Report of the joint interim legislative committee on Arizona's tax structure

              STATE OF ARIZONA
THIRTY-SECOND LEGISLATURE
REPORT OF THE JOINT INTERIM LEG I SLAT1VE COMMITTEE ON ARIZONA'S TAX STRUCTURE
JULY 1976
FOREWORD



This study i s the result of research conducted for the Thirty-second Arizona Legislature, Second Regular Session, Joint Interim Committee on Arizona's Tax Structure. The committee was jointly chaired by Senator



A. V. "Bill" Hardt and Representative W . A. "Tony" Buehl and i t s member-



ship consisted of a l l members of the Senate Committee on Finance and the House Committee on Ways and Means. The research efforts contained in this report have been reproduced because they represent val uabl e source documents on Arizona ' s tax structure which will be of interest to citizens, legislators, and professional researchers.

A great deal of the information should also prove valuable



to other s t a t e legislatures considering changes in their tax structures. This study represents one of the few attempts t o completely analyze Arizona's tax structure--its past development, i t s present status, and possible a1 ternati ves for future changes. The professional staffing for the tax structure study was drawn from the Senate Research Staff, the House Research Staff, the Arizona Legislative Council Research Division, and the Arizona Department of Revenue. The report of the Joint Interim Committee on Arizona's Tax Structure which was produced by the legislative staff i s divided into five volumes. Volume I



discusses the history and development of Arizona's major sources of revenue, such as the property tax, the income tax, and the sales tax. Arizona's



relative reliance on various forms of taxation a t both the s t a t e and local level and a t the s t a t e level only, compared to a l l other states, i s the subject matter of Volume 11. The tax rates and taxable bases to which



these rates are applied f o r major forms of taxation in Arizona are compared to a l l other s t a t e s in Volume 111. Volume IV consists of a series of



memoranda which were generated by 1egis1 ative s t a f f to analyze major pol icy issues which were before the Legislature during the Second Regular Session of the Thirty-second Legislature. Final ly, Volume V contains miscel laneous



information generated during the course of the research f o r the tax structure study including reports discussing the development of a permanent income tax and property tax computerized information system f o r Arizona. The study results will hopefully form a foundation f o r future analysis of Arizona's tax structure incl uding possible further development of a1 t e r natives to Arizona ' s present revenue structure.



Bob Stump



Stan Akers Speaker of the House



JOINT INTERIM COMMITTEE ON ARIZONA'S TAX STRUCTURE



FOREWORD TABLE OF CONTENTS VOLUME I



i

iii



-



HISTORY AND BACKGROUND O VARIOUS TAXES F



- Research Design o f Tax Study Chapter 2 - H i s t o r y and Development o f the Estate Tax i n Arizona Chapter 3 - H i s t o r y and Development o f the Luxury Tax i n Arizona Chapter 4 - A Discussion o f the Property Tax i n Arizona

Chapter 1 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9



-



H i s t o r y and Development o f the Sales Tax i n Arizona H i s t o r y and Development o f the I n d i v i d u a l Income Tax i n Arizona Insurance Premium Tax Report t o t h e J o i n t I n t e r i m Committee on Arizona Tax Structure Reliance Comparison Insurance Premium Tax (State Collections Only F i s c a l Year 1971-72)



-



-



-



Reliance Comparison - Insurance Premium Tax (State Collections Only - F i s c a l Year 1974-75)



VOLUME I 1



-



RELIANCE COMPARISONS OF VARIOUS TAXES SOURCES (FISCAL YEAR 1971-72)



-



STATE AND LOCAL



Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter



-



Overview Ranking Chart o f Arizona's Reliance i n Relation t o Other States Sales Tax Reliance Property Tax Reliance Luxury T l x Reliance I n d i v i d u a l Income Tax Reliance Corporate Income Tax Reliance Death and G i f t Tax Reliance Motor Vehicle Fuel Tax Reliance "Other" Tax Revenue Reliance



9-



Chapter 10



Total " A l l Taxes" Reliance



VOLUME I11



-



RELIAlJCE COMPARISONS O VARIOUS TAXES F ONLY (FISCAL YEAR 1974-75)



-



STATE SOURCES



Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9



-



Overview Ranking Chart o f Arizona's Reliance i n R e l a t i o n t o Other States Sales Tax Reliance Property Tax Reliance Luxury Tax Reliance I n d i v i d u a l Income Tax Reliance Corporate Income Tax Reliance Death and G i f t Tax Reliance Motor Vehicle Fuel Tax Re1 iance "Other" Tax Revenue Reliance



-



Chapter 10 VOLUME I V



T o t a l " A l l Taxes" Reliance



-



RATES AND BASES COMPARISON



Chapter 1 Chapter 2 Chapter 3 Chapter 4 VOLUME V



-



Property Taxes



-



Rates and Bases



-



December 31, 1975



345 357 373 393



A l c o h o l i c Beverages Taxes January 14, 1976 Sales Taxes Income Taxes



-



Rates and Bases



-



-



Rates and Bases Rates and Bases



-



January 21, 1976



- April



10, 1976



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BURDEN OF TAXATION, FISCAL IMPACT AND POLICY OPTIONS



Chapter 1



-



A Discussion of t h e Burden o f Taxation and Examples o f U t i l i z a t i o n o f t h e I n d i v i d u a l and Corporate Income Tax Data Base t o Analyze F i s c a l A1 t e r n a t i v e s - February 2, 1976 Estimates o f Revenue Impact o f E l i m i n a t i o n of t h e Sales Tax on Food and t h e I n c l u s i o n o f C e r t a i n Business and Professional A c t i v i t i e s W i t h i n t h e Sales Tax Base February 3, 1976



429



Chapter 2



-



467



-



Chapter 3



-



A Discussion o f Local, S t a t e and Federal Tax C o l l e c t i o n s Compared t o Arizona Personal Income and Gross S t a t e Product - February 10, 1976



483



VOLUME V (Continued) Chapter 4 Chapter



- L o t t e r i e s - February 25, 1976 5 - A Discussion o f Some o f t h e P o t e n t i a l



491 503



F i s c a l Impacts o f Lowering t h e Assessment R a t i o Applied t o R e s i d e n t i a l Rental Property February 26, 1976



-



Chapter 6



- A Disccussion



o f Some o f t h e P o t e n t i a l F i s c a l Impacts o f Lowering t h e Assessment R a t i o Applied t o R e s i d e n t i a l Rental Property May 5, 1976



523



-



Chapter 7



- A Comparative and H i s t o r i c a l Discussion o f Arizona's

Corporate Income Tax and a D e s c r i p t i o n o f t h e Tax L i a b i l i t y and Tax Burden Impact o f E l i m i n a t i n g t h e Federal Income Tax Deduction f o r Corporations With A l t e r n a t i v e Rate S t r u c t u r e s - March 1, 1976 The Homestead Exemption March 10, 1976



547



Chapter 8 Chapter 9



-



-



An A l t e r n a t i v e Approach



-



569 579



- A Discussion o f t h e Future Impact o f

-



t h e Freeze o f R e s i d e n t i a l P r o p e r t i e s Valuations (Class 5) Upon HomeOwners, Owners o f P r o p e r t i e s Other Than Homes, The S t a t e and I t s P o l i t i c a l Subdivisions The C i r c u i t Breaker: An A1 t e r n a t i v e R e s i d e n t i a l Property May 18, 1976 o f Tax Re1 i e f Program f o r Arizona t o t h e Ten Percent Expenditure and Levy L i m i t a t i o n s Imposed Upon Arizona ' s C i t i e s and Counties February 22, 1976



Chapter 10 Chapter11



61 3 627



- An A l t e r n a t i v e



-



Chapter 12 - R e s i d e n t i a l Property Tax Reduction June 1976 VOLUME V I



-



1975-1976



-



639



-



MISCELLANEOUS INFORMATION



Chapter 1 Chapter Chapter



- Summary Discussion - Senate B i l l 1426 - "Piggybacking" 2 - Glossary of Income Tax Terms 3 - Comparison o f Federal Adjusted Grors Income w i t h Arizona

Adjusted Gross Income



649 653 683 705 727 733



Chapter 4 Chapter 5 Chapter 6 Chapter



-



Summary o f Steps t o Complete Arizona Income Tax Form P r e s e n t l y and A f t e r Enactment o f S.B. 1426 E x t e n t o f S t a t e Personal Income Tax Conformance t o t h e Federal Personal Income Tax Base, by State, 1975 Summary o f I n f o r m a t i o n on Senate B i l l 1426 Minutes o f Meeting November 6, 1975



7-



-



Senate Committee on Finance



-



739



VOLUME V I (Continued) Chapter 8 Chapter 9



-



M a t e r i a l s Prepared f o r House Ways and Means Committee Meeting - December 16, 1975 Minutes of J o i n t I n t e r i m Committee on Arizona Tax S t r u c t u r e Meeting February 3, 1976



-



Chapter 10 - L i m i t a t i o n s Imposed Upon Selected Computer Runs R e l a t i v e t o Property Valuation Chapter11



-



Development o f a Computerized Information System on Property Valuation



VOLUME I H I S T O R Y AND BACKGROUND OF V A R I O U S TAXES



MEMORANDUM ---------October X5, 1975 TO : FROM : THROUGH: I. Senate Finance Committee George Cunningham David P. dankofsky Senator A.V. nBill" Hardt



INTRODUCTION



In anticipation of the Legislature's desire to undertake a somewhat comprehensive review of the state of Arizona's revenue structure, a joint House/Senate staff team began initial data gathering and information collection activities at the early part of the summer. This staff team has been working under the general direction of Dr. Arlyn Larson and has agreed upon an overall design or approach for such a study. To date initial memoranda have been prepared for the estate and luxury taxes (see attachments under Tab No. 2 and 3) and extensive data specification requirements have been developed for the income tax. Members of the staff team include: from the House research staff, Harold Scott, Robert Lockwood, and Mary Ellen Simonson; from the Senate Research Staff, George R Cunningham, Jr., Charles Thompson, David . Jankofsky, and Lin Hallickson. The intent of this memorandum is to describe the proposed scope, design, substance, and methodology for this interim study effort. 11. RESEARCH DESIGN OR APPROACHES IN ATTACKING THE ISSUES



In a July staff sessi3n with Dr. Larson an attempt-wasmade to specify every conceivable policy issue that has ever been surfaced by any Legislator regarding Arizona's revenue structure. From this session, the scope, substance, and methodology for addressing each of these issues was agreed upon in general terms. It was initially decided that a series of memoranda would be prepared for each of the five major state general fund revenue sources (estate, luxury, property, sales, and income taxes) and that specific memoranda covering other possible revenue sources (including lottery, real estate transfer, severance, value-added, and insurance premium taxes) would also be provided.



S p e c i f i c a l l y , s i x memoranda w i l l be prepared f o r each of t h e f i v e major revenue sources mentioned above according t o t h e following substantive categories:

1. Substance, H i s t o r y , and Background The memoranda i n t h i s c a t e g o r y w i l l provide: a ) a d i s c u s s i o n of l e g i s l a t i v e enactments over t h e y e a r s which a f f e c t e d t h e r a t e o r base of t h e t a x , b) a d e t a i l e d d e s c r i p t i o n of what i s p r e s e n t l y on t h e books, and c ) an overview of t h e revenue t h e t a x has produced over t h e p a s t t h r e e o r f o u r y e a r s . For t h e most p a r t , Senate members of t h e s t a f f team and Mary E l l e n Simonson of t h e House s t a f f have been p r i m a r i l y r e s p o n s i b l e f o r t h e work r e q u i r e d i n t h i s catagory.



-



Comparison of Rates and Bases of A l l S t a t e s In t h i s c a t e g o r y , s t a f f w i l l attempt t o provide a s t a t e by s t a t e comparison of t a x r a t e s and t a x bases. S p e c i a l emphasis w i l l be devoted t o examining major deductions from t h e g r o s s t a x and major exemptions from t h e base of t h e t a x . The g e n e r a l conclusions drawn from t h i s p a r t of t h e study should g i v e l e g i s l a t o r s some i d e a of where Arizona's t a x r a t e might be higher o r lower f o r a p a r t i c u l a r t a x o r where Arizona provides f o r an exemption o r deduction t h a t i s a t y p i c a l of o t h e r s t a t e s .

2.



-



The primary r e s p o n s i b i l i t y f o r t h i s category rests w i t h t h e Senate members of t h e s t a f f team.

3 . Reliance Comparison Each of A r i z o n a ' s f i v e major revenue sources w i l l be s t u d i e d i n t e r m s of A r i z o n a ' s r e l i a n c e o r e f f o r t l e v e l on each t a x i n comparison t o o t h e r s t a t e s . The b a s i s from which comparisons w i l l be made w i l l be d i v i d e d i n t o two p a r t s : a ) s t a t e generated revenue s o u r c e s o n l y and, b) a combination of s t a t e and l o c a l revenue sources.



-



Three i n d i c a t o r s of r e l i a n c e a r e being compared t o o t h e r s t a t e s : a) b) c) t h e p e r c e n t of t o t a l revenue t h a t an i n d i v i d u a l t a x generates t h e d o l l a r amount of p e r c a p i t a c o l l e c t i o n s of t h a t t a x t o t a l c o l l e c t i o n s of t h e t a x a s a p e r c e n t of t o t a l p e r s o n a l income



The f i n a l product w i l l r e s u l t i n an attempt t o rank A r i z o n a ' s r e l i a n c e among a l l s t a t e s on t h e v a r i o u s t a x e s according t o i n d i c a t o r s such a s t h o s e enumerated above. The primary r e p p o n s i b i l i t y f o r t h i s study c a t e g o r y rests w i t h t h e Senate p o r t i o n of t h e s t a f f team.

