POLICY BRIEF
Policy Brief
March 2009
State Equalization Property Tax Our Position In a globalized economy, Arizona can no longer set fiscal policy as if it were in a vacuum. Companies and individual entrepreneurs are watching to see what Arizona does in comparison to other states and countries. Then, they will react accordingly. To make sure they react in a positive way, the Arizona Chamber of Commerce and Industry supports the permanent elimination of the State Assistance Property Tax Rate. Now is the time for Arizona to position itself for economic growth and job creation. The repeal is a critical and important step as Arizona looks to improve its competitiveness.
Introduction In 2006 the Arizona Legislature passed the Omnibus Tax Relief Act suspending the State Equalization Property Tax Rate for three years. According to research from the Joint Legislative Budget Committee, this legislation saved property owners a projected $250 million a year.1 Bills currently in the state legislature would make this temporary suspension permanent. Repealing the statewide property tax will prevent further job loss and will make Arizona more competitive by lowering taxes for homeowners and businesses in this struggling economy. If the Legislature does not act, businesses will face a dramatic tax increase when the tax returns following fiscal year 2009. Businesses both large and small will undertake the difficult decision of whom to layoff when the new property tax bill comes due. Taxing our citizens and businesses in a time of economic crisis will result in a longer recession and less capital to retain employees and create jobs. Background The State Equalization Property Tax Rate was enacted in 1981 to support local communities’ public school financing. The state legislature sets the rate for this property tax. Prior to 1981, Arizona’s public schools, like in most states, received their funding from local property taxes. If real estate in a particular area had high valuations, the town or city could impose a relatively low tax rate and still meet its school system’s financial needs. In areas where valuations were low, property owners were forced to bear a greater burden to pay for schools. In an effort to comply with the state constitution’s call for “a general and uniform public school system,”2 the legislature established a formula to determine an “equalization base” of guaranteed funding. If local property taxes fail to meet this minimum, money raised from the State Property Tax Rate is used to top those districts’ coffers until they reach the set equalization base level.3
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
State Equalization Property Tax Policy Brief Because a fixed statewide property tax rate combined with rising real estate values meant owners’ tax bills were constantly increasing, the legislature passed Truth in Taxation (TNT) laws in 1998. TNT was intended to lower tax rates to offset the rise in property valuations, thereby stabilizing owners’ tax liability. From 2001 to 2006, TNT lowered the State Equalization Property Tax Rate from 51 to 44 cents per $100 valuation –a 16 percent drop. However, statewide primary valuations jumped 55 percent over the same period resulting in property tax increases for many residents.4 In Maricopa County the increase was nearly 60 percent.5 Although most property taxes are collected at the local level, state lawmakers wanted to provide some form of relief from this tax surge. They negotiated a three-year suspension of the State Equalization Property Tax Rate (one of the two property taxes the state controls) saving owners over $250 million a year. The degree to which education and statewide property taxes are truly separate issues was made clear in the Joint Legislative Budget Committee’s December 2007 fiscal note. The Committee reported that the Department of Education had a $61.1 million budget surplus. Additionally, the legislature appropriated $145 million in additional funding last year.6 In the FY 2009 budget adjustments signed into law on January 31, 2009, the legislature cut $133 million from education, which translates to only 3.2% of its General Fund budget. It is important to remember that the State’s General Fund counterbalanced the loss of this revenue stream, ensuring no school district fell below the base funding level. The business community supports a strong educational system. High property taxes, however, detract from the ability to create wealth and employment for Arizona.
