Calling business property taxes a major threat to the state’s economic stability, three organizations are asking the Legislature for a change in the tax system.
“The single greatest imbalance in Arizona’s tax system is the extreme burden placed on business property,” said a paper presented by the Arizona Chamber of Commerce State Budget Committee to the Legislature’s Tax Reform for Arizona Citizens Committee meeting on Sept. 23.
“Arizona ranks third in the nation and highest in the Rocky Mountain region in business property taxes,” the paper said. “The burden is a significant obstacle for the retention, expansion and new location of business property in Arizona.”
Dick Foreman, co-chairman of the Arizona Chamber committee, urged members of the tax reform committee to consider equalizing assessment ratios but to do it over a period of time to soften the impact.
“There is no single greater threat to economic stability,” Mr. Foreman said of the current assessment ratios.
Currently, the assessment ratio for business property is 25 per cent, and the assessment ratio for residential property is 10 per cent. Businesses, under this system, pay two and a half times the taxes homeowners pay for the same amount of property value.
Groups Urge Change
The National Association of Industrial and Office Properties (NAIOP) and the Arizona Tax Research Association (ATRA) joined the Arizona Chamber of Commerce in urging a change.
“ATRA believes the most pressing issue in Arizona’s tax system is the effect of the classification system on business property taxes,” said Kevin McCarthy, president of the tax association. “There are two ways to deal with the problem — reduce property taxes overall or create equity across the classes.
“Considering the importance of the property tax for both state and local government, significant reductions in the property tax are unrealistic,” he continued. “That leaves equity as the only other avenue to begin addressing the problem of high business taxes.”
John Lentine, representing NAIOP, told the tax reform committee members that property taxes constitute 35 per cent of the operating expenses for a typical office building and 55 per cent for a typical industrial building.
He said because of Arizona’s property tax system, cities in other states have an advantage in attracting business. He gave members the results of a study prepared for NAIOP on comparative business expenses in Reno, Los Angeles, Salt Lake City, San Jose, Calif.; and Phoenix.
For a company with 50 employees and gross revenues of $5 million, the study concluded that expenses, including property taxes, were $4.61 million for a company in Phoenix compared to $4.5 million in Reno, $4.59 million in San Jose, $4.5 million in Los Angeles and also $4.5 million in Salt Lake City.
The major factor in the higher expenses in Phoenix was property tax. For Phoenix, the property tax load was $103,802. The next highest load was in San Jose at $91,133. Los Angeles had a property tax load of $29,655.
Equalization of property taxes has been advocated often in the past, but attempts at pure equalization — everyone paying at the same assessment ratio — have not been successful because equalizing the ratios means homeowners would pay significantly higher property taxes if the same level of property tax revenue were to be required.
Topic Came Up In 2000
Sharon Megdal, an economist who is associate director of the University of Arizona Water Resources Research Center, was chairman of a study group in 1989 that published a report called Fiscal 2000.
In a recent interview, she discussed the problems of trying to work on the property tax system.
“We [the Fiscal 2000 study group] like others recommended simplification of the property tax. It’s a hard thing to do politically but most would agree it would be good if we could lower business property taxes.
“But, as everybody knows, unless you lower reliance on property taxes significantly the only way you do that is by raising residential property taxes. And, that’s problematic.”