A bill to decrease Arizona鈥檚 commercial property tax assessment ratio to 15% over the next five years would achieve a goal set decades ago by the Citizen’s Finance Review Commission and others if it becomes law. 

Senate Bill 1093, sponsored by state Sen. J.D. Mesnard, R-Chandler, would continue the scheduled assessment ratio decrease under last year’s SB 1108, which called for a gradual reduction from 18% to 16%, but lower it an additional percentage point by 2027.

Property taxes in Arizona are not based on what a property would sell for on the open market, but rather the property鈥檚 assessed value, which is determined by applying the assigned assessment ratio to the limited property value. There are eight property classes, each assigned an assessment ratio. For example, the assessment ratio on residential property is 10%, while agricultural or other properties, which are in Class 2, have an assessment ratio of 15%.

Tax policy experts say the commercial property tax assessment ratio reduction is necessary to ensure the state鈥檚 continued economic competitiveness and to help reduce the disparity in the property tax burdens borne by commercial property taxpayers versus homeowners

鈥淎rizona commercial property makes up roughly one-fifth of the property owned in the state, and yet we pay around one-third of the total cost incurred by property taxes,鈥� said Tim Lawless, the president of CREED, Commercial Real-estate Executives for Economic Development .

Lawless says that during the 1970s and 1980s, state lawmakers sought to make Arizona more attractive to out-of-state transplants by keeping residential property tax rates low. Competitive tax rates and the growth of air conditioning helped fuel Arizona鈥檚 economic and population expansion as thousands of new residents made the state their home. 

Arizona is one of 18 states that treats commercial property differently from other property classes, which places a greater property tax burden on Arizona businesses.

鈥淩esidents are half of all the property value at 49%, and they only pay a few more percentage points than the business community who own 20% of the taxable property,鈥� Lawless said. 

Amid the post-September 11 economic downturn, Arizona鈥檚 normally reliable tourism sector suffered, prompting leaders to reexamine the state鈥檚 economic policies and mix of tax bases.

Former Pinnacle West CEO Bill Post was appointed by then-Gov. Janet Napolitano to co-chair the Citizens Finance Review Commission to determine how Arizona could diversify its economy and identify what hindered the state鈥檚 ability to attract jobs.

The commission found one of the biggest hurdles to economic growth was Arizona鈥檚 uncompetitive commercial property taxes. Lawmakers and successive governors responded. 

In 2006, the state Legislature and Gov. Napalitano were successful in lowering the assessment ratio from 25% to 20%. Under Gov. Jan Brewer in 2011, the commercial property tax assessment ratio was lowered again from 20% to 18%. The Legislature and Gov. Ducey last year passed legislation to phase-in a further reduction to 16%.

鈥淥f the western states, we compete with nine of them, and eight of them, including California, have lower overall commercial property tax than Arizona,鈥� Lawless said. 鈥淎t the time of the first commission, Phoenix had the third-highest commercial property tax in the United States; only Michigan and New York were higher. And although rankings often depend on cities and types of offices and manufacturing facilities, overall we are roughly around 18th in the nation. However, It is still more important to look at the states that we compete with.鈥�

During a House Ways and Means Committee hearing on the Mesnard bill earlier this month, committee members expressed concerns over how an assessment ratio reduction would affect education funding and taxpayers in Arizona鈥檚 other property tax classes.

Lawless and other witnesses testified that SB 1093, if it becomes law, would hold K-12 education harmless, and would use the general fund to ameliorate any kind of tax shifts from other classes of real estate. 

The legislation is supported by a large coalition of the business community, including utilities, health care, taxpayer advocates and chambers of commerce. Opponents include organized labor, the County Supervisors Association, and the Arizona Center for Economic Progress, a progressive public policy group.

The bill passed the Senate last month with bipartisan support. An amended version of the bill is awaiting a vote of the full House. If the House gives the legislation a passing vote, the Senate will need to adopt the House鈥檚 amended version before it can be sent to Gov. Doug Ducey for his signature.

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As voters head to the polls next Tuesday, commercial real estate and economic development professionals are calling on citizens to vote 鈥渘o鈥� on Proposition 208. The high-tax measure threatens Arizona鈥檚 economic growth and recovery, and could punish thousands of small construction businesses who would be subject to the new tax, they said. 

