August 6, 2014

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

2. 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

3. 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

4. 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)

5. 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

6. Actual Value Growth vs. 5% Limit Proposal (1992-2012)

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

8. There Has Been On-going Debate About The Efficacy of our System for DecadesMany Study Committees Fiscal 2000 - 1999 CFRC - 2004 TRAC – 2004 Governor Brewer’s TPT Task Force - 2012 Usually jump-started for two reasons: Impetus for real tax reform Cover for tax increases Combination of both Arizona Tax Research Association

9. Total State and Local Taxes in Arizona Arizona Tax Research Association

10. Total State & Local Taxes National RankingsTotal State & Local Taxes Arizona Tax Research Association

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

12. National RankingsTotal State & Local Property Taxes Property Tax Arizona Tax Research Association

13. 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 Arizona Tax Research Association

14. 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

15. 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. Arizona Tax Research Association

16. 2012 Effective Tax Rates Arizona Tax Research Association Source: Arizona Tax Research Association – Tax Year 2012 Property Tax Model

17. Equity 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 Arizona Tax Research Association

18. Sales Taxes National RankingsTotal State & Local General Sales Taxes Arizona Tax Research Association

19. Sales Tax (TPT) - Major Issues 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 Arizona’s chaotic system led to major TPT reform in 2013 (more still needed) Arizona Tax Research Association

20. 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 Arizona Tax Research Association

21. 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

22. PRE HB2111 Arizona Most States One payment, one audit Multiple payments, multiple audits One payment One audit State Tax Base City Tax Base One payment One audit Program City Sales Tax State Sales Tax County Sales Tax State Sales Tax County Sales Tax Municipal Sales Tax Non-Program Cities One uniform sales tax base 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 Apache Jct. Avondale Chandler Douglas Flagstaff Glendale Mesa Nogales Peoria 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 Phoenix Prescott Scottsdale Tempe Tucson Bullhead City Sedona Somerton Willcox RDS RDS RDS RDS ARIZONA TAX RESEARCH ASSOCIATION

23. 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

24. POST HB2111 Maintains multiple tax bases Arizona Tax Research Association

25. 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?

26. 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

27. 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

28. Individual Income Taxes National RankingsTotal State & Local Individual Income Taxes Arizona Tax Research Association

29. Corporate Income Taxes National RankingsTotal State & Local Corporate Income Taxes Arizona Tax Research Association

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

31. 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

32. 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