4. Incidence and Burden Compari~on T h i s category i n v o l v e s an i d e n t i f i c a t i o n of t h e e x t e n t t o which i n d i v i d u a l t a x p a - e r s , -y a t varying income l e v e l s , bear t h e burden f o r t h e payment of a t a x . An a t t e m p t w i l l be made t o examine t h e t a x burden of both



-



individuals and corporations. The information and data required for this memoranda category is very closely tied to the following discussion of the fiscal impact of changes in the rates and bases. In order to estimate the incidence and burden of taxation on individuals, it is necessary to acquire data on consumption patterns and income received from rrontaxable sources classified by both income level and family size. In turn, this data must be meshed through a series of manual and computer manipulations with the data pulled by the Department of Revenue as described in Category #5. In corporate analysis, the study team will build a simple simulation model which will enable the team to compare Arizona's relative tax burden on "hypotheticalw corporations as compared to other southwestern states. Again this requires extensive secondary source data in addition to that gathered from the Department of Revenue. The primary responsibility for this portion of the study has been the responsibility of the House Staff members, Harold Scott and Robert Lockwood. 5, Fiscal Impact of Alternative Rate and Base Changes in Arizona This could possibly be viewed as the most important memoranda category and it is also the most difficult in terms of what has to be done to generate the needed data. For the income tax alone, it requires significant manpower commitments from the Department of Revenue. A brief description of what is required for the personal income tax follows: a representative sample of all income tax forms according to income level and size of family had to be designed and specified. (The sample size has been determined to be 7,018 forms). b) the Department of Revenue just extract from the individual income tax returns in the sample approximately 30 to 40 items, c) once these items are extracted they must be keypunched, placed on computer, run-off, analyzed and collated. This process demands extensive manpower and computer time commitment from the Department of Revenue. In fact, as of the beginning of the week of September 29 to October 3, the eight clerks on a part time basis to Department employed begin the extraction of data from the 7,018 forms selected for the sample. In order to undertake this kind of effort for the corporate income tax and for the sales tax, a similar process will be required and the manpower and computer time commitments will increase accordingly. The final product for the personal income tax will result in the ability to project the statewide fiscal impact of the inclusions or exclusions of existing and alternative deductions and exemptions from gross income of individuals. a)



-



Because the sample was designed to include data according to income level and size of family, the detail necessary to accomplish the incidence and burden will be available for memoranda category No. 1. In addition, after the present tax system's incidence and burden impact has been calculated, it will enable the research team to simulate burden-incidence impacts of any alternatives to the present system. The primary staff responsible for this category have been Dr. Arlyn Larson, Harold Scott, and Robert Lockwood.

6. Policy Options - This memoranda category establishes the point where the joint team will separate and Senate and House majority and minority staffs will explore, at the direction of their respective legislative members, alternative policy options in terms of the data provided in the first five memoranda catagories. Because of the groundwork already covered in the first five categories, the respective staffs should have adequate comparative, substantive and fiscal data to explore many policy options that legislative members wish to pursue in these five major general fund tax revenue sources.



ARIZONA STATE SENATE



HISTORY AND DEVELOPMENT OF THE ESTATE TAX IN ARIZONA



For Review Prior to Senate Finance Committee Meeting of November 6, 1975



Prepared by Senate Staff



HISTORY AND DEVELOPMENT OF THE ESTATE TAX IN ARIZONA



The Special Session of the First Arizona Legislature enacted an inheritance tax by passage of Chapter 15, Laws 1912. The



rate structure was twice amended; in 1921 to provide for a graduated rate structure, and in 1922 to further break down the various categories on which rates were imposed--as well as changing the rates (see attachments #1



-



#3).



Laws 1937, Chapter 27, repealed the inheritance tax and instituted in its place an estate tax. In his 1937 address to



the Legislature, Governor R.C. Stanford noted that the expense of administering the inheritance tax was roughly 40% of the receipts and recommended various changes. recommend a change to an estate tax. He did not, however,



Nevertheless, an inheritance



tax, it was felt, was a disincentive to the wealthy and an estate tax was instituted. An inheritance tax is levied against the bequest, devise, legacy, etc. which an individual heir receives. Even though the tax is levied before the bequest is awarded to the heir, the tax is - facto levied against the heir. de For instance, under



the 1912 Arizona Law, exemptions from taxation were allowed in amounts of $5,000 for lineal heirs, $2,000 for collateral heirs and $500 for all others. Rates for lineals were at 1%,



rates for collaterals were at 2%, while rates for all others began at 3%. The tax was deducted from the bequest and the remainder distributed to the heir.



Estate taxes, on the other hand, are levied against the decedent's net estate at an established rate after exemptions. It is a levy on the right to transfer property after death and not on receipt of benefits In re Gracia's Estates (1969) 9, Arizona App. 587, 455 P. 2d 269. distributed to the heirs. The remainder of the estate is then No consideration is given to the re-



lationship of the heir to the decedent, The establishment of an estate tax at overall lower rates than an inheritance tax, it was felt in 1937, would be a major factor in attracting the wealthy to Arizona to escape excessive inheritance taxes in other states. The institution of the estate



tax was also intended to be an overall revenue-raising move in that although its burden was lighter than the inheritance tax, presumably more wealthy people would move to Arizona and would be subject to the estate tax, and, wealthy citizens would pay more in property and sales taxes while alive. The 1937 law provided a rate structure of 2 to 20% on net estates from 0 to $5,000,000 (see attachment #4). a $25,000 exemption was allowed on the net estate. Laws 1939, Chapter 10, significantly lowered the rates to a scale of 4/5 of 1% to 16% on net estates from 0 to $10,000,000 in order to conform with the Federal Estate Tax Code. rates are still in effect today, (see attachment #5). Those The Additionally,



exemption on net estates was also raised to $100,000; also still in effect. The law was amended in 1949 to provide that if the estate tax levy imposed by Arizona were less than the maximum credit allowed against the Federal Estate Tax for state estate taxes



paid, (which varies according to the size of the estate) an amount

r-"



.-



equal to the difference between the actual levy according to the rate structure and the maximum federal tax credit would be automatically levied. By such a mechanism, a minimum estate tax levy, The



equal to the Federal Estate Tax credit, was established.



law was designed so as to insure that one would pay no more to both Arizona and the Federal Government than one would otherwise pay to the Federal Government if Arizona had no estate tax. Subsequent amendments to the Estate Tax Code were enacted in order to keep Arizona in conformance with the Federal Law. Some revisions to the law were effectuated jn 1953, however the rate structure remained unchanged. Arizona's current estate tax law is tied very closely to the Federal Code. The rate structure is such that given an equiv-



alent gross estate for Federal and Arizona purposes and similar deductions, the Arizona rate will be equal to the maximum allowable Federal credit. The rate structure is exactly as it was in 1939--



4/5 of 1% to 16% on net estates from 0 to $10,000,000 (42-1510). Pursuant to the 1949 law, if the total tax levy arrived at pursuant to the rate structure is less than the maximum Federal estate tax credit for state estate taxes paid, an amount equal to the difference is automatically levied (42-1514). of estate tax computation. ) The gross estate, for Arizona residents, consists of all real property (e.g. real estate, buildings) located within the State, all tangible personal property (e.g. , furniture, equipment, jewelry automobiles) within the State, and intangible personal property (e.g., bank accounts, stock and bonds) wherever located. For non(See attachment #6 for examples



residents, the gross estate is constituted of real and tangible



p e r s o n a l p r o p e r t y l o c a t e d i n Arizona. property i s not subject t o the tax.



Intangible personal



Net e s t a t e a g a i n s t which t h e t a x i s l e v i e d , i s computed by s u b t r a c t i n g from t h e g r o s s e s t a t e (42- 1512) : a. b. Funeral expenses Expenses i n c u r r e d i n a d m i n i s t e r i n g p r o p e r t y s u b j e c t t o claims c. d. Debts of decedent Net l o s s e s during a d m i n i s t r a t i o n of e s t a t e (from f i r e , t h e f t , a c t s of God, when n o t compensated by i n s u r a n c e ) e. f. g. P r o p e r t y and income t a x e s accrued a t time of d e a t h Bequests, e t c . , t o s u r v i v i n g spouse ( m a r i t a l deduction) Expenses i n c u r r e d i n a d m i n i s t e r i n g p r o p e r t y n o t s u b j e c t t o claims The following p r o p e r t i e s a r e exempt from t a x a t i o n under t h e E s t a t e Tax Code (42-1512.B.): a.' P r o p e r t y given f o r t h e use of t h e United S t a t e s , any S t a t e , T e r r i t o r y , a s long a s t h e p r o p e r t y i s used exc l u s i v e l y f o r p u b l i c purposes b. P r o p e r t y given t o n o n - p r o f i t c o r p o r a t i o n s t o be used f o r religious, charitable, s c i e n t i f i c , l i t e r a r y , o r educational purposes, o r f o r t h e p r e v e n t i o n of c r u e l t y t o animals o r children, or t o a trustee o r trustees, o r a fraternal s o c i e t y , o r d e r o r a s s o c i a t i o n o p e r a t i n g under t h e lodge system used f o r t h e same purposes

c.



$100,000 worth of p r o p e r t y of any t y p e on every e s t a t e P r o p e r t y upon which Arizona E s t a t e Tax was p a i d l e s s t h a n



d.



5 - years



b e f o r e t h e d e a t h o f t h e decedent



Exemptions and deductions for non-residents are pro-rated in the proportion that the value of the gross estate within Arizona bears to the valuation of the entire gross estate. Net estate tax collections recently, have been as follows (all money deposited in the General Fund): Fiscal Year 1971-1972 Net Collections $5,630,943 Number of Estates Processed 10,751



Prepared by Senate Staff September 13, 1975



Attachment #I



INHERITANCE TAX RATES ESTABLISHED PURSUANT TO Chapter 15, Laws, S p e c i a l Session of 1912

1.



- on e n t i r e b e q u e s t , i n h e r i t a n c e , d e v i s e , l e g a c y , g i f t 1%



o r b e n e f i c i a l i n t e r e s t t o any p r o p e r t y o r income therefrom r e c e i v e d by g r a n d p a r e n t s , p a r e n t s , husband, w i f e , c h i l d r e n , s i b l i n g s , wife o r widow of son, husband of daughter o f decedent. a. N t a x l e v i e d u n l e s s e s t a t e from which b e q u e s t , e t c . , o was drawn was g r e a t e r t h a n $10,000 $5,000 exemption f o r each person



b.

2.



- on 2%



e n t i r e bequest, inheritance, devise, legacy, g i f t o r b e n e f i c i a l i n t e r e s t t o any p r o p e r t y o r income therefrom r e c e i v e d by u n c l e , a u n t , n i e c e , nephew o r decedent, o r any l i n e a l descendant of same. N t a x l e v i e d u n l e s s e s t a t e from which b e q u e s t , e t c . , o was drawn was g r e a t e r t h a n $5,000 $2,000 exemption f o r each person



a.

b.

3.



In a l l other cases:

3 % on amounts t o $10,000 r e c e i v e d by each person



9 thereafter a. b.



t h e r e a f t e r on amounts t o $20,000 r e c e i v e d by each person on amounts t o $50,000 r e c e i v e d by each person 6 % f o r amounts g r e a t e r t h a n $50,000 r e c e i v e d by each p e r s o n N t a x l e v i e d u n l e s s e s t a t e from which b e q u e s t , e t c . , o was drawn was g r e a t e r t h a n $500 $500 exemption f o r each person



Attachment #2



INHERITANCE TAX RATES AS AMENDED BY CHAPTER 96, LAWS 1921

1.



For g r a n d p a r e n t s , p a r e n t s , husband, w i f e , c h i l d r e n , s i b l i n g s , w i f e o r widow of son, husband of daughter o f decedent:



T f t h e r e a f t e r on amounts t o $20,000 r e c e i v e d by each person



1% amounts t o $10,Q00 r e c e i v e d by each person on



- for

2.



amounts g r e a t e r t h a n $20,000 r e c e i v e d by each person



$5,000 exemption f o r each person For u n c l e s , a u n t s , n i e c e s , nephews o r any l i n e a l descendent of same, of t h e decedent:



3-%- t h e r e a f t e r on amounts t o $20,000 r e c e i v e d by each person



2 % of amounts up t o $10,000 r e c e i v e d by each p e r s o n



8% f o r

3.



amounts g r e a t e r than $40,000 r e c e i v e d by each person



N exemptions o For a l l o t h e r s :



3% t h e r e a f t e r on amounts t o $20,000 r e c e i v e d by each person

N exemptions o



4 % on amounts up t o $10,000 r e c e i v e d by each p e r s o n



t h e r e a f t e r on amounts t o $50,000 r e c e i v e d by each person 7% - f o r amounts g r e a t e r than $50,000 r e c e i v e d by each person



INHERITANCE TAX RATES AS AMENDED BY CHAPTER 2 6 , LAWS 1922, SPECIAL SESSION, FIFTH LEGISLATURE

1.



For husbands, wives, l i n e a l i s s u e , l i n e a l a n c e s t o r , adopted c h i l d ( o r l i n e a l i s s u e of t h a t c h i l d ) of decedent

1% on amount t o $25,000 r e c e i v e d by each person t h e r e a f t e r on amounts t o $50,000 r e c e i v e d by each person 3% t h e r e a f t e r on amount t o $100,000 r e c e i v e d by each person 6% t h e r e a f t e r on amount t o $500,000 r e c e i v e d by each person f o r amounts g r e a t e r t h a n $500,000 r e c e i v e d by each person



-



A l l Others - - $ 2 , 0 0 0



2.



For b r o t h e r , s i s t e r , o r descendant of b r o t h e r / s i s t e r o f d e c e d e n t ; w i f e , widow of s o n , o r husband o f daughter of decedent



m%

3.



2 % on amounts t o $25,000 r e c e i v e d by each person Z % t h e r e a f t e r on amounts t o $50,000 r e c e i v e d by each person j t h e r e a f t e r on amounts t o $ I O O , O O O r e c e i v e d by each person 7 t h e r e a f t e r on amounts t o $500,000 r e c e i v e d by each p e r s o n E - f o r amounts g r e a t e r t h a n $500,000 r e c e i v e d by each p e r s o n

person For a u n t s and u n c l e s of decedent:

3 % on amounts t o $25,000 r e c e i v e d by each person t h e r e a f t e r on amounts t o $50,000 r e c e i v e d by each p e r s o n i5% t h e r e a f t e r on amounts t o $100,000 r e c e i v e d by each person iT% t h e r e a f t e r on amounts t o $500,000 r e c e i v e d by each person 53% f o r amounts g r e a t e r t h a n $500,000 r e c e i v e d by each p e r s o n



-



Exemption: $250 f o r each person



4.



For b r o t h e r o r s i s t e - o f g r a n d f a t h e r o r grandmother o r descendant of b r o t h e r o r s i s t e r o f g r a n d f a t h e r o r grandmother of decedent

4 % on amounts t o $25,000 r e c e i v e d by each p e r s o n on amounts t o $50,000 r e c e i v e d by each p e r s o n 1 2 % t h e r e a f t e r on amounts t o $100,000 r e c e i v e d by each person ra% t h e r e a f t e r on amounts t o $500,000 r e c e i v e d by each p e r s o n f o r amounts g r e a t e r t h a n $500,000 r e c e i v e d by each p e r s o n



8% t h e r e a f t e r



-



Exemption: $150 f o r each p e r s o n



5.



