Arizona Business Gazette Tax cuts for business?

Lawmakers eye property rates
Capitol Media Services
Thursday, February 7, 2002
Howard Fischer

State lawmakers are taking the first tentative steps toward reducing the property tax burden on business.

Virtually all lawmakers agree the property tax structure is unfair. But the concept faces an uncertain future because of one simple fact: It would shift the cost of future bond issues and overrides from businesses to homeowners and apartment dwellers.

And lawmakers realize that this is an election year, and businesses do not vote.

Still, state Rep. Steve May, R-Paradise Valley, who is championing the change, hopes to convince colleagues that this small move will pay off in other ways. If nothing else, he said, it will eliminate the need for lawmakers to come up with a host of special exemptions to attract and keep businesses.

Central to the dispute is Arizona's property tax system.

Most businesses have their property assessed for tax purposes at 25 percent of what is considered their "full cash value," generally meaning the market price. By contrast, residential property has a 10 percent assessed valuation.

That means the owner of a $100,000 business pays 2 ½ times as much in property taxes as the owner of a $100,000 home.

The situation is exacerbated because business equipment, from machinery right down to chairs and typewriters, also is taxable; residential personal property is not.

Kevin McCarthy, lobbyist for the business-backed Arizona Tax Research Association, said the net result is inherently unfair and that it severs the link between the people who approve the taxes and those who pay the lion's share.

The current practice of schools, cities and counties that push bond elections and overrides is to tell voters not so much the overall repayment schedule but what it would cost each year for the typical homeowner. Rep. Jeff Hatch-Miller, R-Phoenix, said it s designed to present a figure low enough to gain voter acceptance.

What is hidden, said Hatch-Miller, is that a greater burden is paid by businesses. But the business owners get no vote on the matter.

McCarthy said that has resulted in Arizona having one of the highest business property tax burdens of any state. And that, in turn, hurts efforts to attract companies.

The proposal being debated would have a single 10 percent assessment ratio for all future voter-approved debts.

Alan Stephens, executive director of the County Supervisors Association, said the problem with all that is it amounts to shifting the tax burden from businesses to homeowners.

"In some cases, it could be a sizeable shift," he said.

A single assessment ratio does that because of the nature of bond and override measures.

Consider a community where half of the full cash value is business and half is residential and the measure needs to raise $10 million for an override - essentially a boost in spending.

Because of the dual assessment ratio, businesses overall would pay about 71 percent of the total needed, with the balance paid by owners of residential property.

If suddenly both business and residential property is equally valued, the total assessed value of the district goes down. That means the tax rate goes up to the point where the same $10 million can be raised.

And, in this example, businesses would pay only half of that $10 million levy.

Stephens suggested that there may be a hidden agenda by some businesses in all this: If the annual cost goes up too much, voters may be less likely to approve future ballot measures at all. He said, though, that could prove short sighted, as that could mean rejection of programs businesses really believe are important to them like improved transportation systems.

May bristled at the notion of the measure being a tax shift, pointing out that the change will occur only if voters approve new bond issues and overrides in the future. He said the current system amounts to a "deceptive practice" to hide the true cost.

And McCarthy said this is a necessary first step to eliminate some of the often byzantine provisions of the tax code.

He said that Arizona is known for having one of the highest property tax burdens on business of any state in the region, if not the country. So, in order to attract business here, lawmakers have enacted special provisions to cut that burden.

One such example involves Enterprise Zones. Companies that locate there get not only a corporate income tax credit for new jobs created but also a 5 percent assessment ratio for five years. It's a provision that gives them an 80 percent break in their property taxes.

And as to helping areas of high unemployment, lawmakers left the provisions of drawing these zones particularly loose.

Theoretically, the area must have a poverty rate or unemployment rate at least 50 percent higher than the statewide average. But that allows lines to be drawn in many ways, taking in more affluent areas if the zone also includes census tracts with deep poverty.

So, for example, 16 square miles of the city of Chandler is within a zone, as is much of Tempe. In fact, the majority of the city of Tucson is also an enterprise zone, as is much of Phoenix as well as virtually the entire western half of Maricopa County.

Stephens, however, said all the protests from the business community ignore the various other changes in statutes that lawmakers and voters have enacted over the past decade for businesses.

One change exempts the first $50,000 worth of business equipment from taxation. And another accelerates the depreciation schedule, meaning that the value of the equipment for tax purposes is reduced much quicker.