A bill to decrease Arizona’s commercial property tax assessment ratio to 15% over the next five years would achieve a goal set decades ago by the Citizen’s Finance Review Commission and others if it becomes law.
Senate Bill 1093, sponsored by state Sen. J.D. Mesnard, R-Chandler, would continue the scheduled assessment ratio decrease under last year’s SB 1108, which called for a gradual reduction from 18% to 16%, but lower it an additional percentage point by 2027.
Property taxes in Arizona are not based on what a property would sell for on the open market, but rather the property’s assessed value, which is determined by applying the assigned assessment ratio to the limited property value. There are eight property classes, each assigned an assessment ratio. For example, the assessment ratio on residential property is 10%, while agricultural or other properties, which are in Class 2, have an assessment ratio of 15%.
Tax policy experts say the commercial property tax assessment ratio reduction is necessary to ensure the state’s continued economic competitiveness and to help reduce the disparity in the property tax burdens borne by commercial property taxpayers versus homeowners
“Arizona commercial property makes up roughly one-fifth of the property owned in the state, and yet we pay around one-third of the total cost incurred by property taxes,” said Tim Lawless, the president of CREED, Commercial Real-estate Executives for Economic Development .
Lawless says that during the 1970s and 1980s, state lawmakers sought to make Arizona more attractive to out-of-state transplants by keeping residential property tax rates low. Competitive tax rates and the growth of air conditioning helped fuel Arizona’s economic and population expansion as thousands of new residents made the state their home.
Arizona is one of 18 states that treats commercial property differently from other property classes, which places a greater property tax burden on Arizona businesses.
“Residents are half of all the property value at 49%, and they only pay a few more percentage points than the business community who own 20% of the taxable property,” Lawless said.
Amid the post-September 11 economic downturn, Arizona’s normally reliable tourism sector suffered, prompting leaders to reexamine the state’s economic policies and mix of tax bases.
Former Pinnacle West CEO Bill Post was appointed by then-Gov. Janet Napolitano to co-chair the Citizens Finance Review Commission to determine how Arizona could diversify its economy and identify what hindered the state’s ability to attract jobs.
The commission found one of the biggest hurdles to economic growth was Arizona’s uncompetitive commercial property taxes. Lawmakers and successive governors responded.
In 2006, the state Legislature and Gov. Napalitano were successful in lowering the assessment ratio from 25% to 20%. Under Gov. Jan Brewer in 2011, the commercial property tax assessment ratio was lowered again from 20% to 18%. The Legislature and Gov. Ducey last year passed legislation to phase-in a further reduction to 16%.
“Of the western states, we compete with nine of them, and eight of them, including California, have lower overall commercial property tax than Arizona,” Lawless said. “At the time of the first commission, Phoenix had the third-highest commercial property tax in the United States; only Michigan and New York were higher. And although rankings often depend on cities and types of offices and manufacturing facilities, overall we are roughly around 18th in the nation. However, It is still more important to look at the states that we compete with.”
During a House Ways and Means Committee hearing on the Mesnard bill earlier this month, committee members expressed concerns over how an assessment ratio reduction would affect education funding and taxpayers in Arizona’s other property tax classes.
Lawless and other witnesses testified that SB 1093, if it becomes law, would hold K-12 education harmless, and would use the general fund to ameliorate any kind of tax shifts from other classes of real estate.
The legislation is supported by a large coalition of the business community, including utilities, health care, taxpayer advocates and chambers of commerce. Opponents include organized labor, the County Supervisors Association, and the Arizona Center for Economic Progress, a progressive public policy group.
The bill passed the Senate last month with bipartisan support. An amended version of the bill is awaiting a vote of the full House. If the House gives the legislation a passing vote, the Senate will need to adopt the House’s amended version before it can be sent to Gov. Doug Ducey for his signature.