For any o t h e r s , body p o l i t i c o r c o r p o r a t e



Zb% t h e r e a f t e r on amounts t o $50,000 r e c e i v e d by each person 1 % t h e r e a f t e r on amounts t o $100,000 r e c e i v e d by each person 5 ZO% t h e r e a f t e r on amounts t o $500,000 r e c e i v e d by each person



5% on amounts t o $25,000 r e c e i v e d by each person



ZS% f o r

:;;;piion



amounts g r e a t e r t h a n $500,000 r e c e i v e d by each person

:



o r each person



GENERAL EXEMPTION - p r o p e r t y t r a n s f e r r e d t o r e l i g i o u s , c h a r i t a b l e o r educational organizations within the S t a t e ; o r property t r a n s f e r r e d t o municipal c o r p o r a t i o n s w i t h i n t h e S t a t e f o r county, town, o r municipal purposes



ATTACHMENT #4



ESTATE TAX RATES ESTABLISHED PURSUANT TO THE ARIZONA ESTATE TAX ACT OF 1937 RATE 2%



NET ESTATE

on amounts t o t h e r e a f t e r on amounts t o

11 11 tt 11



$



25,000 50,000 75,000



4% 6% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%



f o r amounts g r e a t e r t h a n



Attachment #5



CURRENT ARIZONA ESTATE TAX RATES (Established Pursuant to Laws 1939, Chapter 10) RATE 4/5 of 1% 1-3/5% 2-2/5% 3-1/55 4% 4-4/5% 5-3/5% 6-2/5% 7-1/5% 8% 8-4/5% 9-3/5% 10-2/5% 11-1/5% 12% 12-4/5% 13-3/5% 14-2/5% 15-1/5% 16%

11 11 11 11



NET ESTATE on amounts to thereafter on amounts to

11 11 11 11



$



50,000 100,000 200,000 400,000 600,000 800,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 10,000,000



11



11



11



11



11



11



11



11



1I



11



11



11



11



11



11



11



11



11



11



11



1I



11



11



11



for amounts greater than



Attachment* #f



EXAMPLES OF ESTATE TAX COMPUTATION Example #1 Assume gross estate of $170,000 A.



P



Computation of gross Federal Tax: Gross e s t a t e . . . ~ . . . ~ . . . . . . . . . . . . . . . . . . ~ ~ ~ e ~ ~ ~ ~ $ ~ 7 ~ , ~ ~ ~ Less: Standard Federal e x e m p t i o n ~ - ~ ~ ~ ~ ~ ~ ~ e D ~ ~ ~ ~ o ~ Misc. deductions common to both U.S. and A r i z o n a ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ s - ~ ~ e Net estate



.................................. $100,000

-



Tax levy pursuant to graduated rate structure (see Federal tax table, attachment 17) $20,700

B.



Computation of Federal credit for state estate taxes paid: Net Federal estate



- $100,000



Credit pursuant to Federal tax structure (see attachment #7) - $560



-



C.



Computation of Arizona Tax Levy: Gross estate ................................$170,000 Less : Standard Exemption .......................100,000 Misc. Deductions common to both U.S. 6 Arizona .....................10,000 Net Arizona estate..



........................$

-



60,000



Tax levy pursuant to Arizona rate structure (see attachment # E ) - $560 Since the Arizona Estate Tax Levy pursuant to the rate structure completely absorbs the allowable Federal tax credit, no additional estate tax levy is imposed. The Arizona estate tax is then allowed as a credit against the Federal levy, and the tax on the estate is:

1 )

2)



Arizona



...................................$



560



Federal ($20,700 minus allowable credit of $560)..................................20,140



Assume gross estate of $170,000 A. Computation of gross Federal tax: Gross estate $170,000 Less: Standard exemption ..........................60,000 Misc. deductions common to both U.S. and Arizona ..........................10,000 Net Federal estate



..................................



............................$100,000

$20,700



Tax levy (see attachment #7)



B.



Computation of Federal credit for state estate taxes paid: Net Federal estate



-



$100,000



Credit pursuant to Federal tax structure (see attachment # 7 ) - $560 C. Computation of Arizona estate tax levy: '~ross estate $170,000 Less: Standard exemption .........................100,000 Misc. deductions common to both U.S. and Arizona ..........................10,000 Additional Arizona deductions not Allowed in Federal law ....................10,000 Net Arizona Estate



..................................



............................$



50,000



Tax levy pursuant to Arizona rate structure $400 (see attachment #5 - Federal credit allowable - $560; hence, additional Arizona - $160 estate tax pursuant to A R ~ - 1 5 1 4 Total Arizona Levy



-



$400 + $160 = $560



Total estate tax distribution: Arizona Federal ($20,700 minus allowable credit of $560) Total.........................................



.......................................$ 560 ..................................... 20 140



$- 20,700 -



Were it not for the provisions of 42-1514 (stating that if the Arizona estate tax levy pursuant to the Arizona rate structure is less than the allowable Federal credit, an amount equal to the d i f s n c e is automatically levied) the total estate tax distribution would be as follows:



Arizona (pursuant to rate structure ONLY) 400 Federal ($20,700 minus credit for state taxes paid of $400) 20 300 Total nC77RJ-



.....$

-



............................... .........................................



In other words, the Total levy would be the same if Arizona had no provision throughwhich to tax up to the Allowable Federal credit. However, since a part of the Federal credit would be unused, a bigger proportion of those revenues would go to the Federal government rather than Arizona. Example # 3 Assume gross estate of $170,000 A. Computation of gross Federal tax: Gross estate ..................................$170,000 Less: Standard exemption Misc. deductions common to both U.S. and Arizona Additional deductions which are not allowable by Arizona law................ Net estate



........................ ........................

$17,900



60,000 10,000 10,000



....................................$ 90,000



Tax levy (see attachment #7)



B.



Computation of Federal credit for state estate taxes paid: Net Federal estate



-



$90,800



Credit pursuant to Federal tax structure (see attachment #7) - $400 C. Computation of Arizona estate tax levy: Gross estate.. Less : Standard exemption Misc. deductions common to both U.S. and Arizona.............;.......... Net Arizona estate



................................$170,000 ........................ 100,000

10,000



............................$60,000



Tax levy pursuant to Arizona rate structure (See attachment # 5 ) $560 .



-



Total estate tax distribution = Arizona. Federal ($17,900 minus allowable credit of $400) Total



...;.. .............................. $ 560 .................................. 17,500 ....................................... 18,ubo



ATTACHMENT # 7



CHARTS RELATING TO THE COMPUTATION QF FEDERAL ESTATE TAX LIABILITY



ARIZONA STATE SENATE



HISTORY AND DEVELOPMENT OF THE LUXURY TAX IN ARIZONA



For Review Prior to Senate Finance Connittee Meeting of November 6, 1975



Prepared by Senate Staff



HISTORY AND DEVELOPMENT OF THE LUXURY TAX IN ARIZONA I. HISTORICAL BACKGROUND The following paragraphs provide a chronological discussion of legislative enactments over the past 40 years which changed or adjusted the rates of taxation or the base of Arizona's luxury tax. Attachment number 1 provides a summary of the



tax rate levels by year of enactment on liquor and tobacco products. The 1933 Legislature enacted the first luxury tax in Arizona. Tax rates were imposed at varying levels on tobacco



products, liquor products, and recreational materials including: polo equipment, fishing tackle and accessories, shotgun shells, and non-commercial films. The purpose of this first Arizona luxury tax was to raise additional revenue' for unemployment and welfare relief. In 1946, the Legislature raised the tax rate on all liquor products to provide additional funds for old age assistance. In 1962, the Legislature again raised the tax rate on all liquor products to generate additional revenue for unemployment relief, welfare relief, and old age assistance. In 1965, the tax rate on twenty cigarettes was raised from two to six and one-half cents and the tax on each 8 ounce container of spirituous liquor and high (greater than 24%) alcohol content wine was raised from nine to twelve and one-half cents. The revenue was earmarked for state school equalization. The Legislature, in 1967, raised the tax rate from six and one-half to ten cents on each twenty cigarettes for the purpose of raising funds for the Central Arizona Project and

.m



financial assistance for schools. The per unit basis for the imposition of the tax on spirituous liquors was changed from twelve and one-half cents per eight ounces to two dollars per gallon by the 1969 Legislature. However, this change did not raise or alter the effective tax rate on liquor. In the election of November, 1972 an initiative measure was passed by the people of Arizona which, along with providing for the sharing of state income tax revenues with cities, preempted the area of luxury taxation to the State so long as this sharing continues.

4



I



In 1973, the Legislature created the Department of Revenue



and transferred the responsibility for the collection of the luxury tax from the State Tax Commission to the newly formed Department. During the 1973-74 Special Session on School Finance, the tax rate on spirituous liquors was raised from two dollars to two dollars and fifty cents per gallon with a proportionate increase for greater or lesser quantities. The Legislature also raised the tax on a package of twenty cigarettes from ten cents to thirteen cents. The purpose of this legislation was to provide



additional revenues for the state school fund. II. PRESENTTAX RATES AND STRUCTURE

A.



Spirituous liquor



The present tax rate on spirituous liquor is two dollars and fifty cents per gallon. Of the revenue collected



from this tax, three 6 one-half cents per gallon is statutorily



earmarked f o r t h e s t a t e school fund and t h e C e n t r a l Arizona



-



p



P r o j e c t (42-1204.B). However, t h e o l d Tax Commission and now t h e Revenue Department have been p l a c i n g t h e s e revenues i n t h e g e n e r a l fund a l l o w i n g t h e L e g i s l a t u r e t o make t h e d i v i s i o n of monies between t h e C e n t r a l Arizona P r o j e c t and t h e S t a t e School Fund. N r e a l earmarking t a k e s p l a c e however. o d e p o s i t e d i n t h e General Fund. The monies a r e simply



Monies a r e t h e n a p p r o p r i a t e d



f o r t h e CAP and f o r S t a t e Aid t o Schools from t h e General Fund and, i n any e v e n t , g e n e r a l l y exceed t h e amounts which would be



s t a t u t o r i l y earmarked f o r t h o s e purposes from t h i s revenue s o u r c e .

B.



Vinous l i q u o r



The p r e s e n t t a x r a t e on vinous l i q u o r l e s s than 2 4 % a l c o h o l c o n t e n t i s f i v e and o n e - f o u r t h c e n t s p e r s i x t e e n ounces (42-1204.A.3). The t a x r a t e on vinous l i q u o r s more than 2 4 % a l c o h o l c o n t e n t i s twelve and o n e - h a l f c e n t s p e r e i g h t ounces (42-1204.A.4). However,



no l u x u r y t a x revenues have accrued t o t h e s t a t e r e c e n t l y from vinous l i q u o r s w i t h h i g h ( g r e a t e r t h a n 24%) a l c o h o l c o n t e n t . P r i m a r i l y , t h i s i s due t o t h e f a c t t h a t most o f t h e s o - c a l l e d " f o r t i f i e d wines" a r e g e n e r a l l y n o t f o r t i f i e d i n excess of around

21%.



Hence, f o r t i f i e d wines i n e x c e s s of 2 4 % a l c o h o l c o n t e n t

d

I 6



c o n s t i t u t e a m i n i s c u l e p a r t of t h e t o t a l market and have n o t e n t e r e d i n t o t h e Arizona market r e c e n t l y . Three and o n e - h a l f c e n t s p e r e i g h t ounces of t h e revenue c o l l e c t e d from t h e t a x on f o r t i f i e d wines has been earmarked f o r t h e s t a t e s c h o o l fund and t h e C e n t r a l Arizona P r o j e c t (A.R.S. 42-1204B.).

"A



However, i t i s a g a i n an academic earmarking s i n c e Revenues



no luxury t a x revenues a r e c o l l e c t e d from t h e s o u r c e . a c c r u i n g from t h e l u x u r y t a x on ltlow wines1' a r e n o t



s t a t u t o r i l y earmarked.

C.



Malt l i q u o r s



The p r e s e n t t a x r a t e on m a l t l i q u o r s ( b e e r ) p e r g a l l o n i s eight cents. earmarked. The revenue from t h i s t a x i s n o t s t a t u t o r i l y There a l s o e x i s t s a t a x on m a l t e x t r a c t s of f i f t e e n Malt e x t r a c t s , f o r t h e p u r p o s e s of t h e l u x u r y



c e n t s p e r pound.



t a x code, a r e c o n s i d e r e d t o be t h o s e i n g r e d i e n t s used i n t h e manuf a c t u r e o f b e e r and o t h e r b e v e r a g e s and a r e t a x e d a t t h e r a t e o f f i f t e e n c e n t s p e r pound. C o l l e c t i o n s from t h i s t a x a r e mainly



from i n d i v i d u a l s who make t h e i r own "home- brewtt.

D.



Tobacco



The p r e s e n t t a x r a t e on a package o f twenty c i g a r e t t e s i s t h i r t e e n c e n t s (42-1204.A.6; 42-1231.A.1). Three and o n e - h a l f



c e n t s o f t h e revenue c o l l e c t e d from t h i s c i g a r e t t e t a x h a s been earmarked f o r t h e s t a t e s c h o o l fund and t h e C e n t r a l Arizona P r o j e c t (A.R.S. 42-1231.C.). These r e v e n u e s , l i k e t h o s e g e n e r a t e d



by l i q u o r s , have s i m p l y been p l a c e d i n t h e General Fund.. O t h e r tobacco p r o d u c t s a r e t a x e d a t d i f f e r e n t l e v e l s . Various tobacco p r o d u c t s such a s smoking t o b a c c o , s n u f f , and f i n e c u t chewing tobacco a r e t a x e d a t one c e n t p e r ounce (42-1204.A.7). Cavendish, p l u g , o r t w i s t t o b a c c o a r e t a x e d a t o n e - f o u r t h o f one c e n t p e r ounce, w h i l e e a c h twenty s m a l l c i g a r s n o t weighing more t h a n t h r e e pounds a r e t a x e d a t a r a t e o f two c e n t s p e r ounce. C i g a r s a r e t a x e d a t t h e r a t e o f one c e n t on e a c h t h r e e c i g a r s , i f the r e t a i l p r i c e i s not g r e a t e r than f i v e cents per c i g a r ; o r i f the r e t a i l p r i c e i s g r e a t e r t h a n f i v e c e n t s p e r c i g a r , t h e t a x i s one cents per cigar.



111.



