revenues, i t might be a good idea t o s e l e c t a tax which i s affordable t o the individual taxpayer from current cash flow, because the larger the revenue requirements, the more likely i t becomes t h a t payment of the tax will represent a hardship t o the individual. Thus, the income tax might be the best tax t o levy when large amounts of general revenues a r e required. In the case of the general tax reform currently underway, i t i s hoped that evaluating a l l of the alternatives under consideration i n terms of a standard s e t of c r i t e r i a , will serve a s a basis f o r developing a mix of taxes which s a t i s f i e s a11 of the c r i t e r i a t o the greatest degree possible in order t o produce a tax structure which more f u l l y meets the demands of the taxpayer.
PROBLEM
POSITIVE CHARACTERISTICS
POSITIYZ EXAMPLES EXAMPLES
Revenues SltouJ d
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Revenue Generation
Taxes Which Generate Excessive Or Inadequate Revenues
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Revenues Produced Should Be J u s t S u f f i c i e n t To Pay For Servi ces Demanded By Taxpayers
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Revenues Shoul d Expand As The Prim O f Services Increases
PROBLEM
CRITERIA
POSITIVE CHARACTERISTICS
POSITIVE EXAMPLES NEGATIVE EXAMPLES
I
To t h e Greatest Extent Possible Taxes Should Promote A R a t i o n a l P a t t e r n o f Development W i t h i n The S t a t e
Significant F o r t i o n Of The T o t a l Tax Levy Should Be Paid By Residents O f Other S t a t e s
1I II
Sales Tax On Individual Income Tax
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Consistency With S t a t e Goals
Taxes Which Have Negative E f f e c t s On S t a t e Growth And Devel opment
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Tax Should Not I n h i b i t The Growth O f Business O r Discourage New Business From L o c a t i n g W i t h i n The S t a t e E s t a t e Tax
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Unempl oyment Insurance Tax
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PROBLEM
CRITERIA
POSITIVE CHARACTERISTICS
POSITIVE EXAMPLES NEGATIVE LXAMPLES
Tax Burden Borne B Individuals y Should Be A f f o r d Able From Current CashFlowWithout Undue Hardship Tax Burden Borne F a i r And Should By I n d i v i d u a l s Not Become Too With Common - Great A Burden To - Circumstances The I n d i v i d u a l Should Be Re1a t i v e l y Taxpayer Equ iv a l e n t Assuming That Taxes Are Affordabl e Taxpayers Recei vi n g More Services Should Be Taxed A t Higher Levels
Individual Income Tax
II
I
-
Property Tax
C. .l
I
a
Social Equity
Taxes Whi ch Are U n f a i r Or Unaffordable To The I n d i v i d u a l Taxpayer
Individual Income Tax
-
School D i s t r i c t Property Tax
-
Fuel Tax Individual Income Tax
SECTION THREE
TAX BURDEN AND RELIANCE
INTRODUCTION State and local governments i n the U.S. finance the vast majority of t h e i r expenditures by taxation and d i r e c t charges imposed on citizens and businesses. Each s t a t e , moreover, fashions i t s unique taxation system within guide1 ines that are establ ished by i t s social , pol i t i c a l , and economic i n s t i t u tions. These boundaries consist of: (1 ) the conditions ( i .e. economic, political and social) under which particular types of taxes may be imposed and ( 2 ) the goals and objectives t h a t the overall tax system must meet. As a result of these influences, s t a t e s come t o rely upon certain tax sources to a greater or lesser extent i n the generation of revenue. Furthermore, i t i s the nature and mix of taxes imposed within each s t a t e that establish the final tax burdens borne by particular family and income groups. This chapter will compare the tax re1 iance of own source revenues of s t a t e and local governments f o r the contiguous block of eleven western s t a t e s and examine the changes in the average per capita tax burden between FY 1966-67 and FY 1976-77. Average family tax burdens of income, property and sales tax will also be examined.
A.
COMPARISON OF TAX BURDEN AND RELIANCE OF ELEVEN W S E N STATES ET R
In t h i s section, s t a t e and local taxation i n the eleven western s t a t e s will be analyzed to determine the incidence, o r burden of taxation on individuals, and the extent t o which the various s t a t e and local governments are dependent on particular taxes f o r revenue.
1.
0
TAX BURDEN
Economists usual ly distinguish between the statutory incidence of taxation and the economic incidence of taxation. Statutory incidence refers t o the legal l i a b i l i t y f o r payment of a particular tax, and i s usually of primary i n t e r e s t t o government o f f i c i a l s who must collect the taxes and the firms who must pay them. However, once a tax i s enacted, taxpayers will attempt t o transfer or s h i f t the burden of the tax onto others. A tax on business, f o r example, may be shifted onto consumers through higher prices. Business taxes may also be borne, i n part, by the factors of production through lower wages paid t o workers or reduced dividends t o shareholders. The final burden of a tax a f t e r a l l shifting has taken place i s called the economic incidence of taxation. Ultimately, the economic incidence of a l l taxes r e s t s with individual s i n t h e i r capacity as taxpayers, consumers, workers and shareholders. This i s i l l u s t r a t e d in Figure 111-1. The individual i s confronted w i t h the prospect of paying those d i r e c t taxes f o r which he i s legally responsible and the indirect taxes which are ultimately shifted onto him. Whil e d i r e c t taxes are re1 atively easy t o compute or ascertain, indirect taxes are "hidden" and t h e i r computation i s highly uncertain. The final incidence of indirect taxes i s d i f f i c u l t t o determine because the extent of tax shifting t o individuals i s dependent upon a number of factors, including; the nature of demand and supply f o r the commodity being taxed, how much of the product i s consumed locally and how much i s exported outside the s t a t e , and the type of tax imposed. I t i s , therefore, not surprising t h a t data do not e x i s t t h a t detail comparisons of the economic incidence of taxation among s t a t e s and among taxpayer classes. Nevertheless, there are several sources of information available that will provide genera1 insight into the incidence of d i r e c t and indirect taxation among states.
Figure 111-1
THE BURDEN OF TAXATION
property tax
)BUSINESSES
C
-
t
,
r
increase$. REDUCE costs WAGES
,
PF
STATUTORY INCIDENCE TAXES
1
costs
DIVIDENDS
property taxes
property tax
>.
s
HOUSEHOLDS
.
In t h i s section, two types of data are used t o analyze and compare tax burdens i n the eleven western states. The f i r s t data are taken from the Census Bureau publ ication , "Governmental Finances. " The data are per capita own souce revenue collections by tax source. These data show the average per capita tax burden of d i r e c t and indirect taxes f o r each of the eleven states. They do not, however, provide information about how the taxes impact family and income groups, nor do they account for taxes that might be exported t o residents and businesses located in other states. The second data series describes the tax burdens of particular family and income groups resulting from three d i r e c t taxes--individual income, sales and property taxes. These data are taken from several detailed tax burden studies prepared by researchers over the past several years.
a
a. Combined State and Local Per Capita Own Source Revenue Table 111-1 shows combined s t a t e and local per capita own source general revenue collections in 1967 and 1977 f o r the eleven western s t a t e s . The data were taken from U.S. Census Bureau publ ications of s t a t e and local government finances i n each of the study years.* Own source genera1 revenue as defined by the Census Bureau includes a l l revenue of s t a t e and local governments excl usive of intergovernmental transfers, u t i 1i ty revenue, 1iquor stores revenue, and insurance t r u s t revenue. The figures presented in Table 111-1 a1 low comparison of changes in per capita revenues i n both current dollars and constant 1967 dollars. B examining y the change i n revenues expressed in current do1 l a r s , i t is possible to gain insight into the absolute magnitude of changes in per capita revenues that occurred during the period. The sources of the change i n per capita revenue include both real growth and inflationary growth. Real growth refers t o the increase in revenues due t o increases in population, increases in economic productivity , and government changes in tax rates and bases. Inflationary growth i s the r e s u l t of the general increase of prices of goods and services. B removing the inflationary e f f e c t s from the change in per capita income, y i t i s possible t o show the "real " growth i n tax revenues. In removing the effects of inflation, the 1977 per capita figures have been deflated by the amount of the increase, between 1967 and 1977, of the s t a t e and local
0
*Sources: U,S.Dept. of Commerce, Bureau of the Census, 1977 Census of Governments; Government Finances; Compendium of Government Finances, No. 5, U.S.G.P.O., 1969. U.S. Dept- of h ' m e r c e , Bureau of the Census, Governmental Finances in 1967-77, U.S.G.P.0. , 1978. "
TIT
e
Table 111-1 Per C a p i t a Own Source General Revenue Per C a p i t a Own Source General Revenue 1977 Current Do1 l a r s $1,032 1,033 1,320 1,093 830 1,006 1,219 952 7 2 6 11 8 3 9 1977 Constant 1967 Do1 l a r s 51 8 51 9 663 549 41 7 505 61 2 478 Average Annual Rate o f Change 1967-77 Current Do1 l a r s 10.4% 9.8 10.3 9.5 8.2 10.0 9.3 1967-77 Constant 1967 Do1 l a r s 3.0% 2.5 2.9 2.2 1 .O 2.7 2.0 5.8
State United States Arizona Cal i f o r n i a Colorado Idaho Montana Nevada
1967 $385 406 496 440 378 388 503 393
1977 Rank (Western U.S.)
@
NewMexico Oregon Utah Washington Wyomi ng Western S t a t e Average* *Weighted Average Sources:
9.2
468 499
1,121 1,766
4 1
563 887
9.1 13.5
4.6 5.9
469
1,208
U.S. Department o f Commerce, Bureau o f t h e Census, 1967 Census o f Governments: Compendi um o f Government Finances, No. 5, U.S. G.P.O. , 1969 U.S. Department o f Commerce, Bureau o f t h e Census, Governmental Finances i n 1976-77, U.S.G.P.O., 1978
government purchases index of the GNP imp1 i c i t price deflator,* In t h i s way, 1977 per capita revenues can be expressed in terms of equivalent 1967 do1 l a r s . Major findings from examination of Table 111-1 are as follows: 'The average annual r a t e of increase of per capita s t a t e and local own source general revenue between 1967 and 1977 i n Arizona was 9.8% in current do1 l a r s and 2.5% in constant 1967 do1 l a r s . 'The average annual rate of real increase of per capita own source general revenue i n Arizona was below t h a t of the e n t i r e U.S. (3.0%) and t h a t of the western s t a t e s as a whole (2.6%). '1 977 per capita revenue in Arizona was $1,033--almost identical t o the U.S. average of $1,032, b u t considerably lower than the western states average of $1,208. 'In 1977, Arizona ranked seventh in per capita own source general revenue among the eleven western states.
A more detailed account of own source general revenue in Arizona i s presented i n FiguresIII-2 and 111-3. Figure 111-2 i s a bar graph showing changes in the components of combined s t a t e and local per capita own source general revenue, expressed i n current do1 lars. Figure 111-2 indicates t h a t taxes account for $887 or 86% of total own source general revenue. Figure 111-2 a1 so shows t h a t per capita tax collections more than doubled during the ten-year period. In relative terms, income taxes have grown a t a f a s t e r pace than other types of taxes. The rapid growth i n per capita income tax collections i s a reflection of the s t a t e ' s increasfng, or progressive, income tax r a t e schedule. Since the tax i s levied a t progressively higher rates on income, as income increases, s taxpayers are pushed into higher tax brackets. A a r e s u l t , income tax collections grow a t a f a s t e r r a t e than per capita income and collections from other types of taxes. Figure 111-3 presents similar information f o r Arizona a f t e r accounting f o r inflation. A shown in the figure, once inflation i s removed, the resulting s "real " increase in per capita taxes i s substantially lower. The reader i s referred t o Appendix 111-1 where similar graphs can be found f o r the other ten western states.
@
*U.S. Dept. of Commerce, Bureau of Economic Analysis, Survey of Current Business, January 1976.
