The delicate balancing act involved in changing Arizona’s property tax structure will leave some homeowners paying higher property taxes.
Because of the way property taxes are structured in Arizona, any decrease in the commercial property assessment ratio will shift a higher tax burden onto homeowners. School districts and other entities that levy property taxes set their rates to reach a certain dollar amount, and when one rate is lowered, others rise accordingly.
To offset the shift onto homeowners, the jobs bill included an increase in the rebates that the state provides to homeowners. The sizes of the rebates will be determined at a later date by the Department of Revenue.
But for some homeowners, those rebates won’t be enough to cover their increased tax load.
Judy Richardson, of the financial services firm Stone & Youngberg, said homeowners’ tax burden will depend on their school district, their city and other factors. Thanks to the increased rebates, some will even pay less.
But others, primarily those in school districts with large amounts of commercial property, are going to be paying a greater share when the assessment ratio on commercial property starts dropping in 2014.
“For some homeowners it’s going to give them much more money than they are impacted, and for others it’s going to be much less because there’s so much variation,” Richardson said. “I’m not sure the Legislature necessarily understands this.”
The balancing act works like this: School districts and other entities have bonds and other financial obligations that must be met, so they levy secondary property taxes — in addition their primary rate — in order to make payments to the investors. The districts start with the dollar amount that must be raised, which is largely determined by bond obligations and other formulas, and set the property taxes accordingly.
If a district has a large amount of commercial property, the assessed value of that property will go down when the assessment-ratio reductions in the jobs bill go into effect. So other types of property in the district, primarily residential property, will have higher taxes to make up the difference.
For example, if a school district had nine commercial properties and one residence, and it needed to raise $100,000, that home will become a greater percentage of the total property tax base when the cuts go into effect.
“In that case, even though that guy got a homeowner’s rebate increase, it’s not going to cover the increased tax because he’s now 13 percent of the (total) property instead of 10,” said Randie Stein, also of Stone & Youngberg. “There’s still the whole pie, and between them they still have to come up with $100,000.”
For people who own homes in districts with little or no commercial property, the rebates will adequately cover their increased taxes. But for homeowners in districts with high levels of commercial property, the rebates will likely fall short.
One of the key provisions of the Arizona Competitiveness Package, also known as the jobs bill, is a decrease in Arizona’s commercial property tax assessment ratio to 18 percent from 20 percent. The assessment ratio on agricultural property will drop to 15 percent from 16 percent. Both cuts will be phased in and will be fully in effect in 2018.
Supporters of the commercial property tax cuts acknowledge that some homeowners will pay more due to the jobs bill. But some, such as Kevin McCarthy of the Arizona Tax Research Association, say it’s actually making the system more fair for businesses.
McCarthy said Arizona has some of the highest commercial property tax rates in the country. The assessment ratio for commercial property, which makes up about 22 percent of taxable property in Arizona, is 20 percent. For owner-occupied homes, which make up nearly 59 percent of the property, the assessment ratio is only 10.
Currently, Arizona has the 16th highest commercial property tax rates in the country, and before the Legislature cut the 25 percent assessment ratio in 2005, it was in the top three, McCarthy said.
“One of the things that’s a little maddening about this discussion of tax shifts is the hyper-focus on changes in the assessment ratios … without recognizing the tax shifts that occur with the ratios themselves that are in place,” McCarthy said.
For taxing purposes, McCarthy said, most states don’t even separate business and residential property. While Arizona’s system has been a boon for homeowners, it has made the state exceptionally unattractive to many industries, he said.
“That makes for very good politics in order to insulate and subsidize the homeowner voter, but from a tax policy standpoint, it leaves you in a very bad place,” McCarthy said. “By design, you end up with considerably higher business taxes than most other states.”
McCarthy said it will be impossible to determine what percentage of Arizona homeowners will have their property tax hikes offset by the increased rebates, but he believes it will be the majority.
Those rebates, however, apply to only owner-occupied homes. Tom Farley, CEO of the Arizona Association of Realtors, said people who own rental properties or second homes will take on greater tax burdens. And homeowners who already receive the maximum $600 rebate can’t get more money to offset their increased property taxes.
Farley also worries that many homeowners who are eligible for rebates will be hurt by the complexity of the new rebate system.
Currently, homeowners receive the rebates automatically, and as a result, people often receive rebates for second homes and rental properties, even though those aren’t eligible. One provision of the jobs bill requires county assessors to send homeowners an affidavit they must sign to get their rebates, which supporters say will cut down on fraud and rebates sent to ineligible property owners.
Farley said many homeowners likely won’t realize they must sign the affidavits and send them back to their county assessors, which will leave some without the tax rebates they’re entitled to. County assessors, he said, might also be overwhelmed with the new forms and accidentally misfile the affidavits.
“No one really looks at those notice-of-evaluation forms when they come out because they always have bad news in them,” he said.
According to the Arizona Department of Revenue, the state issued about
$420 million in homeowner rebates last year. The Joint Legislative Budget Committee estimated that the increased rebates will cost the state an additional $105 million in 2018, while the waste and fraud eliminated through the affidavits will only bring in about $39 million. Ten percent of the savings earned through the affidavits will go to county assessors to cover their increased costs and workloads.