LUXURY TAX REVENUE STAMPS In the case of spirituous and vinous liquors, malt liquors



and all tobacco-products other than cigarettes, the luxury tax is paid by the wholesaler at the time he or she purchases the items for resale. The tax is then statutorily required to be added to the sales price. The wholesaler must then remit the



amount of the tax to the Department of Revenue on a monthly basis. This monthly remittance must be accompanied by a sworn No



statement attesting to the accuracy of the tax payment.



state stamp is affixed to spirituous and vinous liquors or malt liquors to indicate payment of the tax. Cigarettes, on the other hand, have a stamp affixed to each package to indicate payment of the tax. Wholesalers purchase the stamps from the Department of Revenue (the tax is thereby paid) and affix them to each package of cigarettes. Metering



machines are also used by wholesalers if they prove more practicable. In 1973, a measure was enacted which allowed wholesalers or retailers of cigarettes to purchase luxury tax revenue stamps at the following graduated rates: 96% of face value for the first $30,000 worth of stamps purchased in any month; 97% of face value for the second $30,000 worth of stamps purchased in any month; 98% of face value on all stamps in excess of $60,000 worth

of stamps purchased in any one month.

/



The purpose of this program



is to allow a retailer or wholesaler an opportunity to regain part of the administrative expense incurred due to the mandatory



stamping of cigarettes. Hence, total luxury tax collections from cigarettes are generated from an actual rate of slightly less than 134 per package of twenty.



IV.



NET TOTAL COLLECTIONS The net total collections during the last four years for



all tobacco and liquor products is set forth in Attachement number 2. As can be seen by reviewing the following chart, Arizona has traditionally received two-thirds of its luxury tax revenues from cigarettes, 19% of luxury tax revenues from spirituous liquors, 9 to 10% of the luxury tax from malt liquor, and 3 to

4 % of the luxury tax from vinous liquors.



The remainder of the



income comes from tobacco licenses.



V.



SUMMARY From the above narrative, the following generalizations



can be made: 1) Luxury tax revenues during the fiscal year 1974-75



amounted to approximately $50 million; approximately 7.4% of net General Fund revenues.

2)



Luxury tax revenues accruing from the sale of cigarettes



traditionally constitute roughly two-thirds of total luxury tax collections.

3)



The earmarking of portions of the luxury tax in the



amounts of three and one-half cents on each gallon of spirituous liquor, three and one-half cents on each eight ounces of vinous liquor with greater than 2 4 % alcohol content, and three and onehalf cents on each package of cigarettes for the Central Arizona Project and the State School Fund is purely academic. No such



earmarking is done.



Monies are simply placed into the General



Fund and appropriations made to the various items with no relationship to the amount of revenue in the special fund. 4) Since luxury tax revenue stamps for cigarettes are



sold to wholesalers or retailers at 96% of face value for the first $30,000 worth of stamps in a given month, the effective tax rate in such instances is approximately 12.484 per package. The next $30,000 worth of stamps in a month are sold for 97% of face value, in which case the effective tax rate is 12.614 per package. Stamps in excess of $60,000 sold in a given



month are sold at 98% of face value, making the effective tax rate 12.744 per package.



ATTACHMEU NUMBER 1 T X RATE CHANGES BY YEAR OF ENACTMENT A ON LIQUOR AND TOBACCO PRODUCTS 'RODUCT 1933

'



N



cn



1946



1962



1965



1967



1969



1974



x.

1)



LIQUORS S p i r i t u o u s Liquors p e r 8 oz. per gallon Vinous L i q u o r s l e s s than 24% alcohol c o n t e n t p e r 16 oz. Vinous L i q u o r s more t h a n 2 4 % a l c o h o l content p e r 8 oz. 54 7%4 94 12%4 1244



$2.00



$2.50



3)



34



444



544



544



5$4



5L&



5156



2)



54 51 101



744

7%4



94 84 154



1244 84



1244 84 154



1244

84



12454 88 154



3)



Malt L i q u o r (Beer)

per gallon 154



E). M a l t E x t r a c t p e r pound

1 1 . TOBACCO

A)



Isf#



154



Cigarettes p a c k a g e o f 20 ~ o b a c c oP r o d u c t s p e r oz. Cavendish, p l u g o r t w i s t tobacco per oz. Small c i g a r s n o t more t h a n 3 l b s .



24



24

14



24



6%4



104



104



134

'



B)

C)



14



14



14



14



14



16



k4 24



CB

24



CI

24



CB

24



CB

26



C#

24



CB

2#



D)

E)



C i g a r s (1) 14 14 14 14 14 14 16 ( 1 ) Tax i s 1 4 on e a c h 3 c i g a r s i f s u c h c i g a r s r e t a i l f o r n o t more t h a n 54 e a c h ; t a x i s 1 4 p e r c i g a r if s u c h c i g a r s r e t a i l f o r more t h a n 54 e a c h .



STATE OF ARIZONA LUXURY TAX COLLECTIONS FISCAL YEARS 1971-72 THROUGH 1974-75

PRODUCT Spirituous Liquors

1971-72 1 9 7 2 - 73 1973-74



ATTACmlENT NUMBER 2



1974-75



$ 6,696,376

19.3%



$ 7,305,114

19.4%



$ 7,812,569

19.1%



$ 9,658,946

19.3%



Vinous Liquors (greater than 2 4 % alcohol) Vinous Liquors (less than 2 4 % alcohol content) Ma1 t Liquor (beer)



0



0



0



0



$ 1,320,112

3.8%



$ 1,511,418

4.0%



$ 1,516,249

3.7%



$ 1,557,456

3.1%



$ 3,531,276

10.2%



$ 3,860,231

10.3%



$ 4,356,043

10.7%



$ 4,702,714

9.4%



Malt Extract Stamp Sales Cigarettes



$



7,075 .02%



$



5,258 .01%



$



5,686 .01%



$



6,115 .01%



$22,648,524 65.3%



$24,477,445 65.0%



$26,643,480 65.2%



$33,659,092 67.2%



Non-cigarette tobacco products (those enumerated in 42-1204.A17 through 42-1204.A. 10) Licenses

TOTAL



$



473,464 1.4%



$



491,696 1.3%



$



502,893 1.2%



$



512,966 1.0%



*



$



655 .002%



$



632 .002%



$



540 .001%



$



709 .001%



$34,677,482



$37,651,794



$40,837,460



$50,097,998



*

!



,



2



Represents revenues paid to Department of Revenue for licenses permitting sale of tobacco products ( 4 2 - 1 2 0 3 ) . Fees are $ 5 . 0 0 for wholesaler license; $ 1 . 0 0 for reretailer license. Both are valid indefinitely. Liquor licenses are under the urisdiction of the State Liquor Cor ~1'Board and revenues thereare not e lected here. ' , 1



ARIZONA STATE SENATE



A DISCUSSION OF THE PROPERTY TAX IN ARIZONA



For Review Prior to Senate Finance Committee Meeting of November 6, 1975



Prepared by: Senate Staff



l



I



THE STATE PROPERTY TAX IN ARIZONA

I



i



The following narrative attempts to delineate the major points in the current structure of Arizona Property Tax Laws. It touches upon the current administration of the law, exemptions from property taxation, as well as highlighting the existing property tax relief programs. An Appendix, discussing the This narra-



historical development of the tax is also provided. tive takes the following outline form: I. Current Arizona Property Tax Structure A. Definitions In General Administration of Property Tax Rolls



B.

C.



.D



.



Constitutional and Statutory Exemptions from Property Taxation



E. 11.



Current Property Tax Relief Programs



Summary and Generalizations



Appendix



--



Historical Review of Constitutional and Statutory



Exemptions from the Property Tax



I.



CURRENT ARIZONA PROPERTY T X STRUCTURE A

A.



Definitions



1.



F u l l Cash Value



--



The v a l u a t i o n d e t e r m i n e d on



p r o p e r t y by a c o u n t y a s s e s s o r o r by t h e D e p a r t ment of Revenue; synonymous w i t h market v a l u e (42-227.A.) and b a s e d on c u r r e n t usage (42-123.A.5)



2.



Assessed Value



--



A percentage of f u l l cash value



as s p e c i f i e d by law (42-227.B.)

f i v e c l a s s e s of p r o p e r t y .

3.



f o r each of t h e



Assessment R a t i o



--



The p e r c e n t a g e a p p l i e d a g a i n s t



f u l l cash value i n order t o determine assessed value. 4. $100 o f Assessed V a l u a t i o n



--



The b a s e a g a i n s t



which t h e p r o p e r t y t a x r a t e i s a p p l i e d i n o r d e r t o compute t h e t a x l e v y , e . g . , assuming a n a s s e s s e d



v a l u a t i o n o f $500 and a t a x r a t e o f



-



$.lo,



the r a t e



i s a p p l i e d a g a i n s t e a c h -o f a s s e s s e d v a l u a t i o n $100

t o determine t h e t a x levy:

5.



$o lo



$500 x $ . I 0 = $.SO



Property Class



--



Insofar as property taxation is



c o n c e r n e d , a g r o u p i n g o f p r o p e r t i e s w i t h a common a s s e s s m e n t r a t i o and s u b j e c t t o e s s e n t i a l l y t h e same a d m i n i s t r a t i v e p r o c e d u r e s . The c u r r e n t s t r u c t u r e o f A r i z o n a p r o p e r t y t a x a t i o n provides f o r t h e following - c l a s s e s of 5 p r o p e r t y (42-136), a s s e s s e d a t t h e following p e r centages of f u l l cash value f o r property t a x purposes (42-227):



Class 1



--



flight property, private car



companies, railroads, producting mines, standing timber (60%) Class 2



----



telephone, gas, water and electric



utility property (50%) Class 3 Class 4 (18%) Class 5 - - residential property and non-profit housing for the elderly or handicapped (15%) These classifications and percentages apply to property located in - taxing jurisdictions within all the state (state, county, city, school district, community college district, special district).

6.



commercial and industrial property ( 2 7 2 ; agricultural property and vacant l a n d



MAS - - Mass Appraisal System; a computer-based formula for valuing homes which uses the market approach to valuation, i.e., using sales data, among other factors, from houses of similar characteristics i.n order to set valuations.



B.



In General Arizona's current property tax structure has its roors in the early 1960's. The old laws requiring uniform valu-



ation of all property were being consistently violated and in 1963 a suit was filed challenging the arbitrary valuation procedure. The Arizona Supreme Court ruled in Southern



Pacific Railroad vs. Cochise County that the valuations were not uniform and were therefore discriminatory. This



ruling forced the Legislature into a property reappraisal program. In 1963, the Legislature created a Division of



Appraisal and Assessment Standards within the State Tax Commission to accomplish the reappraisal. The Division of Appraisal and Assessment Standards completed its work in 1 9 6 7 . Then, the Division was



redesignated as the Department of Property Valuation with the responsibility of overall supervision of the state's property tax structure. That year property tax administra-



tion in the state was substantially restructured by establishing - classes of property for tax purposes (consolidating 4

26 the - existing classes); a fifth class was added



in 1973.



The framework established in 1 9 6 7 is still appli-



cable today. Administration of Property Tax Rolls For purposes of administration, the - classes of 5

2 property are grouped into essentially - categories:



centrally-assessed and locally-assessed. Centrallyassessed properties consist of classes 1 (mines, airlines, railroads, and timber) and 2 (utilities), and the annual setting of their full cash value is done by the Property and Special Taxes Division of the State Department of Revenue. Locally-assessed properties consist of classes



3 (commercial and industrial), 4 (agricultural), and 5



(residential) and their valuation is done by the various county assessors for such properties located within their respective counties. County Assessors are deputies of the



Department of Revenue and value property pursuant to



standard formulae, procedures, and guidelines issued by the Department. set forth below.

1.



All valuations are subject to appeal as



Locally-assessed Properties.



On January 1 of each



year, the various county assessors are required to ascertain the full cash value of class 3, 4, and 5 property within their jurisdictions (42.221.A). Persons aggrieved by the valuations on their properties have until March 15 to appeal them to the county assessor (42-221.D.). The assessor must then rule on Should the



the appeals within 30 days (42-221.F.).



assessor rule against the petitioner, the petitioner may further appeal the valuation to the Board of Equalization (Board of Supervisors) of the county in which the property is located. This must be done within 15

7



days of the assessor's decision (42-241.01.A).



Appeals



to the Board of Equalization cannot be made unless an appeal has first been made to the county assessor. The



Board must hear all appeals within 20 days (42-241.B.) and then rule upon them within 10 days after the hearing (42-241.01.C.) or by about May 30. If the petitioner has not been satisfied by the County Board's decision, he or she can appeal further to the State Board of Tax Appeals, or to the Superior Court, or both, in turn (42-245). An appeal to the



St.ate Board must be done within 20 days of the County Board's decision (42-245.A.2.). Once again, before a person can appeal to the State Board, all lower levels



of appeal must be exhausted.



The State Board must



then render a written decision on all appeals by July 25 (42-245.A.2.). The State Board is the last level of administrative - appeal. Further appeals must be made to the



Superior Court of the applicable county by November 1 and taxes must be paid under protest (42-245.A.1.; 42-151.E.). Appeals to the Superior Court can be made



directly from the County Board of Equalization or from the State Board of Tax Appeals (42-245).



2.



Centrally-assessed Properties.



On or before the first



Monday in June of each year, the Division of Property and Special Taxes of the State Department of Revenue is required to establish the full cash value on class



1 and 2 properties.



Between the first and third Mon-



days in June, class 1 and 2 aggrieved taxpayers may have an "administrative review" of their valuation by the Division of Property and Special Taxes, (42-124.02.C.). On the third Monday in June, the



valuations are .transmitted to the respe.~tiveCounty Boards of Supervisors.

A petitioner who was not satisfied with



the administrative review by the Department may further appeal to the State Board of Tax Appeals (42-124.02.D.). While no statutory time constraints limit the time for appeal to the State Board, the fact that the State Board must hear and decide all appeals on property by July 25 imposes a limit of some sorts. Further appeals must be

k



made t o t h e S u p e r i o r Court of t h e a p p l i c a b l e c o u n t y and t a x e s must b e p a i d under p r o t e s t . A f t e r t h e J u l y 25 d a t e f o r d e c i d i n g a l l a p p e a l s of p r o p e r t y v a l u a t i o n ( s a v e t h o s e which a r e a p p e a l e d t o c o u r t ) , f u l l cash values valuations



--



and t h e r e f o r e a s s e s s e d



--



a r e known f o r e a c h t a x i n g j u r i s d i c t i o n .