Figure 111-2
PER CAPITA OOH SOURCE REWNUK STRTE M1D LOCAL Q W R W l E N T S
MIZOW 1967 US. 1977 CURRENT 88
1W7
DOLLARS
TOTAL PERCENT 1077 INCREASE
AVERAGE PERCENT INCREASE
M(HUAL-
I
1600
cm-n )
164.33
TOTAL (YWEIIL REUWL
400.30 3eo.s~ 146.B4 77.91 86.80
1033.49 317.03 S4.07 i6s.s-1 8 8
I
1
TOTAL T ~ X E S PROPERlV TRXEE IHCOPIL t M S
AISC. REMHIES
S A U S TAWS
8 ~ 6 . ~ 1 tn.91 117.38 138.0s 560. w 140.94
ia.ea
ra.os ~8.60
9.19
9.94 8.07
QENEAAL REUEHUE
TOYAL 7AXE8
PROPERN YAXES
SALES TAXES
INCOnE TAXES
~ISC. REIRIUJf
Figure 111-3
PER CAPITA OUN SOURCE REUtNUE
SThtE M D LOCAL QOUERNNLNt0 CIRIZONA (An17 US. 1977 CONSTANT ID67 8
1917
TOTAL QLNERnL maIW TOTAL TAKCS P R O P W Y TWOS INCORE ThXES SALES TAXES AISC. REMIIUCS
TOTlK PER1977 INCREASE (67-77)
MIERAQE
(V1NUAL
PERCENT IWREASE
400.36
380 60 146.14 77.91 t9.w
610.88 41S.17 169.83 138.93 63.03 103.91
97.74
a.48
'-
86.86
nas.sr
aO.S4 9.18 70.P4
81 .@8
a.68 .I1 ~i.4a 1r.s. 1.B3
-
I
QEMRAL #VCNUE TOTAL PROPERTY TAXES SALES TM(E6 INCORE TMS IIISC. RLMW
b. Direct Tax Burden of Families. An i n t e r e s t i n g comparison of s t a t e taxation structures i s t h a t of the average tax burden of d i r e c t taxes o r s t a t u t o r y tax burdens confronting families i n each s t a t e . Although d i r e c t taxes comprise only a portion of the t o t a l tax burden of individuals, they a r e certainly the most v i s i b l e sources of taxation and provoke the g r e a t e s t taxpayer concern. Several studies have been reported i n recent years t h a t estimate the d i r e c t tax burden of individuals residing i n d i f f e r e n t s t a t e s . In t h i s section, the r e s u l t s of two such studies a r e presented. One study, undertaken by Dr. Stephen E. Lile f o r the Kentucky Department of Revenue*, computes 1976 payments of income t a x , s a l e s t a x , property tax, motor vehicle tax and c i g a r e t t e taxes f o r families based on s i x classes of adjusted gross income. The second study examined i n t h i s section was prepared by the Minnesota Department of Revenue and reports income tax 1i a b i l i t i e s f o r 23 income l e v e l s and four family types. Table 111-2, taken from the L i l e study, presents estimated tax l i a b i l i t i e s f o r the eleven western s t a t e s by type of tax f o r s i x income levels. The estimates are based on taxes i n e f f e c t during 1976 w i t h the exception of s t a t e income taxes which a r e estimated f o r 1977. Each family income group i s assumed t o consist of four family members w i t h one wage earner. Income i s assumed t o come exclusively from wages and salary. Each family is assumed t o reside i n the s t a t e ' s l a r g e s t c i t y . Based on the figures i n Table 111-2, Arizona ranks f i r s t among the eleven s t a t e s in t o t a l family tax burden f o r the $7,500 and $10,000 income brackets; second a t the $15,000 income level ; t h i r d a t the $17,500 level ; fourth a t the $25,000 l e v e l ; and f i f t h a t the $50,000 income level. As a matter of comparison, the S t a t e of Oregon ranks eleventh a t t h e $7,500 income level and second a t t h e $50,000 level. California ranks second a t the $7,500 income level and f i r s t a t the $50,000 income level. The s t a t e s of Nevada, Washington and Wyoming do not impose an income tax, while Oregon and Montana do not levy s a l e s taxes. Nevada, Washington and Wyoming rank low in t o t a l tax l i a b i l i t y a t a l l s i x income levels. Montana's lack of a s a l e s tax is o f f s e t w i t h i t s income tax, so t h a t i n terms of t o t a l "Stephen E. L i l e , I n t e r s t a t e Comparisons of Family Tax Burdens w i t h Residence Location Based on Each S t a t e ' s Largest City , Kentucky Department of Revenue, June 30, 1978, 56 pp.
TABLE 111-2 TOTAL DIRECT TAX BURDENS ELEVEN WESTERN STATES
$7,500 A d j u s t e d Gross Income
I ncsme Tax
Arizona Cal if o r n i a Col orado Idaho Montana Nevada New Mexico Oregon Utah Washi ngton Wyomi ng
Salgs Tax
Property Tax $296 460 269 308 271 265 269 109 184 178 243
Other, Taxes $224 193 175 158 207 164 145 128 200 248 196
Total $798 7 91 71 8 568 629 545 457 41 3 673 609 555
Rank 1 2
T o t a l Taxes As % o f Adjusted Gross Income
$ 90
4 56
3
7 5 9
-3
151
WesterndStates Average
$57
$157
$259
$1 85
$61 4
Source:
Stephen E. L i l e , " I n t e r s t a t e Comparison of F a m i l y Tax Burdens w i t h Residence L o c a t i o n Based on Each S t a t e ' s L a r g e s t City," Kentucky Department o f Revenue, June 1978.
TABLE 111-2 TOTAL DIRECT TAX BURDENS ELEVEN WESTERN STATES
$10,000 Adjusted Gross Income T o t a l Taxes As % o f Adjusted Gross Income
Inceme Tax Arizona California Colorado Idaho Montana Nevada $1 61 0 138 102 279
Sal gs Tax $219 165 256 123
Property Tax $350 545 31 9 364 322 31 4 31 9 297 21 8 21 1 288
Other Taxes $224 193 175 158 207 164 145 128 200 248 196
Total $954 903 888 747 808 61 3 573 724 833 675 620
Rank
135 200
- 91
299 201
10 11
6.13 5.73 7.24 8.33 6.75 6.20
@
New Mexi co Oregon Utah Washington Wyomi ng
21 4 21 6 136
7
4 8 9
-
WesterndStates Average $136
$185
$293
$185
$758
Source:
Stephen E. L i l e , " I n t e r s t a t e Comparison o f Family Tax Burdens w i t h Residence L o c a t i o n Based on Each S t a t e ' s L a r g e s t City," Kentucky Department o f Revenue, June 1978.
TABLE 111-2 TOTAL DIRECT TAX BURDENS ELEVEN WESTERN STATES
$1 5,000 Adjusted Gross Income T o t a l Taxes As % o f Adjusted GrossIncome
Incame Tax Arizona California Col orado Idaho Montana Nevada New Mexi co Oregon Utah Washington Wyomi ng WesterndStates Average $220
Salgs Tax
Property Tax
Otherc Taxes
Total
Rank
$233
$445
$205
$980
Source:
Stephen E. L i l e , " I n t e r s t a t e Comparison o f Family Tax Burdens w i t h Residence L o c a t i o n Based on Each S t a t e ' s Largest C i t y , " Kentucky Department o f Revenue, June 1978.
TABLE 111-2 TOTAL DIRECT TAX BURDENS ELEVEN WESTERN STATES
$1 7,500 Adjusted Gross Income T o t a l Taxes As % o f Adjusted GrossIncome 7.59% 8.62 7.33 7.39 6.59 4.61 5.56 8.73 7.24 4.88 4.59
Incerne Tax
Salgs Tax $296 248 350 170
Property Tax $511 7 95 465 532 46 9 458 465 81 9 318 308 420
Otherc Taxes $224 193 175 158 207 164 145 128 200 248 196
Total $1,329 1,509 1,283 1,294 1,153 806 973 1,528 1,267 854 803
Rank
Arizona California Colorado Idaho Montana Nevada New Mexico Oregon Utah Was h i ngton Wyomi ng
$298 273 2 93 434 477
3
2 5 4 7 10 8 1 6 9 11
184 274
89 581 456
293 2 98 187
-
WesterndStates Average $363
$256
$505
$1 85
$1,164
6.65%
Source:
Stephen E. L i l e , " I n t e r s t a t e Comparison o f Family Tax Burdens w i t h Residence L o c a t i o n Based on Each S t a t e ' s L a r g e s t City," Kentucky Department o f Revenue, June 1978.
TABLE 111-2 TOTAL DIRECT TAX BURDENS ELEVEN WESTERN STATES
$25,000 Adjusted Gross Income T o t a l Taxes % o f Adjusted Gross Income 7.38% 8.58 7.34
Incpe Tax Arizona California Colorado Idaho Montana Nevada New Mexi co Oregon Utah Was h i ngton Wyomi ng $61 6 636 653
Salgs Tax $278 2 95 205
Property Tax
Other Taxes $294 193 380
Total $1,845 2,145 1,836
Rank
4
2
5
$
657 1,021 598
355 1,066 841
21 7 322
589 588 1,053 40 9 3 96 540
164 145 128 200 248
970 1,420 2,247 1,794 996 956
11
*
3.88 5.68 8.99 7.18 3.98 3.82
8
1 6 9 10
344 352 220
-
1 96
WesterndStates Average $748
$270
$650
$21 0
$1,625
Source:
Stephen E. L i l e , " I n t e r s t a t e Comparison o f Family Tax Burdens w i t h Residence L o c a t i o n Based on Each S t a t e ' s Largest City," Kentucky Department of Revenue, June 1978.
TABLE 111-2 TOTAL DIRECT TAX BURDENS ELEVEN WESTERN STATES
$50,000 Adjusted Gross Income T o t a l Taxes As % o f Adjusted Gross Income
Incsme Tax Arizona California Colorado Idaho Montana Nevada New Mexico Oregon Utah Washi ngton Wyomi ng WesterndStates Average $2,255 $1,712 2,818 1,787 2,574 2,246
Sal gs Tax $405 429 2 98 2 91
Property Tax $1,095 1,702 997 1,140 1,005 982 987 1,755 682 660 900
Other, Taxes
Total $3,537 5,142 3,555 4,163 3,458 1,461 3,419 4,986 3,371 1,420 1,416
Rank 5 1 4 3 6 9 7 2 8 10 11
$416
$1,083
$221
$3,265
Source:
Stephen E. L i l e , " I n t e r s t a t e Comparison o f Family Tax Burdens w i t h Residence L o c a t i o n Based on Each S t a t e ' s L a r g e s t City," Kentucky Department o f Revenue, June 1978.
a ~ o m b i n e ds t a t e and l o c a l income t a x e s - income t a x e s a r e based on 1977. b ~ o m b i n e ds t a t e and l o c a l s a l e s taxes. C I n c l udes motor v e h i c l e t a x e s and c i g a r e t t e e x c i s e t a x . dunweighted average based o n l y on t h o s e s t a t e s t h a t l e v y a p a r t i c u l a r t a x . s t a t e s t h a t do n o t l e v y a t a x a r e excluded from average.
Those
.
