The Arizona Â鶹´«Ă˝Ół»­ of Commerce & Industry is applauding Gov. Doug Ducey for dramatically improving Arizona’s tax code by signing into law HB 2822, a bill passed with bipartisan support that simplifies the state’s business personal property tax law. 

The legislation was a top tax policy priority for the Â鶹´«Ă˝Ół»­ in 2022. 

“Compliance with business personal property tax is notoriously cumbersome, especially for the state’s small businesses who don’t have an army of accountants behind them to navigate the Arizona Department of Revenue’s 76-page manual of instructions that explains how to value everything from farm equipment to laptops.”  

The bill, sponsored by Rep. Jeff Weninger, R-Chandler, sets the valuation factor at 2.5% for business personal property acquired in tax year 2022 and beyond in taxation classes 1, 2, and 6. These classes include commercial & industrial uses, agriculture, and non-profits. 

“Business personal property tax is a form of double taxation,” Seiden said. “Businesses pay sales tax at the time of purchase but remain on the hook to the taxman throughout the life of the equipment. We thank Rep. Weninger for his leadership in introducing legislation that improves the tax climate for businesses of all sizes and for encouraging greater capital investment. On behalf of Arizona job creators, the Â鶹´«Ă˝Ół»­ extends its appreciation to members of both parties who came together to adopt this wise policy.” 

The Arizona Â鶹´«Ă˝Ół»­ is the state’s most consistent advocate for pro-economic-growth tax policy, having successfully led efforts to improve the state and federal individual and corporate income tax codes, and the corporate property tax assessment ratio.  

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The state Legislature on Tuesday passed a personal property tax reform with bipartisan support that supporters say will dramatically simplify a complicated section of Arizona tax law. 

H.B. 2822, sponsored by Rep. Jeff Weninger, R-Chandler, sets the valuation factor at 2.5% for business personal property acquired after tax year 2022 in taxation classes 1, 2, and 6. These classes include commercial & industrial uses, agriculture, and non-profits.

Compliance with business personal property tax is notoriously cumbersome. The Arizona Department of Revenue’s Business Personal Property Tax manual includes 76 pages of instructions and 49 pages of tables that explain how to value equipment ranging from cranes to TVs and chairs. 

Chad Heinrich, the Arizona state director of the National Federation of Independent Business, said in a state Senate Commerce Committee hearing earlier this month that it’s an issue of major importance for small businesses. 

“Our members rank it second only to federal income taxes, when they look at tax issues that are important to them,” he said. 

The personal property tax requires businesses to pay taxes on assets like machinery and equipment of all types, ranging from something as large as a farmer’s tractor all the way down to a simple laptop. The personal property tax is on top of the sales tax the buyer pays at the time of purchase. 

The Tax Foundation, a Washington, D.C.-based tax research association, says that unlike real property like a building or land that cannot be easily moved to a jurisdiction with more favorable tax policy, the mobility of personal property makes it more sensitive to taxation. The foundation argues that “personal property taxes distort investment decisions, complicate business tax compliance, and reduce economic growth.” 

Tim Lawless, president and CEO of CREED, a commercial property owner advocacy group, said passage of the bill into law will help make Arizona’s tax code more competitive when it comes to landing investment over other states in the region. 

State Sen. J.D. Mesnard, chairman of the Commerce Committee and a longtime advocate for business property tax reform, supported the bill. 

“Business personal property tax is double taxation. You pay the sales tax when you buy the thing, and then you pay it for holding it,” he said. “So, if you want folks to invest in new capital and all the jobs that creates, you want businesses to locate or expand here, this is not what you want to have.” 

State Rep. Morgan Abraham, D-Tucson, said the state’s personal property tax law is overly complex, especially for small businesses. 

“I own many businesses that involve personal property and the depreciation associated with personal property is terrible – the state laws that we have,” he said in a party caucus meeting where the bill was discussed. “And it’s very confusing and very hard for small business owners to adequately account for the depreciation of personal property.” 