March 2009 Page 2 of 4 Property Tax Differences for Business and Homeowners In Arizona, property is divided up into nine classes. A property’s valuation will vary depending on its classification. Owner-occupied homes are listed in Class 3 and assessed at 10 percent of full cash value (market value). Business property, however, is placed in Class 1 and subject to 22 percent of full cash value.7 That means if a home and business have the same market value, say $200,000,8 the business will pay primary tax on $44,000 while the home will pay tax on only $20,000 worth of value. A further distortion comes in the form of the Homeowner’s Rebate. In 2006, the State covered 36 percent of homeowners’ primary school district tax rate. In Phoenix Union School District the primary property tax rate for a business was 9.76 cents per $100 valuation. The primary tax rate for a home, on the other hand, was 7.29 cents per $100 valuation. By applying those rates to the above valuations, we find a tax bill of $4,294 for the business and $1,458 for the home —a difference of $2,836.9 The State Equalization Property Tax portion of these two tax bills is similarly affected. Applying the State Equalization rate of $0.33 cents per $100 valuation to this example results in a $145 tax for business owner and a $66 tax for the homeowner —120 percent less. Many businesses, however, own property worth more than $200,000. Perhaps a more realistic example is that of a commercial development valued at $3.9 million in Tempe. The State Equalization Tax part of the owner’s property tax bill would come to over $15,000.10 Competitive Arizona High property taxes are particularly damaging. A growing body of research has found property taxes, because they must be paid regardless of a company’s
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
State Equalization Property Tax Policy Brief profitability, negatively impact business start-ups.11 According to the Minnesota Taxpayers Association and the Arizona Tax Research Association, Arizona ranked 5th highest in the nation for industrial property taxes payable in 2007.12 Furthermore, business property in Arizona suffers much higher taxes than neighboring states. Figure 1 shows the annual amount a 10,000 square foot manufacturing/industrial space would have to pay in property taxes in five Western states. Figure 1
March 2009 Page 3 of 4 To Critics of the Repeal Some worry repealing the statewide property tax would unfairly benefit big business. What it would actually do is benefit everyone. According to the Arizona Department of Commerce, property-intensive industries employ over 20 percent of the civilian labor force.13 Lower property taxes would provide companies with additional financial resources to stave off job loss in the short term and support higher wages and expansion in the long term. The ongoing result would be the creation of more jobs to keep Arizona’s economy healthy. Lowering the cost of business in Arizona by cutting property taxes will benefit the future of all residents. Another criticism of the repeal focuses on the state’s looming budget deficit, projected to reach $3 billion for fiscal year 2010. Opponents question how the legislature can contemplate eliminating the State Equalization Property Tax when revenue is coming in below expectations. There are a few problems with this argument. First, if the State Equalization tax had been collected in fiscal year 2009, it would have added approximately $250 million in revenue, leaving a deficit of at least $1.35 billion.14 This suggests the Arizona budget problem lies with too much spending and an antiquated tax system that does not promote investment, capital formation, and job creation.
Source: EJM Developers, Co., “Good Cents Presentation,” January 16, 2008
To remain a competitive and attractive location for business, to preserve and create more jobs, and to increase individual incomes, Arizona needs to eliminate the state equalization property tax.
Second, while sales and income tax collections are down approximately 11 percent from last year, the corporate income tax is down 24.6 percent.15 Simple economic rationale affirms that increasing taxes on homeowners and business by $250 million is not the way to grow an economy that is in crisis. When business suffers during an economic downturn workers suffer. Now is the time to aid in the sustainability and development of the private sector.
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
State Equalization Property Tax Policy Brief
March 2009 Page 4 of 4
Position In a globalized economy, Arizona can no longer set fiscal policy as if it were in a vacuum. Companies and individual entrepreneurs are watching to see what Arizona does in comparison to other states and countries. Then, they will react accordingly. To make sure they react in a positive way, the Arizona Chamber of Commerce and Industry supports the permanent elimination of the State Equalization Property Tax Rate. Now is the time for Arizona to position itself for economic growth and job creation. The repeal is a critical and important step as Arizona looks to improve its competitiveness.