1 i a b i l i t y , Montana ranks about the middle of the eleven s t a t e s . Oregon's highly progressive income tax is the highest of the eleven s t a t e s a t the $25,000 and $50,000 income levels. A a r e s u l t , even though Oregon does s not impose s a l e s taxes, i t ranks f i r s t and second i n terms of t o t a l l i a b i l i t y a t the $25,000 and $50,000 income levels. Further examination of t o t a l tax 1i a b i l i t i e s i n Arizona indicates t h a t t o t a l l i a b i l i t y f a l l s a s a percentage of income, a s income increases. This relationship i s shown i n the t a b l e below. Arizona Total Direct Taxes
Income $ 7,500 10.000
Total Tax Liabil i ty $ 798 954
Rank Among 11 Western S t a t e s 1 1
Total Tax L i a b i l i t y as Percent of Income 10.6% 9.5
Figure 111-4 graphically displays the tax b i t e a s a percentage of family income f o r f i v e of the eleven western s t a t e s . Three of the s t a t e s , Oregon, California and New Mexico have r e l a t i v e l y progressive tax systems. In these s t a t e s ', t a x 1i a b i l i t y as a percentage of income increases, a s family income increases. In Arizona and Nevada, taxes a r e somewhat regressive, a s tax 1i a b i l i t y declines a s a percentage of family income. For the western s t a t e s region a s a whole, taxes a r e regressive up t o $15,000 of family income, and re1 a t i v e l y proportional between $1 5,000 and $50,000. Property Taxes. According t o the L i l e study, Arizona ranks t h i r d among the eleven western s t a t e s i n payments of property taxes, a t the $7,500 and $10,000 income l e v e l s , and fourth f o r the four upper income brackets. The study a l s o indicates t h a t the property tax diminishes a s a percentage of income a s income increases. I t should be noted, however, t h a t the property tax l i a b i l i t y estimates provided i n the Lile study do not account f o r t h e homeowner property t a x reduction program i n Arizona. During 1976, t h e tax year considered i n the
F i g u r e 111-4
MAJOR SPATE AND LOCAL TAXES 4S A PERCENTAGE OF FRNILV INCORE SELECTED SThtES
PERCENT OF FMILV INCONE PhID I N T X E S
8.88
Lil e study, the rebate program i n Arizona reduced residential property taxes an average of 14% 011 a statewide basis. A though the omission of the homeowners' 1 rebate from the Lile study results in an overestimation of the total amount of property taxes paid by a family in Arizona, i t does not a l t e r the conclusion that the property tax may be regressive w i t h respect t o income. Property Tax Liability Rank Among 11 Western States Property Tax Liabil i t y as Percent of Income
a
Income
Income Taxes According t o the Lile study, the income tax l i a b i l i t y i n Arizona ranks 1o among the western s t a t e s t h a t impose an income tax. w Table 111-3 was constructed from the data i n TableIII-2, and shows effective income tax rates f o r the eight western s t a t e s that levy an income tax. The Table also displays a U.S. income tax l i a b i l i t y index f o r each s t a t e . The l i a b i l i t y index indicates the extent t o which a particular s t a t e ' s income tax 1iabil i t y i s greater or l e s s than the average of a l l s t a t e s in the U.S. that impose an income tax. The index i s calculated by dividing the tax l i a b i l i t y of each s t a t e , a t each income level by the average U.S. l i a b i l i t y . If the resulting number i s greater than one, t h i s indicates t h a t the particular s t a t e ' s l i a b i l i t y i s greater than the average of a l l s t a t e s . An index number less than one indicates that the s t a t e l i a b i l i t y i s l e s s than the U.S. average. From the figures i n Table 111-3, i t can be seen t h a t the Arizona income tax takes an increasing percentage of family income a t a l l income levels except $15,000. T h i s i s evidenced by the effective tax rates* calculated f o r each income level. Examination of the l i a b i l i t y index a t each income level also indicates t h a t the Arizona income tax i s below the U.S. average f o r a l l income groups examined. *The effective tax r a t e i s computed by dividing the s t a t e income tax l i a b i l i t y f o r each s t a t e by family income.
e
0
Table 111-3 EFFECTIVE 1977 INCOME TAX RATES ELEVEN WESTERN STATES
$7,500 Fami l y Income State Arizona Cal i f o r n i a Colorado Idaho Montana New Mexico Oregon Z Utah
1
-I -
$1 0,000 Fami l y Income Effective Tax Rate U.S. Liabil i t y Index
$1 5,000 Family Income Effective Tax Rate U.S. Liabil i t y
Effective Tax Rate
U.S. Liabil i t y Index
CC)
$17,500 Family Income State Arizona California Colorado Idaho Montana New Mexico Oregon Utah Effective Tax Rate U.S. Liabi 1i t y Index
$25,000 Family Income Effective Tax Rate U.S. L i abi 1i t y Index
$50,000 Family Income Effective Tax Rate U.S. Liability
.
Similar conclusions about the income tax can be derived from a study prepared by the Minnesota Department of Revenue. The Minnesota study estimated income tax l i a b i l i t i e s f o r tax year 1977 f o r twenty-three income levels and four f i l i n g types.* Data from the Minnesota study a r e summarized in Table 111-4 f o r three of the four f i l i n g classes defined i n the study. In analyzing the data from t h e Minnesota study the following conclusions can be drawn: "For the two married f i l i n g types, t h e e f f e c t i v e Arizona Tax r a t e increases w i t h respect t o gross income up t o $50,000 gross income. For the two highest income brackets, the r a t e declines. For the single f i l e r , the e f f e c t i v e tax r a t e increases up t o $30,000 and declines thereafter. 'For the s i n g l e tax f i l e r , the Arizona income t a x l i a b i l i t y i s greater than the average of a l l s t a t e s up t o the $20,000 income l e v e l , and below the average of a l l s t a t e s between $20,000 and $50,000 o f family income. 'For the single tax f i l e r , the Arizona income tax l i a b i l i t y i s below the western s t a t e s ' average a t a l l income levels. 'For the married f i l e r s , the Arizona tax l i a b i l i t y i s equal t o o r below t h a t of a l l the western s t a t e s except i n one instance--married w i t h two wage earners, and married with one wage earner earning $6,000 gross income.
@
'Comparing Arizona income tax 1 i a b i l i t y t o average U.S. income tax 1 i a b i l i t y , the Arizona tax l i a b i l i t y index i s above 1 f o r a l l f i l i n g types a t the $6,000 income bracket. However, the index f a l l s t o between .69 and .74 a t the $100,000 bracket. T h i s i s an indication t h a t t h e Arizona income tax is f a r l e s s progressive than the U.S. average, and especially so a t the highest income bracket. T X RELIANCE A As mentioned previously, a s t a t e ' s taxation s t r u c t u r e i s shaped by many f a c t o r s . Economic, pol i t i c a l and social i n f r a s t r u c t u r e a1 1 play v i t a l roles i n determining the mix and types of taxes imposed i n a s t a t e . a. Aggregate S t a t e and Local Reliance Figures 111-5 and 111-6 present the d i s t r i b u t i o n of own source general revenue i n 1967 and 1977 by major level of government f o r t h e S t a t e of Arizona. The d i s t r i b u t i o n c h a r t i n the upper r i g h t hand portion of Figures 111-5 and 111-6 shows combined s t a t e and local revenues, while the two d i s t r i b u t i o n charts a t the bottom of each f i g u r e show the s t a t e and local government revenues separately.
2.
*Minnesota Department of Revenue Research Off i c e , " Comparison of Individual A Income Tax L i a b i l i t i e s : Tax Year 1977," 1978.
a-
:
Table 111-4 Effective Income Tax Rates Arizona 1977 Married, Two Wage Earners - 75/25 Earnings Spl i t
Single Fi 1e r $6,000 Effective tax r a t e U.S. Index Western S t a t e s Index $1 2,000 Effective tax r a t e U.S. Index Western S t a t e s Index $1 5,000 Effective tax r a t e U.S. Index Western S t a t e s Index $20,000 Effective t a x r a t e s U.S. Index Western S t a t e s Index $30,000 Effective tax r a t e U.S. Index Western S t a t e s Index $50,000 Effective tax r a t e U.S. Index Western S t a t e s Index $70,000 Effective Tax Rate U.S. Index Western S t a t e s Index 3.66% .74 .72 3.57% .69 .69
Married, One Waae Earner
$1 00,000 Effective tax r a t e U.S. Index Western S t a t e s Index
m
Source:
Minnesota Department of Revenue, Research Off i c e , " Comparison of A Individual Income Tax L i a b i l i t i e s : Tax Year 1977, " 1978.
From Figures 111-5 and 111-6, the following general conclusions can be drawn : 'Between 1967 and 1977 dependence on the property tax has declined somewhat f o r s t a t e and local govenments combined--36% t o 31%. Dependence on the property tax has decreased a t the s t a t e level--from 12% t o 10% and a t the local level--66% t o 59%. 'Dependence on t h e income tax has increased a t the s t a t e level from 7% i n 1967 t o 18% i n 1977. This resulted i n a change i n dependence f o r combined s t a t e and local governments from 4% i n 1967 t o 10% in 1977. 'Dependence on s a l e s taxes and other gross receipts taxes has increased between 1967 and 1977 f o r combined s t a t e and local governments--from 19%t o 26%.
a
For a comparison of 1977 distribution of own source genera1 revenue f o r the ten other western s t a t e s , the reader i s referred t o Appendix 111-2. b. S t a t e , Counties and Municipalities i n Arizona Distribution of revenue collections of t h e s t a t e , counties and municipalities i n Arizona i s shown i n greater d e t a i l i n Figures 111-7, 111-8 and 111-9. In Figure 111-7, 1977-78 revenue collections of the s t a t e a r e shown. The data were derived from several sources including: 1977-78 Annual Financial Report, Department of Administration, Finance Division, p. 4; 1977-78 Annual Report of the Arizona Department of Revenue; 1978 S t a t e of Arizona Tax Handbook; Department records of the Arizona Department of Transportation; Department records of the Arizona Department of Administration. From Figure 111-7, the s t a t e derives over 33% of i t s revenue from combined s a l e s and use taxes. Almost 17%of the s t a t e ' s revenue is generated by individual and corporate income taxes. The genera1 property tax accounts f o r 6 . 3 % of t o t a l revenuqand property taxes from a l l sources contributes about 8%. Aid from the federal government accounts f o r 16.9%. Figure 111-8 shows revenue sources f o r a l l Arizona counties and f o r Maricopa County in 1975-76. In aggregate, counties r e l y on the property tax f o r about 47% of t o t a l general revenue. S t a t e shared revenues and s t a t e t r a n s f e r s account f o r 27% of t o t a l county general revenue, while the federal government supplies over 10% of t o t a l county revenue i n Arizona. The distribution of revenue collections i n Maricopa County shown i n the r i g h t pie c h a r t of Figure 111-8 i s similar t o t h a t of a l l counties.
0
*
.
In Figure 111-9, distribution of c i t y revenue collections in 1975-76 i s presented. The l e f t hand chart shows revenue collections for a l l Arizona c i t i e s , while the right hand chart shows the distribution of collections for the City of Phoenix. On the average, Arizona c i t i e s derive 10.8% of total general revenue from property taxes; 20.5% from revenue transfers from the s t a t e ; 14.2% from revenue transfers from the federal government; 15.6% from municipality operated util i t i e s ; and 37.2% from other taxes, charges and m i scel 1aneous revenues. The City of Phoenix derives 14%of i t s total general revenue from property taxes. Phoenix also i s more dependent on federal aid (17.4%) than are other c i t i e s i n the state. Phoenix depends on general sales taxes f o r 13.14% of i t s revenues and selective sales taxes f o r another 6.4%.
C
S F
S
. F
C
. r
000
--,--7
-7-7 .F
EEE
-J
45
urn
f
ICE
F i g u r e 111-7
SOURCES OF ARIZONA STATE REVENUE BEFORE DISTRIBUTION TO LOCAL GOVERNRENTS 1977-78
I
I
h
rn
GENERAL PROPERW 'Ims
E
F
C
H
OTHER TAKES LICENSES, FEES MID PERMITS
FEDERAL AID
SALES AND SERVICES RISCELUWEOUS
D
SALES hND USE
TnXES
I
TOTAL REVENUE
~1,7i?5,466,329
SOURCESI 1977-78 ANNUAL FINANCIAL REPORT, DEPORTRENT OF ADfl INISTRRTION, F INANCE DIVISION, OCTOBER 19780 P. 4 . " 1977-78 ONNUAL REPORT OF THE 6RXZONO DEPhRTRENT OF REVENUE, 1978 STATE OF ARIZONA TAX HANDBOOK) ApfZONA DEPARTRENT OF TRANSPORTATION, DEPT. RECORDS1 ARIZONA DEPARTRENT OF ADHINISTRATIQNr DEW. RECORDS*
COUNTY REVENUE SOURCES ARIZONA COUNTIES 1975-76
ALL COUNTIES
TOTAL REVENUE1 S388r588, @@@
LOCAL W E R M E N T S STATE QOVERNMEN?
