Government Finance Officers Association of Arizona August 6, 2014 Arizona Tax Research Association Arizona Tax Research Association Only statewide taxpayer organization representing both businesses & individuals before policymakers at the state & local level Advocates for sound public finance and tax legislation at the Capitol Goal is to have efficient state & local government and the effective use of tax dollars through sound fiscal policies Arizona Tax Research Association Arizona Tax Research Association Local government budgeting processcounties, community colleges, some cities ATRA publications Property Tax Rates & Assessed Values An Explanation of Arizona Property Taxes Arizona Tax Digest School Finance Primer Legislative Review ATRA Newsletters Budget Reviews Major Ballot Issues Prop 107 – Income Tax Repeal (2000) Ballot Box Budgeting Prop 200 – Tobacco/AHCCCS (1994) Prop 204 – Quality Ed & Jobs Act (2012) Prop 301 – Education Sales Tax (2000) Prop 108 – 2/3’s Vote (1992) Prop 117 – Property Value Limits (2012) Proposition 117 Makes a major change to Arizona’s property valuation system Reduces the number of taxable values from two to one Eliminates secondary and primary values Taxpayers will have one limited net assessed value Assessor will value property at the market value (full cash value) Annual growth in limited net assessed value capped at 5% Effective valuation year 2014 and tax year 2015 Arizona Tax Research Association Actual Value Growth vs. 5% Limit Proposal (1992-2012) 100 Net Assessed Value (Billions) 90 80 70 60 Actual NAV Limited NAV 50 40 30 20 10 0 1992 1994 1996 1998 2000 2002 Tax Year 2004 2006 2008 2010 2012 States Three Legs to Most State & Local Tax Stools 50 - Property 46 - Sales 43 - Individual Income 46 - Corporate Income Arizona Tax Research Association There Has Been On-going Debate About The Efficacy of our System for Decades Many Study Committees Fiscal 2000 - 1999 CFRC - 2004 TRAC – 2004 Governor Brewer’s TPT Task Force - 2012 Usually jump-started for two reasons: Impetus for real tax reform Cover for tax increases Combination of both Arizona Tax Research Association Total State and Local Taxes in Arizona Sales Property Income Subtotal Other Taxes* Total FY 2013 $9,398,151,182 $6,555,794,961 $4,060,928,175 $20,014,874,318 $1,330,983,037 $21,345,857,355 *Based on FY 2011 actual tax collections. Arizona Tax Research Association Total State & Local Taxes National Rankings Total State & Local Taxes Total Tax Collections-State and Local FY 2011 State ARIZONA Per Capita Amount Rank $3,340.61 40 U.S. Average $4,295.48 Arizona Tax Research Association Per $1,000 of Income Amount Rank $95.10 39 $105.37 Snapshot of AZ’s Tax System Average Overall Reliance (typically) •High Sales Taxes • Average Property Taxes High Business Property Taxes Low Homeowner Property Taxes • Low Personal Income Taxes Arizona Tax Research Association Property Tax National Rankings Total State & Local Property Taxes Property Tax Collections-State & Local FY 2011 ARIZONA Per Capita Amount Rank $1,095.94 32 U.S. Average $1,422.56 State Arizona Tax Research Association Per $1,000 of Income Amount Rank $31.20 26 $34.90 Property Tax-Major Issues Arizona’s system has generally been regarded as one of the most complex in the country Several aspects of the property tax system have created significant policy problems: High Business Property Taxes 1% Residential Cap Accountability Arizona Tax Research Association Disparate Tax Treatment between Businesses & Residential Properties Shift taxes within classification system Businesses pay approximately twice as much as residential Disparate treatment leads to industries seeking tax incentives Create greater equity instead of rifle-shot relief to selected industries Arizona’s Classification System (Tax Year 2013) Class 1 2 3 4 5 6 7 8 9 Description Commercial, Industrial, Utilities & Mines Agricultural & Vacant Land Owner-occupied Residential Rental Residential Railroad, Private Car, Airline Flight Residential Historic, Enterprise & Foreign Trade Zones Commercial Historic Rental Residential Historic Possessory Interests Assessment Ratio 19.5% 16% 10% 10% 15% 5% 1% 1% 1% *The assessment ratio for class one property will decline to 19% in 2014, 18.5% in 2015, and 18% in 2016. Arizona Tax Research Association 2012 Effective Tax Rates Class 1 Commercial, Industrial, Utilities, and Mines 2 Agricultural and Vacant Land 3 Owner-occupied Residential 4 Rental Residential 5 Railroad, private car, airline flight 6 Rd historic, enterprise & foreign trade zones 7 Commercial historic 8 Rental residential historic 9 Possessory Interests Total Total Taxable Full Cash Value 109,285,983,323 25,277,600,480 254,706,920,931 55,482,733,037 1,614,204,100 5,681,532,496 35,609,615 11,287,618 135,126,357 452,230,997,957 Percent of Total 24.17% 5.59% 56.32% 12.27% 0.36% 1.26% 0.01% 0.00% 0.03% 100.00% Arizona Tax Research Association Source: Arizona Tax Research Association – Tax Year 2012 Property Tax Model Total Yield 2,451,471,481 436,660,735 2,516,565,936 658,373,285 26,852,575 32,969,178 736,457 113,395 150,836 6,123,893,879 Percent of Total 40.03% 7.13% 41.09% 10.75% 0.44% 0.54% 0.01% 0.00% 0.00% 100.00% Effective Rate 2.24% 1.73% 0.99% 1.19% 1.66% 0.58% 2.07% 1.00% 0.11% 1.35% Equity Considerable success: 2005 Legislation: 10-year phase down in class one assessment ratio to 20% 2007 Legislation: accelerated reduction to six years-assessment ratio