current issues in public finance - arizona tax research ......boom & bust of the real estate...

Current Issues in Public Finance Kevin McCarthy, ATRA

� State Fiscal Stability

� Sales Tax Reform

� Instability in the Property Tax System

� Tax Reform & Economic Development

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F is c a l Y e a r

Millio

ns

of

$

E x p e n d it u re s B a s e R e v e n u e s R e v e n u e s w / te m p . s a le s ta x

*FY 2008 on-going spending of $10,515 includes $370 million in SFB cash financing, as well as $250 million in K-12 school aid not included in the FY 2010 and FY 2011 budgets.

($1,345)($429)

Adopted

June ’06

Adopted

June ‘07

Adopted

June ‘08

Beg. Balance (in millions): 1.047 529 1 1 1 1 1 (332.3)

($2,765)

Adopted

Sept. ‘09

Updated

Oct. 22, ‘09

($3,481)($3,481)

Updated

Nov. 23, ‘09

FY ’12 State Adopted BudgetExcludes beginning balance, one-time revenues & expenditures

Updated

June ‘10

($1,777)

Adopted

April ‘11

*Structural Deficit without temporary sales

tax ($770 Million)

$131

Arizona Tax Research Association

State Fiscal Stability

� Fiscal stability or a return to budget deficits rests on

FY13 state budget decisions.

� Governor has reiterated that the sales tax was

temporary and that it will sunset on June 1, 2013.

� There appears to be little interest in the Legislature to

make the temporary sales tax permanent.

� To that end, it is imperative that the Legislature and

Governor develop a FY13 budget that can be sustained

in FY14 without the temporary sales tax.


What Happens to the Temporary Tax?

� There is obviously considerable interest in the tax not

going away. By all accounts, there are two groups that

are considering an initiative for the November 2012

ballot to make the tax permanent.

� Regrettably, unlike the soft earmark of Prop 100, it is

anticipated that these initiatives would include hard

earmarks of the sales tax - this despite the widespread

recognition that such earmarking has done considerable

damage to the state’s budgeting process.


Sales Tax Reform

� Taxpayers shouldn’t be asked to agree to a

permanent 1-cent increase without reforms.

� The case for reforming Arizona’s sales tax

system is significant:

� It is our most important revenue source

� Arizona’s sales tax system is the most complex in

the country


One audit

One payment

Arizona

Non-Program Cities

Avondale Doug las Flagstaff Glenda le Mesa

Sedona Scottsdale Prescott Phoenix

Noga les

Somerton Tempe Tucson W illcox

One payment One payment One payment One payment One payment One payment One payment

One payment One payment One payment One payment One payment One payment One payment One payment

One audit One audit One audit One audit One audit One audit One audit

One audit One audit One audit One audit One audit One audit One audit One audit

State Sales Tax

County Sales Tax

Program City Sales Tax

Most States

County Sales Tax

State Sales Tax

Municipal Sales Tax

One payment

One audit

One uniform sales tax base

One audit One payment

State Tax Base City Tax Base

One payment, one audit Multiple payments, multiple audits

One payment

One audit

Apache Jct.

Bullhead City

Chand ler Peor ia

One payment

One audit

RDS RDS RDS RDS

Arizona’s Sales Tax Structure vs. Other States


Historical Snapshot of AZ’s Tax System

Average Overall Reliance

� Total taxes – 39th/capita & 34th/$1,000 income

� High sales taxes – 10th/capita & 7th/$1,000 income

� Avg. property taxes – 33rd/capita & 23rd/$1,000 income

� High business property taxes – 15th

� Low homeowner property taxes – 42nd

� Low personal income taxes – 42nd/capita & $1,000

income (44-state comparison)


Arizona’s Three-legged Stool

1980-2000-2010

1980 2000 2010

Sales 38% 38% 37%

Property 32% 28% 37%

Income 17% 21% 14%


National Rankings

Total State & Local Taxes

Amount Rank Amount Rank

Arizona $3,130.09 46 $93.17 39

Arizona adj. $3,284.78 39 $97.78 34

U.S. Average $4,141.14 $103.66

Total Tax Collections - State and Local

FY 2009

Per $1,000

Per Capita of Income


National Rankings

Total State & Local General Sales Taxes

Amount Rank Amount Rank

Arizona $1,122.68 12 $33.42 9

Arizona adj. $1,229.27 10 $36.59 7

46-state avg. + D.C. $970.16 $24.26

General Sales Tax Collections - State and Local

FY 2009

Per Capita

Per $1,000

of Income


Average Sales Tax Rates

1980 - Retail

� State Rate = 4%

� Avg. City Rate = 1.2%

� Total Avg. Rate = 5.2%

2011 - Retail

� State Rate = 6.6%


� Avg. County Rate = 0.7%


1990 - Retail

� State Rate = 5%


� Avg. County Rate = 0.5%



Tax Foundation Sales Tax Rate Study - AZ Ranks 2nd


Instability in the Property Tax System

� Boom & Bust of the real estate market in Arizona

has caused considerable volatility in Arizona’s

property tax system.

� 2006 – 2009 SNAV increase was 59.1%.

� 2009 – 2011 SNAV decrease was 28.7%.

� 2006 – 2009 avg. tax rate decrease was 16.3%.

� 2009 – 2011 avg. tax rate increase was 18.9%.