LOCAL COUERNIlENTS STATE CovERWENT
SOURCES1 COVERNPlENTAL f INfiNCES I N 1975-76, U* S. BUREAU OF THE CENSUS, GOVERNRENTS OIUISX OH, KPtEnBER 1977, P 3 . .6 COUNTY GOVERNRENT FINANCES I N 1975-76, U96. BUREN OF THE CENSUS, GOWRWPIEttTS DIVISION, OCTOBER 1977, P.10.
Figure 111-9
nUNICIPAL REVENUE SOURCES ARIZONA C I T I E S 1975-76
CHARGES & RXSC.
RECIENUE
GENERAL SALES
PROPERW TAXES
GOVERNRENT
LOCAL O M R M E N T S STATE OOUERNRENT STATE GOVERNMENT
SOURCESI OOVERN.ENIf?L FlNhNCES I N 1975-76, U.S. BURERU OF THE CEf$5U$, GOVERNRENTS DIVISION. SEPTEflBER 1 9 A . p * 3 @ * NTIES81975-76, U.S. BUREAU OF THE CENSUS. LOCAL GOVERNRENT FINANCES I N SELECTED RETROPOLITAN BREGJ BOUERmEWtS DIUISIONo NOUEIIBER 1077. PaOB,
t
APPENDIX 111-1
PER CAPITA OWN SOURCE GENERAL REVENUE: 1967-1 9 7 7 I N CURRENT DOLLARS AND CONSTANT 1 9 6 7 DOLLARS WESTERN STATES
PER C M I t A OUH SOURCE RfUfNtE 6TClTf N t D LOCAL O O U E ~ N T S
ARIZOHCI 1967 us. CURRENT 88
ion
1067 DOLLARS
ID77
TOTAL PERCENT INCREA#
cm-n) ~ ~ c w ~ s c
0.91 8.@7 1a.or
AUERAW ANNUIIL PERCENT
I
TOTAL TAXES TWQ PROP~RW
1HCcm t A # S SALES t A # S RISC. RnENUEs
3aa.sa 146.84 77.01 1a.iro n.8~
~ 6 . ~ is7.01 1 317.@3 117 a38 w4.w a38.0~ s6e.m -.re 140.94
i6.m
aa.aa
0.10
OENERClL REUfNUf
TOTAL TRKLS
PROPERN TMES
MLES
TrU(E9
INCORE TRXES
MISC.
REUEWE
PER ChPITll O W SOURCE REUENUL SthTf
MD
LOChL OWERNRCNTS
MIZONll 1967 US. 1gW COWSThNt 1967 1
�Be7
TOTCIL QEWRM. REVMU
TOThL TAXES PRo4mv T W S INc(CORE thXES SALES TAXES
la77
TOtM MRRME PERCLWI (Y(ENIIL INCREhSE PrRcEMT (67-77 INCREhSE
4n.w 380.6e 146.84 n0 .1 16.a 96.86
L~O.U
419.17 1bO.83 138.63 63.@3 130 0.1
81.74 9-18 7e.84 981.96
aO.H
a4 .8 Z6 .P -88 5-40
18-58
nxsc.
WM~S
a1.a
1-03
QEnERAL REVENUE
TOTAL TAXES
PROPERTV TAXES
MIUS 1-6
INcOrsE TlUtES
IlIsc.
RCMM
PER W I T A OUI SOURCE REUENUE
stntf ~ M D LocnL
QOUERNRENTS
CALIFORN11) ID67 U8. 1977 CURRENT I .
\
lOC7
1977 1310.80 1088.W 4S7.M a.48
TOTLL PERUM
MRME MAL IWCRCA# PRCEMT (07-77) INCREME
TOTAL QEI(IERhL R E V E M
~ 0 t fh#b h~ PROPERW TWES IWCOIlt TA)(LS IhU6 T K S AE IIXSC. A Z ~ S
t
496.39 6 4 209.13 72-81 P I . a8 89.91
165.m
la.27 1a.39 8-16 12-84 84-81 9.19
4
8
m9 . 8
167.99 118.93 W.8@ 8O1.67
1U.17
ran
OENERRL REVENUE
TOTCIL 'TAXES
PROQERW TAMS
SRLES
INCOR
TAXES
TrSXES
MISC. RNENUE
PER CAPITA OUN SOURCE REWWUC STATE -A)(D LOCRt OOVLRtUENTS CMISOfWfh 1967 US. 1977 COHSTWT 1947
(1
1W7
mtn~ MMRAL m a m tornt tnxfs
PROPERW TAXES IWCW TAXES MLCSTAXES nrsc. REU~UJES
4m.m
'
LO77 INCREASE PERCENT (67-77 Iwcmns rra.rr 33.64 8.03
TOTAL PERCENT
MltRAOC WWnL
406.47 m.13 78.83
19.99
aa0.0~
11s.01
S~Q.DR tae.71
e6.u
%*.all
34.6s 99 .6 65.14 we.07 88.~7
30 .1
1. am am .
6.14
.ob
OEMML RE
TOTAL TMU
PROPERTV
SALES
INCONE
TAXES
TAXES
TAXES
IISC. REVEWE
PER c n p t t n OUN SOURCE REVEM)):
LThtE AND L O C N QOUERMPKNTS COLORiRDO 1967 US. 1 0 7 7 CURREIIT SO
1087
1977
TOTAL PERCENT INCREASE (67-77)
MlliRhM AWNUIIL PERCENT INcREnsE
PROPERtV TAXES INCOME tnms S ~ L E Stnxts WISC. REVENUES
tOMt TCIXES
QU(ERAL REVENUE
totn~
TAXES
PROPERTY TAXES
-LEO TIU(ES
IHCO~
RISC.
TAXES
REIKI(LIE
COLORID0 t 9 3 7 US. 1977 CONSTINT 1 0 6 7 8
r
10C7
tOtU a a E R n L REUmlE
~OTCILTMQS PROPLRtV T M S
R I S . REVErmLS
1877 I)(CRE&S PERCENT (67-77) I N C R E M t S8l 4.B 413.77 117.77 181 b.4 8.4 135.43 84.W M.60
-29 77.3Q.a
PntCOCl
TOW
CIUERCIQC:
rrnrrmrL
4M.16 343.14 m.38 a8 .6 3. 993.01
88 .4
S.92
1. 9 8 @3
snus t n a s
INCORE TMQS
.
1. wa
7.u 3.39
OEMRAL REVENUE
TOTAL TAXES
PROPERTV TI X E S
SALES TWLS
INCORE TWLS
RISC. REVCWUC:
PIER CATITA O;HJ SOURCE REVENVE
STATE IUU) LOCAL W R N I I E N T S M t A W 1967 US. 1977 CURRENT 8 I
8e8e
DOLLARS
tT Q M QOfWK RMlllE
1067
3 3e3.57
im ~ m n PERCENT s
(67-77)
Pmml
1SS.19
tsa.a4 118.75
A)(MYIL
fWC1KA#
144
TOWN. TUQS M R N TA)OES I C I E TAKES W OO s n u g TAXES
1. nu
=.a
JC1.76
OLHERAL
TOTAL
REUnuL
TAXES
PROPERTY TAXES
IWOM
TAXES
RISC. REVENUE
PER CAQlTn
OW)
SOURCE REVENUE
nnm M D I
LocnL
ooocmnts
RONTAM 1997 VS. 1977 CONSTMFT 1967 8
1
9
DOLLARS TOT~L QCMRAL
17 -
TOTAL PcRctnt
AUER6QE nnnunL
ww
388.30 303.67 170.04
34.68 84 74
TOTAL TAXES PROPERW T M S INCORE T M S SllLE6 TAMS IISC. R E W S
. I
1977 IHCRCISH 1 PERCENT (97-77 INCREASE E06.49 a.18 Re97 384.08 a6.W i81.70 P.39
6.S
+87
90.99 18e.m
161.64 4.0 06
10.89 3.m
PER cnpxtn
oun
SOURCE R r u t n w
#TAT AND LOCAL QOULRWMNTS NEUADC, 1967 US. la77 CONSThNt 1067 S
.
1367
TOtrrL OMERM. REwNuE TOTAL TAXES PROPmW 78 1WOIE t A # S
IY.*HIL 1977 INCREASE PERCENT (67-771 xneREn!x Ce1 l.6 481 4.5 134 4.6 1e6.64 14@ 6.l 81-18 19-79 C4.@7) 1e-34
87-53
(
TOthL PERCENT
WERACE
6W.93 374.1@ 195 4.6 188.U
58.70
1. 8 @ 1 .UZ ,431
7.H
SwEs T M 8 CIISC. RhUaULS
84 .6
REUENUE
TMES
TAXES
PER CbYlTA
OU((
SOURCE REUENUE
STATE CY(D LOCAL QWERWEI(T$
mu nrxrco
roc7 us, CURRENT L I
row
1947
TOTAL -RAL
REUEM
1977
TOTAL PERCENT XNCRElrSE
(67-77
MIERAOE WAL MRCENT lWCREASE
33e 9.
81@. 99
~ ~ 1 . 9 3~ 4 i . w C84.64 113.46 m4.m 47.14 3E7.W 130.47 86.9% 187.67 307.68 197.63
#.a4 8.71 6.40 11.14 16-09 10.36
TOTlL T X S AE
PAOMRTY TAXES INCORE T M S
IIISC. LKUENUES
MLES TWS
01 .OB 77.m 11.67 1m.U
.
OEHERAL
REVENUE
TOTAL TAXES
PROPERN TAXES
%LEI
TAXES
INCOllL T~~XES
RlbC.
R mU E tE
PER CIIPITA O W SOURCI R E V E W
s t n n MD
L O C ~ LMR~CONT~
B
W REXICO 1867 UO* 1977
CONSTNIT 1 7 -
lOCI
10th~ -AL
REUEHIJE
334 9.8
m0 .0 61. a .
T O M L TAXES PROPERTV TAXES INCOM TnXES SALES TAXES I I S C . REVLnrs
n.97 11.67 188.33
1W77 INCREASE PERCENT (67-71) INCRliW 478.18 2.3 15 19 .7 313.68 16.15 14 .7 66-90 (6.62) ( -68) 112.66 44.49 37 .s e3.61 104.73 74 .3 114.44 34.42 30. .0
TOTAL PERCENT
MPWL
AuERnGE
-7-4
I
~18~. REVEM
WiIERAL REVENUE
TOTAL TAXES
PROPERTY TRXLS
SALES TMS
zncon~ TAXES
PER C A P I T l OUN SOURCE REUENUE STATE AND LOCAL QOVERNRENTS OREGON 1967 US. 1077 CuaRtnt 88
*
19C1
ID71 1093.56 793.10 353.@3 m4.n
U
TOTAL PERCENT INCREME ($7-771
WERAGE mmML KRCENt
INmECL!x 10.@9
9.66
totw
UNERCIL
m
418.M 31S.m 149.0a 76.69
161.W
TOTAL TAXES P R O P E W TA#S IWOIIE 18 m a s TMS RISC. RLUC)(ULS
1st. 17
135.47 asa.31
lB3.a
8.04
io.ci
tOR.%6
11.38
QEtLRAL REVENUE
TOTAL
TMS
PROPCRN TA#S
INCORE
TAXES
RIUC. IWXIaJE
PER CAPITA OUN SOURCE REVENUE STATE AND LOCCIL OOUERNHENTS OREGON 1967 US. 1977 CONSTANT 1967 S
1917
1977
PERCENT LINNuat INCRELISL PERCENT (47-77) lNCREASI
tovnL
nmnw
I
0
GENERAL REVENUE TOTAL TAXES PROPERTV TAXES INCORE TAXES
HISC* REVENUE
PER cnpxtn OUN SOURCE REUENUE
SThTE hf4D LOCnL QOUERNnENTS UTAH 1917 US. 197t CURRENT 88
r
1967
~ 0 t OIEMRIIL h~
(KKW
'
1977
We88
TOThL PCRCENT
INCRCAM
(67-77
)
AVERhOL nnnunL PERCENT INCRLLSE
371 .La ~98.158 181.0 61.91 31.96 79 .U
132.49 1aa.w 67.64 P30.97 87e.59 9
1-88 1-35 4.66 13.e8 14.@@ lee39
3
TOT~L TAXES PROPERW T M S IWOmf T M S M L C S TAXES IIISC. REVENUS
a6a.oi 1Be.68 Rle.49 144.4e 911.97
QENERRL REVENUE
TOThL TAXES
PROPtRTV TWO
WUS TAMS
INCORE TAXES
RISC.
