A debate among taxpayers regarding the most hated tax rarely changes minds. The current legislative session features a debate about whether to direct tax relief to property taxpayers or income taxes or possibly both.
Valid arguments can be advanced about the deleterious impact of most major taxes. However, the property tax historically has endured the wrath of taxpayers. Why? Because unlike other major taxes, the property tax is the object of a complicated annual shell game played by elected officials that ultimately wears thin with those paying the tax.
Fed by dramatic growth in real estate prices, skyrocketing property-tax valuations in Arizona are stoking the flames of a potential taxpayer revolt. In Mohave County, one of the first counties to send new valuation notices this year, taxpayers are forming to circulate an initiative that would place a tax limit similar to California's Proposition 13 in the Arizona Constitution. The initial meeting of the "Arizona Tax Revolt" packed the Bullhead City Council chambers in early February. A similar movement could surface in Maricopa County, where Assessor Keith Russell has sent out valuation increases for homeowners that average 51 percent.
At the heart of the property-tax shell game is the ambiguous and sometimes complicated relationship between property valuations established by the county assessor and the tax rates that result from budgets adopted months later. The foundation for a property-tax revolt is almost always built on significant increases in property valuations fed by a hot real estate market.
County assessors, fulfilling their legal obligation, increase values to reflect market conditions. Correctly, assessors proclaim that the valuation notice is not a tax bill and the final determination of taxes owed is based on the budgetary decisions of as many as 10 different taxing jurisdictions.
The Arizona Tax Research Association has consistently advocated measures that limit state and local government's ability to ride dramatic valuation increases to huge increases in their levies. Beginning in 1996, the association successfully pushed through the Legislature a series of Truth in Taxation, or TNT, provisions that require the state, counties, cities and community college districts to decrease tax rates to offset growth in valuations.
The good news is that the TNT law has been successful in mitigating property-tax increases at the state level. Since the law went into effect in 1999, state tax rates have decreased 14 percent. The bad news is that local governments (counties, cities and community colleges) have consistently adopted rates in excess of the TNT rates.
Current TNT laws require state and local governments that levy primary (levies for operating budgets) property taxes to provide public notice and majority vote of the governing body before raising taxes. The record suggests this requirement has been a very low hurdle for local governments looking to turn valuation increases into tax increases. Most local governments easily garner the majority vote to exceed the TNT rate, and combine those votes with claims they are not increasing taxes because the tax rate is not increasing.
Clearly, the primary reason local governments continue to spin the "this is not a tax increase" story is that so many taxpayers still fall for it. Time and again, the strategy used to pass multimillion-dollar bond elections in Arizona is to soothe taxpayers by telling them it won't increase their taxes. The fact that those measures always rely on increasing property values, and therefore rising tax bills, never seems to resonate with voters.
If there is a silver lining to the dramatic growth in property valuations, it will be that taxpayers will become more knowledgeable about how government budgets, as well as bond and override elections, ultimately affect their property taxes. Instead of accepting the fantasy that all of the spending can be purchased for free, taxpayers will begin demanding greater accountability for those expenditures.
In the near term, taxpayers should demand that elected officials decrease tax rates in order to offset valuation increases. At the state level, Rep. Steve Huffman (HB 2685) and Sen. Dean Martin (SB 1289) have introduced bills to cut state property taxes as well as require local governments to receive voter approval before exceeding their TNT rates.
Whether it's the most hated tax or not, cutting property taxes now is a particularly good idea.