Coming out of the COVID-19 pandemic, Arizona has a special opportunity to position itself as a premiere choice for corporate relocations and new business attraction. Recently, we’ve celebrated several big wins with company expansions that will bring many new jobs to our state.
Specialized tax treatment, such as Foreign Trade Zones, which dramatically lower property taxes for businesses within the designated area, helped make these major investments possible. However, these benefits are not available to all businesses. They are constricted to specific geographic areas.
Opportunities exist for many more job creators, both large and small businesses, to make our state home if we can address one area of our tax system where Arizona is currently not competitive with other markets – commercial property taxes.
NAIOP members include real estate developers and brokers who scour the U.S. and beyond seeking tenants for their office buildings and industrial facilities. Time and time again we hear that high commercial property taxes factor negatively into site selection decisions.
To better understand the full scope of this problem, NAIOP commissioned Rounds Consulting Group to conduct an economic impact analysis. That report revealed several important insights.
Arizona’s commercial property taxes are currently not competitive, despite progress being made over the past 15 years. Property in Arizona is valued by the Department of Revenue and county assessors.
Currently, commercial properties are taxed based on 18% of their assessed value. This is often referred to as the assessment ratio. For comparison, residential properties are taxed using a 10% assessment ratio.
Effective tax rates are the actual amount owed based on the assessment ratio and the relevant jurisdictions’ tax rates. When we look at the effective tax rates on a national basis, Arizona ranks the 20th highest for office properties and the 10th highest for industrial properties.
When we dig deeper, the situation becomes more dire. Our key competitors are regional markets such as Houston, Denver, Salt Lake City, Boise, Los Angeles and Las Vegas that site selectors evaluate for companies looking to expand in the Western U.S.
When analyzing these key competitors, Phoenix has the third highest effective tax rate for office properties and the second highest for industrial properties. Although Houston tops the list, it is important to note that the state of Texas has no income tax and offers bountiful incentives to companies looking to relocate to the Lone Star State.
Job growth is particularly important following a recession. The world has fundamentally changed, and some markets will come out ahead while others will fall behind. Getting the economic fundamentals right will position Arizona to be among those markets poised for growth.
Arizona’s strong revenue position makes it possible to take decisive action this year that will improve our ability to compete for new jobs. SB 1108, sponsored by Sen. J.D. Mesnard, includes a provision to lower the assessment ratio on commercial properties by 1% over a two-year period.
This proposal would bring the assessment ratio down to 17%, which would move Arizona’s national ranking on office property from the 20th highest to the 27th and on industrial property from the 10th highest to the 19th. The proposal is structured in a way that it would not shift the tax burden to other types of taxpayers nor would it decrease funding for public schools.
As lawmakers debate a tax package to aid in Arizona’s continued economic recovery from the pandemic and to position our state for increased growth, lowering the assessment ratio on commercial property is a policy change that would meaningfully enhance our ability to attract private investment and job creators.
Other priority legislative issues
COVID Liability Protection - UPDATE Protecting employers, building owners and landlords from frivolous lawsuits related to COVID-19 is a priority for NAIOP. To fully reopen the economy businesses must feel secure that they will not be sued as long as they are abiding by CDC guidelines and all applicable laws to keep employees, customers and tenants safe. Fortunately, SB 1377 provides these assurances. Governor Doug Ducey signed this legislation, sponsored by Sen. Vince Leach, into law on April 5, 2021.
Initiative Reform For the past several election cycles, out-of-state groups have invested heavily in ballot initiatives. In 2020, both Proposition 208, which increased income taxes to fund education, and Proposition 207, which legalized the recreational usage of marijuana for adults received most of their funding from contributors outside of Arizona. Out-of-state labor unions pushed an initiative that could have upended our state’s entire healthcare system had it not been kicked off the ballot by the courts. In the prior election cycle, billionaire hedge fund manager Tom Steyer underwrote an initiative that would have dramatically changed Arizona’s energy portfolio if it had passed.
This year, several referenda have been introduced to return the initiative process to its original purpose as a tool of direct democracy for the residents of Arizona. Because the right to initiative is enshrined in the state Constitution, any changes will require a vote of the people in the 2022 election. It is our expectation that a final package of will not come to fruition until next year. However, NAIOP is supporting several measures this year to show our support to those legislators who are committed to moving forward with common-sense reforms. These include:
HCR 2016, sponsored by Rep. Tim Dunn. This measure would require that ballot initiatives be passed by 60% of voters rather than the current simple majority.
HCR 2001, sponsored by Rep. John Kavanaugh. This measure would limit ballot initiatives to addressing a single subject.
SCR 1034, sponsored by Sen. Vince Leach. This measure would allow the legislature to amend an initiative that passed but was found by the Arizona Supreme Court to contain illegal or unconstitutional language.