The two most powerful lawmakers on issues of tax policy want to tap the state’s anticipated revenue surplus — eventually up to $200 million a year — to reduce what businesses pay in property taxes.
Sen. Dean Martin, R-Phoenix, and Rep. Steve Huffman, R-Tucson, are crafting legislation for the upcoming session to reduce the tax burden on businesses.
Martin, who leads the Senate Finance Committee, and Huffman who runs the House Ways and Means Committee, have produced various tax-cut packages in the past. But this year they have a new twist they believe will finally help it get the necessary votes: It would ensure that what businesses do not pay is not shifted to homeowners — the people who vote.
That, they said, would avoid political heat.
"We will be courageous in our tax policy,’’ said Martin. "But we’re not going to be suicidal.’’
They hope to alter Arizona’s property tax system, which is considered a heavy burden on business.
All property is appraised at its full cash value, generally what it would bring on the market. But the actual property tax paid is based instead on the assessed valuation. And not all properties are assessed at the same rate.
Specifically, residential property is assessed at 10 percent of its full cash value. Most commercial and industrial property, however, has a 25 percent assessment ratio.
That means the owner of a $250,000 business pays 2.5 times as much in property taxes as someone with a $250,000 home. And everything a business owns, from forges and printing presses to desks and computers, also is subject to the annual levy.
That combination is especially problematic for manufacturers that have expensive equipment. Proponents of lowering business property taxes say these are the companies that pay the highest wages — the companies Arizona hopes to attract and retain.
Efforts to reduce the assessment ratio on business have failed.
The reason is the nature of property taxes, which are a key — and sometimes the largest — source of revenue for local governments, school districts and community colleges.
Each government can raise a set amount of revenue each year, a formula adjusted for population growth and inflation. The tax rate is computed by dividing that figure into the total assessed value of the community or district.
If the assessment ratio of all businesses are reduced, that lowers that total assessed value. And that means either the government has to live with less or has to increase the total tax rate to raise the same amount of money.
That second option means the burden falls on the homeowners whose assessment ratio has not changed — and who are the people who vote every two years on who remains in the Legislature.
Huffman figures each 1 percent drop in the business assessment ratio reduces revenue to local governments by $40 million. So moving from 25 to 20 percent — his goal over five years — eventually carries a $200 million annual price tag.
To prevent the burden from being shifted to homeowners, he would have the state increase the share it now pays of each homeowner’s school taxes.
Huffman believes there will be enough cash in the state budget even after all needs are met.
Huffman said each 1 percent drop in the assessment ratio frees up at least $53 million in capital "that can be injected immediately into our state economy, into our businesses for job creation, for capital expansion in our state.’’
Martin said Huffman is on the right track in seeking to reduce business property taxes. But he said his House colleague is taking a too complicated approach to a simple issue.
"The real problem is not the assessment ratio,’’ he said.
"The real problem is the amount of the bill that you end up having to pay.’’
His solution? Have the state use its cash to provide a school tax rebate to businesses, just like the one for homeowners.
"It has the same effect: It lowers your bill,’’ Martin said.
"And it does something else,’’ he continued. "It keeps the homeowners from being shifted any costs."
Gov. Janet Napolitano said she won’t commit just yet to any change in the property tax system, even though that was a top recommendation last year by her Citizens Finance Review Commission.