Property-tax drop sought

Bill passage could lessen sting of valuations
The Arizona Republic
Sunday, January 1, 2006
Mary Jo Pitzl

Property values have gone up dramatically.

That means tax bills will go up.

That is why several lawmakers propose that a key property tax should come down, noting that the state has a $750 million budget surplus that makes it affordable to cut taxes.

A property-tax cut would save money for owners of business and residential properties and shift about $200 million of school funding onto the state General Fund.

It's the latest plan to cash in on the state's budget surplus, and it will set the stage for a spirited debate about the merits of cuts in property tax vs. income tax when the Legislature convenes next week.

"If we can cut property taxes, that's the surest-fire way to grow our economy in a sustained way," said Tim Lawless, president of the Arizona chapter of the National Association of Industrial and Office Properties.

That group, along with the Arizona Tax Research Association and other business groups, is pushing the bill for a property-tax cut.

They argue that the savings will buffer homeowners from some of the sticker shock of higher property taxes. In the metro area, property values have climbed 30 percent to 50 percent in the past year.

The proposal would save $43 in 2007 for the owner of a home valued at $100,000; $129 for the owner of a $300,000 home. A business with $1 million in property value would save $1,054.

The savings would come by setting the county education tax rate for the 2007 tax year at zero. It currently is 43 cents per $100 of assessed valuation, and in 2005 raised $204 million. The money is used to equalize payments to school districts.

The schools wouldn't go lacking for that $204 million, however, because proponents say the money would be backfilled out of the state budget surplus.

"It'll hold the education system harmless," said Rep. Steve Huffman, R-Tucson, who will sponsor the tax-cutting bill along with state Sen. Dean Martin, R-Phoenix.

Even in down years, when the state doesn't have any extra cash lying around, schools would not get a funding cut, Huffman said. That's because a voter-approved measure from 2000 requires the state to cover all education obligations, even if the money has to be taken from other programs.

Also, lawmakers always could adjust the county education tax rate to something greater than zero, said Huffman, chairman of the House's tax-setting Ways and Means Committee. However, that could be politically difficult because it would be portrayed as a tax increase.

The proposal is likely to collide with a $400 million income-tax cut being sponsored by state Rep. Laura Knaperek, and backed by the Arizona Free Enterprise Club, a group founded in 2005 by several Arizona millionaires.

Knaperek said she likes the idea of property-tax cuts, and there may be room to enact both proposals.

But, she said, the income-tax plan would give taxpayers money back, whereas a property-tax cut would just take the edge off what are sure to be higher bills because of rising property values.

In any event, Knaperek said she welcomes the debate about the merits of different tax cuts.

Lawless said that income-tax cuts make more sense if done on the federal level. Arizona ranks in the lower third for income taxes, when compared with other states, he said. In contrast, Arizona's business property taxes rank in the top five nationally.

"We are a (property) tax heaven for individuals," he said, "but we are a tax hell for businesses."

Kevin McCarthy, executive director of the Arizona Tax Research Association, said that income-tax cuts are laudable.

Still, he believes property-tax cuts will win out because of the universal effect of rising property values on tax bills.

Huffman, who sells residential real estate, agrees.

"With the real estate market being as hot as it has been over the last few years, all my (legislative) colleagues are starting to get phone calls from their constituents about property-tax bills going up," he said.

Plus, many business lobbyists are trying to build on the success of the last legislative session, when lawmakers agreed to a 10-year plan to cut the ratio at which businesses are assessed for taxes.

Even when those changes are in place, Arizona business-property taxes still will rank 15th highest in the nation, McCarthy said, so further reductions are needed.

Several education advocates are wary about the proposal.

Lawmakers should keep the county education tax and the money it generates, and then use some of the surplus to boost teacher salaries, said John Wright, president of the Arizona Education Association.

Plus, he's worried that if the tax rate is set at zero, any attempt to increase it would be politically difficult.

"It's certainly going to have the political taint of a tax increase," he said.

Tom Horne, the state superintendent of public instruction, said that he's neutral about the proposal as long as it doesn't leave schools with less financing.

His priority for the tax surplus is a $2,500 income-tax credit for all teachers, a proposal that could cost $152 million.