Taxation Vexation: Phoenix-area home values went down; property taxes stayed up

The Arizona Republic
Wednesday, May 1, 2013
Ronald J. Hansen and Catherine Reagor

During the epic housing crash, property values fell by almost 50 percent in Maricopa County. Did property taxes fall a similar amount? Not by a long shot.

As homeowners clung to the idea that lower tax bills would be one small consolation of the bust, schools and cities and fire districts and hundreds of other government entities stared down their own financial crises in the five years from 2008 to 2012.

With property valuations in general dropping by double-digit percentages each year, equally less taxpayer money would be collected. But demands for education, city services and fire protection for essentially the same number of residents weren’t abating.

School boards, city councils and other government entities, scrambling to avoid the full effects of the property-value crash, wielded their power to raise tax rates to collect more money.

The rising tax rates created a vexing disconnect between values and taxes for all property owners, commercial and residential.

For homeowners, the frustration was felt with every payment of every tax bill, even though Maricopa County easily had the lowest residential property taxes among the nation’s 20 most populous counties in a national Tax Foundation survey.

Every year, many property owners expected to receive the bill that would drop in lockstep with their falling property value.

For most people, that bill never came. County residential-property values declined, on average, three times faster than tax bills between 2008 and 2012, according to an Arizona Republic analysis of county data.

Among 970,000 residential properties that were on the tax rolls in those five years, overall property taxes declined 16 percent on average, according to The Republic’s analysis of county tax and property records. Property values plummeted 49 percent over the same period.

This trend generally applied to most houses in the county. But another factor plays into each homeowner’s tax bill: the region’s decentralized tax system, created in the 1980s to allow each taxing body to manage its own costs and to make growing areas essentially pay for their own infrastructure.

Individual tax bills varied wildly — even within adjacent neighborhoods — lending a maddeningly random quality to the system. With a patchwork of school districts, municipalities and more than 1,000 special taxing districts across the county, even houses with identical values could have tax bills that vary by more than 300 percent, according to The Republic’s analysis.

RELATED ARTICLE: Special districts often lead to disparate tax bills

For example, owners of a house assessed at $150,000 in Cave Creek owed $1,005 in taxes in 2012; owners of a house in Laveen with the same assessed value owed $2,361. Owners of a Scottsdale house assessed at $300,000 owed $1,831 in taxes; owners of a Glendale house with the same assessed value owed $4,504.

“During the past few years, many metro Phoenix homeowners have been opening their property-tax bills and thinking, ‘What the hell?’” said Mark Stapp, executive director of Real Estate Development at the W.P. Carey School of Business at Arizona State University. “Their home’s value has dropped. But their taxes haven’t because local governments have to raise money, even when home prices are down.”

For nearly 150,000 homeowners, tax bills were higher in 2012 than they were in 2008. More than 7,000 homeowners saw their bill rise every year in that span, according to The Republic’s analysis of county records. At the same time, small pockets of homeowners saw their bills drop almost in step with the decline in their valuations. Cave Creek homeowners had among the lowest tax burdens.

Because of higher tax rates, homeowners saw their bills rise in Phoenix’s posh Biltmore area, in swaths of southeast Mesa, in the area surrounding Arizona State University in Tempe, in Ahwatukee Foothills’ newer neighborhoods, in new communities in Surprise and in golf-course communities in north Scottsdale.

Homeowners in lower-income areas often felt the sting of higher school tax rates as values fell and perennially cash-strapped districts raised their assessments. By the end of the recession, residents of the relatively low-income Roosevelt Elementary School District in south Phoenix paid one of the higher school tax rates in the Valley.

RELATED ARTICLE: Tax appeals frequently lead to dead ends

Kevin McCarthy, president of the Arizona Tax Research Association, said widespread apathy about tax policy, from city budgets to school bonding issues, has helped create a system in which few people connect their voting decisions to their pocketbook.

“Your property taxes aren’t simply based on the value of your property. They’re based on the budgets of the many jurisdictions that tax your property, and they’re also based on voter activity,” said McCarthy, a lobbyist for commercial-property owners and an expert on the state’s property-tax system.