IILVE)(U~
PER CRPITA OUN SOURCE REVENUE
STATE hND LOCFIL GOUERNNENTS UTAH 1967 VS. 1977 CONSTANT 1967 8
LOQ~
~OT~L QLNERAL REUE)(UE
~ 0 t tnxEs h~ PROPERtV TMIES INCORE tnxrs SMES T W S AISC. REUEIUEI
1977 x n c u u s PERCENT (67-77) IWCRfASE 433.89 327.68 95-14 ts7 e.a 72.53 1W.31
16.77
totnL PERCENT
(IUERAGE WNUM
.sa aw.w
37;
15 .6 11 .4 (e.31)
1Bl.W
61 .9i
38.W 79.00
1.6 10 tee.&?) 7e.75 86.13
34.67
s.se
6.48
3@ .1
PER c n P I t n OUN SOURCE REUENUC
I t R t E &ND LOCAL QOUERWENTL
WSHINQTON 1067
CUU(ENT 88
US. 1977
eow
1 -
1B77
PERCENT INCREASE (67-77)
HUIIL PERCENT
INCREASE
I
QENERAL
~~
TOT~L Tl)XES
PWPERTV TrU<ES
SALES TAXES
nssc. REuENa
PER CAPITh OUN SOURCE REVENUE STATE M D LOCAL GOUERMENTS WSHINCTON 1067 US. 1977 CONSTCVlT 1967 8
10Q7
r o t & QE)(ERIK REUEWUL:
480 6.3 369. @9 1lO.SQ 137.93 180 0.1
1977 IWRl%E (a?-??, L63.S iw.3!i 41L.4C 11.1 813 107 6.7 14-10 1.6 @@ a.@ ?@ 38.44
PtRClEM
totnl.
AWNUAL PERCENT
huERnGE
INCREASE
18 .7 14 .0 1W . 9.49 3-38
J
TOThL T W O PmfmW T M S ImcmE T M S 81)LLS TAXES MI=. R N L M S
t 6a 7.
I
GENERAL REUENUE TOTAL TlXES PROPERTV TlXES SflLES TAXES MISC. REVIENU
PER CAPITA OUN SOURCE REVENUE
SThtE WD LOCAL OOUERNRENTS
UVOFIINQ 1967 US. 1977
CURRENT SS
TOTAL DOLLARS
1-7
ion
136B.06 900.48 4e8.22 267.88 301.~8
1
1sH
INCREASE (97-77
PERCENT I)(CIKhSE
TOTAL QESRAL RfUENUf TOTAL TAXES PROPERTY TAXES IWICOM TrUctS BALES TCJQS RIM. REUENICS
49B.S
SO. 19
174.61 109.77 316.58 1ss.w
10.63
1
191.16 61 .Be
rra.ar
ia.oa
15.34 0.04
140.01
REVENUE
TAXES
TAMS
PER cnpxtn OUN SOURCE REVLM
ST&TC nND LOCAL QOMRMENTS
UESTEW stntEs 1967 C R E T SS URN
us.
tm
I
1967
1977 iee8.3~ 89a.38 ana.61 W.BI 188.01 248.03
totnL PRET ECN XNCRE*St (67-77) 1~7.83 1~1.63 114.90 810.~4 598.69 103.00
CIVLRIIQC MtNML PERCENT 1~REASE
m t n ~( U ~E I ~L 70th~ tnxre
RZVEW
r
468.67
374.3s
m.03
PROPERTY T ~ X E S INCOME T ~ X E S SALES TAXES RISC. REUENUES
1. nw
71.36 %6.9@ 94.31
9.811
1e.m e1.S
1e.16
7.m
(RNCRIIL
EUDU(E
TOtM
TAXES
POET R PRY TAXES
ShLES TAXES
IHCm
TAXES
RIIC.
RVNE EEU
PER CAPITL OUN SOURCE REVENUE STLTE AND LOCAL OOUERtlflENTS UESTERN STATES 1967 US. 1977 CONSTANT 1967 8
C
1867
PERCENT MMML 1#?7 INCREASE PERCENT
totu
wma
(67-77) INcRns
-.be
mu a ~ ? m R~EHUE n~
TOmL TA#S MOeO#rv 7S W S TA#S RIW. RM)ILIES
+
IWCOlC 7S -
481.67 374.36 180 7.@ 78-36 8.9 19 04.31
606.01 488.33 1W.18 113.U 93-90 140.
a.aa
4-76 13.88
8-67 .77
ma84 79 .4 S9.03 847.91 =.I@
e.ra
*
PER CfbPITA OUN SOURCE REVENUE STATE kND LOCAL GOVERNMNTS UNITED s t a t E s i s 7 US. 1977 CONStCINT 1367 1
TOTM TcUQS PROPERN TnXES INCONE tlXES SALES TAXES RIM. REWWWS
309.61 13e.m 61. 9 3
40.7s
7S.a
408.34 145.10 84.31 oa.ao 1eO.99
31.93 93 .1 64-46 iia.or 46-15
a8 .1 8-15 1-87
I
-+
I
GEIERAL REVENUE
TOTAL TAKES
PROPERTV TAXES
SfiLES TAXES
IHCOHE TRXES
flISC. REUENUE
I
APPENDIX 111-2
TAX RELIANCE OF OWN SOURCE GENERAL REVENUE I N 1977: STATE AND LOCAL GOVERNMENTS WESTERN STATES
TbU( REVtNUf
W SOURCES 1977
STATE
MID LOCAL
GOUERtWCNT R E U E M
CALIFORNIA
t~
PROPERTV TnxEs
SALES TAXES
8
C
0
-
I~ON~ TAXES
OTHER TWES
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TOTAL W
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STATE P O U E R ~ E M REUEWUE
LOCAL GOUERMTNT REKHLR
TAX REWEIILE SV SOURCES
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MISC, REVENUE
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L TOTAL OUN SOURCE C
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MILLION
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TAX REVENUES BY SOURCE$ RONTANA
1977
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TOTAL O M SOURCE 6MRAL REKHuE
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SOURCE QENERAL REVRUE
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SECTION FOUR PROPERTY T X A
In this section, the Arizona property tax will be described and examined w i t h respect to the f o l l owing characteristics : 'administration 'incidence 'collections and distribution 'comparison with evaluative c r i t e r i a A. Description
1. Property Tax Base
a. Current Base. The property tax i s levied on the assessed valuation of properties within the s t a t e . Assessed valuation i s equal t o a percentage of the f u l l cash value of a l l land, improvements and personal property, both secured and unsecured. The f u l l cash value of property is the market value of the property as appraised by the County Assessor o r Department of Revenue. Secured property i s personal property affixed t o the land such as buildings, whi 1e unsecured property i s general l y equipment or movable personal property. For any parcel of property, the percent of f u l l cash value which i s subject to taxation will depend on the classification of the property. The property tax base in Arizona i s unique i n t h a t i t i s defined by several classes of property, each w i t h a separate assessment rate. The assessment r a t e defines the percent of f u l l cash value which i s subject t o taxation. Classification allows the s t a t e t o t r e a t the several types of property differently f o r taxation, thereby influencing the proportion of taxes paid by each class of property. To date, only eight 'states, including Arizona, have adopted comprehensive classified tax systems. Eighteen other s t a t e s have imp1emented partial classification schemes. In Arizona, there are eight classifications of property f o r taxation as shown below:
PROPERTY CLASSIFICATIONS FOR TAXATION
Class 1
Assessment Ratio 60%
Property Types f l ight property; private car company property, r a i 1roads, producing mines and timber telephone and telegraph company property; gas, water, and e l e c t r i c company property; pipe1 ine company property
3
27%
comercial and industrial property agricultural property residential property; non-prof i t handicapped or elderly care facilities
6
7
23%*
8%
rental residential property historic property producing oil and gas company property
Exemptions. Exemptions reduce the amount of taxable val uation , thereby reducing tax l i a b i l i t y . Exemptions are usually given f o r one of the following reasons:
b.
'For social purposes 'As 'To 'To 'To 'To
f o r re1 igious, charitable or educational institutions rewards f o r services rendered to the public - veterans exemptions eliminate hard-to-tax property - intangible personal property refrain from taxing property t h a t i s immune t o taxation government property provide incentives - exemptions f o r certain industries o r new industries redistribute the wealth - exemptions f o r the aged and low income.
-
In addition t o the general exemptions 1isted above, the Arizona Constitution provides f o r property tax exemptions f o r widows and veterans: *The assessment r a t i o f o r class 6 properties i s 23% f o r 1978 and 21% f o r 1979. **The f u l l cash value of producing o i l and gas wells in any year is equal t o the value of the gross receipts of production in the preceding year.
Widows exemption: The f i r s t $2,000 of assessed valuation is exempt from the property tax i f t o t a l assessed valuation does not exceed $5,000, and t o t a l income i s no more than $3,500, o r $5,000 if children reside i n the home. Veterans exemption: The f i r s t $2,000 of assessed valuation i s exempt from the property tax i f t o t a l assessed valuation does not exceed $5,000. To qua1 i f y f o r t h i s exemption, the veteran must have been honorably discharged, served a t l e a s t 60 days during time of war, and have been an Arizona resident p r i o r t o September 1 , 1945. In 1978, approximately $33.3 mill ion of assessed valuation in residential property was exempted under these provisions. c. Historic Development of the Base.* Historically, the appraisal of property was a very a r b i t r a r y process and dependent upon the discretion of the local appraiser. Prior t o statehood i n Arizona, the county s h e r i f f was authorized a s the tax assessor and collector. Under the early system, each property owner was responsible f o r f i l i n g an a f f i d a v i t of h i s property w i t h the county s h e r i f f . The r e s u l t a n t l i s t of property values w i t h i n the county comprised the property tax base. In 1912, the year of statehood, the S t a t e Tax Commission was formed t o supervise the collection of property taxes. A 1 similar properties were t o 1 be valued equally a t f u l l cash value. The Tax Commission was authorized t o appraise a1 1 producing mines, r a i l r o a d s , telegraph and telephone companies, express companies and private c a r companies in t h e s t a t e . Appraisal of a l l other properties was charged t o the counties. The Tax Comission immediately discovered t h a t property appraisals varied widely across the s t a t e , ranging from 25% t o 70% of f u l l cash value. In an attempt t o equalize appraisals, the Commission ordered t h a t a1 1 property be assessed equally, a t 50% of i t s f u l l cash value. A though an e f f o r t was 1 made t o comply w i t h this order,which resulted i n a substantial increase i n assessed valuation, not a l l counties conformed f u l l y . To give the S t a t e Tax Commission the power t o supervise the county boards of equalization, an amendment t o the Constitution was presented t o the voters i n t h e 1912 election. The amendment passed, and i n 1913 the S t a t e Tax Commission was granted broader powers. *For a more detailed description of the h i s t o r i c a l development of the property tax, see " Historical Review of the Property Tax i n Arizona," prepared by House A S t a f f , October 1977.