The p r o p e r t y t a x i s u s e d a s t h e " b a l a n c e r " o f t h e b u d g e t s among t h e v a r i o u s Arizona t a x i n g j u r i s d i c t i o n s . B r i e f l y , t h e t a x r a t e i s computed a s f o l l o w s : a. The a n t i c i p a t e d t o t a l revenue n e e d s a r e computed by e a c h t a x i n g j u r i s d i c t i o n b a s e d upon t h e i r a d o p t e d budgets. b. The a n t i c i p a t e d revenue c o l l e c t i o n s from a l l s o u r c e s o t h e r t h a n t h e p r o p e r t y t a x a r e computed.



c.



The r e q u i r e d p r o p e r t y t a x l e v y i s computed by s u b t r a c t i n g t h e amount i n p a r a g r a p h i n p a r a g r a p h 1. from t h e amount



d.



The r e q u i r e d l e v y i s c o n v e r t e d t o a t a x r a t e p e r

$100 a s s e s s e d v a l u a t i o n .



I n o t h e r words, a p r o p e r t y t a x r a t e i s s e t t h a t i s d e s i g n e d t o make up t h e d i f f e r e n c e between a n t i c i p a t e d and needed revenue f o r t h e e n s u i n g b u d g e t y e a r .

A t t h e s t a t e l e v e l , t h i s " b a l a n c i n g " i s done by t h e



1 8 member J o i n t L e g i s l a t i v e Tax Committee on t h e second Monday i n August. I t i s accomplished by most o t h e r



t a x i n g j u r i s d i c t i o n s i n t h e s t a t e on t h e t h i r d Monday in ~ u ~ u s t . The County T r e a s u r e r s e r v e s a s t h e t a x c o l l e c t o r



for the taxes imposed by all taxing jurisdictions (with the exception of private car, express companies, and flight property, collected by the Department of Revenue).

'



After collecting the taxes, the Treasurer transmits the requisite amount to the various taxing jurisdictions in accordance with the rates and assessed valuations of properties located inside their boundaries. One-half



of the total property tax payment (for all jurisdictions) for a given year is due and payable on October 1 of that year and delinquent November 1 (September 1 and October

1, respectively if there is no general homeowner property

t a x reduction) and one-half due and payable on March 1



of the following year and delinquent May 1.



(These



"second-half" dates are the same irrespective of whether

a general homeowner property tax reduction is given).



D.



Constitutional and Statutory Exemptions from Property Taxation The original State Constitution provided that exemptions



from property taxation be done via Constitutional Amendment,

Presently, the Constitution provides for the following exemptions (Article 9, Section 2 : ) 1.

2.



Federal, state, county and municipal property. Public debts as evidenced by the bonds of Arizona or its political subdivisions.



3.



Up to $2,000 of the assessed valuation of property of certain widows and veterans (for a full discussion of this exemption, see Sections E., 3 6 4 below).



4.



Stocks and inventory of a wholesaler or retailer



principally engaged in the resale of such stocks and inventory.

5.



Household goods used for non-commercial purposes. Property of educational, charitable, and religious associations which are not used or held for profit as exempted by law. Indian lands are exempt pursuant to Article 20, Section 5. The provisions of Article 9, Section 2 are generally



6.



self-executing, so no further statutory enactment is necessary in order to effectuate the exemption except where so noted.

A.R.S.



42-271 reiterates the various exemptions set forth



in the Constitution in addition to specifying certain educational, charitable and religious properties which have been statutorily exempted pursuant tothe permissive nature of the Constitution in this area. 1. Delineated under 42-271 are:



Federal, state and municipal property. Public debts as evidenced by the bonds of the State or

its political subdivisions.



2.



3.



Public libraries, colleges, schoolhouses and other buildings used for education, along with their libraries and equipment, and the lands appurtenant to their buildings, etc., as long as they are used for educational purposes on a non-profit basis.



4.



:



Hospitals, asylums, poor houses, and other charitable institutions for the relief of the indigent or afflicted,

the lands appurtenant thereto, and fixtures and equipment,



not used or held for profit.

5.



Grounds and buildings belonging to agricultural societies,



n o t used o r h e l d f o r p r o f i t . Churches and b u i l d i n g s u s e d f o r r e l i g i o u s w o r s h i p , t h e i r f u r n i t u r e and equipment, and t h e l a n d a p p u r t e n a n t t o t h e b u i l d i n g s , s o l o n g a s no r e n t i s p a i d f o r t h e l a n d and s o l o n g a s t h e p r o p e r t y i s o p e r a t e d on a non-profit basis. N o n - p r o f i t p o r t i o n s o f c e m e t a r i e s and g r a v e y a r d s . P r o p e r t y of r e s i d e n t widows, widowers, h o n o r a b l y d i s c h a r g e d v e t e r a n s , members o f t h e r e v e n u e marine s e r v i c e , m i l i t a r y n u r s e s , i n an amount n o t e x c e e d i n g $2,000 o f a s s e s s e d v a l u a t i o n where t h e t o t a l a s s e s s e d v a l u a t i o n o f t h e p r o p e r t y of s u c h p e r s o n s i s l e s s t h a n $5,000 and where t h e v e t e r a n s s e r v e d a t l e a s t - days i n t i m e o f 60 war and were r e s i d e n t s p r i o r t o September 1, 1945. O b s e r v a t o r i e s and t h e i r p r o p e r t y n o t u s e d o r h e l d f o r profit. P r o p e r t y used i n t h e o p e r a t i o n o f a h e a l t h c a r e i n s t i t u t i o n c a t e r i n g t o t h e e l d e r l y o r handicapped, n o t used o r held f o r p r o f i t . Property used f o r s u b s i d i z e d , n o n - p r o f i t housing f o r t h e e l d e r l y o r handicapped. 12. Property of charitable i n s t i t u t i o n s , the lands appurtenant t h e r e t o , f i x t u r e s and equipment, n o t u s e d o r h e l d f o r p r o f i t and i n which any income from t h e p r o p e r t y i s u s e d f o r t h e r e l i e f of t h e i n d i g e n t o r a f f l i c t e d .



1.



P r o p e r t y Tax R e l i e f f o r t h e E l d e r l y C h a p t e r 1 8 2 , Laws 1 9 7 3 , p r o v i d e d i n p a r t f o r an



annual credit against income tax liability for the lowincome elderly in an amount equal to a certain percentage of property taxes paid.

65 In order to qualify, an individual must be - years



of age or over and all property owned by such individual cannot exceed $5,000 in assessed valuation. For a per-



son living alone, income may not exceed $3,500 annually; if living with one or more legal dependents, the household income ceiling in order to be elibigle for relief under this program is $5,000. Exactly what constitutes income is statutorily defined (43-128.01) and was amended by Chapter 77, Laws 1975 to make more individuals eligible under the provisions of the program. in the income computation are the following: Included



-------



Adjusted gross income (as defined by the Department of Revenue). Capital gains. A1 imony . Support money. Nontaxable strike benefits. Nontaxable interest received from the Federal Government or any of its instrumentalities.



--



Pensions or annuities not specifically exempted by



Specifically excluded from the computation of income for the purposes of this relief program are: Social Security payments; Arizona unemployment insurance payments; veterans disability pensions; workman's compen-



sation; income tax credits given under this program; railroad retirement benefits; "loss of time" insurance payments; gifts from nongovernmental sources; relief in kind. Qualifying individuals are allowed an income tax credit in an amount equal to a certain percentage of the property taxes which they paid according to the following statutory schedule:

a.



For individuals living alone:

% O F PROPERTY TAX ALLOWED AS AN INCOME TAX C R E D I T



HOUSEHOLD INCOME



b.



For individuals living with one or more dependents:

$ O F PROPERTY TAX ALLOWED AS AN INCOME TAX C R E D I T



HOUSEHOLD INCOME



$



0



2,500 3,000 3,500 4,000 4,500



-



2,500 3,000 3,500 4,000 4,500 5,000



100% 90% 70% 50% 40% 30%



-



-



This allowable income tax credit applies to qualified elderly who either own or rent their dwelling units. Insofar as homeowners are concerned, for the purposes of



b



t h i s program, p r o p e r t y t a x e s a r e d e f i n e d t o be o n l y t h o s e t a x e s r e s u l t i n g from a p p l i c a t i o n o f t h e t a x r a t e t o t h e f i r s t $2,000 o f a s s e s s e d v a l u a t i o n . In the case of a



r e n t e r , who d o e s n o t d i r e c t l y r e c e i v e a p r o p e r t y t a x b i l l i n g , a n amount e q u a l t o 25% o f t h e a n n u a l r e n t b u t n o t t o e x c e e d $225.



--



--



i s considered t o constitute



p r o p e r t y t a x e s p a i d i n o r d e r t o compute t h e a l l o w a b l e c r e d i t u n d e r t h i s program p u r s u a n t t o t h e s t a t u t o r y s c h e d u l e d e l i n e a t e d above. The amount of p r o p e r t y t a x r e l i e f g r a n t e d u n d e r t h i s program f o r t h e t a x y e a r 1974 i s e s t i a a t e d t o be a p p r o x i m a t e l y $200,000, b a s e d upon a n e x a m i n a t i o n of a l i n o s t a l l 1974 income t a x r e t u r n s . However, s i n c e



1 9 7 4 was t h e p r o g r a m ' s f i r s t y e a r o f o p e r a t i o n , and

s i n c e amendments t o t h e program were made t h i s y e a r which s h o u l d make more p e r s o n s e l i g i b l e f o r t h e p r o p e r t y t a x r e l i e f , $200,000 would p r o b a b l y n o t be a n a c c u r a t e i n d i c a t o r o f r e l i e f t o be g r a n t e d under t h i s program i n 1975. The l a t e s t e s t i m a t e s by t h e s t a f f o f t h e



J o i n t L e g i s l a t i v e Budget Committee p r o j e c t a p p r o x i m a t e l y



$ 4 m i l l i o n i n p r o p e r t y t a x r e l i e f f o r t h e t a x y e a r 1975. 2.

R e n t e r s ' P r o p e r t y Tax R e l i e f C h a p t e r 1 6 6 , Laws 1 9 7 4 , i n s t i t u t e d a p r o p e r t y t a x r e l i e f program f o r i n d i v i d u a l s who r e n t t h e i r d w e l l i n g units. No a g e o r income c r i t e r i a a r e s e t f o r e l i g i b i l i t y



f o r t h i s form o f t a x r e l i e f . T h i s program p r o v i d e s f o r a c r e d i t a g a i n s t income



tax liability in an amount equal to 10% of annual rent



paid or $25, whichever is less.

Elderly individuals who rent their place of residence



-



and who are eligible for tax relief under the property

tax relief program specifically for the elderly (see 1, above) as well as for the relief under this program, may not claim relief under both. Based upon an analysis of 1974 income tax returns, relief under this program for the tax yea,r 1974 is estimated to approximate $2.7 million.

3.



Widows Exemption Constitutionally, a resident widow of Arizona is allowed to declare as exempt from taxation, property up to the amount of $2,000 of assessed valuation, provided she meets the following qualifications: a. The assessed valuation of all of the widowls property is less than $5,000. b. Annual income cannot exceed: i $3,500 if the widow has no minor children . living with her. ii. $5,000 if the widow resides with a minor or incompetent child. c. She lived in Arizona with her husband at the time of his death; or, if her husband died in another state,



she must have been a widow residing in Arizona since

before January 1, 1969. The statutory exemption, however (42-271.8.), provides



ka



that the exemption is granted to widows and widowers and makes no reference to the income limitation. Nor does it note the constitutional condition of living with the spouse in Arizona at the time of death or residing in Arizona since January 1, 1969. A letter from the State Attorney General's Office to the Maricopa County Attorney's Office dated September

10, 1974, opined that extending this exemption to



widowers went beyond what was allowed by the Constitution (widows only) and was, therefore, unconstitutional. The law has not yet been tested in court, however. Interpretation of this statute is not presently uniform among the counties. No directive from the Division of



Property and Special Taxes of the State Department of Revenue has been issued to date in an attempt to give the various assessors some uniform direction. Additionally, in that same September 10, 1974 lettel the Attorney General opined that the language of 42-271.8 was unconstitutional since it disregards various income and residency limitations placed upon the widows exemption by the Constitution as discussed above.

:



The statute is currently being administered by



the counties however, in accordance with the income and residency limitations placed upon the widows exemption



by the Constitution as discussed above. 4 .

Veteran's Exemption In addition to the exemption provided for widows,



Article 9, Section 2 of the State Constitution also provides an exemption, up to $2,000 of assessed valuation, on the property of some veterans. The veterans'



exemptions fall generally into - categories: World 3 War I; service-connected disability; non-serviceconnected disability.

a.



World War I (or prior war)



-



This provides for an



exemption of property up to $2,000 of assessed valuation to honorably discharged veterans who:

1) are residents of Arizona currently and who were



residents prior to September 1, 1945; 2) served at least - days during World War I or prior wars; 60

3) own property whose assessed valuation does not



exceed $5,000. b. Service-connected disability



-



In order to take



advantage of this exemption, an honorably-discharged resident veteran must 1) have a service-connected disability certified by the United States Veterans Administration; 2) own property whose assessed valuation does not exceed $5,000; 3) have been a resident prior to September 1, 1945 or must have been a resident at least - years prior to entry 4



-



into the serivce.



The exemption is computed as



follows for those eligible:

i.

'



If the individual has a disability of - or 60% less, that percentage is multiplied by the total assessed valuation of the veteran's property (which cannot exceed $5,000) , but



the exemption cannot exceed $2,000. ii.



If the disability is greater than 0609 all 9

property is exempt up to the maximum of $2,000 of assessed valuation.



c.



Non-service-connected disability



-



This provides



an exemption up to $2,000 of assessed valuation to honorably discharged resident veterans who: 1) have a non-service-connected total disability, whether physical or mental; 2) own property not exceeding $5,000 in assessed valuation; 3) served 60 - days in time of war after World War I - were and



Arizona residents prior to September 1, 1945. In the event that an individual is eligible for an exemption under more than one of these categories, the total -exemption granted may not exceed $2,000.



The statutory provision relating to the veteran's exemption (42-271.8) provides for an exemption up to $2,000 worth of assessed valuation for honorably discharged resident veterans who served - days during 60 war - who were residents prior to September 1, 1945. and However, in the previously mentioned September 10, 1974 letter from the Arizona Attorney General, referenced in the above discussion of the widow's exemption, it was

:



opined that this statutory provision relating to veterans' exemptions was also unconstitutional since it failed to take into account the various limitations imposed by the Constitution, i.e., the limitation to veterans of World War I or prior wars or the disability provisions.