Property-tax bills are composed of two dozen different categories, some of which can include multiple taxing entities levying taxes annually.

School taxes for elementary, secondary and community colleges make up more than two-thirds of an average property owner’s tax bill, according to Maricopa County officials.

In many — but hardly all — cases, school taxes are the main reason for higher-than-expected bills as districts raised rates to counter the drop in property values. And voters in many districts added to their school taxes by approving overrides — measures that raised extra cash for classroom operations — and construction bonds.

For other homeowners, special taxing districts can be the reason behind their higher-than-expected taxes. Homeowners, often on the region’s fringes, live in newer communities where the developer established special districts to pay for roads, fire protection, water, lights and other services. Homeowners in long-established areas may be part of irrigation or improvement districts they may barely be aware of. Taxes from those districts boost homeowners’ property bills, creating tax gaps between them and others nearby who aren’t in those districts.

Unlike city boundaries or neighborhood signs that help visualize communities for the public, there are no obvious markers for taxing districts. One neighborhood may have multiple tax overrides and bonds to pay for each year, while homeowners less than a mile away belong to separate school districts and pay different special taxes.

It’s rarely the type of detail most prospective buyers check before closing on a home.

While some frustrated homeowners may view the system as a conspiracy to suck more money from their pockets, it may be more fairly viewed as the bill for a la carte government. If roads or lighting or school-spending increases were desired, those in the area, not the broader population, were saddled with the tax expense.

Every year, the county treasurer sends out bills based on tax rates set every summer by every taxing district. Few people challenge the system. Perhaps one reason for that: Compared with California or New Jersey or Connecticut, taxes here are relatively low.

The Tax Foundation, a Washington-based nonpartisan tax-research organization, analyzed nationwide Census Bureau data on property taxes between 2005 and 2009.

Maricopa County’s median property tax in that span was $1,346, slightly less than Pima County in Arizona and 849th highest in the nation. In property taxes as a percentage of household income, the county ranked 1,351 out of about 2,900 counties examined by the Tax Foundation; in property taxes as a percentage of the median home value, it ranked 2,140.

In Scottsdale: Retiree feels bite of system’s disparity
Retiree Jim Stafford, a Scottsdale homeowner on a fixed income, says his taxes increased 22 percent last year for a variety of reasons, including higher city, county and school levies.

“While I fully appreciate and value county services, it would appear a more realistic budget model might be in order for county government to address wild increases year over year,” Stafford said. “My home continues to drop in value, which increases the pain.”

The beginning: An effort to deal with growth.

The simple math of property taxes, and the system created to manage growth, are two keys to understanding tax trends in Maricopa County.

Two numbers are multiplied to create the tax bill: a house’s assessed value, and the tax rate for each of the many taxing districts in which a house is located. Tax rates, not the property’s assessed value, are by far the most important figures in determining final bills.

Across the country, property-tax systems vary. In a few states, including California and South Carolina, property taxes are set by the state. In others, such as Arizona, Georgia and Texas, property taxes are set by county. Maricopa County’s current decentralized property-tax system was created in the 1980s to modernize education funding and cope with the state’s rapid population growth.

Property-tax bills can include two dozen different categories of taxing districts, from schools to water to community facilities districts to specialized categories such as lighting and irrigation. A typical homeowner’s bill has more than a dozen taxing entities levying taxes annually.

That localization means costs often are funneled directly to those who are using the services instead of spreading them citywide, countywide or statewide. The impact of education taxes, and taxes tied to development, can create profound disparities between tax bills.

Built into the decentralized system is the ability to adjust tax rates as needed to provide enough cash for these services regardless of property valuations, McCarthy said. In the boom years of the past decade, tax rates often were lowered to reflect the growing base of property owners and the rising value of their houses.

In Madison district: School taxes a burden
The valuation on Tom Rich’s North-Central Phoenix home has dropped 29 percent since 2008. But with eight different school taxes, overrides and bonds, his taxes had jumped 22 percent by 2012, adding $1,037 to his bill.