鈥淚鈥檝e been in Arizona for about a quarter of a century and this is the worst proposition to make the ballot during that time, and it may be one of the worst in the history of the state,鈥� said Tim Lawless, president of Commercial Real-estate Executives for Economic Development (CREED).  

鈥淚t’s divisive. It’s very chilling to job creation and it’s basically killing the golden goose. We鈥檝e got a good thing in Arizona and we need to keep the momentum and I feel this is going to sidetrack that totally,鈥� said Lawless, whose organization represents the largest property owners in the state, accounting for a minimum of 70-million square feet under management and more than 5,000 business tenants, most of whom are small businesses. 

Why they oppose the ballot initiative 

Lawless is one of several real estate and economic development experts who spoke to 番茄社区 about why they oppose Prop. 208. 

The ballot initiative is intended to tax top earners in the state to fund education. But it also will affect a large number of small businesses and sole proprietors in the construction industry who file their taxes under the individual tax code, not the corporate tax code, he said. 

In Arizona, the industry employs close to 150,000 workers, according to the Arizona Office of Economic Opportunity.

鈥淧eople in commercial real estate, especially the developers, take a lot of risk when they decide to build a multi-million-dollar development, and they are typically small business people,鈥� he said. 鈥淢any companies have 10 to 15 employees and everything else is pretty much subbed out and they create LLCs to push the work forward. 

鈥淚t鈥檚 really their skin in the game and this is going to have a chilling effect on them wanting to take greater risks.鈥� 

Jobs, growth, tax revenues at risk  

The tax measure, also known as the 鈥淚nvest in Ed鈥� initiative, would almost double the marginal income tax rate for individuals who earn $250,000 or more, and couples earning $500,000 or more, from 4.5 to 8.0 percent.   

Local economists and groups like the nonprofit Arizona Tax Research Association and the Goldwater Institute have calculated that passage would create a dampening effect on jobs, new business growth and tax revenues. 

Commercial real estate group values education, not Prop. 208

Suzanne Kinney, president and CEO of the Arizona Chapter of NAIOP, the commercial real estate association, said her members care deeply about education and understand how important it is to pay teachers and support staff fair salaries in order to attract and retain the best talent. 

But placing the tax burden on the shoulders of small contractors, subcontractors, manufacturers and other small companies is unfair and creates a foreboding look into the future, Kinney said. 

鈥淲e believe a well-educated workforce is essential to the livelihood of Arizona. However, implementing a funding mechanism that singles out a small sliver of taxpayers will have a negative, long-lasting effect on small businesses,鈥� she said. 

Competing with no-tax, low-tax states for major corporations 

If passed, the tax increase initiative would result in Arizona having the country鈥檚 ninth-highest income tax rate, said economic forecaster Elliott Pollack, CEO of Elliott D. Pollack & Company, who spoke during a town hall to chambers of commerce leaders Monday. 

Pollack said other high-tax states like California and New York are shedding people and jobs.

Arizona could easily lose its competitive edge to other states with lower income taxes, or no income taxes, like Texas, Kinney said. Brokers who work with national manufacturers are being told by some of their clients that they are putting planned investments on pause until the ballot initiative is decided.  

鈥淚f Proposition 208 passes, Arizona could get passed over for major corporate locations, including in the manufacturing sector,鈥� she said. 鈥淭oo many of our neighboring states have lower income tax rates, including several that have no income taxes at all.鈥�

Stable funding source for education still needed

Kinney said she is concerned that the state has been unable to rally around a stable funding source that will provide schools with the resources they need without damaging the economy. 

鈥淎s a policy wonk, I am certain there are better ways to fund education. My dream would be to see all those who care about education come together around a better solution,鈥� she said.

番茄社区s, real estate and economic development groups voting 鈥渘o鈥�

番茄社区s of commerce across Arizona, and real estate and economic development groups are opposing Prop. 208 including: 

Commercial Real-estate Executives for Economic Development 

Arizona Association of REALTORS

Arizona Builders Alliance

Homebuilders Association of Central Arizona

Arizona Multihousing Association

NAIOP Commercial Real Estate Development Association

Southern Arizona Home Builders Association

Southern Arizona Leadership Council

Associated General Contractors Arizona Chapter

Yavapai County Contractors Association

For more information and to view a complete list of who opposes the high tax measure, go to: . 

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