Joint Legislative Budget Committee, “Fiscal Impact of Statutory Tax Changes,” September 20, 2007, http://www.azleg.gov/jlbc/ taxchanges07.pdf 2 Arizona State Constitution, Article XI Section 1, http://www.azleg. gov/FormatDocument.asp?inDoc=/const/11/1.htm 3 In addition to the State Equalization Property Tax, which is actually collected by the counties, revenue from the Qualifying Tax Rate and Basic State Aid from the General Fund is used to guarantee funding levels. If a district collects enough money on its own to meet the equalization base level, then the State does not provide any funds. 4 Joint Legislative Budget Committee, “State of Arizona 2006 Tax Handbook,” September 12, 2006, p 82, http://www.azleg.gov/ jlbc/06taxbook/06taxbk.pdf 5 Maricopa County Department of Finance, “Tax Rate 2001-2006,” http://www.maricopa.gov/Finance/tax_pub.aspx 6 Joint Legislative Budget Committee, “FY2009 Appropriations Report,” August 2008, http://www.azleg.gov/jlbc/09app/apprpttoc. pdf 7 For Tax Year 2007; the percent will drop .5 percent each year until it is reduced to 20 percent for business in 2015 8 The Arizona State University Real Estate Center records the median sale price for a single family home in Greater Phoenix between 2004 and 2007 at $255,000. For more information see http://www.poly.asu.edu/realty/marketupdate/ sales/Annual%20 Sales.xls. 9 For a full explanation see the Arizona Tax Research Association’s “An Explanation of Property Tax,” 2007, http://www.maricopa.gov/ Finance/tax_pub.aspx 10 EJM Developers, Co., “Good Cents Presentation,” January 16, 2008 1
For more see Timothy J. Bartik (1989). “Small Business Start-Ups in the United States: Estimates of the Effects of Characteristics of States,” Southern Economic Journal, pp. 10041018; Stephen T. Mark, Therese J. McGuire and Leslie E. Papke (2000). “The Influence of Taxes on Employment and Population Growth: Evidence from the Washington, D.C. Metropolitan Area,” National Tax Journal, Volume 53, pp. 105-123; Sanjay Gupta and Mary Ann Hofmann (2003). “The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures,” The Journal of the American Taxation Association, Supplement 2003, pp. 1-25. 12 Minnesota Taxpayers Association, Arizona Tax Research Association, “Residential Property Tax Rankings vs. Industrial Property Tax Rankings,” March 3, 2009 13 Arizona Department of Commerce – Research Administration, “State of Arizona Labor Force and Non-Farm Employment,” 2007, http://www.workforce.az.gov/admin/uploadedPublications/1970_ aznaics01-06.pdf 14 Joint Legislative Budget Committee “Joint Caucus Budget Update: FY 2009 and FY 2010 Revenues and Budget Shortfall Estimates,” January 14, 2009, http://www.azleg.gov/jlbc/ JointCaucusBudgetUpdate 011409.pdf 15 Joint Legislative Budget Committee, “2009 Revenue Update,” February 12, 2009 http://www.azleg.gov/ jlbc/09janrevupdate.pdf. 11
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
March 2009
State Equalization Property Tax Our Position In a globalized economy, Arizona can no longer set fiscal policy as if it were in a vacuum. Companies and individual entrepreneurs are watching to see what Arizona does in comparison to other states and countries. Then, they will react accordingly. To make sure they react in a positive way, the Arizona Chamber of Commerce and Industry supports the permanent elimination of the State Assistance Property Tax Rate. Now is the time for Arizona to position itself for economic growth and job creation. The repeal is a critical and important step as Arizona looks to improve its competitiveness.
Introduction In 2006 the Arizona Legislature passed the Omnibus Tax Relief Act suspending the State Equalization Property Tax Rate for three years. According to research from the Joint Legislative Budget Committee, this legislation saved property owners a projected $250 million a year.1 Bills currently in the state legislature would make this temporary suspension permanent. Repealing the statewide property tax will prevent further job loss and will make Arizona more competitive by lowering taxes for homeowners and businesses in this struggling economy. If the Legislature does not act, businesses will face a dramatic tax increase when the tax returns following fiscal year 2009. Businesses both large and small will undertake the difficult decision of whom to layoff when the new property tax bill comes due. Taxing our citizens and businesses in a time of economic crisis will result in a longer recession and less capital to retain employees and create jobs. Background The State Equalization Property Tax Rate was enacted in 1981 to support local communities’ public school financing. The state legislature sets the rate for this property tax. Prior to 1981, Arizona’s public schools, like in most states, received their funding from local property taxes. If real estate in a particular area had high valuations, the town or city could impose a relatively low tax rate and still meet its school system’s financial needs. In areas where valuations were low, property owners were forced to bear a greater burden to pay for schools. In an effort to comply with the state constitution’s call for “a general and uniform public school system,”2 the legislature established a formula to determine an “equalization base” of guaranteed funding. If local property taxes fail to meet this minimum, money raised from the State Property Tax Rate is used to top those districts’ coffers until they reach the set equalization base level.3
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
State Equalization Property Tax Policy Brief Because a fixed statewide property tax rate combined with rising real estate values meant owners’ tax bills were constantly increasing, the legislature passed Truth in Taxation (TNT) laws in 1998. TNT was intended to lower tax rates to offset the rise in property valuations, thereby stabilizing owners’ tax liability. From 2001 to 2006, TNT lowered the State Equalization Property Tax Rate from 51 to 44 cents per $100 valuation –a 16 percent drop. However, statewide primary valuations jumped 55 percent over the same period resulting in property tax increases for many residents.4 In Maricopa County the increase was nearly 60 percent.5 Although most property taxes are collected at the local level, state lawmakers wanted to provide some form of relief from this tax surge. They negotiated a three-year suspension of the State Equalization Property Tax Rate (one of the two property taxes the state controls) saving owners over $250 million a year. The degree to which education and statewide property taxes are truly separate issues was made clear in the Joint Legislative Budget Committee’s December 2007 fiscal note. The Committee reported that the Department of Education had a $61.1 million budget surplus. Additionally, the legislature appropriated $145 million in additional funding last year.6 In the FY 2009 budget adjustments signed into law on January 31, 2009, the legislature cut $133 million from education, which translates to only 3.2% of its General Fund budget. It is important to remember that the State’s General Fund counterbalanced the loss of this revenue stream, ensuring no school district fell below the base funding level. The business community supports a strong educational system. High property taxes, however, detract from the ability to create wealth and employment for Arizona.