“This is price gouging. A monopoly by our local governments, and I have no choice (but) to pay,” said Rich, who paid $5,700 in property taxes last year, about $4,300, or 75 percent of it, for schools. He lives in the Madison Elementary School District. Almost $1,900 of his taxes went to Madison, and almost $2,000 went to Phoenix Union High School District taxes, bonds and overrides. The balance of his school taxes went to the Maricopa County Community College District.

He doesn’t have children but said he doesn’t mind paying school taxes.

“I just question all the overrides and bond interest,” Rich said. “I could vote no on the overrides, but they would still go through. It’s become ludicrous.”

It could be worse. Across the street, the tax bill for Rich’s neighbor jumped 53 percent, or $1,580, in the five-year period.

Jay Mann, a spokesman for the Madison district, said its budgets have fallen from $6,800 per pupil in 2007-08 to $6,090 in 2011-12, in part because state funding — another casualty of the recession — was scaled back. The district, he said, has tried to preserve a quality education for its diverse student needs, whether that involved assisting low-income families or high-tech job training for future workers.

“For us, it’s largely been preservation of what we were doing,” Mann said. That task has been difficult, he said, with higher energy costs and reduced state funds for capital needs.

The cost of education: In many school districts, the combined tax rates have gone up nearly every year since the recession began.

RELATED ARTICLE: Summer tax votes lead to rate hikes

And education, by far, accounts for the largest chunk of property-tax bills. Between 2008 and 2012, primary taxes earmarked for elementary, high school and community college accounted for 48 percent of tax bills, according to state treasurer records.

Add in voter-approved bonding issues and overrides that allow specific school districts to boost per-pupil funding, and education costs were responsible for, on average, 73 percent of a property-tax bill in 2012, according to The Republic’s analysis. In 2012, some voters reached their limits. Nearly half the bond and override measures in 28 districts failed in November.

School budgets are tied more to enrollment than real estate. Each district’s budget is a mix of federal, state and local tax dollars. What the state and Washington don’t cover comes from local homeowners.

Tax rates for operations in districts such as Creighton and Kyrene Elementary and Mesa Unified went up three successive years beginning in 2010. Tax rates for bonds and overrides went up four years in a row in districts such as Madison and Roosevelt Elementary and Dysart Unified.

“With school bonds and overrides, there’s no mechanism that those taxes go down when the values go down,” said McCarthy. “It matters little if bonded debt was based on an overly optimistic view of taxpayer growth because bonds that have been sold need to be paid back.”

Dysart’s school tax rates, including bonds and overrides, have climbed almost 33 percent since 2008.

“We were stunned with a 16 percent increase in our taxes during 2012,” said Surprise homeowner Brad Whitman. “The increase came in spite of a drastically reduced assessed value on our home. Many of us are just paying too much to schools.”

Whitman’s house’s value dropped from $205,000 in 2010 to $174,000 in 2012.

About $1,400 of his $1,990 tax bill went to the Dysart school district. Whitman also owed nearly $225 to three special tax districts.

In north-central Phoenix: Irrigation taxes
Raymond Santoyas, 85, who lives on Northern Avenue in north-central Phoenix, paid more than $1,000 in special-district taxes last year.

Across the street, his neighbor paid $7.

The disparity is due to the boundary of the Berridge Ridge irrigation district. Santoyas is in it; his neighbor isn’t.

“It doesn’t make sense. My property bill keeps going up, but my values aren’t,” Santoyas said. “I am mad, but what can I do about it?”

Santoyas is allotted about 2 hours and 15 minutes to open the water valve and flood his property each year. His home is much smaller than his neighbor’s, but his yard is bigger.

“I have about one-sixth of an acre,” he said. “I don’t understand the irrigation tax because I pay a water bill.”

The irrigation district, set up to flood yards a few times a year, is separate from what he pays for city of Phoenix water.

Thousands of special districts: While education usually tops the property-tax expenses, special districts can double the final bill for some homeowners.

Countywide, there are more than 1,000 of these districts, which collect taxes for services confined to the areas that need them. The services range from fire protection to street lighting to water services. Districts are created on a case-by-case basis by residents or a real-estate developer and essentially act as financing mechanisms for residents to pay taxes for a range of services in their own geographic area.

Once authorized, these entities are inconsistently regulated. Some of the district’s governing boards file elaborate, audited annual reports; others file single-page, handwritten summaries of their activities. There is no indication anyone in local, county or state government routinely reviews these documents.