During t h e t a x y e a r 1974, $30,483,544 i n a s s e s s e d v a l u a t i o n was exempted s t a t e w i d e f o r b o t h t h e widows1 and v e t e r a n s ' exemptions. The t o t a l s t a t e w i d e a s s e s s e d Using t h e 1974



v a l u a t i o n t h a t y e a r was $5,127,772,073.



a v e r a g e p r o p e r t y t a x r a t e o f $10.31, a p p r o x i m a t e l y $3,142,853 was g r a n t e d i n p r o p e r t y t a x r e l i e f f o r a l l j u r i s d i c t i o n s under t h i s program f o r widows and v e t e r a n s . Given t h e $1.50 s t a t e t a x r a t e i n e f f e c t a t t h e t i m e , t h e revenue l o s s t o t h e s t a t e l a s t y e a r was a p p r o x i m a t e l y $47,143.



5,



General



Homeowner Tax Reduction (Rebate)



Because t h i s p r o p e r t y t a x r e l i e f program i s t i e d t o s c h o o l d i s t r i c t spending l e v e l s , t h e f o l l o w i n g d e f i n i t i o n s are instructive:



a.



S t a t e s u p p o r t e d classrooms



--



The number o f c l a s s -



rooms which w i l l be funded by t h e s t a t e , o b t a i n e d by d i v i d i n g t h e d i s t r i c t ' s Average D a i l y Membership

(ADM)



i n common s c h o o l d i s t r i c t s by 26, i n h i g h



s c h o o l d i s t r i c t s by 24, (15-1601).

b.



Basic support l e v e l



--



The monetary amount w i t h



which t h e s t a t e funds each s t a t e s u p p o r t e d classroom. For c o m p u t a t i o n a l p u r p o s e s , t h e s u p p o r t l e v e l was s e t a t $19,370 f o r common s c h o o l s and $24,360 f o r h i g h s c h o o l s i n f i s c a l 1973-74, T h i s was s t a t u t o r i l y For



p e r m i t t e d t o grow by 7 t f o r f i s c a l 1974-75.



e a c h f i s c a l y e a r t h e r e a f t e r , i t i s a d j u s t e d by a growth r a t e s e t by t h e L e g i s l a t u r e (15-1202.03), o r i n t h e e v e n t t h e L e g i s l a t u r e f a i l s t o a c t , t h e growth



'rate for the previous year automatically applies (as was the case for FY '75-76).

c.



Budget cost level



--



Generally the amount of



allowable school district spending during a given year for maintenance and operations purposes. The general homeowner property tax reduction had its origins in 1973 at which time the Legislature, as a reaction to drastically increased property valuations due to the implementation of a Mass Appraisal System



(MAS) for appraising property at its market value,

instituted a statewide property tax reduction program. The 1973 program served to reduce property tax billings



on single-family residential homes through a $42 million

infusion of state money (in turn derived from Federal Revenue Sharing monies). This program was also the



first step in a long-range plan to deemphasize property

t a x revenues as the primary funding source for common

.r I;



and high schools, in addition to reducing the overall

property tax burden on the state's taxpayers. The computation of the 1973 reduction simply reduced the

t a x rate of certain taxing jurisdic'tions (state, counties,



cities, towns, school districts and junior colleges) by



25%.

The First Special Session of the Thirty-first Legislature (1973-1974), as part of a comprehensive program designed to deemphasize the property tax as a funding source for common and high schools, placed a newproperty tax reduction formula into the law (42-371; 42-671).



-



An annual homeowner property tax reduction



to this formula is conditioned upon Legislative appropriations therefor.



The property tax reduction formula is tied to schoo.

district spending levels and only applies to singlefamily residences located within an organized school district. The procedure is the same for both common

A school district will



1



and high school districts.



compute its allowable spending level for M 6 0 purposes (budget cost level). state support level



It will then compute the



--



the number of state supported



classrooms in the district multiplied by the state support level



--



and the tax rate, which, with state aid, is

--



sufficient to fund the budget cost level is computed. From that tax rate, 104 is subtracted and the remaining rate is applied against the assessed valuation of each home in the district and the resultant dollar amount is the property tax reduction amount.

... .



In this.manner, the



*.

.



.property tax rate for school district M 6 0 expenditures is effectively reduced to 104. For example, assume the following:

i.



School district tax rate of $2.00 is sufficient .to cover budgeted M 6 0 expenditures



ii.



An assessed valuation for a given home of

$4,500 ($30,000 full cash value)



iii.



The budget cost level for that school district



is less than 30% greater than the State Support

Level :



9



The p r o p e r t y t a x r e d u c t i o n i s computed by subtracting



$.lo



from $2.00, l e a v i n g $ 1 . 9 0 , and



a p p l y i n g t h a t $1.90 r a t e a g a i n s t t h e a s s e s s e d v a l u a t i o n of $ 4 , 5 0 0 , d i v i d e d by 100.

OR:



$1.90 x 4,500 = $85.50 c o n s t i t u t e s t h e p r o p e r t y



10 0



t a x r e d u c t i o n f o r t h a t home, f o r t a x e s l e v i e d by t h e s c h o o l d i s t r i c t . The t a x l e v y f o r t h a t



s c h o o l d i s t r i c t ' s M 6 0 b u d g e t would b e computed a s follows: $.I0 x 4,500 = $4.50. This



10 0

c o m p u t a t i o n i s t h e same f o r b o t h e l e m e n t a r y and h i g h s c h o o l d i s t r i c t p r o p e r t y t a x e s where t h e b u d g e t c o s t l e v e l i s l e s s t h a n 30% g r e a t e r t h a n t h e S t a t e Support Level. Tax r e d u c t i o n s f o r



b o t h e l e m e n t a r y and h i g h s c h o o l d i s t r i c t s a r e summed, and t h e n s u b t r a c t e d from t h e t o t a l property t a x levy of a l l jurisdictions i n order t o a s c e r t a i n t h e homeowner's t a x b i l l i n g . I f t h e budget c o s t l e v e l f o r a g i v e n d i s t r i c



i s more t h a n 30% g r e a t e r t h a n t h e s t a t e s u p p o r t

level, the tax r a t e required, with s t a t e a i d , fund t h e b u d g e t c o s t l e v e l up t o 30% g r e a t e r t h a n t h e s t a t e s u p p o r t l e v e l i s computed. Then,



a s was t h e c a s e above, 1 0 Q i s s u b t r a c t e d from t h a t t a x r a t e and t h e r e m a i n i n g r a t e , when applied against the assessed valuation of the v a r i o u s homes i n t h e d i s t r i c t , c o n s t i t u t e s t h e p r o p e r t y t a x r e d u c t i o n amount. I n t h i s manner,



the effective M 4 0 tax rate for the district spending level up to 30% above the state average will still be 104; however, that protion of the school district's spending which is in excess of 30% above the state average will be generated totally from the property tax levied upon the property within the school district. As an example, assume a school district is identical in all respects to the district in the above example, with the exception that the budget cost level for that school district is in excess of 30% greater than the state support level; and, 1) A school district tax rate of $2.20 is sufficient to cover budgeted expenditures



M 6 0 purposes;

2) A home assessed valuation of $4,500 ($30,000 full cash value.) Given those assumptions, a $2.00 tax rate would be sufficient to cover anticipated expenditures up to 30% above the state support level. Hence, property tax reduction is



computed for that district by subtracting $.lo from the $2.00 rate and applying that $1.90 against the assessed valuation of the 4 500 home divided by 100, or: $1.90 X -iiT(T = $85.50



'"lr



The tax levy for school district M 6 0 purposes would be $.30 ($.lo

+



$.20 which



represents that portion of the school district spending in excess of 30% above the state support level.) X $4,500 100

=



$13.50.



Once again, it must be noted that a property tax reduction amount must be computed for property taxes levic by both elementary and high school districts, in order to ascertain the total property tax reduction amount on a given home. If the total property tax reduction amount computed (for both elementary or high schools) exceeds the amount appropriated by the legislature for property tax reduction the tax reduction amount computed for each eligible is reduced proportionately so as to make the computed statewide total tax reduction amount equal to the amount appropriated for such tax reduction. In 1974, computed home



property tax reduction amounts had to be reduced by 9%; in 1975, they were reduced by approximately 25%. Summing the property tax reductions for elementary and high school districts would yield a total tax reduction amount of $128.25 on the $30,000 house in the above examples. The computation is as follows: $4,500 ($1.90 + $19.0) X 100 = $171.00 where $1.90 is the property



.75 X $171.00 = $128.25



tax reduction rate for both elementary and high school districts; $4,500 is the assessed value of a $30,000 home;



.75 represents the 25% reduction amount made in order to scale down the computed statewide property tax reduction amount to an amount equal to that appropriated by the legislature for property tax reduction. By way of contrast, the property tax levy on that home resulting from application of the state tax rate only is actually less than the amount of property tax reduction. The direct state property tax levy amounts to $72.00; 4,500 computed as follows: $1.60 X 100 = $72.00.

11.



SUMMARY AND GENERALIZATIONS

A.



The present property tax structure in Arizona is a



complex, interconnected mechanism applicable to all political units within the state. Property subject to the tax is valued at its full Property can



cash value which is synonymous with full market value.



be ultimately exempted from taxation solely by constitutional amendment and property so exempted is exempted from taxation by the state and all political subdivisions. In the singular case of the



widowst and veterans' exemption, however, there is a conflict between constitutional and statutory provisions. grouped into - classes. 5 administrative purposes Properties are



The classification system is relevant for as well as in determining who places the Additionally, each class



actual value on a given piece of property.



has a particular assessment ratio - - the percentage of full cash value which gives an assessed valuation, against which the property tax is levied. Locally-assessed properties, classes 3 (commercial



I



and industrial), 4 (agricultural), and 5 (residential), are valued by the County Assessor of the county in which they are located as



as of January 1 of each year.



An appeals procedure is provided but Centrally-assessed properti



must be completed by July 25 each year.



classes 1 (mines, railroads, flight property, timber) and 2 (utilitieq, are valued the first week in June each year by the Department of Revenue. An appeals procedure is also provided for Tax



these properties and must also be completed by July 25.



rates are levied by the various taxing jurisdictions by the third Monday in August. One-half of the tax payments are due no later



than November 1 and May 1, payable to the local County Treasurer, who serves as the collecting agent for most property taxes.



B.



Four different property tax relief programs (three



statutory and one constitutional) currently coexist for the following groups: homeowners; elderly; renters; widows and veterans



C.



Any significant change in either the administration or



in the base of the property tax would entail intergovernmental implications. A change in the time frames within the administrative structure of the tax could well affect the handling of the tax rolls by the County Treasurer or the statutory appeals process. Additionally, a change in the assessment ratio or classification system which serves to restrict or expand the tax base could drastically affect the bonding capacity of some political subdivisiol since allowable bonded indebtedness is tied to assessed valuation.



Or, a tax base restriction or expansion in a school district would

cause less or more revnue to be generated by the $1.30 qualifying



tax rate in that district, thereby necessitating an increase or decrease in state aid pursuant to the current statutory formula for determining state aid to school districts.



D.



In 1975-76 it is anticipated that 12.6% of the state's



total general fund revenue will be generated from the property tax. State property tax collections for recent years and the



state tax rates for those years are as follows: Year 1975 1974 1973 1972 1971 Rate 76 75 74 73 72 $1.60 $1.50

$ .75



State Collections $93,220,632 (est.) $76,916,581 $33,573,352 $56,336,693 $60,163,243



-



$1.55 $1.90



It should be noted that these rates and collections apply

- only to the state property tax.



Since 1974-75, the total state-



wide property tax rate has been composed of 2 tax rates



--



one



for educational purposes (42-108.02) and one for general purposes (42-108). In addition to the state rates and collections,



political subdivisions (cities, towns, counties school districts, special districts) are empowered to impose property taxes to help defray the costs of their government services.



APPENDIX



Historical Review of Constitutional and Statutory Exemptions From the Property Tax



The original State Constitution of Arizona provided that exemptions from property taxation be done via constitutional amendment . Constitutional exemptions from property taxation as of the Constitution's ratification in 1910 were: 1.

2.



Federal, state, county and municipal property; Public debts as evidenced by the bonds of Arizona or its political subdivisions;



3.



$1,000 of the assessed valuation of the property of resident widows when the total assessed valuation of their property did not exceed $2,000 (assessed value was equivalent to full cash value).



Additionally, the original Constitution provided that the property of educational, charitable and religious associations or institutions not used or held for profit could be exempted from property taxation by law. Indian lands were exempted by the Enabling Act and the Constitution (Article 20, Section 5). Article 9, Section 3 of the Arizona Constitution also required an annual state tax, sufficient "to defray the necessary and ordinary expenses of the State." Chapter 35, Laws 1913 provided for various statutory property tax exemptions which both elaborated upon the existing constitutional



exemptions a s w e l l a s p r o v i d i n g exemptions f o r v a r i o u s c h a r i t a b l e , r e l i g i o u s , a n d e d u c a t i o n a l i n s t i t u t i o n s a s t h e L e g i s l a t u r e was empowered t o do by t h e C o n s t i t u t i o n .

1.



The e x e m p t i o n s w e r e :



F e d e r a l , s t a t e , county and municipal p r o p e r t y . P u b l i c d e b t s a s e v i d e n c e d by t h e b o n d s o f A r i z o n a o r a n y of i t s p o l i t i c a l subdivisions.



2.



3.



H o s p i t a l s , a s y l u m s , p o o r h o u s e s and o t h e r c h a r i t a b l e i n s t i t u t i o n s used f o r i n d i g e n t and a f f l i c t e d r e l i e f w h i c h were p u b l i c l y - o w n e d ; s c h o o l s e x c l u s i v e l y f o r Indian education with t h e i r appurtenant lands, f i x t u r e s and e q u i p m e n t ; l a n d s a n d b u i l d i n g s b e l o n g i n g t o a g r i c u l t u r a l s o c i e t i e s which w e r e u s e d f o r a g r i c u l t u r a l p u r p o s e s a n d n o t used o r h e l d f o r p r o f i t .



4.



Buildings used f o r r e l i g i o u s worship with t h e i r f u r n i t u r e , equipment, and appurtenant land (provided t h e r e l i g i o u s o r g n i z a t i o n owned t h e l a n d ) n o t u s e d o r h e l d f o r p r o f i t .



5.



The p o r t i o n s o f c e m e t a r i e s a n d g r a v e y a r d s n o t u s e d o r held for profit.



6.



$ 1 , 0 0 0 o f t h e a s s e s s e d v a l u a t i o n o f r e s i d e n t widows when t h e i r t o t a l a s s e s s c d v a l u a t i o ~ l( e q u i v a l e n t t o f u l l c a s h v a l u e a t t h e time) d i d n o t exceed $2,000.