B 1913, statutory classes existed f o r express companies, private car y companies, banks and general property. Properties i n each of these classes were treated differently. Express companies were taxed on gross proceeds in l i e u of ad valorem taxes. Private car companies were also subject t o a separate tax i n l i e u of the s t a t e property tax. Banks were taxed on capital stock, and general properties were assessed and taxed under general law. Each taxing mechanism was selected f o r purposes of simp1 i c i ty and convenience. In 1933, the Intangible Property Tax Act created seven classes of intangible property, each bearing a different tax rate. This law represented the f i r s t attempt t o use the classification system t o modify the burden of taxes among taxpayers. In the f o l l owing year, however, the a c t was struck down by the State Supreme Court on the grounds t h a t the classification system t h a t was established was arbitrary and t h a t there was no mechanism f o r taxpayers ' appeals. I t i s interesting t o note, however, that a1 though the a c t was declared unconstitutional, the court did rule t h a t a classification system was constitutional a s were different tax rates f o r different classes. In 1950, the Leg is1 ature distinguished between manufactories and other types of property, and a s a r e s u l t modified the tax burden of businesses. The 1950 a c t provided t h a t machinery used i n the operation and maintenance of any manufactory could be assessed f o r tax purposes a t 50% of i t s book value. Excluded from the definition of a manufactory were businesses engaged in the following a c t i v i t i e s : 'mining, smelting, quarrying, etc. 'furnishing u t i l i t i e s t o consumers 'telephone o r telegraph service 'pipe1 ine operations 'pub1 ication 'job printing o r advertising 'slaughtering 'contracting Thus, while the State Tax Commission was trying t o establish uniformity of assessments, the s t a t e was providing f o r differences in the treatment of properties by altering the assessment r a t i o s applicable t o different types of property. Differences in assessments persisted, thereby a1 tering the r e l a t i v e property tax burden, both between and w i t h i n counties, and between classes of property.
\
In 1959, the Southern Pacific Railroad challenged the property tax assessment system i n court on the grounds t h a t the railroads were being assessed higher than other properties. The Arizona Supreme Court ruled t h a t the system was discriminatory and must be prohibited i n the f u t u r e since i t was not provided f o r i n s t a t u t e . The l e g i s l a t u r e , concerned by the decision, ordered a reappraisal of a1 1 properties w i t h i n the s t a t e i n preparation f o r reform. The revaluation was t o be conducted by the newly established Division of Appraisal and Assessment Standards which became the Department of Property Val uation i n 1967. In 1968, a f t e r the revaluation was completed, the 1e g i s l a t u r e began research t o develop a c l a s s i f i c a t i o n system which would e s s e n t i a l l y preserve the e x i s t i n g tax burden. The 26 classes of property existing a t the time were merged i n t o four classes, each t o be appraised a t f u l l cash value. A separate assessment r a t i o was then applied t o each c l a s s i f i c a t i o n t o determine assessed valuation. The four c l a s s i f i c a t i o n s of property establ ished i n 1967 and t h e i r assessment r a t i o s a r e as follows: Class 1: Assessment r a t i o - 60% Fl ight property, private c a r companies, r a i l road property used i n t h e continuous operation of the 1 ine, producing mines, and standing timber Class 2: Assessment r a t i o - 40% Telephone and telegraph companies, gas water and e l e c t r i c u t i l i t i e s and pipe1 ines
25% Class 3 : Assessment r a t i o Commercial o r industrial property other than t h a t included i n Class 1 , 2 o r 4, including residential rental property Class 4: Assessment r a t i o - 18% Agricultural property and a l l other property not included i n Class 1 , 2 o r 3
-
This c l a s s i f i c a t i o n system was protested by the railroads t o the Arizona Supreme Court i n 1969. The Supreme Court, however, upheld the c l a s s i f i c a t i o n sys tem. Legislation i n 1968 required t h a t the county assessors update property valuations annually. This was found t o be very expensive i n terms of personnel and budgets. The Director of the Department
of Property Val ua t i on wanted t o update one-third of a l l properties each year, t h u s revaluing each piece of property every three years. An Attorney General ' s opinion concl uded t h a t such a system would be permissable.The three-year revaluation was challenged i n court, however, on the grounds t h a t i t was unfair t o those taxpayers revalued in the f i r s t and second years, and was found t o be unconstitutional . The case, however, was appealed and overturned. i n 1975. The number of property cl a s s i f i c a t i a n s was expanded during the period from 1973 t o 1977. Currently, eight classes of property a r e defined i n s t a t u t e , each w i t h a separate assessment r a t i o . 2. Property Tax Rates
a. S t a t e Property Tax Rate. The s t a t e property tax r a t e i s s e t annually by the J o i n t Legislative Tax Committee on o r before the second Monday i n August of each year. The property tax r a t e is technically composed of two tax r a t e s , one f o r general purposes and one f o r educational purposes. The combined s t a t e tax r a t e cannot exceed $1.60 per $100 of assessed valuation. The s t a t e property tax r a t e s f o r the years 1968 through 1978 a r e shown below: S t a t e Property Tax Rates* Year Tax Rate Year Tax Rate
b. Local Property Tax Rates. Local property tax r a t e s a r e s e t by the governing board of each county, c i t y o r town by the t h i r d Monday i n August. School d i s t r i c t and community college property tax r a t e s a r e s e t by the county board of supervisors w i t h i n the same time l i m i t . The tax r a t e may vary substantially between taxing areas. In 1978, f o r example, f o r a l l school d i s t r i c t s comprised of both an elementary and a high school, the high tax r a t e was $22.05 i n Union No. 62 i n Maricopa County, and the low r a t e was $2.825 f o r Morenci Unified D i s t r i c t No. 18 i n Greenlee County. The tax r a t e is a function of the budgeted needs of t h e community, and the *Tax r a t e i s defined a s a r a t e per $100 of assessed value.
amount and type of property i n the d i s t r i c t s .
1978 Average Aggregate Property Tax Rates by County* County Apache Cochise Coconino Gila Graham Green1ee Maricopa Mohave Navajo Pima Pinal Santa Cruz Yavapai Yuma *The average combined r a t e applied t o property w i t h i n the county includes s t a t e , county, c i t y , school d i s t r i c t and special d i s t r i c t Average Tax Rate per $100 Assessed Valuation
1. Property Tax Base
a. Appraisal. Property i s required by 1aw t o be appraised annually, as of January 1 of each year. There a r e two l e v e l s of property tax administration i n Arizona. The county assessors appraise standing timber l i s t e d i n Class 1, and a l l properties i n Classes 3, 4, 5, 6 , and 7. All other properties a r e appraised c e n t r a l l y by t h e Department of Revenue's 1 Division of Property and Special Taxes. A 1 central l y appraised properties a r e income producing properties which aften cross county l i n e s and are d i f f i c u l t t o appraise. The Department of Revenue is directed by s t a t u t e t o "adopt standard appraisal methods and techniques f o r use by the department and county assessors i n determining the val uation of property. " There a r e three general ways t o appraise property: the Cost Method, the Sales Comparison Method, and the Income Capitalization Method. These methods a r e described below.
Cost Method The cost method determines the market value of property by adding the cost t o replace the house or building, l e s s depreciation, to the value of the land. This method i s used f o r a l l locally val ued commercial property, and f o r some single family residences. In order t o revalue a l l property annually, the method has been computerized. The cost model devel oped by the Department of Revenue i s a statewide model and i s implemented a s described below: A t time of construction, a county assessor makes a physical inspection and notes a l l the physical characteristics of a piece of property. The assessor then assigns the property a rating denoting quality. Based upon construction data, a typical home of a given r a t e i s estimated to cost a specific number of do1 l a r s per square foot. The number of square f e e t in the property being assessed i s then mu1 tip1 ied by this do1 l a r amount t o reach a replacement cost. Any physical characteristics not accounted f o r i n a home of this rating a r e then valued and#added t o the base price. These characteristics a r e termed "add-items. " The age of the property i s then taken into consideration and the property i s depreciated. B feeding t h i s information into a computer, y the appraised value of the home during subsequent years may be calculated simply by changing the cost values assigned t o physical characteristics to reflect current market value. The land value i s then added t o the market value of the improvements. The primary advantages of the cost model are as follows:
1) The mechanics of the cost model are easy t o explain t o taxpayers. 2)
The cost model works best f o r the appraisal of dissimilar properties for which there i s relatively l i t t l e sales data.
The primary disadvantages of the cost model are as follows:
1) The cost of add-items i s not often changed.
2)
A typical house i s n ' t typical anymore. improvements are add-items.
35% of the value of property
3)
4)
I t i s d i f f i c u l t t o continually update manuals t o r e f l e c t changed base factors and add-on values. I t i s d i f f i c u l t t o estimate depreciation without looking a t market val ues
.
5)' Cost does not necessarily r e f l e c t market value.
Sales Comparison Method The sales comparison method estimates the market value of a piece of property based upon the sales prices of similar properties which have recently sold in the same geographic area. To expedite the annual reappraisal of homes, the Department of Revenue began a computerized appraisal system, using a s t a t i s t i c a l technique called M1 t i p l e Linear Regression (MLR) which measures the re1 ationship between property u characteristics and sales price. The MLR i s used only f o r single family residential homes because i t requires a large volume of sales data from similar properties and properties in other classifications do not t u r n over rapidly. The MLR i s a statewide model, but r e f l e c t s differences between counties. Eight counties use the MLR model. Some use i t exclusively f o r single family residential properties, while others use MLR in urban areas and the cost model i n rural areas. A t t h i s time, the original MLR model i s used as follows: A t the time of construction, a county assessor makes an inspection and 1i s t s the physical characteristics of a home which are related t o sales price by one of the 24 equations of the MLR model. These physical characteristics include square f e e t , number o f rooms, patios, etc. This information i s then fed into the Department of Revenues computer. To determine the level a t which a given physical characteristic i s t o be valued, the Department u t i l i z e s data from recently sold homes. After a piece of property i s sold, a sales a f f i d a v i t must be sent t o the county assessor. The county assessor then sends the affidavits t o the Department of Revenue. Sales affidavits which do not represent market value transactions, such as sales between relatives or foreclosures, are not used by the Department. These types of sales often do not accurately r e f l e c t market value and would d i s t o r t the data base. The sales affidavits include information about the characteristics which are related t o sales price by one of the 24 equations of the model. Based upon the number and type of physical characteristics and the sales price, the computer calculates the portion of the sales price which may be a t t r fluted t o each of the characteristics l i s t e d on the sales affidavit. T h i s value I S termed a "coefficient." For purposes of the annual reappraisal of property, the values derived f o r a property characteristic from the sales affidavits of a given area are used only t o calculate the value of properties within t h a t area. The base
@
price of a property i s calculated by suming the values determined f o r each characteristic of the property. The base price i s then adjusted by a "neighborhood factor" which represents market differences attributable t o the differences. between neighborhoods. The neighborhood factors are also derived from the sales affidavit data and primarily r e f l e c t differences i n land value. The f i r s t appraisal of homes made in 1973 with the MLR system produced values t h a t were approximately 25 percent higher than those derived under the old system. To compensate the homeowner for the sudden increase in valuation, the Legislature began the homeowner property tax rebate program. The primary advantages of the MLR model are as fol lows:
1) Provided t h a t sales information i s current, the MLR model should produce values as close as possible t o actual market value.
2) If appl ied correctly, the MLR model reduces human error.
)
The MLR model uses sales data and property data to s t a t i s t i c a l l y generate appraisal values.
4) The MLR model works best f o r similar properties, with abundant sales data.
The primary disadvantages of the MLR Model are as follows:
1) The MLR model i s very technical and the mechanics are d i f f i c u l t t o explain. In-house s t a t i s t i c a l expertise i s required to monitor and update the system.
2) The equations in the model could be simpler and more logical.
3) The number of variables has not been expanded since construction of the model. Physical characteristics, such as fireplaces, fences, and l o t sizes are not represented in the equations.
4) The coefficients are not always internal ly consistent. For example, a piece of property in "excellent" physical condition may have a lower value than i f i t were in "good" condition.
5) Any improvements made a f t e r the time of construction will not be reflected unless a building permit was recorded, or a county assessor noted the construction.