March 2009 Page 2 of 4 Property Tax Differences for Business and Homeowners In Arizona, property is divided up into nine classes. A property’s valuation will vary depending on its classification. Owner-occupied homes are listed in Class 3 and assessed at 10 percent of full cash value (market value). Business property, however, is placed in Class 1 and subject to 22 percent of full cash value.7 That means if a home and business have the same market value, say $200,000,8 the business will pay primary tax on $44,000 while the home will pay tax on only $20,000 worth of value. A further distortion comes in the form of the Homeowner’s Rebate. In 2006, the State covered 36 percent of homeowners’ primary school district tax rate. In Phoenix Union School District the primary property tax rate for a business was 9.76 cents per $100 valuation. The primary tax rate for a home, on the other hand, was 7.29 cents per $100 valuation. By applying those rates to the above valuations, we find a tax bill of $4,294 for the business and $1,458 for the home —a difference of $2,836.9 The State Equalization Property Tax portion of these two tax bills is similarly affected. Applying the State Equalization rate of $0.33 cents per $100 valuation to this example results in a $145 tax for business owner and a $66 tax for the homeowner —120 percent less. Many businesses, however, own property worth more than $200,000. Perhaps a more realistic example is that of a commercial development valued at $3.9 million in Tempe. The State Equalization Tax part of the owner’s property tax bill would come to over $15,000.10 Competitive Arizona High property taxes are particularly damaging. A growing body of research has found property taxes, because they must be paid regardless of a company’s
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
State Equalization Property Tax Policy Brief profitability, negatively impact business start-ups.11 According to the Minnesota Taxpayers Association and the Arizona Tax Research Association, Arizona ranked 5th highest in the nation for industrial property taxes payable in 2007.12 Furthermore, business property in Arizona suffers much higher taxes than neighboring states. Figure 1 shows the annual amount a 10,000 square foot manufacturing/industrial space would have to pay in property taxes in five Western states. Figure 1
March 2009 Page 3 of 4 To Critics of the Repeal Some worry repealing the statewide property tax would unfairly benefit big business. What it would actually do is benefit everyone. According to the Arizona Department of Commerce, property-intensive industries employ over 20 percent of the civilian labor force.13 Lower property taxes would provide companies with additional financial resources to stave off job loss in the short term and support higher wages and expansion in the long term. The ongoing result would be the creation of more jobs to keep Arizona’s economy healthy. Lowering the cost of business in Arizona by cutting property taxes will benefit the future of all residents. Another criticism of the repeal focuses on the state’s looming budget deficit, projected to reach $3 billion for fiscal year 2010. Opponents question how the legislature can contemplate eliminating the State Equalization Property Tax when revenue is coming in below expectations. There are a few problems with this argument. First, if the State Equalization tax had been collected in fiscal year 2009, it would have added approximately $250 million in revenue, leaving a deficit of at least $1.35 billion.14 This suggests the Arizona budget problem lies with too much spending and an antiquated tax system that does not promote investment, capital formation, and job creation.
