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Arizona homeowners boast the third-lowest property tax burden per capita in the nation. Three layers of restrictions work in tandem: a local revenue limit of population plus inflation; a permanent 5% assessment cap for all homes; and a total rate cap of 1% of the limited taxable value of an individual home.
Local Spending Cap – Population Plus Inflation
Property taxes are driven entirely by local government spending (barring the rare exception of a statewide property tax). Thus, a strict spending cap is crucial to reining in local taxes. It has proven to be the backbone of Arizona’s unparalleled success in keeping property taxes unusually low.
Many states are cutting and eliminating income taxes by capping state spending and permanently reducing rates using excess revenue collections (see NC, MS, WV, and OK for examples). Arizona simply takes that principle and applies it to local property taxes.
Local governments are prohibited from increasing property tax revenue growth beyond the rate of inflation (CPI) plus population growth in their jurisdiction. In this way, cities, counties, and school districts can account for long-term higher costs for basic services. They are also free to expand their services in proportion to the new people moving in. But since they cannot spend beyond their means, they are prohibited from abusing their power.
If municipalities are convinced that raising taxes is the only option, they may place a question before voters on the ___ ballot. If ___ of voters support the question, the spending limit is temporarily overriden. ATR recommends a supermajority threshold of 2/3 or 60% to guard against “tyranny of the majority” seen in states like Colorado, whose municipalities frequently override the limit, often indefinitely, to pay for pet projects and progressive boondoggles.
Permanent Assessment Cap – “Limited Property Values”
While California’s Proposition 13 protects assessed values from growing beyond 2% annually, those values – and the associated taxes – reset to market when a home is sold or transferred. Arizona solves that problem by imposing a “Limited Property Valuation” from the time the home is built until it is demolished.
An Arizona home’s value for taxation purposes may grow at a maximum of 5% per year, with exceptions for new construction and renovation. No reset at the time of sale. This eliminates most economic distortions and behavioral shifts typically seen under Prop 13-style assessment caps.
Individual Rate Cap – A Failsafe
If the two mechanisms above fail, for whatever reason, to protect an individual homeowner from relatively high property taxes, Arizona’s rate cap functions as a failsafe. It protects an individual’s tax burden from rising above 1% of the total ___ value of his or her home. This cap applies to the total tax burden of all taxing jurisdictions, however many there may be.
NO SUBSIDIES FOR LOCAL GOVERNMENTS
Some state lawmakers attempt to shoulder responsibility for the bad decisions of cities and counties whose spending is out of control. These states attempt to “solve” out-of-control local property tax burden by subsidizing local governments, especially the biggest, bluest cities that spend the most on the least effective programs. Nebraska is a classic example of this failed strategy; despite spending hundreds of millions on subsidies, the problem is worse than ever, leaving Nebraska with the third-highest per capita burden in the nation – and a legislature that has already embraced responsibility for the problem.
Arizona rightly keeps local governments’ hands out of state coffers. Working together, the three major restrictions are more than enough to keep tax burdens low on both the state and local level.
Conclusion
Arizona gets it right. State lawmakers looking to emulate its success ought to begin with a spending cap, such as CPI + population growth or some other hard metric, with supermajority voter approval required to override the limit.
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Please reach out to Dennis Hull, state affairs manager at Americans for Tax Reform, at 239-315-1020 or dhull@atr.org for further information on best practices for property tax relief.