Income Capitalization Method The Income Capitalization Method appraises property on the basis of i t s income generating capabil i ty. This is trans1 ated i n t o current worth t o r e f l e c t market value, o r what the enterprise would be worth t o an investor i n the open market. Historical data and f u t u r e expectations a r e taken i n t o account t o estimate a f u t u r e income stream f o r the property. In c o n t r a s t , an appraisal basedsolely on the value of the physical property and the land will not r e f l e c t earning potential. This method i s used primarily f o r central l y valued properties, but can also be used in the appraisal of commercial properties. Primary advantages of the Income Capital ization Method of appraisal a r e as follows: 1 ) Distinctive type businesses can be treated individually. 2) h he income capital ization method works best f o r dissimilar properties f o r which there i s r e l a t i v e l y l i t t l e s a l e s data. Primary disadvantages of t h e income c a p i t a l i z a t i o n method a r e a s follows: 1 ) The estimation of a f u t u r e earning stream i s d i f f i c u l t . 2) For multi-state companies, t h e allocation of in-state value i s d i f f i c u l t .
3) The method requires highly s k i l l e d appraisers familiar w i t h accounting and economic principles as well a s current industry data.
b. Tax Processing. Administration of the property tax a l s o involves the recording of property values a f t e r they have been appraised, c l a s s i f i e d , and assessed, making f u r t h e r adjustmenti t o the value such as reductions f o r exempt amounts o r deflation f a c t o r s ; notifying taxpayers of property value, and the appeals process. For locally valued property, the county assessor must identify a l l property i n the county t h a t i s subject t o taxation by November 30. B January 1, the y county assessor must determine t h e owner and the f u l l cash value of the property. By February 10, each propert'y owner m u s t be n o t i f i e d a s t o the valuation of the property. If the owner does not agree w i t h the valuation of his property,
he has until February 15 t o f i l e a petition f o r review with the county assessor. The county assessor then has 15 days to determine i f an adjustment should be made and submit a correction t o the Department of Revenue i f necessary. B April 20, the county assessor must deliver the property tax roll t o y the county board of supervisors. The roll must include the assessed valuation of property, and any change i n assessed valuation over the previous year must be reported t o the Department of Revenue. The board of supervisors must then give a public notice of the meeting of the county board of equalization. The board of supervisors also a c t s as the county board of equalization. The county board of equalization meets on the f i r s t Monday in My t o consider any changes i n assessed valuation. a If a taxpayer has f i l e d a petition with the county assessor, and has been denied a change, in whole o r i n part, he may then appeal the decision t o the county board of equalization within 15 days. The county board then has 10 days from the date the petition i s heard, t o make any adjustments. If any increase i n valuation i s t o be made, the county board of equalization must notify the taxpayer and the Department of Revenue a t l e a s t 5 days prior t o the June meeting of the county board. The county board of equalization then meets on the f i r s t Monday in June, and must equalize the tax roll no l a t e r than the second Monday i n June. Any taxpayer dissatisfied with the decision of the county board of equal ization may appeal t o the superior court before November 1 , or petition the s t a t e board of tax appeals within 15 days of the mailing of the decision by the county board of equalization. The s t a t e board of tax appeals meets on the f i r s t Monday a f t e r July 15. Before this time, the board must examine and compare the valuations of property i n each county. The board may equalize property between and within counties and classes. If the valuation of a property i s to be increased, a hearing must be held i n the county or counties where the property to be affected is located. A public notice must be issued a t l e a s t ten days prior t o the hearing. The s t a t e board of tax appeals then has 30 days t o decide upon the petition. This must be done no l a t e r than July 25, a t which time the state.board must submit a statement of any changes i n valuation t o the county board of supervisors and the Department of Revenue. Before the f i r s t Monday in August the county board of equalization must
submit the property tax abstract t o the county board of supervisors, the s t a t e board of tax appeals, and the Department of Revenue. I t i s then the Department of Revenue's responsibility t o prepare a statewide abstract containing the valuation of property by county and taxing d i s t r i c t , and submit copies t o the s t a t e board of tax appeals and each county board of supervisors. A t t h i s time the amount of assessed valuation f o r every jurisdiction is established f o r purposes of setting the tax rate. When the rates have been established f o r a l l taxing jurisdictions, the county board of supervisors prepares the assessment and tax r o l l , and submits i t to the county treasurer. The county treasurer must then publish f o r four consecutive weeks a notice of the due and delinquent dates f o r payments of taxes. The f i r s t one-half of taxes are due on October 1 , and delinquent on November 1. The second one-half of taxes are due on March 1 and delinquent on My 1. a Rate a. Rate Determination. Once the assessed valuation base has been established, and the budgets f o r the coming year proposed by the taxing jurisdictions, a l l taxing jurisdictions t h a t have the right t o levy a tax may establish t h e i r tax rates. The r a t e appl ied t o a particular parcel of property will equal the rates levied by each taxing jurisdiction in which the parcel of property i s located. The r a t e setting procedure f o r each jurisdiction i s essentially the same. The tax r a t e is expressed as do1 l a r s per $100 of assessed valuation. The tax r a t e when applied t o assessed valuation should produce adequate funds to meet the revenue requirements of the taxing jurisdiction. The revenue requirements are known from the proposed budget. Revenues from any source other than the property tax are subtracted from the revenue requirements t o determine the necessary property tax levy. The amount of assessed valuation per jurisdiction i s also known. Because the tax r a t e i s established as dollars per one hundred dollars of assessed valuation, the assessed valuation i s divided by 100. This number i s then divided into the net revenue requirements of the jurisdiction to determine the tax rate.
2.
In sumnary, the property tax r a t e i s s e t in the following manner: Total Revenue Requirements - Funds Other Than Property Tax Necessary Property Tax Levy Necessary Property Tax Levy , Tax Rate Assessed Valuation + 100 Property Tax Jurisdictions. A parcel of property may fa11 within several political jurisdictions t h a t have the power t o levy a property tax. For example, a property owner i s 1iable f o r taxes levied by the s t a t e , the county, a c i t y , a school d i s t r i c t , and perhaps, one o r more special d i s t r i c t s . There are approximately 15 types of special d i s t r i c t s in Arizona, formed f o r the purpose of supplying a locally needed f a c i l i t y o r service. Types of special d i s t r i c t s include:
b.
Antinoxious (weed) d i s t r i c t s Electrical d i s t r i c t s Fire d i s t r i c t s Flood control d i s t r i c t s Hospital d i s t r i c t s Improvement d i s t r i c t s Irrigation d i s t r i c t s Irrigation and water d i s t r i c t s Library d i s t r i c t s Road d i s t r i c t s Sanitation d i s t r i c t s Street 1ighting and improvement d i s t r i c t s Sidewalk d i s t r i c t s Water d i s t r i c t s Water conservation d i s t r i c t s To determine the property tax 1iabil i t y of a particular 'parcel subject t o different taxing jurisdictions, a tax area code is assigned. The tax area code represents a specific geographic boundary in which several tax jurisdictions exist. The tax area code is used to identify the tax rates applicable t o the assessed value of a property. Incidence The responsibility f o r payment of the property tax r e s t s , by s t a t u t e , with the legal owner of the property. The incidence of the property tax varies
@
with the classification of property due t o the differences in assessment ratios. An equal value of Class 1 property, assessed a t 60 percent of market value, pays more property tax than a residential home in the same taxing jurisdiction assessed a t 15 percent of market value. The ultimate economic incidence of the property tax i s dependent upon the types and use of the property being taxed, and the a b i l i t y of the property owner to pass the tax on t o others. The burden of the property tax upon residential property f a l l s almost without exception upon the homeowner. The property tax represents a loss of income t o the homeowner which will rarely be passed t o others. The tax burden on the individual homeowner i s commonly measured as a r a t i o of property tax l i a b i l i t y t o income. The incidence of the property tax on business is not easily defined. The property tax will represent an additional cost to business, which must be covered by a reduction in other costs or by an increase in the price of the product or service provided. Thus, the tax burden upon commercial properties may be borne by the owner(s) in the form of reduced p r o f i t s or dividends, by factors of production, such as 1abor, i n the form of reduced wages, or be passed along to consumers i n the form of higher prices f o r the goods and services they purchase. If the good produced i s sold out of s t a t e , the property tax i s said t o be "exported," or paid by out-of-state residents. Ultimately, individuals bear the burden of a l l commercial taxes. The a b i l i t y of a business t o pass taxes forward and the percentage of the tax that can be passed forward i s dependent upon the demand f o r and supply of the particular good or service provided by the business. For this reason, i t i s d i f f i c u l t t o do more than general i ze about the economic incidence of property taxes upon commercial properties.
Total collections from t h e property tax during 1977-78 amounted t o $778 million. The distribution of property tax collections among taxing d i s t r i c t s i s shown below: Amount State* Counties Cities School D i s t r i c t s Cotnnuni t y Col 1eges Special D i s t r i c t s Unorganized Terri tory TOTAL Source:
$ 75,701,324 177,199,062 52,490,423 395,961 ,952 56,457,874 18,830,759 1,775,431
% of Total
9.73% 22.76 6.74 50.87 7.25 2.42 0.23 100.00%
$778,416,825
Arizona Tax Research Association, 1978 Arizona Property Tax Rates and Assessed Valuations
*the s t a t e rebated $57.5 mill ion back t o homeowners during 1977-78
A large portion of the t o t a l tax levied on property owners is never collected or is returned t o taxpayers because of the e f f e c t s of several t a x re1 i e f programs. These programs a r e discussed below:
Current Property Tax Re1 i e f Programs a) Property Tax Re1 i e f through the Arizona Income Tax
.
Homeowners Property Tax Deduction - When computing Arizona income tax l i a b i l i t y , property taxes paid a r e a deductible expense from adjusted gross income. Property Tax Credit - f o r homeowners age 65 o r older, w i t h sole income of l e s s than $3,750 or a j o i n t income of l e s s than $5,000, there i s a property tax c r e d i t t h a t is dependent upon the level of income. The maximum c r e d i t i s $225. Renters Credit - each r e n t e r may receive an income tax c r e d i t of ten percent of r e n t paid, o r $75, whichever i s l e s s . This figure represents the amount of property taxes paid i n d i r e c t l y as rent. b) Property Tax Rebate
The property tax rebate originated i n 1973 when l e g i s l a t i o n was enacted t o r e l i e v e homeowners from the e f f e c t s of s i g n i f i c a n t l y increased property valuations
caused by the statewide revaluation of residential property under the MLR appraisal system. As the program currently operates, monies are appropriated t o the county treasurers t o pay a portion of the school d i s t r i c t property rax levy which would otherwise be paid by homeowners. The property tax rebate was original ly made possible by revenues received from the Federal Revenue Sharing Program. Total funds appropriated f o r t h i s purpose are shown below f o r each year in which the program has been in effect. Property Tax Rebate Totals
c ) Property Valuation Limits In an attempt t o reduce the inflationary impact on housing values, the Legislature i n 1977 required t h a t f o r tax year 1978, prior t o computing property tax l i a b i l i t y , the assessed value of residential property was t o be divided by 1 .O5. This will deflate the assessed value by 5%. For tax year 1979 assessed values will be deflated by a factor of 1.15.
Criteria
1. Revenue Generation:
a. Will revenues from the property -tax expand as the demand f o r government service expands? As the population grows, new demands are placed upon government. The increase in population will probably require the construction of new homes, which will add t o the property tax base. The expanded base w i l l , in t u r n , produce new revenues which can be used t o finance the growth in government services associated w i t h an increase in population. Will revenues from the property tax expand as the price of government services increases? Market values of property consistently increase as the general level of prices within the economy r i s e s . Property tax l i a b i l i t y i s based upon the market value of property, and therefore, i s a growing source of revenue in an inflationary economic period. Problems may r e s u l t i f the added revenues resulting from the growth of market value exceed the revenue needs of the government.
b.
A property values increase due t o inflation, the same tax r a t e will s
r e s u l t in a growing property tax levy regardless of the requirements of the taxing jurisdiction. The property owner's tax l i a b i l i t y will continue t o grow under these conditions unless the tax r a t e i s reduced commensurately o r the property tax revenue i s rebated back.
2.
