A bill to reduce Arizona’s commercial property tax assessment rate to 15% over the next five years would achieve a target set decades ago by the Citizen’s Finance Review Commission and others if it became law.
Senate Bill 1093, sponsored by State Sen. JD Mesnard, R-Chandler, would continue the planned valuation ratio decrease under last year’s SB 1108, which called for a phased reduction of 18 % to 16%, but would lower it by an additional percentage point from 2027.
Property taxes in Arizona are not based on the price a property would sell for on the open market, but rather on the assessed value of the property, which is determined by applying the assigned assessment rate to the limited value of the property. . There are eight categories of properties, each assigned a rating ratio. For example, the assessment ratio for residential properties is 10%, while agricultural or other properties, which are class 2, have an assessment ratio of 15%.
Tax policy experts say reducing the commercial property tax assessment rate 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 to the owners
“Commercial property in Arizona represents about one-fifth of owned property in the state, yet we pay about one-third of the total cost incurred in property taxes,” said Tim Lawless, CREED president, Commercial Real- Estate Executives. for economic development.
Lawless says that during the 1970s and 1980s, state legislators sought to make Arizona more attractive for out-of-state transplants by keeping residential property tax rates low. Competitive tax rates and growing air conditioning have helped fuel Arizona’s economic and population expansion as thousands of new residents call the state home.
Arizona is one of 18 states that treats commercial properties differently than other property classes, placing a higher tax burden on Arizona businesses.
“Residents account for half of the property value at 49%, and they pay only a few percentage points more than businesses that own 20% of taxable property,” Lawless said.
Amid the post-9/11 economic downturn, Arizona’s normally dependable tourism sector has suffered, prompting leaders to re-examine the state’s economic policies and mix of tax bases.
Former Pinnacle West CEO Bill Post was appointed by the then Governor. Janet Napolitano will co-chair the Citizens Finance Review Commission to determine how Arizona could diversify its economy and identify what has hindered the state’s ability to attract jobs.
The commission found that one of the biggest impediments to economic growth was Arizona’s uncompetitive commercial property taxes. Successive lawmakers and governors have responded.
In 2006, the state legislature and Governor Napalitano succeeded in lowering the valuation ratio from 25% to 20%. Under Governor Jan Brewer in 2011, the commercial property tax assessment ratio was again lowered from 20% to 18%. The Legislative Assembly and Governor Ducey passed legislation last year 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 a 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 while rankings often depend on cities and types of offices and manufacturing facilities, overall we’re about 18th in the country. However, it is even more important to look at the states with which we are in competition.
During a House Ways and Means Committee hearing on the Mesnard bill earlier this month, committee members expressed concern about how a reduction in the assessment rate would affect the education funding and taxpayers of other Arizona property tax classes.
Lawless and other witnesses testified that SB 1093, if it becomes law, would hold K-12 education harmless and use the general fund to improve any type of tax transfer of other real estate classes.
The legislation is backed by a broad coalition of the business community, including utilities, health care, taxpayer advocates and chambers of commerce. Opponents include unions, 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 awaits a vote of the full House. If the House gives the legislation a favorable vote, the Senate will have to pass the amended House version before it can be sent to Gov. Doug Ducey for his signature.