August 6, 2014 Arizona Tax Research Association Government Finance Officers Association of Arizona

Arizona Tax Research Association Only statewide taxpayer organization representing both businesses & individuals before policymakers at the state & local level Advocates for sound public finance and tax legislation at the Capitol Goal is to have efficient state & local government and the effective use of tax dollars through sound fiscal policies

Arizona Tax Research Association Local government budgeting process- counties, community colleges, some cities ATRA publications  Property Tax Rates & Assessed Values  An Explanation of Arizona Property Taxes  Arizona Tax Digest  School Finance Primer  Legislative Review  ATRA Newsletters  Budget Reviews

Major Ballot Issues Prop 107 – Income Tax Repeal (2000) Ballot Box Budgeting  Prop 200 – Tobacco/AHCCCS (1994)  Prop 204 – Quality Ed & Jobs Act (2012)  Prop 301 – Education Sales Tax (2000) Prop 108 – 2/3’s Vote (1992) Prop 117 – Property Value Limits (2012)

Proposition 117 Makes a major change to Arizona’s property valuation system  Reduces the number of taxable values from two to one  Eliminates secondary and primary values  Taxpayers will have one limited net assessed value Assessor will value property at the market value (full cash value) Annual growth in limited net assessed value capped at 5% Effective valuation year 2014 and tax year 2015 Arizona Tax Research Association

Actual Value Growth vs. 5% Limit Proposal ( )

Arizona Tax Research Association Common Characteristics of Most States Three Legs to Most State & Local Tax Stools 50 - Property 50 - Property 46 - Sales 46 - Sales 43 - Individual Income 43 - Individual Income 46 - Corporate Income 46 - Corporate Income

Arizona Tax Research Association There Has Been On-going Debate About The Efficacy of our System for Decades Many Study Committees Fiscal Fiscal CFRC CFRC TRAC – 2004 TRAC – 2004 Governor Brewer’s TPT Task Force Governor Brewer’s TPT Task Force Usually jump-started for two reasons: Usually jump-started for two reasons:  Impetus for real tax reform  Cover for tax increases  Combination of both

Arizona Tax Research Association Total State and Local Taxes in Arizona

Total State & Local Taxes Arizona Tax Research Association National Rankings Total State & Local Taxes

Arizona Tax Research Association Snapshot of AZ’s Tax System Average Overall Reliance Average Overall Reliance (typically) High Sales Taxes Average Property Taxes High Business Property Taxes Low Homeowner Property Taxes Low Personal Income Taxes

National Rankings Total State & Local Property Taxes Arizona Tax Research Association Property Tax

Arizona Tax Research Association Property Tax-Major Issues  Arizona’s system has generally been regarded as one of the most complex in the country  Several aspects of the property tax system have created significant policy problems:  High Business Property Taxes  1% Residential Cap  Accountability

Disparate Tax Treatment between Businesses & Residential Properties Shift taxes within classification system Businesses pay approximately twice as much as residential Disparate treatment leads to industries seeking tax incentives  Create greater equity instead of rifle-shot relief to selected industries

Arizona Tax Research Association Arizona’s Classification System (Tax Year 2013) * The assessment ratio for class one property will decline to 19% in 2014, 18.5% in 2015, and 18% in 2016.

2012 Effective Tax Rates Source: Arizona Tax Research Association – Tax Year 2012 Property Tax Model Arizona Tax Research Association

Equity Considerable success: Considerable success:  2005 Legislation: 10-year phase down in class one assessment ratio to 20%  2007 Legislation: accelerated reduction to six years-assessment ratio reduced to 20% by 2011  2011 Legislation: reduced the assessment ratio on class one from 20% to 18% in half-percent increments beginning in 2013

Sales Taxes Arizona Tax Research Association National Rankings Total State & Local General Sales Taxes