Social Equity: a. I s the property tax affordable t o the individual taxpayer? Everyone pays property tax in some form. A property owner pays the tax directly or as part'of a mortgage payment. A renter pays property taxes w i t h i n the price of the rent. Tax l i a b i l i t y i s dependent upon assessed valuation, which i s a percentage of market value. The market value represents potential p r o f i t to the property owner a t the time of sale, but may not bear a relationship t o the current income of the individual occupying the property or his a b i l i t y t o pay taxes. A market values r i s e , the assessed valuation and resultant tax s l i a b i l i t y also r i s e s , unless the tax r a t e i s reduced t o offset the higher assessed value. If property tax l i a b i l i t y increases more than income, the property owner will be paying a relatively larger percentage of income in property taxes regardless of his a b i l i t y to pay. In 1976, the average new home was bought f o r $48,400. The l a t e s t national figures f o r the U.S. show the average new home price t o be $62,900. This increase in market values has outpaced growth i n income f o r many people.
b.
I s the property tax borne by individuals w i t h common circuistances equivalent? Differences i n appraisal techniques and f 1aws within the appraisal system can r e s u l t in unequal tax burdens f o r similar properties, both within and between taxing jurisdictions. Sales r a t i o s have been developed by the Department of Revenue t o show the relationship between appraised property values derived by the MLR method and current sales prices i n the several counties. The most recent study showed that the s t a t e ' s median sales r a t i o f o r residential property was .83, which means that the appraised f u l l cash value was 83% of the estimated current market price. These sales ratios range from 65% in Navajo County t o 85% in Graham County. Disparities in sales ratios can be between properties in the same legal class, between properties in different legal classes, or between counties. If two identical homes a r e appraised differently, i t will r e s u l t in the homeowners bearing different tax burdens. Here i s an example, using a $40,000 home in two different counties, t o i l l u s t r a t e the possible inequities. In order t o isolate the e f f e c t s of the differences inappraisal, the example assumes the same tax r a t e f o r each home. Navajo County $40,000 .65
--
Graham County market value sales r a t i o ' 3 , 0 f u l l cash value $400 .15 assessment r a t i o $5,100 assessed value $40,000 .85
.15
$,0 390
market value sales r a t i o f u l l cash value assessment r a t i o assessed value
*Average s t a t e tax rate. Unequal tax burdens w i t h i n the same class of property can also be a r e s u l t of different tax r a t e s between jurisdictions. As mentioned e a r l i e r , tax rates are dependent upon: 1) the needs of the community, as expressed i n the proposed budget, and 2) the amount and type of property i n the community. The difference in tax r a t e s will greatly a f f e c t the tax burden. Consider two taxpayers with homes valued a t $40,000 in two school d i s t r i c t s with greatly divergent tax rates as shown below:
Home A Market value Assessment r a t i o Assessed value Assessed value Tax r a t e Tax l i a b i l i t y
i
Home B $40,000 .15
$40,000 .15
',0 600
100
lxm
'$m3
$ 60.00 x 2.82
$ 60.00 x 22.05 $1,323.00
The d i s t r i b u t i o n o f t h e t a x burden i s c l e a r l y d i f f e r e n t f o r each o f t h e homes i n t h e example. I t must be remembered, however, t h a t a1 though t h e t a x l i a b i l i t i e s a r e d i f f e r e n t f o r each home, t h e d i f f e r ences may be due i n p a r t t o t h e d i f f e r e n t l e v e l and type o f services r e q u i r e d by t h e i n d i v i d u a l s o f t h e two d i s t r i c t s . The " b e n e f i t s " p r i n c i p a l o f t a x a t i o n i s another measure o f s o c i a l e q u i t y . c.
W i l l i n d i v i d u a l s who r e c e i v e g r e a t e r b e n e f i t s from government s e r v i c e s pay g r e a t e r property taxes?
Properties l o c a t e d i n a c o m u n i t y w i t h a h i g h property t a x r a t e w i l l be s u b j e c t t o g r e a t e r taxes than p r o p e r t i e s o f s i m i l a r value l o c a t e d i n communities w i t h a low p r o p e r t y t a x r a t e . A h i g h t a x r a t e could r e f l e c t a g r e a t e r w i l l i n g n e s s on t h e p a r t o f the c o m u n i t y t o provide funding f o r government services, i n which case t h e l e v e l o f p r o p e r t y taxes may bear a r e l a t i o n s h i p t o b e n e f i t s received. A h i g h t a x r a t e may a l s o e x i s t because t h e amount of assessed v a l u a t i o n i n t h e d i s t r i c t i s low. Property owners i n d i s t r i c t s w i t h low v a l u a t i o n may be r e q u i r e d t o pay a p r o p o r t i o n a t e l y higher t a x r a t e t o finance services s i m i l a r t o those purchased i n o t h e r d i s t r i c t s which l e v y a smaller t a x r a t e a l b e i t on a g r e a t e r assessed v a l u a t i o n . 3. Ease o f A d m i n i s t r a t i o n : Can t h e property t a x base be determined w i t h o u t d i f f i c u l t y ? The p r o p e r t y t a x i s l e v i e d on t h e assessed v a l u a t i o n of a p r o p e r t y which i s based on t h e p r o p e r t y ' s c u r r e n t market value. Ift h e p r o p e r t y has n o t been s o l d r e c e n t l y , no d i r e c t measure o f t h e c u r r e n t market value o f t h e p r o p e r t y w i l l be r e a d i l y a v a i l a b l e and t h e value o f t h e t a x base w i l l have t o be determined by one of t h e t h r e e methods discussed above. Because o f t h e complexity of these methods of appraisal, t h e exact value o f t h e t a x base w i l l be somewhat d i f f i c u l t t o determine. Estimating t h e value o f t h e property t a x base i s f u r t h e r complicated by t h e use o f a separate assessment r a t e f o r each c l a s s i f i c a t i o n o f property. P r o p e r t i e s a r e c l a s s i f i e d according t o use. As usage changes o r p r o p e r t i e s a r e subdivided, v a l u a t i o n assessment i s made more d i f f i c u l t . I n a d d i t i o n , a parcel o f p r o p e r t y may contain two o r more l e g a l classes of p r o p e r t y which compl i c a t e s assessment. For example, a farm may be comprised o f a
home (class 5) and agricultural land (class 4). Such termed a " s p l i t parcel." For assessment purposes, an determine how much of the total value of the property by each use, in order to determine the value which i s each assessment rate.
a parcel i s assessor must i s represented subject t o
4.
Consistency with State Goals: a. Will a substantial portion of the property tax be paid by the residents of other states? Residential property taxes are borne by homeowners and renters. The vast majority of homeowners and renters are Arizona residents. Due t o the growth in tourism, however, some taxes on residential property may be paid by non-residents. Comercial property taxes represent an added cost to business. In order to cover t h i s additional cost, businesses may reduce purchases of suppl i e s or wages paid t o employees; they may raise the price of goods and services provided; o r they may reduce the p r o f i t s or dividends available t o owners and shareholders. Thus, firms which are owned by outof-state residents, which purchase suppl ies from out-of-state vendors and which produce a good o r service consumed in whole or in part out of s t a t e , will provide the best opportunity t o export the property tax.
b.
W11 the property tax produce revenues without detrimentally affecting i business? The a b i l i t y of commercial properties t o pass the property tax t o others i s dependent upon the demand f o r and supply of the good or service provided. If the sales of the good or service are sufficient t o cover a l l costs of production including the cost of paying property taxes, there will be no detrimental e f f e c t t o business.
The i~-migration of new businesses t o Arizona i s dependent upon the supply and price of labor, materials, transportation, land and the existence of markets f o r the product. The property tax i s generally not a sufficiently large percentage of u n i t costs t o weigh heavily on the decision of firms t o relocate. Studies indicate t h a t the property tax i s probably not a major determinant i n the location decisions of firms.
SECTION FIVE SALES AND U E T X S S AE
This section presents an overview of the sales and use taxes levied within Arizona. Included are:
A.
SALES T X S AE
1. Transaction Privilege Tax 2. Education Excise Tax 3. Special Excise Tax f o r Education
B.
U E TAX S
C.
RENTAL OCCUPANCY TAX
A.
SALES TAXES
In Arizona, the sales tax, t h a t tax which i s imposed upon the gross proceeds of sale or gross income from sales, i s composed of three individual taxes: a transaction privilege tax; an educational excise tax; and a special excise tax f o r education. For purposes of evaluation and examination, in t h i s section, these three taxes are grouped together because of certain commonalities in the areas of administration, collection and incidence. The use tax and the rental occupancy tax are addressed individual l y
.
The Transaction Privilege Tax. The Transaction Privilege Tax, a sales tax, was f i r s t authorized in 1933. The tax i s based upon the privilege extended t o the s e l l e r t o engage in the business of selling tangible personal property. The l i a b i l i t y f o r the tax l i e s with the s e l l e r and i s applied to the gross receipts of specified a c t i v i t i e s . The rates of the Transaction Privilege Tax are s e t by s t a t u t e and range from 4% to 2%. Tax revenue i s shared with c i t i e s , towns and counties. Transaction Privilege Tax collections, including penalties, i n t e r e s t and 1icenses , during 1977-78 amounted to $247.6 mil 1ion. The revenue from the Transaction Privilege Tax i s t o be used t o pay f o r obligations of the s t a t e and county governments, t o pay f o r the expernses of the s t a t e and the counties, to reduce the levy on property f o r pub1 i c school education,
and t o reduce or eliminate the s t a t e and county property tax r a t e . Education Excise Tax. Another s a l e s tax, the Education Excise Tax was authorized i n 1959. This tax i s a l s o imposed upon the gross proceeds of s a l e s o r gross income from the a c t i v i t i e s of various businesses. For most business cl a s s i f ications, the education excise tax r a t e i s s e t by s t a t u t e a t 100% of the transaction privilege tax rate. Exceptions a r e mining, timbering, rental of real property, and feed wholesaling, on a1 1 of which the r a t e is 50% of the privilege tax r a t e . The Education Excise Tax is earmarked f o r educational purposes. Collections i n 1977-78 amounted t o $240.6 million, including penalties and interest. Special Excise Tax f o r Education. A t h i r d s a l e s tax was enacted i n 1968, the Special Excise Tax f o r Education. This special excise tax i s a l s o levied on the gross receipts of selected business c l a s s i f i c a t i o n s a t r a t e s s e t by s t a t u t e of 1%o r 2%. The tax r a t e f o r copper mining, copper smeltering and copper production i s 1 %, but has been reduced t o 4% f o r t h e period June 1, 1978 through June 30, 1980. Receipts from the Special Excise Tax f o r Education a r e deposited t o the S t a t e General Fund but a r e not dedicated t o any s p e c i f i c purpose. In 1977-78, coll ections amounted t o $81.1 mil 1 ion. These three taxes together produced collections of $569.2 mil 1ion f o r nearly one-third of t o t a l s t a t e revenues. The aggregate r a t e f o r each business c l a s s i f i c a t i o n against which any one of t h e three s a l e s taxes is levied and the component p a r t s of the t o t a l r a t e a r e shown i n Table V-1, Exemptions The following a c t i v i t i e s and commodities a r e exempt from payment of the s a l e s tax by s t a t u t e :
1. The s a l e of stocks and bonds. 2. Personal o r professional services. 3. A service provided i n connection w i t h the r e t a i l s a l e of tangible personal property, other than mining, u t i l i t y , communications, private c a r , pipe1 ines, transportation, pub1 ishing, job printing, advertising, prime contracting, and the provision of services i n connection w i t h the s a l e of food o r drink.
TABLE V - 1
TAXABLE ACT IV I IES T
PRIVED, SP, EXCISE EXCISE TAX FOR COMBINED TAX EDUCATION TAX
TAXABLE ACTIVITIES
ILEGE TAX
'EFFECTIVE JUNE1 1978 THROUGH JUNE30, 1980, THE SPECIAL , EDUCATION EXCISE T A X I S REDUCED B Y ONE-HALF PERCENT
FOR COPPER M I N I N G , FOR ANY PURPOSE, COPPER SMELTERING AND COPPER PRODUCTION'
4. 5. 6.
The sale of a warranty or service contract w i t h a term factor cost of $400 or less. The sale of prescription drugs. The sale of prescribed prosthetic appliances. with insulin.
7. The sale of insulin and the sale of insulin syringes i f purchased
8 The s a
Arizona State Agency Publications