Since s t a t e h o o d , e x e m p t i o n s t o p r o p e r t y t a x a t i o n h a v e b e e n

a d d e d b o t h b y C o n s t i t u t i o n a l amendment a n d s t a t u t o r y e n a c t m e n t . Laws 1 9 1 5 , C h a p t e r 6 9 , p r o v i d e d a p r o p o s e d C o n s t i t u t i o n a l amendment, l a t e r a d o p t e d a t t h e g e n e r a l e l e c t i o n , t o i n c r e a s e t h e widow's e x e m p t i o n from a n amount n o t e x c e e d i n g $ 1 , 0 0 0 t o a n



amount n o t e x c e e d i n g $ 2 , 0 0 0 , where t h e t o t a l v a l u a t i o n o f s u c h widow's p r o p e r t y d i d n o t e x c e e d $5,000 i n s t e a d o f t h e p r e v i o u s $2,000 l i m i t a t i o n . O b s e r v a t o r i e s o p e r a t i n g on a n o n p r o f i t b a s i s f o r p u b l i c b e n e f i t w e r e exempted from p r o p e r t y t a x a t i o n by C h a p t e r 6 , Laws 1917. The widow's e x e m p t i o n was a g a i n a l t e r e d i n 1927 by a C o n s t i t u t i o n a l amendment which i n c l u d e d i n t h e e x e m p t i o n h o n o r a b l y d i s c h a r g e d s o l d i e r s , s a i l o r s , U.S. M a r i n e s , members o f t h e r e v e n u e m a r i n e s e r v i c e , a n d army n u r s e s . The e x e m p t i o n was l i m i t e d t o



t h o s e m i l i t a r y p e r s o n n e l who had s e r v e d a t l e a s t 60 d a y s i n t h e s e r v i c e s d u r i n g w a r t i m e and were r e s i d e n t s of t h e s t a t e p r i o r

I ,



-



t o 1927.



The e x e m p t i o n s w e r e i n t h e same amounts a s f o r widows - -



up t o $ 2 , 0 0 0 exempt i n v a l u a t i o n i f t h e t o t a l v a l u a t i o n of t h e a p p l i c a n t was l e s s t h a n $ 5 , 0 0 0 .

A C o n s t i t u t i o n a l amendment a d o p t e d i n t h e e l e c t i o n o f November 3 ,



1964 exempted f r o m p r o p e r t y t a x a t i o n a l l s t o c k s o f raw o r f i n i s h e d m a t e r i a l s , u n a s s e m b l e d p a r t s , work i n p r o c e s s , o r f i n i s h e d products c o n s t i t u t i n g t h e inventory of a r e t a i l e r o r w h o l e s a l e r l o c a t e d w i t h i n t h e s t a t e and p r i n c i p a l l y e n g a g e d i n the r e s a l e of such materials, p a r t s , o r products. T h r e e a d d i t i o n a l e x e m p t i o n s were a p p r o v e d i n t h e 1968 g e n e r a l e l e c t i o n as amendments t o A r t i c l e 9 , S e c t i o n 2 of t h e A r i z o n a Constitution. C e r t a i n h o u s e h o l d goods u s e d f o r n o n c o m n e r c i a l S e c o n d l y , c e r t a i n l i m i t a t i o n s upon t h e



p u r p o s e s were exempted.



amount o f income a widow c o u l d e a r n i n a g i v e n y e a r a n d s t i l l be e l i g i b l e f o r t h e widow's e x e m p t i o n ( $ 2 , 0 0 0 o f a s s e s s e d v a l u a t i o n



i f t o t a l a s s e s s e d v a l u a t i o n i s l e s s t h a n $ 5 , 0 0 0 ) w e r e imposed.



The limitations provided that a widow could not earn more than $3,500 annually if she had no dependents, or $5,000 if she had one or more dependents (See Section I . E . 3 , for details). Finally,



certain limitations on the veteransF exemption were provided that year. The exemption of up to $2,000 was granted in only



the following instances:

1)



At least - days were served during World War I or prior 60 Arizona residency was established prior to September 1, war began a phase-out, (The exemption for services in



wars - and 1945.



being completely eliminated by 1972.) 2)

3)



The veteran had a service-connected disability. The veteran had a non-service-connected total disability.



Other more recent changes in the property tax structure were enacted in 1975 and provided for the exemption from taxation of the property of charitable institutions whose income is used exclusively for the care or relief of the indigent or afflicted and for reasonable operating expenses. Another 1975 change provided



that non-profit housing designed for the elderly or handicapped which receives a subsidy was exempted from taxation (and that non-profit housing designed for the same clientele - receiving not a subsidy was placed in Class 5 and taxed on the basis of a 15% assessment ratio).



ARIZONA STATE SENATE



HISTORY AND DEVELOPMENT OF THE SALES TAX IN ARIZONA



Prepared by Senate Staff December 12, 1975



I



HISTORY AND DEVELOPMENT OF THE SALES TAX IN ARIZONA

1



I.



HISTORICAL SKETCH OF THE STATE SALES TAX Laws authorizing the first state transaction privilege (sales)



tax against the volume of business, determined by the gross proceeds of sale or gross income therefrom, were enacted in 1935 (Chapter 77). The rates imposed were - - and - on various 2%, 1% 1/4% Over the years, individual rates on



business classifications.



various classifications were imposed, increased, decreased, or eliminated. (See attachment #1 for an historical summary of rates However, the



imposed upon the various business classifications.)



first major change in sales tax rates was ~ccomplishedin 1959 through the imposition of an excise tax earmarked for education. This tax, like the transaction privilege tax, was also levied upon the'gross proceeds of sale or gross income from doing business in the state. It was imposed at a rate equal to - of the trans50%



action privilege tax rate and was to be administered in conjunction with the transaction privilege tax. Hence, the total sales tax



1% rate was 1-1/2% on those businesses previously affected by a transaction privilege tax rate, - on those which the transaction 3% privilege tax was - and - on those previously affected by a 2%; 3/1% 1/4% 1968. rate. The next major change in the rate structure was accomplished in At that time, a new special excise tax for education was imposed,



also to be administered in conjunction with the transaction privilege tax. This excise tax was also imposed upon the gross proceeds of sales The original



or gross income from the activities of various businesses.



special excise tax for education was levied on specific business classi-



fications at a 1-1/2% rate, with the exception of the mining industry, 112% on which a - rate was levied. The overall effect of this tax was to raise the total state sales tax rate to - on all business classifica3% tions, with the exceptions of mining ( g % ) , timbering (1-1/2%), meat packing (3/8%), and feed wholesaling (3/8%). While this tax was not.



earmarked by statute, it was imposed in 1968 to increase revenues to the state which were necessitated by increased state funding for elementary and high schools. In 1974, to help raise revenues to pay for increased state funding to local elementary and high schools, both the education excise tax and special excise tax for education were increased on various business classifications. The net effect of the increases was to raise the total sales tax rate to - on most businesses, with the 4% exception of mining, timbering, rental of real property, and feed wholesalers.

Of



those items, the rate on mining was increased from 2% The - tax 3/8%



to 2-1/2%, and the rates on timbering, rental of real property and feed wholesaler remained at 1-1/2%, - and - respectively. 3% 3/8%, on meat packing was repealed that year. have been effectuated since that time. In 1956, a use tax was imposed upon individuals making purchases at retail for use, storage, or consumption within Arizona and not paying a transaction privilege tax on those purchases. Such a situation occurs



No major sales tax rate changes



primarily when purchases are made out-of-state (most notably automobiles) and no sales tax is paid to the other state, or a sales tax at a lower rate is paid to that state. In both instances, when the property is



brought to Arizona for storage, use, or consumption, the difference between the Arizona rate and that which was actually paid is levied,



payable to the State of Arizona. (42-1408).



The original use tax rate was 2%



Since that time, additional education excise taxes were



imposed in 1959 and 1974 on such purchases (42-1361,.,A.2. , making the ) 4%. current total Arizona rate 11.



CURRENT SALES TAX STRUCTURE A . Rates



In Arizona, the so-called sales tax



---



imposed upon the gross is composed of three



proceeds of sale or gross income frm sales taxes:



a transaction privilege tax; an educational excise tax; and a The transaction privilege tax rates



special excise tax for education.



are statutorily set in sections 42-1309 through 42-1315 and range from 1/4% to 2%. The educational excise tax rate is statutorily set at 100%



of the transaction privilege tax rate for most business classifications;

f



-



exceptions being mining, timbering, rental of real property, and feed wholesaling, on all of which the rate is 50% of the privilege tax rate (42-1361). purposes. The education excise tax is earmarked for educational The special excise tax for education is imposed upon selected It



business classifications at rates set forth in 42-1371 of - or 1% 2%. is not statutorily earrcarked. However, it was originally imposed in



1968 when the Legislature was seeking additional funds for public education. The aggregate rate for each business classification against which any one of the taxes is levied and the component'parts of the total rate are as follows:



CLASSIFICATION

'



PRIV. TAX

&



EDUCATION EXCISE TAX



SPEC.EXCISE TAX FOR EDUCATION



TOTAL SALES T A RATE



Transportation Mining-Oil Timbering Utilities Communications Railroad

& &



Towing



Gas Prod.



Aircraft

&



Private Car Publishing



Pipelines



Job Printing Restaurants Amusements

&



&



Advertising Bars



Rentals-Real Property Rentals-Personal Property Contracting Feed Wholesale Retail B. Non-Taxable Items 1% 1/4% 2% 1% 1/8% 2% 2% 4% 3/8% 4%



--



--



The sales tax is statutorily precluded from applying to:



1 The sale of stocks and bonds (42-1312.A.l.) .

2.

3 .

Personal or professional services (42-1312.A.2.) Services rendered in addition to the sale of tangible



personal property at retail by businesses other than those enumerated in 42-1310.2 (a) through (h), 42-1311, and 42-1313 (42-1312.A. 3. )



.



(This



category primarily addresses itself to retail establishments which provide a service in connection with the sale of an item and exempts the service charge from the tax.),



4 .

5.



The sale of prescription drugs (42-1312.A.4). Sales of gasoline on which a fuel tax has been levied



(42-1321.A. 1)

6.



.

Common or contract motor carriers subject to the Motor Sales of tangible personal property to a licensed contracto:



carrier ~icense Tax (42-1321.A. 2 . )

7.



for subsequent inclusion in a structure in fulfillment of a contract (42-1321.A. 3 . )

8.



Sales in interstate or foreign commerce which are exempted



from a sales tax by the U.S. or Arizona Constitution (42-1321.A.4).

9.



Personal property purchased, leased or rented by a non-prof



charitable hospital or a hospital operated by the state or political subdivision (42-1321.A.5.; 42-1314.A.2.).



10.



Sales made directly to the U.S. Government by manufacturers



modifiers, assemblers, or repairers (statutorily defined in 42-1321.F.1, and sales to the manufacturers, etc., when such sales are a component part of subsequent sales to the U.S. Government (42-1321.B). 11. Sales to the U.S. Government by other than manufacturers,



modifiers, assemblers, or repairers are exempt to the extent of - of 50% the tax (42-1321.C.). 12. 13. Printing, when sold for resale (42-1310.2 (h))



.



Payments from a contractor to labor employed in construc-



tion (42-1310.2 (i)) 14.



.



Events sponsored by the Arizona Coliseum and Exposition



Center Board or County Fair Commissions (42-1314.C.). 15. Theatre films (which are not taxed as personal rental



property if the theatres in which they are run are taxed under the transaction privilege tax statute (42-1314.D).



16.



Use of coin-operated washing, drying, dry cleaning, or



car washing machines (42-1314.E).

17.



The leasing or renting of residences which have been



continuously occupied by the same person for at least 90 days (42-1314.F

18.



Amusements, exhibitions, etc., sponsored by religious or



charitable institutions (42-1314.A.l).

19.



Sales of electricity, power, gas, or water for resale



(42-1310.2 (b)) 20.



.

The publishing of books (does not preclude books from



being taxed at retail, 42-1310.2(g)). 21. 42-1312.A. Sales for resale to final consumers (42-1301.12;



.

The following categories of machinery and equipment a. Used directly in manufacturing, processing, fabricat



22.



job printing, refining or metalurgical operations.

b.



Used directly in mining, including equipment needed

I



to prepare materials for extraction, and the handling, loading or transportation of such materials to the surface.

c.



Tangible personal property consisting of central



office switching equipment, switchboards, private branch exchange equipment, coaxial cable, micro-wave radio and carrier equipment of telephone and telegraph companies.



d.



Tangible personal property used directly in the



production or transmission of electrical power, including transformers and control equipment used at transmission substation sites. (This does not include machinery and



equipment used in the distribution of such power.) e. Pipelines four inches in diameter or larger, used



to transport oil, natural gas, artificial gas, water or coal slurry.



i.



For airlines holding a federal or state certificate



of public convenience and necessity or foreign air carrier permit for air transportation, tangible personal property con-



.



sisting of airplanes, navigational and communications instruments and related accessories and equipment used in conjunction with aircraft used in transporting persons or property for hire. g. Tangible personal property consisting of rolling



stock, rails, ties, and signal control equipment used directly



in railroad transport.

h. Used directly in drilling for or extracting oil and



gas for commercial purposes. 23. Machinery and equipment delineated in Number 22 (above)



which is exempt if sold is also exempt if leased or rented (42-1314.A.2.)

24.



Timber and forest products are exempt on sales subsequent (This does not, however, Similarly, service



to the first sale for profit or commercial use.



prevent a final product from being taxed at retail.)



or manufacturing charges (which are taxed when the income of a business i derived wholly or in part from such charges) are exempt on sales subsequent to the first sale for profit or commercial use (42-1310.01).

25.



Charges from a landlord to a tenant for utilities, when



the landlord has installed individual meters for each rental and charges each tenant on the basis of the individual reading (42-1314.A.3.)

26.

!



When a mined product or timber is shipped out-of-state



without having been sold, section 42-1316 provides that the sales tax be imposed upon the value of the item before it enters interstate commerce. Hence, freight charges which are included in the ultimate



sales price of such an item are deductible from the ultimate sales price (42-1321.D.), as are out-of-state processing or refining costs in the case of ore mined within Arizona in order to ascertain the value of the item as it leaves the State, and therefore the sales tax payable to Arizona.



C .



