Lawmakers may shift the responsibility for education funding to local property owners as a way of coping with staggering budget deficits in the near future, even though it would translate to higher property taxes.
“It may have to be (an option) because I just don’t know where we’re going to find money,” said Rep. John Kavanagh, a Fountain Hills Republican. He chairs the Appropriations Committee in the House of Representatives.
“We may well have to require local governments and taxpayers to pick up more of the burden.”
Education funding makes up 41 percent of the state’s $10.3 billion general fund budget. While a sizeable portion of the $4.3 billion education budget this year is subject to a voter-protection clause in the state Constitution, and therefore off-limits to cuts, there is a way for lawmakers to cut state funding by hundreds of millions of dollars without decreasing how much money schools receive.
Essentially, the Legislature sets the basic state aid funding level each year. That funding is provided by two sources: the state’s general fund and local property taxes. In 1980, the “qualifying tax rate,” or QTR, was established.
The QTR is the rate that school districts apply to local properties and is multiplied by the valuation of properties in each school district to determine how much funding can be raised through local taxes. If the amount is less than the basic aid level, the state fills in the remainder. So, if a school district was owed $10 million under the basic-aid formula, but its local property tax would only generate $5 million, the state would cover the other $5 million using money from the general fund. The system is designed to equalize funding for students in both rich and poor areas of the state.
If the Legislature were to increase the QTR, it would increase the amount school districts could raise through property taxes and decrease the state’s obligation to education funding without reducing the amount of money schools receive.
It also carries a significant political advantage over other tax increases lawmakers have considered: It doesn’t require the two-thirds approval needed to increase revenue because, technically, it doesn’t affect revenue. Rather, it decreases an expenditure - education funding - which can be done by a simple majority.
House Speaker Kirk Adams acknowledged that was advantageous, especially when compared to a more run-of-the-mill tax increase proposal, which would require 40 votes in the 60-member House and 20 in the 30-member Senate.
“But that advantage is overwhelmed by the fact that it is a massive property tax increase,” he said.
Adams said the idea should remain on the list of options, although he didn’t envision any proposal to increase property taxes gaining much traction with legislators or voters, who have consistently opposed such tax increases.
In May, Democrats included a massive hike in the QTR as part of their budget proposal. The plan would have increased the rate to $4.42 from $2.92 per $100 of assessed valuation, an increase of more than 50 percent.
They estimated such an increase would have saved the state $730 million in education aid. It would have resulted in a $137 increase in property taxes on a $150,000 home. Commercial property, which is taxed at a higher rate, would have been hit harder. A $5 million commercial property would have seen an increase of nearly $16,500.
Instead, the Republican-led Legislature opted to allow the automatic decrease in QTR. The rate is governed by the Truth in Taxation law, which took effect in 1999. It provides a mechanism to reduce property tax rates automatically in order to offset increases in the value of property, allowing owners to avoid higher taxes when values increase.
Kevin McCarthy, president of the Arizona Tax Research Association, called increasing the QTR to address budget deficits “a horrible idea” because Arizona already has high business property taxes and increasing them makes the state less attractive to new and relocating businesses.
“We think it’d be a huge mistake to aggravate that situation by raising property taxes as a way to increase revenues,” he said.
But others see it as a viable option that needs to be explored further. Dana Wolfe Naimark, president and CEO of Children’s Action Alliance, called the QTR a “robust and fair” way to reduce the deficit without cutting school funding.
Increasing this property tax, she said, won’t be an impediment to economic development given that Arizona consistently ranks in the top 20 nationally in overall business climate in surveys done by policy analysis groups.
And besides, Naimark said, policymakers have to start looking beyond the traditional methods used to solve budget deficits because many of those options have been exhausted.
“We can’t be a one-trick pony. We’ve got to look at a variety of strategies,” she said. “We have to open our eyes and minds (to) all the responsible options, and that should be high on the list.”
With shortfalls exceeding $2 billion predicted for the next three years, everything has to be on the table, said House Minority Whip Chad Campbell. “If you think this year was bad, next year’s going to make this one look like a walk in the park,” he said.
Kavanagh agreed. Because the deficits are going to be so large, and the tools lawmakers have at their disposal so few, he and other legislators are going to have to adopt strategies they would otherwise adamantly oppose.
“Very desperate times call for considering things we never would have in the past,” he said.