Some Arizonans will see hikes in property-tax bills

Deep in law that hands out tax breaks to businesses is a potential tax increase for many Arizona homeowners.

Beginning next year, owners who live in their homes must sign an affidavit affirming as much to retain a state subsidy that cuts their property-tax bill by up to $600 a year.

If they rent out their house or fail to return the affidavit, they will lose the subsidy and face a higher bill.


The idea is that, by weeding out people who wrongly get the subsidy, the savings will be used to offset a property-tax break for businesses.

No one knows how many homeowners this will affect, though legislative analysts estimated that 25 percent of the rental homes in the state are misclassified and 6.5 percent of homes are second homes. Officials involved in Arizona's real-estate community fear the new requirement could trigger undeserved property-tax hikes.

Tom Farley, CEO of the Arizona Association of Realtors, as well as the county assessors who will have to enforce the new procedure, suspect many property owners will ignore or overlook the requirement to sign the affidavit, which will be attached to the notice of valuation mailed to all property owners each year.

"We think innocent people are going to get hit," Farley said.

That, they say, could result in angry taxpayers and add more costs for local governments to correct the problem.

Shifting burden

The requirement to declare that a property is owner-occupied, as opposed to a rental, is part of the tax-cut and jobs bill Gov. Jan Brewer signed into law last month.

One section of the legislation reduces the rate at which business and agricultural properties are assessed for taxation.

Because of the way Arizona's property taxes work, a cut in one category forces an increase in another - in this case, residential properties - so that there is no net loss in tax dollars collected. But lawmakers, not wanting to see residential taxes rise, increased the amount of the state subsidy, which has been 40 percent of the property-tax bill.

To cover the cost of the business-tax breaks and the increased rebate, lawmakers had to find money to fill the gap. The solution: Crack down on property owners who wrongly claim the rebate.

To do that, the legislation puts the burden on owners to attest that they actually live in the house they own. If they don't, the county will reclassify it as a rental, and the homeowner rebate will no longer be used to reduce the property-tax bill.

Currently, property owners indicate if a home is their residence when they buy a home, and they continue to receive the tax break indefinitely. The new legislation will require them to affirm that every other year, beginning in 2012.

Lawmakers figure they can save $39 million a year by withholding the rebate from people who rent out their properties.

Unintended tax hikes

Real-estate agents and others fear unintended consequences.

Farley told lawmakers people give scant attention to the property-valuation notices the county mails each year.

This year's batch went out in late February.

"It's a small little notice," he said of the current form, which is the size of a post card.

When it is mailed out next year, with an affidavit form included, Farley worries it will still be overlooked.

"We think most people will do what we've been conditioned to do, which is put it in our income-tax file or throw it away," he said.

Others agree.

"I'm sure there will be a lot of non-compliance because people don't pay attention," said Paul Petersen, information officer for the Maricopa County Assessor's Office.

Once the program begins, people will have 60 days to return the affidavit or the assessor will classify the property as a rental.

And that, said Cochise County Assessor Philip Leiendecker, is when the "mushroom cloud" will hit.

Although affidavits may not get noticed, higher taxes will, he predicted.

It's unclear if the new policy will affect property taxes due in fall 2012 or if there will be a delay until 2013. Counties are waiting for guidance from the state Department of Revenue, which must create the affidavit and related instructions.

Lawmakers, such as Rep. Debbie Lesko, R-Glendale, said there will be a remedy. People have up to three years after getting a tax bill to provide the proper documentation to restore the homeowner rebate.

Doubtful outcome

County assessors say that they're bracing for higher costs and bigger headaches when the affidavit requirement takes effect.

The new legislation assumes county governments will front the costs of creating, mailing and processing the forms.

After that, the legislation states that counties will be reimbursed from the higher tax collections from rental properties.

But many assessors question whether the policy will yield the $39 million that budget analysts predict.

"The results on the financial end won't be worth it," said Ron Gibbs, chief deputy assessor in Yavapai County.

First, some rentals are eligible for the homeowner rebate.

If a house is rented to a direct relative of the owner, it qualifies. Second homes, or vacation homes, also qualify as long as they are not used for more than three months.

Second, assessors say they've already weeded out many properties that shouldn't be getting the state subsidy.

In Cochise County, Leiendecker estimates 85 to 90 percent of the residential properties are properly classified as owner-occupied.

In Maricopa County, the Assessor's Office last year removed 4,700 rental properties from the rebate list.

Still, no one has a good handle on how many homeowners are wrongfully benefiting from the long-standing state rebate.

That's all the more reason to use the affidavit, said Kevin McCarthy, executive director of the Arizona Tax Research Association, a business-supported advocacy group.

He also said the process, although almost guaranteed to cause unwarranted angst with some taxpayers, should provide a clearer view of how taxes work.

"I think it would be healthy for people to understand this system is in place and their taxes are being subsidized by the state of Arizona," McCarthy said.

Possible fix

Assessors as well as real-estate agents say they're talking with the Governor's Office about changes that could avert some of the headaches they foresee.

But to avoid problems, they would need legislation this year.

Leiendecker said it would be simpler to have homeowners pay the full tax and then apply the rebate to their income taxes.

That would provide a consistent statewide standard and avoid the risk of, say, winter visitors - who don't qualify - benefiting from the homeowner rebate.

"The snowbirds are not filing income tax in Arizona," he said.

There's no sign of a follow-up bill, as lawmakers are bearing down on the state budget and aiming for an April adjournment.

Rep. Steve Farley, D-Tucson (no relation to Tom Farley), said the new law wrongly puts the burden on the property owner to prove he or she merits the homeowner rebate.

"This has the potential for massive unintended consequences," he said. If people claim a benefit to which they're not entitled, he said, they "put the burden back on the government to investigate."

by Mary Jo Pitzl The Arizona Republic Mar. 14, 2011 12:00 AM




Some Arizonans will see hikes in property-tax bills