Administration



Any person receiving income or proceeds from a sale upon which a transaction privilege tax is levied must have a privilege tax license, obtainable from the Department of Revenue for $1. The license is valid



indefinitely unless the ownership or location of the business changes. Sales tax collections are remitted to the State Department of Revenue from the various businesses on a monthly basis (42-1322) being due and payable on or before the 15th day of the month following the month in which the tax accrues. reference). (A sales tax form is attached for Extensions



The tax is delinquent - days later (42-1322). 5



of up to 60 days may be granted by the Department for good cause

(42-1326.F.). Failure to file a return within the statutory time constraints results 'in a penalty of 10% of the amount of the tax, plus -per 1/2% month on the unpaid balance from the time the tax was due and payable until paid (42-1322.C)



-



.



Failure to remit the proper amount of tax on time when not due 1/2% to negligence or intent to defraud results in a - per month interest rate on the additional amount due, due and payable - days after receipt 30 of the notice of delinquency, or, if appealed, - days after the deci10 sion of the Department of Revenue has become final. If the deficiency



or delinquency is due to negligence, a penalty of 10% of the additional amount due is assessed plus interest of - per month. 1/2%

1f such



deficiency or delinquency is due to intent to defraud, the penalty is

/--,



I



raised to - with interest at 25%



1/2% per month (42-1327). In cases of



negligence and defraud, the tax is also due and payable - days after 30 receipt of the notice of delinquency, or, if appealed, - days after 10 the decision of the Department of Revenue becomes final. Any person contesting his or her sales tax liability as determined by the Department can get an administrative review of that liability by the Department's Sales Tax Section (42-1338). An individual not satisfied with the Department's decision may further appeal to the State Board of Tax Appeals, Division Two (42-1338.01). Further appeal to



Superior Court is provided, but the tax must be paid under protest (42-1339). D. State Transaction Privilege Taxes Shared with Local Governments



Cities and towns and counties share in the state transaction privilege tax collections. The education excise tax and special excise 25% - of state transaction privilege



tax for education are not shared. tax - collections



is distributed to the various municipalities in the



state, to be apportioned among them on the basis of their relative pouplations (42-1341.D). 4% - is earmarked for the Department of Revenue's



privilege tax administration fund (42-1341.B), and - is earmarked to 15% the Department of Economic Security, to be used for public welfare purposes (42-1341.C). Of the remaining amount (56% of transaction -



40% privilege tax revenues), - is apportioned to the State General Fund (42-1342), and the other - is apportioned to the counties, to be 60% divided among them on the basis of the average of the following percentages:



1.



The percentage which the total county assessed valuation



is of statewide assessed valuation.



2 .



The percentage which the transaction privilege tax revenuL



collected within the county is of that collected within the state as a whole (42-1342). The net effect of this distribution formula is that 41.4% of transaction privilege tax monies are devoted to state purposes, 33.6%



-



is distributed to the various counties, and - distributed to the 25%

state's municipalities. (See attachments 2,3, and 4 for details on state and local shares of state sales tax revenues for recent years.)



E.



Local Government Sales Tax



Sales and use taxes are also levied by various cities and towns at rates set by their respective governing bodies. With the exception



of Bisbee, Holbrook, Oro Valley, Williams, Tombstone, South Tucson, and Tucson, which levy a - rate, all cities which impose a sales or use 2% tax do'so at a - rate. 1% (Tucson, however, exempts food.)



- cities 56



levy a sales tax.



Counties do not levy a sales or use tax, lacking the



authority to impose such taxes on their own, and lacking the requisite state legislation in lieu of their own authority. An initiative measure



adopted in the election of 1972 provided that the Department of Revenue could collect and administer the transaction privilege tax of any city



or town, in addition to providing that the Department could enter into

an intergovernmental contract with any city or town to provide uniform methods of administration collection, auditing and licensing.



- cities 34



currently have their sales taxes collected by the state.



(Only 31 cities



-



are indicated on the attached sales tax return; additions are Goodyear, Guadalupe, and Huachuca City. Also, Parker and Show Low will have

!



their sales tax collected by the State beginning January 1, 1976).



F.

A



Use Tax use tax is imposed upon the purchase or sale of tangible personal



property at retail for use, storage, or consumption within Arizona on

i



which no transaction privilege tax is levied or on which a tax has been levied at a rate lesser than that of Arizona.

4%: -



The aggregate rate is



a - use tax rate and the educational excise tax rate at 100% 2% Most commonly, the use tax is collected when



-



of the use tax rate.



tangible personal property is purchased in another state and brought into Arizona for storage, use, or consumption. The amount payable to



the State of Arizona is the difference between what was actually paid to another state and what would otherwise have been paid to Arizona had the property been purchased here. Additionally, various cities



also impose a use tax, subject to the same conditions as the state use tax. Items not taxable under the use are as follows (42-1409):



1 Tangible personal property sold in ~rizona, . the gross

receipts from the sale of which were included in the computation of the sales tax.



2 .



Tangible personal property against which an excise tax has



been levied by another state or the United States equal to or in excess of Arizona's use tax.

3 .



Tangible personal property, the storage, use, or



consumption of which the State is prohibited from taxing by the laws or Constitution of the United States.

4.



Tangible personal property which becomes an ingredient or



component part of a manufactured, fabricated or processed article, substance, or commodity for sale in the regular course of business.

5.



Sales of gasoline on which an Arizona fuel tax has been



levied.

6.



Sales of tangible personal property to a licensed



contractor for subsequent inclusion in a structure in fulfillment of a contract.



7.



Tangible personal property brought into Arizona by a non-



resident for his or her non-commercial use while temporarily within the State.

8 .



Livestock, poultry, seed, feed and supplies for use or



consumption in farming, ranching and feeding livestock or poultry. "Supplies" does not include equipment, fertilizers, herbicides and insec. sides.

9.



Tangible personal property not exceeding -purchased $200



by an individual in a given month outside the U.S. continental limits for personal use. 10. Personal property purchased, leased or rented from out



of state, by a non-profit charitable hospital or a hospital operated by the state or political subdivision. 11. The various categories of machinery and equipment set for*"



in numbers 22 and 23 of Section 1I.B. above.



G.



Rental Occupancy Tax



In 1974, the Legislature instituted a Rental Occupancy Tax on

commercial tenants who entered into a lease or rental agreement prior to December 1, 1967. Prior to 1968, the - sales tax on the rental 3%



of real property did not apply to many commercial-type rentals, such as shopping centers. rentals. In 1968, the - sales tax was made to apply to such 3%



At that time, many landlords had entered into long-term So, they were forced to



leases without tax "pass throughw provisions.



absorb the tax and were thereby placed in a disadvantagous position relative to other landlords entering into leases after 1968. Hence, in 1974, a Rental Occupancy Tax of - plus an education 2%, excise tax of 1%. was placed upon the rental of real property for which a long-term lease agreement was entered into prior to December 1, 1967. (This law became effective January 1, 1975.) Additionally, the incidence



-



Fqi



of the tax was statutorily shifted to the tenant.



The Rental Occupancy



Tax is in lieu of the sales tax on the rental of real property (42-1314.1 The - Rental Occupancy Tax is administered in conjunction with 2% the sales (transaction privilege) tax and is shared with local governments in the same manner as is the transaction privilege tax. Subsection D. above.) educational purposes.

111.



(See



The - education excise tax is earmarked for 1%



SUIrlMARY AND GENERALIZATIONS

A.



The total state "sales" tax



--



imposed upon the volume of



business determined by the gross proceeds of sale or gross income from the business



--



is constituted of - individual taxes: 3



a transaction



privilege tax; an education excise tax; a special excise tax for education. All are administered and collected jointly. The transaction privilege tax is imposed at rates from - to - on various business 1/4% 2% classifications. The education excise tax is imposed at rates equal And, the special excise to 100% or - of the transaction privilege tax. 50%



-



tax for education is imposed on various business classifications at 1%

2%. or - . Collectively, they are referred to as the sales tax and in most



instances the aggregate rate is 4%.



Exceptions are:



mining; timbering;



rental of real property; and feed wholesaling, on which the aggregate rates are 2-1/28, 1-1/2%, -% , and -, respectively. 3 3/8%



B.



A



use tax is imposed upon the purchase or sale of tangible



personal property at retail for use, storage, or consumption within Arizona on which no transaction privilege tax has been collected. The



4%: aggregate rate is -



a - use tax rate; an educational excise tax 2% Most commonly, the use tax is



100% rate at - of the use tax rate.



collected when an individual purchases an automobile or other personal property in another state, for storage, use, or consumption within



Arizona on which no sales tax has been paid, or has been paid at a



4% rate less than the - Arizona retail rate.



In such instances, a



use tax equal to the difference of what was actually paid to another state and what would have been paid is levied and payable to the State of Arizona.

C.



Any change in the transaction privilege tax rate automatically



changes the education excise tax rate due to the statutory interdependence of the two taxes. The education excise tax is set at 100%



50% of the transaction privilege tax rate in some instances, and - in others. (The special excise tax for education is independent insofar For example, increasing the overas its rate structure is concerned.)



all retail rate from its present 4% (2% transaction privilege and -



2%



education excise) to - could only be done under the current structure 5% by increasing the education excise tax rate to - of the transaction 150% privilege tax rate. And, the increased revenues wou1.d be earmarked �01 An attempt to gain



educational purposes, barring a change in the law.



more revenues for the State General Fund through the sales tax would have to be done by increasing the privilege tax rate. However,



increasing the privilege tax rate from - to 3%would also entail an 2% automatic - education excise tax rate and an aggregate 3%



5%rate. In



such an instance, one-half of the additional revenues (the education excise tax half) would be retained by the State and earmarked for educational purposes and one-half (the privilege tax half) would be divided as follows:



to the counties; 25% distributed to the various municipalities.



-



41.4% -



retained by the state; - distributed 33.6% So,



in order to gain additional revenues for the general operation of state government through only a - overall increase in the sales tax, 1% the sales tax structure would have to be changed.

D,

*:



As alluded to in section C, above, the transaction privilege



tax revenues are shared with counties and municipalities.



The state



retains 41.4% of total collections (4% for the Department of Revenue's

privilege tax administration fund, - to the Department of Economic 15% Security to be used for public welfare purposes, the remaining 22.4% is deposited in the general fund and not earmarked for any specific purpose),



2% distributed is



to the various municipalities, apportioned



among them on the basis of relative populations, and - is distributec 33.6% to the counties, apportioned among them on the basis of the average of the following percentages:



1 The percentage which the county assessed valuation is of .

statewide assessed valuation.

2 .



The percentage which the transaction privilege tax revenuer



collected within the county is of that collected within the state as



a whole.

Revenues accruing from the education excise tax and special excise tax for education are not shared with the various counties or municipalities.

E.



Cities and towns can impose their own sales and use taxes at Holbrook, Williams, Oro Valley,



rates set by their governing bodies.



Tombstone, Bisbee, South Tucson, and Tucson levy a - rate in addition 2% to the state's - the remaining cities and towns which have a sales 4%; tax impose a - rate. 1%

56 - cities currently



(Tucson exempts food from its - sales tax.) 2% Counties lack the authority to



impose a sales tax.



impose a rate of their own and lack the requisite enabling legislation in lieu of their own authority. F. Pursuant to an initiative measure adopted at the 1972 election,



the Department of Revenue is empowered to enter into agreements to collect and administer local sales taxes and to provide for uniform methods of collection, administration, licensing and audit. To date,



34 - of



the state's 69 incorporated cities and towns have the state



-



collect their sales tax.

G.



In 1974, the Legislature instituted a Rental Occupancy Tax



on commercial tenants who entered into long-term leases prior to December 1, 1967. real property. This tax is in lieu of the sales tax on the rental of Prior to 1968, various commercial properties were not This led many landlords to enter into long-



subject to a sales tax.



term lease agreements at that time without tax "pass-through" provisions Hence, when the sales tax was imposed upon these landlords, in 1968, they were forced to absorb it for the duration of their lease agreement. So, the Legislature, in 1974, imposed the Rental Occupancy Tax



in lieu of the sales tax, and shifted its incidence to the tenant, rather than the landlord, to relieve this burden. (plus a - education excise tax). 1% The rate is 2%



It (the - rate). is shared with 2%



cities and counties in the same manner as is the transaction privilege tax and is administered in a manner similar to the privilege tax.



ATTACHMEN1 i HISTORICAL SUMMARY SHOWING IMPOSITION OF STATE TRANSACTION PRIVILEGE (SALES) TAX, EDUCATION EXCISE TAX AND SPECIAL EXCISE TAX FOR EDUCATION EDUCATION EXCISE TAX 1959 RATE INCREASE ON REST. AND BARS 1965 PRIv. 'ED. Ex. SPEC. EXCISE TAX FOR EDEC. 1968 , P R I V . TAX 1935 PRIV. TAX 1974 'EDUCATION EXCISE TAX 1974 SPEC. EXCISE TAX FOR EDUC. 1974



-.



.C



YOTAL



CLASSIFICATION TRANSPORTING AND TOWING MINING-OIL 6 GAS PRODUCTION TIMBERING UTILITIES COMMUNICATIONS RAILROAD & AIRCRAFT PRIVATE CAR 6 P I P E LINES PUBLISHING J O B PRINTING 6 ADVEriTISING 2ESTAURANTS h BARS AMUSEMEATS



SACES TAX W T E [ I N EFFZCT SINCE 7 / 1 / 7 4 )



.-



1% 1% 1%



1/2%



I I



.

I



----



1/2%



1/2% 1/2%



4% 2 1/28



--



-1/28 1/2% 1/2%



--



1%

1%



1%

1%



1 %

1% 1 %

2% 2% 2% 1/4%



------



--



1 1/29

4% 4% 4% 4% 4% 4% 4% 4%



1/2% 1/28 1/2% 1/2%

i



1/28



b



1/28

'\



. 122%

1/28



RENTALS-REAL PROPERTY RENTALS-PERSONAL PROPEKY

MEAT PACKING



--



---



1/2%



1 % 1%



--



---



-1 %

Repealed 1/2%



3%

4%



-Repealed



--, 1/2% .



CONTRACTING FEED WHOLESALE RETAIL*



1%

1/4% 2%



--



-4%



--41.4% S t a t e 33.6% C o u n t i e s 25.0% C i t i e s EDUCATION EXCISE TAX:



--



--



1%



--



3/8%

4%



.PRIVILEGE TAX DISTRIBUTION: T o t a l t o State G e n e r a l F u n d for E d u c a t i o n . T o t a l t o the State G e n e r a l F u n d



SPECIAL EXCISE TAX FOR EDUC:



n o t allocated f o r any purpose.



-



* T a n g i b l e p e r s o n a l p r o p e r t y bought a t r e t a i l i n a n o t h e r s t a