by Catherine Reagor The Arizona Republic Feb. 14, 2010 12:00 AM
Most Maricopa County homeowners will see another significant decline in their homes' value when they open their 2011 property-assessment notices in the next few days. But property taxes for the coming year still may go up as the state, cities and school districts struggle to close huge budget deficits.
Less money coming in from lower property taxes would mean less money in state and local coffers and less money for education. Faced with growing operational deficits, municipalities and schools could be forced to raise property taxes by 10 percent or more to pay salaries and provide basic services, government officials and real-estate experts say.
During 2009, the overall median value of homes in the county fell 15.2 percent, from $155,300 to $131,700, according to the latest report by the Maricopa County Assessor's Office. This decline follows a 23 percent drop in home values during 2008.
A drop in values usually leads to a drop in property taxes.
But Arizona homeowners are taxed through a formula based on two main factors: property valuations set by the county assessor and tax rates set by cities and school districts. Tax rates set by cities and schools fluctuate each year based on funding needed for maintaining services and facilities.
Annual home valuations come out in February. Tax rates are set in the summer, then property-tax bills are mailed out in September. Property-tax rates are based on valuations from 18 months earlier. That means the bill homeowners receive this September will be based on 2008's 23 percent decline in values.
"Now that home values are nose-diving, we expect to reap the benefits of lower taxes," said Jay Butler, director of realty studies at Arizona State University. "But with all the state money drying up, local governments and schools can increase their taxes so they don't have to deal with such severe shortfalls. It won't be popular, but it's likely to happen."
Tax jurisdictions in any community can include elementary schools, community colleges and fire, water and library districts. The more than 1,000 jurisdictions in Maricopa County that rely on property taxes for funding must hold meetings open to the public to discuss all proposed rate hikes. Local decisions on tax rates are then handed over to the Maricopa County Board of Supervisors, which must approve them.
Arizona's property taxes have been low compared with property taxes in the rest of the country. Any increases have been small and raised little opposition. But this summer, the proposed increases predicted by economists and government leaders are bound to draw more attention from homeowners.
"Most jurisdictions will have little choice and will have to raise property taxes this year," said Keith Russell, Maricopa County assessor. "Residents will have to decide how many potholes they are willing to live with in their community and whether they want to get back the music class cut at their local school. Some jurisdictions will be sensitive to people's pocketbooks, and some jurisdictions will be sensitive to keep important services."
About 75 percent of Arizona's property taxes are earmarked for K-12 education. State schools are guaranteed certain funding, even if property taxes don't cover it all. The law requires any shortfalls from property-tax collection to be covered by the state's general fund. Some state leaders already are pressuring school districts to raise property taxes to reduce their dependence on the general fund.
"School districts don't lose spending authority because of losses in assessed values from property taxes," said Chuck Essigs of the Arizona Association of School Business Officials.
Arizona is still facing a huge budget deficit this year. The statewide school sales tax generated $150 million less in 2009 than it did in 2008. That means there already is a large gap in school funding without the drop in property taxes.
If a sales-tax increase proposed by Gov. Jan Brewer is approved by voters, K-12 education is still facing a $300 million to $500 million budget cut this year. If the sales-tax measure fails, the shortfall in funding to education could be much more.
Growth impact
Arizona's relatively low property taxes have long been a draw to businesses and residents.
The state's property-tax rate averaged about 0.60 percent of a home's value in 2009. That makes Arizona's property tax the 39th lowest in the nation, according to the Tax Foundation, a Washington, D.C.-based non-profit. Texas has the highest rate at 1.76 percent.
As more people moved to Arizona and bought houses, home values climbed steadily and so did property-tax revenues. Arizona was able to use money from property taxes, as well as sales and income taxes, to pay for the infrastructure and services needed to sustain growth.
But now most homeowners are seeing their third straight drop in property valuations, consumer spending and wages are down, and Arizona's government coffers are depleted. Raising property taxes is the only option for most municipalities to maintain the education and public services necessary to attract future growth.
In an effort to collect more property taxes, an Arizona lawmaker last month introduced a bill that would eliminate the 50 percent tax break that owners of historic homes receive. The tax break was enacted in the 1970s to entice people to buy homes in older neighborhoods and revitalize those areas. Only about 5,000 homes in the state are designated as historic, so the increase in property-tax revenue from those homes won't be enough.
Because of budget shortfalls the past three years, almost every city in Maricopa County has laid off employees, closed library branches and cut services. Now, the cuts are getting deeper. Phoenix recently announced it would lay off hundreds of police officers and firefighters, though their unions tentatively agreed Wednesday to a pay cut to save jobs. Phoenix also is implementing a 2 percent tax on food sales for five years to try to save some public-safety jobs.
"Arizona's future growth is at stake," Butler said. "Who wants to move to a city without enough firefighters and police officers, even if the property taxes are low?"
Raising property taxes would help narrow government budget gaps and save some services. But higher taxes would hurt homeowners, especially those already struggling to afford their mortgage payments. Most homeowners pay their property taxes through their mortgage payment to their lender. But a record number of Arizona homeowners are behind on their mortgage payments and in foreclosure. Already, it has become more difficult to collect property taxes in Maricopa County, according to the county treasurer.
Property-tax hikes for homeowners will be decided this summer as the many taxing jurisdictions balance their budgets for 2010-11.
"Schools and cities really have no choice but to raise property taxes," said Arizona real-estate analyst RL Brown. "Low property taxes do play a role in attracting new residents, particularly retirees.
"But the entire tax structure of the state must now be reviewed and revised," he said. "Now, we can't provide a satisfactory level of services to promote job growth."
Legislation has been introduced to research ways to improve Arizona's complex property-tax formula.
Some jurisdictions are now limited in how much they can raise property taxes each year. So even if a fire district, for example, raises property taxes this year as much as the law allows, the increase might not be enough to keep open all the fire stations in an area.
Although 2009's decline in valuations was smaller than 2008's drop, the state's property-tax system works on a formula that lags, so cities will likely have to raise taxes even more next year. One state official said Valley homeowners could see a 25 percent increase in the property-tax rate on their 2011 bill.
Understanding property taxes
Property-tax calculations and the terms used to discuss them can be confusing. Here are some basics:
Formulas vary from city to city. But here is an average breakdown of how much different kinds of taxing districts factor into property taxes: special districts, 7 percent; community college, 10 percent; county, 11 percent; cities, 11 percent; and schools, 61 percent. Financial decisions those groups make this summer will determine what property-tax bills look like this fall.
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