Abraham was one of five House Democrats who supported the bill. 

Bill sponsor Weninger said the legislation would improve the state’s overall business environment.

“It brings new jobs here, which brings new income tax, which brings new people going out and shopping and getting more sales tax,” he said during debate on the bill in the House in response to criticism from state Rep. Mitzi Epstein, D-Tempe, an opponent of tax cuts. “I think this will be a magnet and attract more large businesses, but, also, in the possibility that some businesses replace older assets sooner, as was contemplated, guess what – we get sales tax on a new item. And guess where that sales tax goes. It goes to pay for police officers, firefighters, it goes to pay for teachers, and all those kinds of things. So, to me, that’s a good thing.”

The Arizona Â鶹´«Ă˝Ół»­ of Commerce & Industry, which made passage of the bill one of its top priorities for the legislative session, hailed Tuesday’s vote.

“We are grateful for thoughtful leaders of both parties coming together to enact a simple and fair policy solution that allows small businesses to spend more time on their operations and creating jobs, and less time with their accountants trying to cut through government red tape,” Â鶹´«Ă˝Ół»­ Vice President of Government Affairs Courtney Coolidge said. 

Also supporting the bill was a large cross section of the business community, including the Arizona Tax Research Association, the Arizona Â鶹´«Ă˝Ół»­ of Commerce & Industry, and the Arizona Farm and Ranch Group. 

The bill now heads to Gov. Doug Ducey for his signature.

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A bill to decrease Arizona’s 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’s 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’s continued economic competitiveness and to help reduce the disparity in the property tax burdens borne by commercial property taxpayers versus homeowners

“Arizona 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,” 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 Â鶹´«Ă˝Ół»­ore 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’s 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.

“Residents 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,” Lawless said. 

Amid the post-September 11 economic downturn, Arizona’s normally reliable tourism sector suffered, prompting leaders to reexamine the state’s 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’s ability to attract jobs.

The commission found one of the biggest hurdles to economic growth was Arizona’s 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%.

“Of the western states, we compete with nine of them, and eight of them, including California, have lower overall commercial property tax than Arizona,” Lawless said. “At 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.”

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’s 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’s amended version before it can be sent to Gov. Doug Ducey for his signature.

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The Arizona Tax Research Association says Arizona school districts have proposed a $98,886,980.56 increase in property taxes to fund transportation costs. This increase more than doubles state school district spending on the same item in FY2021, when $79,295,907 in property tax dollars were allocated for transportation costs.

The funding formula for transportation spending by school districts is based on route-miles driven the previous year. The sharp increase in property taxes was accomplished through the utilization of a caveat in the funding formula that allows school districts to increase their spending on transportation, denoted as Transpo Delta, in order to account for a difference between projected spending and historic spending.

Federal COVID relief spending

The coronavirus pandemic meant that “Arizona school districts used their school buses far less last school year,” ATRA Senior Analyst Sean McCarthy said. This means that some increase in spending on transportation might have been inevitable as the state and the nation emerge from the pandemic, and children go back to school.

An increase in spending on transportation costs by school districts was likely inevitable, but that does not account for a massive influx of federal fiscal relief for K-12 public schools that came about in response to the pandemic. The federal government has nearly $4 billion in fiscal aid over the course of the past year towards Arizona’s K-12 education system, 90% of which is given “directly to school districts or charter schools.”

These relief funds “are one-time monies and mostly unrestricted, meaning they can be used for any legal purpose,” says McCarthy, “The one-time decrease in formula monies for transportation is a perfect example of what federal dollars should backfill.”

School districts are set to adopt these property tax hikes on Monday, August 16th. ATRA is encouraging the districts to reconsider.

“Saddling the community with increased property taxes when schools actually saved money on these programs last year is insulting and shows a complete lack of regard for taxpayers,” McCarthy said.

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