Source: EJM Developers, Co., “Good Cents Presentation,” January 16, 2008
To remain a competitive and attractive location for business, to preserve and create more jobs, and to increase individual incomes, Arizona needs to eliminate the state equalization property tax.
Second, while sales and income tax collections are down approximately 11 percent from last year, the corporate income tax is down 24.6 percent.15 Simple economic rationale affirms that increasing taxes on homeowners and business by $250 million is not the way to grow an economy that is in crisis. When business suffers during an economic downturn workers suffer. Now is the time to aid in the sustainability and development of the private sector.
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
State Equalization Property Tax Policy Brief
March 2009 Page 4 of 4
Position In a globalized economy, Arizona can no longer set fiscal policy as if it were in a vacuum. Companies and individual entrepreneurs are watching to see what Arizona does in comparison to other states and countries. Then, they will react accordingly. To make sure they react in a positive way, the Arizona Chamber of Commerce and Industry supports the permanent elimination of the State Equalization Property Tax Rate. Now is the time for Arizona to position itself for economic growth and job creation. The repeal is a critical and important step as Arizona looks to improve its competitiveness.
Joint Legislative Budget Committee, “Fiscal Impact of Statutory Tax Changes,” September 20, 2007, http://www.azleg.gov/jlbc/ taxchanges07.pdf 2 Arizona State Constitution, Article XI Section 1, http://www.azleg. gov/FormatDocument.asp?inDoc=/const/11/1.htm 3 In addition to the State Equalization Property Tax, which is actually collected by the counties, revenue from the Qualifying Tax Rate and Basic State Aid from the General Fund is used to guarantee funding levels. If a district collects enough money on its own to meet the equalization base level, then the State does not provide any funds. 4 Joint Legislative Budget Committee, “State of Arizona 2006 Tax Handbook,” September 12, 2006, p 82, http://www.azleg.gov/ jlbc/06taxbook/06taxbk.pdf 5 Maricopa County Department of Finance, “Tax Rate 2001-2006,” http://www.maricopa.gov/Finance/tax_pub.aspx 6 Joint Legislative Budget Committee, “FY2009 Appropriations Report,” August 2008, http://www.azleg.gov/jlbc/09app/apprpttoc. pdf 7 For Tax Year 2007; the percent will drop .5 percent each year until it is reduced to 20 percent for business in 2015 8 The Arizona State University Real Estate Center records the median sale price for a single family home in Greater Phoenix between 2004 and 2007 at $255,000. For more information see http://www.poly.asu.edu/realty/marketupdate/ sales/Annual%20 Sales.xls. 9 For a full explanation see the Arizona Tax Research Association’s “An Explanation of Property Tax,” 2007, http://www.maricopa.gov/ Finance/tax_pub.aspx 10 EJM Developers, Co., “Good Cents Presentation,” January 16, 2008 1
For more see Timothy J. Bartik (1989). “Small Business Start-Ups in the United States: Estimates of the Effects of Characteristics of States,” Southern Economic Journal, pp. 10041018; Stephen T. Mark, Therese J. McGuire and Leslie E. Papke (2000). “The Influence of Taxes on Employment and Population Growth: Evidence from the Washington, D.C. Metropolitan Area,” National Tax Journal, Volume 53, pp. 105-123; Sanjay Gupta and Mary Ann Hofmann (2003). “The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures,” The Journal of the American Taxation Association, Supplement 2003, pp. 1-25. 12 Minnesota Taxpayers Association, Arizona Tax Research Association, “Residential Property Tax Rankings vs. Industrial Property Tax Rankings,” March 3, 2009 13 Arizona Department of Commerce – Research Administration, “State of Arizona Labor Force and Non-Farm Employment,” 2007, http://www.workforce.az.gov/admin/uploadedPublications/1970_ aznaics01-06.pdf 14 Joint Legislative Budget Committee “Joint Caucus Budget Update: FY 2009 and FY 2010 Revenues and Budget Shortfall Estimates,” January 14, 2009, http://www.azleg.gov/jlbc/ JointCaucusBudgetUpdate 011409.pdf 15 Joint Legislative Budget Committee, “2009 Revenue Update,” February 12, 2009 http://www.azleg.gov/ jlbc/09janrevupdate.pdf. 11
Arizona Chamber of Commerce & Industry • 1850 N. Central Ave. Ste 1433, Phoenix, AZ 85004 • http://www.azchamber.com
