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 process counties, 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 to one

taxable

values from two   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 90 80 70 60 50 40 30 20 10 0 1992 1994 1996 1998 2000 2002

Tax Year

2004 2006 2008 2010 2012 Actual NAV Limited NAV

Common Characteristics of Most 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

State Total Tax Collections-State and Local FY 2011 Per $1,000 Per Capita of Income Amount Rank Amount Rank ARIZONA $3,340.61

40 $95.10

39

U.S. Average $4,295.48

$105.37

Arizona Tax Research Association

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

State ARIZONA Property Tax Collections-State & Local FY 2011 Per Capita Per $1,000 of Income Amount Rank Amount Rank $1,095.94

32 $31.20

26

U.S. Average $1,422.56

$34.90

Arizona Tax Research Association

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 2 3 4 5 6 7 8 9

Total

Commercial, Industrial, Utilities, and Mines Agricultural and Vacant Land Owner-occupied Residential Rental Residential Railroad, private car, airline flight Rd historic, enterprise & foreign trade zones Commercial historic Rental residential historic Possessory Interests

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% 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%

Arizona Tax Research Association Source: Arizona Tax Research Association – Tax Year 2012 Property Tax Model

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 Per $1,000 Per Capita of Income State ARIZONA Amount $1,267.89

Rank 10 Amount $36.09

Rank 7

46-State avg. + D.C.

$989.73

$24.25

Arizona Tax Research Association

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 Municipal Sales Tax State Sales Tax County Sales Tax Program City Sales Tax

Non-Program Cities

One uniform sales tax base

One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One audit

Apache Jct.

One audit

Avondale

One audit

Chandler

One audit

Douglas

One audit

Flagstaff

One audit

Glendale

One audit

Mesa

One audit

Nogales

One audit

Peor ia

One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One paym ent One audit

Phoenix

One audit

Prescott

One audit

Scottsdale

ARIZONA TAX RESEARCH A SSOCIATION

One audit

Tempe

One audit

Tucson

One audit

Bull head Ci ty

RDS

One audit

Sedona

RDS

One audit

Somer ton

RDS

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

One payment, one audit One payment One audit

Arizona State Tax Base City Tax Base State Sales Tax County Sales Tax Municipal Sales Tax One uniform sales tax base

One payment One audit

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 Per Capita Per $1,000 of Income State ARIZONA Amount $441.75

Rank 42 Amount $12.58

Rank 41

44-State Average $1,116.57

$27.17

Arizona Tax Research Association

Corporate Income Taxes

National Rankings

Total State & Local Corporate Income Taxes

State ARIZONA Corporate Income Tax Collections FY 2011 Per Capita Per $1,000 of Income Amount Rank Amount Rank $86.42

33 $2.46

32

46-State Average $150.39

$3.68

Arizona Tax Research Association

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 7 th to 43 rd 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