Arizona Tax Research Association Sales Tax (TPT) - Major Issues Arizona’s state & local TPT system is also one of the most complicated and administratively burdensome in the country Arizona’s state & local TPT system is also one of the most complicated and administratively burdensome in the country Lost sales tax revenue to online retail a growing problem Lost sales tax revenue to online retail a growing problem Arizona’s chaotic system led to major TPT reform in 2013 (more still needed) Arizona’s chaotic system led to major TPT reform in 2013 (more still needed)

Arizona Tax Research Association Taxable Business Classifications (State)  Retail  Transporting  Utilities  Telecommunications  Publication  Job Printing  Pipeline  Private Car  Transient Lodging  Personal Prop Rental  Mining  Amusement  Restaurant  Prime Contracting  Owner Builder Sales  Commercial Lease

Model City Tax Code Arizona is one of a few states in the country that allows for an independent, municipal sales tax system The tax base at the city level does not mirror the state base Examples: Advertising, Speculative Builders, Rental Occupancy, Food, Commercial Leases Interpretation of exemptions a major issue Independent municipal system has created significant administrative and compliance issues for taxpayers in Arizona Arizona Tax Research Association

ARIZONA TAX RESEARCH ASSOCIATION Arizona Non-Program Cities AvondaleDouglasFlagstaffGlendaleMesa SedonaScottsdalePrescottPhoenix Nogales SomertonTempeTucsonWillcox 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 auditOne paymentState Tax BaseCity Tax Base One payment, one auditMultiple payments, multiple audits One payment One audit Apache Jct. Bullhead City ChandlerPeoria RDS One audit One payment One audit PRE HB2111

Major Sales Tax Reform Governor’s TPT Simplification Task Force-2012  “Arizona has one of the most complex transaction privilege tax systems in the country”;  “taxpayers have expressed very clearly their desire to see reforms enacted that will modernize and simplify the TPT”; and  “it is in the interest of taxpayers and state and local governments to make the tax code easier to understand, comply with, and administer.” HB2111 – Passed in 2013  Single Point of Administration  Single and Uniform Audit  Trade/Service Contracting Reform

Arizona Tax Research Association POST HB2111 Maintains multiple tax bases

Sales Tax Issues Base “Uniformity” still needs to be resolved System still not in compliance with Marketplace Fairness Act How should uniformity be pursued…major effort or piecemeal?

Impediments to Uniformity Major money associated with some city base exemptions:  Food for home consumption  Advertising  Residential Rental  Commercial Lease Still unclear how Marketplace Fairness impacts uniformity effort

Uniformity-continued An identified tax base – in state statute- has been a goal of the Arizona business community for decades A single, identifiable state and local TPT base in statute will create certainty and consistency in the administration of Arizona’s sales tax

Individual Income Taxes Arizona Tax Research Association National Rankings Total State & Local Individual Income Taxes

Corporate Income Taxes Arizona Tax Research Association National Rankings Total State & Local Corporate Income Taxes

Arizona Tax Research Association Corporate Tax Rate Reductions 1990 – 9.3% 1990 – 9.3% 1997 – 9.0% 1997 – 9.0% 1998 – 8.0% 1998 – 8.0% 2000 – 7.968% 2000 – 7.968% 2001 – 6.968% 2001 – 6.968% 2014 – 6.5% 2014 – 6.5% 2015 – 6% 2015 – 6% 2016 – 5.5% 2016 – 5.5% 2017 – 4.9% 2017 – 4.9% National ranking improves from 7 th to 43 rd National ranking improves from 7 th to 43 rd Note: $50 minimum tax

ATRA Tax Policy Position Historically, ATRA has supported broad-based low taxes that are fair and equitable towards businesses and individuals. ATRA has generally opposed deviations from these principles for economic development ATRA has also opposed targeted tax breaks or changes to the property tax system that carve out special treatment for one industry over others ATRA has opposed organized efforts to eliminate the income tax or property tax

Current Issues School finance equity challenges:  Litigation – Three Lawsuits  Prop 301 Case State may owe up to $2.8 Billion HB2111 TPT Implementation (1/1/15)  Non-Program City Transition  Trade/Service Contracting