Property Tax Shifting from Businesses to Homeowners:
A Historical Perspective

By Alberta H. Charney, Ph.D., EBR Research Director

Although many taxpayers have the perception that that their property taxes are increasing but they are getting less in terms of public services, few understand that changes in tax codes over the last 30 years have actually shifted property tax burden from businesses to individuals.  Taxpayer voters are, in fact, paying a higher share of total property taxes being levied than they used to.

Property Tax Computation

In general, each taxing jurisdiction determines the amount of property taxes to levy, then divides the levy by the net assessed value within the jurisdiction to determine the property tax rate.  Rates are summed across jurisdictions and property owners pay a tax amount equal to the combined rate (dollars per $100 assessed valuation) times the net assessed value of their property. 

In Arizona, property tax implementation is somewhat more complicated than this.  In addition to the full cash value, each property also has a limited cash value.  While the full cash value is related to, but usually less than, the market value of the property, limited cash value is a legislated value that is limited in its growth rate during periods of high housing inflationary periods.

The two valuations have different tax rates associated with them.  The limited cash value is used with primary tax rates, which are established by each jurisdictions.  Although primary tax rates are technically not limited, the growth of the resulting tax levy amount is limited by statute for each jurisdiction.   In cases where voters approve additional tax levies, the full cash value is used along with voter-approved secondary tax rates. The total tax bill is the sum of primary taxes and secondary taxes for all jurisdictions.

Assessment:Sales Ratios

Tax rates are not applied to directly to full cash value or to limited cash value.  Rather, these are converted to Net Assessed Value and Limited Net Assessed Value by multiplying by legislated assessment:sales ratios.  Assessment:sales ratios vary across the following eight different property classes:  Owner occupied housing, Rental occupied housing, Mines, Utilities, Commercial/Industrial, Vacant land, Agriculture, and Railroads.  There are additional classes, such as historical property, that are ignored in this discussion. 

Legislated assessment:sales ratios have dramatically changed over time (Exhibit 1).  Assessment:sales ratios for Mines and Utilities, which were 60% and 50%, respectively, in fiscal year FY77/78, converged with the ratios for commercial and industrial properties by FY 99/00.  The assessment:sales ratio for Mines, Utilities and Commercial/Industrial property are scheduled for additional reductions through FY 15/16, as shown in Figure 1.  Between FY 77/78 and FY 95/95, the ratio for Rental residential declined from 27% to 10%, equal to the ratio for Owner-occupied residential property.  Although the ratios for Railroad property also fell from 60% to converge with Commercial/Industrial properties, the amount of assessed value represented by this category is very small so it was omitted from the graph.  In addition, Agriculture and Vacant land property categories were omitted from the graph because their assessment:sales ratios have been held constant at 16% since FY80/81. 

Shares of Assessed Value

The consequence of the falling assessment:sales ratios for Mines, Utilities and Commercial/Industrial properties is that the share of total net assessed valuation attributable to residential property has been increasing.  Exhibit 2 presents total residential net assessed value (both Owner-occupied and Rental residential) and compares that to the sum of the assessed value of Mines, Utilities and Commercial/Industrial.  The share of net assessed value in Residential increased from 31.5% in FY 77/78 to 53.8% in FY 10/11 and the corresponding share of Mines, Utilities and Commercial/Industrial declined from 60.4% to 35.8% over the same period.1 The proportion of total state net assessed value attributable to residential almost doubled over three decades because of these legislated changes in assessment:sales ratios.

The shares of net assessed valuations shown in Exhibit 2 are statewide numbers and therefore do not represent any particular jurisdiction.  The actual share of assessed valuation attributable to residential depends on the mix of property classifications in each jurisdiction.  Rather, it is intended to demonstrate the general shift in tax burden from Residential to non-residential properties.

Potential Mitigating Factors

An important tax break for homeowners, known as Additional State Aid to School Districts ARS§15-972 or, more commonly, the Homeowner’s Rebate, reduces property taxes paid by owners of owner-occupied residential property.  Initially enacted by Laws of 1980, the rebate to homeowners was set at 45% of owner-occupied residential school district primary property taxes.  The rebate percentage increased to a maximum of 56% beginning in FY 83/84, then was reduced by 6% in FY 90/91 and reduced an additional 5% per year until completely phased out.  Instead, when it reached 35% in FY 94/95, the phase-out was discontinued and the 35% ratio was maintained until FY 05/06, when it began increasing 1% per year until it reached 40%, which is its current level (Exhibit 3).  

In 1988, the maximum size of the rebate for a given residential property was limited to $500.  This limit was increased by $20 per year beginning in 2006 until it reached the current maximum of $600.  The rebates are also implicitly limited in that they are computed on school district primary property taxes collected locally by school districts net of state-provided Equalization Assistance or “Basic State Aid.”

The Homeowner’s Rebate clearly reduces taxes paid by homeowners, but it doesn’t reduce the shift of tax burden from businesses to residential.  Rather, because the current 40% rebate is below the 45%-56% that existed between FY 80/81 and FY 89/90, the changes in the rebate have enhanced the shift in property tax burden toward residential property rather than mitigating it.  Had it been completely phased out as had been legislated in FY90/91, the shift in tax burden toward residential property would have accelerated.

A provision in the Arizona constitution that limits the amount of property tax that can be collected from residential property each year to 1% of the limited value of the property may mitigate the shift of property taxes to homeowners in some jurisdictions.  After calculating the amount of the homeowner’s rebate, it must be determined for each residential property whether or not the resulting total primary property tax levy exceeds 1% of the limited value of the property.  If the 1% is exceeded, the homeowner only pays a primary tax bill of 1% of limited cash value and the additional is paid by the state to the local school district in the form of additional state aid.

Conclusion

Although it can be argued that, for economic efficiency, all property should be taxed in a similar manner, most taxpayers do not understand the shift in the property tax burden from business property to residential property that has occurred over the past three decades.

Footnote:

For additional information, please contact the Economic and Business Research Center.