Secondary NAV, 2001-2011

$61.7

$75.6

$86.5$86.1

$71.8

$54.4

$48.9

$44.5$40.8

$36.8$34.5

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

$100.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Tax Year

Billions -18.4%

11.2%

32.1%

19.8% 0.5%

-12.6%

6.8%11.0%

8.9%10.1%


Statewide Average Tax Rate

$8.56 $8.36$8.09

$7.81

$7.27

$8.54

$6.32$6.13$6.24

$6.75$7.24

$4.01 $3.93 $3.82 $3.72 $3.75 $3.75$3.29

$2.99 $3.07$3.35

$3.67

$12.55 $12.49$12.18

$11.81$11.56

$10.99

$10.04

$9.23 $9.20$9.67

$10.94

$0.00

$4.00

$8.00

$12.00

$16.00

01 02 03 04 05 06 07 08 09 10 11

Tax Year

Per

$100 o

f A

ssessed

Valu

e

Primary Secondary Total


FCV Change By Class, 2009-2011

Class Description TY 2009 TY 2011 2-year Change 2-year % Change

1 Commercial, Industrial, Utilities, & Mines $136,318,330,574 $119,276,874,069 -$17,041,456,505 -12.5%

2 Agricultural & Vacant Land $133,431,932,497 $97,248,068,723 -$36,183,863,774 -27.1%

3 Owner-occupied Residential $418,028,320,989 $290,858,102,349 -$127,170,218,640 -30.4%

4 Rental Residential $67,405,912,775 $52,053,069,483 -$15,352,843,292 -22.8%

5 Railroad, Private car, airline flight $710,907,428 $874,296,999 $163,389,571 23.0%

6 Residential historic, Enterprise zones $5,903,340,961 $4,471,963,656 -$1,431,377,305 -24.2%

7 Commercial Historic $40,844,754 $39,227,650 -$1,617,104 -4.0%

8 Rental Residential Historic $12,400,708 $9,440,199 -$2,960,509 -23.9%

9 Possessory Interests $28,928,925 $125,231,935 $96,303,010 332.9%

Total $761,880,919,611 $564,956,275,063 -$196,924,644,548 -25.8%


FCV Change By Class, 2009-2011

-$140.0

-$120.0

-$100.0

-$80.0

-$60.0

-$40.0

-$20.0

$0.0

$20.0

Billions

Class 1

-$17,041,456,505

(-12.5%)

Class 6

-$1,431,377,305

(-24.2%)

Class 5

$163,389,571

(23.0%)

Class 4

-$15,352,843,292

(-22.8%)

Class 3

-$127,170,218,640

(-30.4%)

Class 2

-$36,183,863,774

(-27.1%)

Class 9

$96,303,010

(332.9%)

Class 7

-$1,617,104

(-4.0%)

Class 8

-$2,690,509

(-23.9%)


ATRA 5% Valuation Limitation Proposal

� Limit the annual growth in both the primary and secondary net assessed valuations to no more than 5%.

� In order to maintain equity between new and existing property, new construction will be enrolled using the current “Rule B” calculation. This means new construction will receive the same value as that of similarly situated properties.

� While primary and secondary values would be the same, the distinction would be maintained for taxing purposes. Note the 1% cap.

� (ATRA position paper on 5% cap in the handout)


Actual Value Growth vs. 5% Limit Proposal

Actual SNAV Vs. Limited SNAV, 1991-2011

$0.0

$10.0

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$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

$100.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Tax Year

Bil

lio

ns

Actual NAV

Limited NAV


Tax Reform & Economic Development

� 2011 session was highlighted by the passage of the Governor’s Arizona Competitiveness Package.

� Tax reforms focused on improving areas of Arizona’s tax system that were viewed as impediments to economic development and job growth.

� ATRA has advocated for fundamental tax reform and opposed targeted tax incentives designed to side-step problems in the tax system:� Reductions in the assessment ratio for business property

as well as reductions in the corporate income tax rate.Arizona Tax Research Association

Major Tax Reforms in Arizona

Competitive Package� Class one assessment ratio reductions:

� 2013 – 19.5%

� 2014 – 19%

� 2015 – 18.5%

� 2016 – 18%

� Corporate income tax rate reductions:

� 2014 – 6.5%

� 2015 - 6.0%

� 2015 – 5.5%

� 2016 – 4.9%

� Elective sales factor for corporate income tax increased from 80% to 100% by 2017


Major Tax Reforms in Arizona

Competitive Package (cont.)

Accelerated depreciation for locally assessed personal

property enhanced another 5% (75% reduction in value

the first year):

Current Percentages Effective Tax Year 20121 30% 25%

2 46% 41%3 62% 57%

4 78% 73%5 94% 89%

6 DOR Schedule DOR Schedule

Percentage of scheduled depreciated valueAssessment Year


Update on Arizona Business

Property Tax Ranking

� 2000 – Ranked 3rd (class one ratio @ 25%)

� 2007 – Ranked 5th (class one ratio @ 24%)



� *Rank 20th if we fast forward the class one

assessment ratio to 18%


Estimated Ranking After Applying Accelerated

Depreciation to New Personal Property

� Assessment ratio at 21% - 39th


� Assessment ratio at 19% - 42nd



Arizona’s Corporate Income Tax Rate

Once one of the highest in the country, Arizona’s rate will be

competitive among the states that impose a corporate income tax

(Ranking improved from 7th to 43rd):

1990 9.3%

1997 9.0%

1998 8.0%

2000 7.968%

2001 6.968%

2014 6.5%

2015 6.0%

2016 5.5%

2017 4.9%


What are the Implications of Targeted Tax Relief for Economic Development Purposes?

� Does it undermine good tax policy?

� Does each tax break granted stand alone on its merits

or does it set a precedent for more?

� What are the implications of dividing the business

community between those receiving preferential

treatment and those paying the going rate?


current issues in public finance - arizona tax research ......boom & bust of the real estate...

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