reduced to 20% by 2011 2011 Legislation: reduced the assessment ratio on class one from 20% to 18% in half-percent increments beginning in 2013 Arizona Tax Research Association Sales Taxes National Rankings Total State & Local General Sales Taxes General Sales Tax Collections - State and Local FY 2011 State ARIZONA 46-State avg. + D.C. Per Capita Amount Rank $1,267.89 10 $989.73 Arizona Tax Research Association Per $1,000 of Income Amount Rank $36.09 7 $24.25 Sales Tax (TPT) - Major Issues Arizona’s state & local TPT system is also one of the most complicated and administratively burdensome in the country Lost sales tax revenue to online retail a growing problem Arizona’s chaotic system led to major TPT reform in 2013 (more still needed) Arizona Tax Research Association Taxable Business Classifications (State) Retail Transporting Utilities Telecommunications Publication Job Printing Pipeline Private Car Transient Lodging Personal Prop Rental Mining Amusement Restaurant Prime Contracting Owner Builder Sales Commercial Lease Arizona Tax Research Association Model City Tax Code Arizona is one of a few states in the country that allows for an independent, municipal sales tax system The tax base at the city level does not mirror the state base Examples: Advertising, Speculative Builders, Rental Occupancy, Food, Commercial Leases Interpretation of exemptions a major issue Independent municipal system has created significant administrative and compliance issues for taxpayers in Arizona Arizona Tax Research Association PRE HB2111 Most States Arizona One payment, one audit Multiple payments, multiple audits One payment One audit State Tax Base City Tax Base One payment One audit State Sales Tax County Sales Tax State Sales Tax Municipal Sales Tax One uniform sales tax base County Sales Tax Program City Sales Tax Non-Program Cities One payment One audit Apache Jct. One payment One audit Phoenix One payment One audit Avondale One payment One audit Prescott One payment One audit Chandler One payment One audit Scottsdale ARIZONA TAX RESEARCH A SSOCIATION One payment One audit Douglas One payment One audit Tempe One payment One audit Flagstaff One payment One audit Tucson One payment One audit Glendale One payment One audit Bull he ad Ci ty RDS One payment One audit Mesa One payment One audit One payment One audit Nogales One payment One audit Sedona Somer ton RDS RDS One payment One audit Peor ia One payment One audit Willcox RDS Major Sales Tax Reform Governor’s TPT Simplification Task Force-2012 “Arizona has one of the most complex transaction privilege tax systems in the country”; “taxpayers have expressed very clearly their desire to see reforms enacted that will modernize and simplify the TPT”; and “it is in the interest of taxpayers and state and local governments to make the tax code easier to understand, comply with, and administer.” HB2111 – Passed in 2013 Single Point of Administration Single and Uniform Audit Trade/Service Contracting Reform POST HB2111 Most States Arizona One payment, one audit One payment One audit State Tax Base City Tax Base One payment One audit State Sales Tax County Sales Tax Municipal Sales Tax One uniform sales tax base State Sales Tax County Sales Tax City Sales Tax Maintains multiple tax bases Arizona Tax Research Association Sales Tax Issues Base “Uniformity” still needs to be resolved System still not in compliance with Marketplace Fairness Act How should uniformity be pursued…major effort or piecemeal? Impediments to Uniformity Major money associated with some city base exemptions: Food for home consumption Advertising Residential Rental Commercial Lease Still unclear how Marketplace Fairness impacts uniformity effort Uniformity-continued An identified tax base – in state statute- has been a goal of the Arizona business community for decades A single, identifiable state and local TPT base in statute will create certainty and consistency in the administration of Arizona’s sales tax Individual Income Taxes National Rankings Total State & Local Individual Income Taxes Individual Income Tax Collections-State & Local FY 2011 ARIZONA Per Capita Amount Rank $441.75 42 44-State Average $1,116.57 State Per $1,000 of Income Amount Rank $12.58 41 Arizona Tax Research Association $27.17 Corporate Income Taxes National Rankings Total State & Local Corporate Income Taxes Corporate Income Tax Collections FY 2011 State ARIZONA 46-State Average Per Capita Amount Rank $86.42 33 Per $1,000 of Income Amount Rank $2.46 32 $150.39 Arizona Tax Research Association $3.68 Corporate Tax Rate Reductions 1990 – 9.3% 1997 – 9.0% 1998 – 8.0% 2000 – 7.968% 2001 – 6.968% 2014 – 6.5% 2015 – 6% 2016 – 5.5% 2017 – 4.9% National ranking improves from 7th to 43rd Note: $50 minimum tax Arizona Tax Research Association ATRA Tax Policy Position Historically, ATRA has supported broad-based low taxes that are fair and equitable towards businesses and individuals. ATRA has generally opposed deviations from these principles for economic development ATRA has also opposed targeted tax breaks or changes to the property tax system that carve out special treatment for one industry over others ATRA has opposed organized efforts to eliminate the income tax or property tax Current Issues School finance equity challenges: Litigation – Three Lawsuits Prop 301 Case State may owe up to $2.8 Billion HB2111 TPT Implementation (1/1/15) Non-Program City Transition Trade/Service Contracting