Effort Underway to Lower Property Taxes for Arizona Businesses
Article originally posted on Tuscon.com on February 4, 2021
Arizona Republican lawmakers are moving to lower property taxes on businesses.
But the chief proponent told members of the Senate Finance Committee on Wednesday that it is being done in a way not to shift the burden to homeowners, and without reducing revenues available to local governments and schools that depend on the levy.
What’s behind SB 1108 is the somewhat unusual system in Arizona where property is valued for tax purposes based on its use.
Residential property, for example, is assessed at 10% of what’s considered it’s “full cash value,” a figure that is supposed to roughly represent its market value. Most commercial businesses, by contrast, have an 18% assessment ratio.
So a home valued at $250,000 would be assessed for tax purposes at $25,000. Everything else being equal, a $250,000 business would have a $45,000 assessed value.
That translates to a difference in taxes, as each jurisdiction’s tax rate is levied based on that assessed value.
The legislation by Sen. J.D. Mesnard, R-Chandler, would drop the business assessment ratio in several steps to 17%. And he eventually wants to get it to 15%.
But here’s the thing. Lowering the assessed value of businesses means an overall lower assessed value of the city, county or school district. At the same time, those entities determine what they need by dividing their budget into the total assessed valuation of the district.
Put simply, if there’s less property value to tax, that means a higher tax rate. And the big losers in that scenario would be homeowners.
Mesnard’s bill seeks to blunt that by essentially having the state pick up the difference that homeowners would pay in the form of lowering their property taxes. The net effect, he said, should be close to zero for the homeowners, though the state would have less cash.
But he contends that lowering business property taxes would pay off in boosting Arizona’s ability to attract new companies.
That conclusion is backed by lobbyist Sean McCarthy of the business-friendly Arizona Tax Research Association. He said states around Arizona don’t have this multitiered assessment approach.
“We do think we have a regional competitiveness issue,” McCarthy told lawmakers.
Tim Lawless, who lobbies on behalf of companies that own commercial real estate, said it’s also a question of fairness.
The way he figures it, commercial property makes up 20% of the total market value of all real estate in Arizona. But Lawless said they pay 35% of all property taxes, abut $8 billion a year.
Conversely, he said, residential property is 50% of total market value but picks up just 38% of the tax burden.
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“We don’t mind paying a little bit more in commercial property taxes than the average bear in the other class,” Lawless said. “We just want to bring it down a bit to create more job creation.”
Chad Heinrich, director of the state chapter of the National Federation of Independent Businesses, said property taxes are the No. 2 concern of small-business owners, behind only federal income taxes.
“Why should a restaurant owner, a small manufacturer, or any other small business owner who needs commercial property to run their business be forced to pay an effective tax rate that is more than double what many other property classifications pay in Arizona?” he asked.
That refers to the fact that there actually are types of property that are assessed for tax purposes at less than 10% of their value. For example, certain noncommercial historic property has a 5% assessment ratio, as does both property and equipment in a foreign trade zone.
The 7-3 vote of the committee sends the measure to the full Senate.