“Most developers come in and create special districts, sell out the communities and then give the debt to the city to bond. No one really regulates special districts,” said Charles Hoskins, Maricopa County treasurer. “A homeowner’s first step to checking out why they are being billed by a special district is to call that district.”

If special-district activities generally go unnoticed, their impact on property-tax bills is not.

Consider the example of two homeowners two houses apart in the Agua Fria Ranch subdivision of Youngtown.

In 2004, nearly identical-sized homes were built on identical-sized lots.

In 2012, one of the houses was assessed at $80,200. The other was assessed at $80,600. Despite the similarities, one property’s tax bill was $1,523 and the other’s was $1,923.

The main reason for the disparity is a special district called the Central Arizona Groundwater Replenishment District. One of the homes was taxed $89 for the year from that district. The other was taxed $355.

Most other houses nearly the same size, built the same year and on the same block — with swimming pools — had bills below $100 from the special district.

The owners of the house with the high water bill, who bought it in December, declined to comment on the bill.

Central Arizona Groundwater collects money from homeowners to buy water and recharge groundwater and taxes homeowners based on usage. More than 1,000 subdivisions in the southwest and southeast Valley are part of this special district, which was created in the mid-1990s. The district is currently trying to raise its rates 4 percent.

Confused about how to interpret your property tax bill? Click the above for a quick primer.
In the southeast Valley: Costly fire service
Real-estate developer and investor Michael Pollack is savvy to the Arizona property-tax system. He has successfully appealed valuations on several of his neighborhood shopping centers.

“One of the concerns I have is that property taxes went up when values went down,” he said. “Now, what’s going to happen as property values go up again?”

On his Chandler home, Pollack has paid $73,000 in special-district taxes since 2006, the most in Maricopa County in that time. About one-quarter of his annual property-tax bill goes to the Sun Lakes Volunteer Fire Department.

Pollack’s house, valued at more than $3 million, is one of the area’s most expensive, so he must pay much more to the special district than many other homeowners in the community, with houses valued at $300,000.

“I haven’t gone deep into research on the fire districts,” Pollack said. “If you live in the county or a city, you would think fire services would be paid for. However, there are areas throughout the Valley that have very different fire-protection situations. It doesn’t seem equitable.”

Lots of moving parts. Homeowners wanting to have a true influence on the size of their tax bill would have to attend a half-dozen or more tax-rate-setting meetings and successfully make their case to their particular school boards, the county supervisors and to any special districts in which they may live as well.

They also can appeal their home’s valuation, but the tax rates they pay influence their final bill the most — a fact recognized by Keith Russell, the former Maricopa County assessor, who resigned this month to become East Mesa justice of the peace. In recent years, the County Assessor’s Office began valuing houses 10 to 20 percent below market value in an effort to save people the time and money of appealing, he said.

Typically, fewer than 5,000 residential homeowners appeal their assessments each year in a county with more than 1 million parcels. Fewer than 1,000 receive a changed valuation.

Fewer than 2,500 Maricopa County homeowners appealed last year, and fewer than 500 were successful.

“A homeowner only saves about a penny in taxes for every $1 they get knocked off their valuation,” Russell said. “Some homeowners go to small-claims court and pay almost $150 to appeal their valuations and end up losing money.”

In Willo: Fed up
Daisy Delaney owns a home in the historic Willo District in central Phoenix. Though her $358,000 house was built to look historic, it doesn’t carry the designation because it was built in the early 1990s.

The historic designation matters because it cuts tax bills in half.

Her tax bill climbed $600 last year to $5,305, largely because of school taxes aimed at improving central Phoenix schools, including nearby Kenilworth Elementary.

Down the block from Delaney, a neighbor with a house valued at $30,000 more than hers pays about $3,000 in property taxes because it’s designated as historic.

“Why aren’t there groups of homeowners getting together to protest these tax increases?” Delaney said. “I have found it impossible to negotiate taxes or assessments in the past. I come from New Mexico, and there, at least, homeowners could get some consideration.

“I am trying to sell just because my taxes are so high,” she said.