BILL #    HB 2493	TITLE: appraisal methods; solar energy devices
SPONSOR:    Cobb	STATUS: House Engrossed
PREPARED BY:    Adam Golden/Hans Olofsson

Description

If current law that assigns solar energy devices no property value is ruled invalid, this bill would assign a full cash value of $500 to a solar energy device of up to 500 kilowatts and an additional $1 to the device for each additional kilowatt.

The bill is retroactive to Tax Year (TY) 2015.

Estimated Impact

The fiscal impact of HB 2493 depends on the outcome of a pending case before the Arizona Tax Court related to the property tax treatment of leased solar panels. 

· If the court upholds the statutory provision that stipulates that solar panels for on-site consumption have no property value, previously paid taxes may have to be refunded, which could result in a significant one-time revenue loss.  Such loss would result from the court's decision, however, and not from the bill itself.

· If the court rules that the "zero-value" provision is invalid, the bill would increase the cost of the K-12 state funding formula by an estimated $250,000 on an ongoing basis.  In addition, since HB 2493 is retroactive to TY 2015, refunds may have to be issued for the difference between taxes paid under prior years' assessments and under the bill's new appraisal method.  

The Arizona Department of Revenue (DOR) estimates that the implementation of the bill would result in administrative costs of $6.4 million for the agency.  The JLBC Staff is still evaluating this cost estimate. 

Analysis

Laws 2006, Chapter 333 amended A.R.S. § 42-11054 such that solar energy devices used for on-site consumption were considered to have no value and to add no value to property.  Neither the state nor the counties attempted to tax solar panels until 2015.  In that year, DOR issued a notice that leased panels would be assessed at their full cash value and taxed appropriately.  Litigation was subsequently filed against DOR for its notice.  There has yet to be a final ruling.

If the court ultimately determines that the solar panels have zero value, the bill would have no fiscal impact relative to current statutes.  While refunds on previously paid taxes may be issued, they would be unrelated to the bill.  If the court decides that the zero-value provision in current statutes is invalid, the bill would assign a full cash value of $500 for a device up to 500 kilowatts and an additional $1 for each additional kilowatt.  Under such a ruling and in lieu of this bill, solar panels would be assessed as business personal property.

According to the information provided by the counties, the total full cash value of solar panels assessed as business personal property by the state's 15 county assessors was $226.1 million in TY 2018.  This amount of full cash value corresponds to $40.7 million in assessed value (full cash value multiplied by Class 1 assessment ratio of 18%).  According to DOR, there are approximately 7,200 personal property tax accounts that would be affected by this bill.  As noted previously, HB 2493 would assign a full cash value of $500 to a solar energy device or system of up to 500 kilowatts and an additional $1 to the device for each additional kilowatt.    

(Continued)

Due to the lack of specific data on solar panels, this analysis assumes that each of the devices would be assigned a full cash value of $500 under the bill, which would translate into a total statewide full cash value of $3.6 million [=7,200 accounts x $500], or $648,000 [= $3.6 million x 18% assessment ratio] in terms of assessed value.     

If the court rules that the zero-value provision is invalid, the bill's appraisal method would reduce the statewide assessed value of solar panels from $40.7 million to $648,000, or about $(40.1) million, which would result in a direct increase of the state share of K-12 funding by approximately $1.5 million annually.  The assessed value reduction would also have an impact on the state's Truth-in-Taxation (TNT) program. 

Under TNT, both the Qualifying Tax Rate (QTR) and the State Equalization Tax Rate (SETR) are adjusted each year to offset the statewide annual valuation change of existing property.  This rate change occurs automatically unless the Legislature decides to forego the TNT adjustment.  As a result of the $(40.1) million assessed value loss, the TNT adjustment would result in the QTR being an estimated 0.2¢ higher under the bill's appraisal method than under the business personal property valuation method currently used by the counties.  The 0.2¢ higher QTR would generate an offsetting TNT savings of $1.25 million.  Therefore, under TNT, the cost would decrease from $1.5 million to $250,000.

In addition, since HB 2493 is retroactive to TY 2015, refunds may have to be issued for the difference between taxes paid under prior assessments and under the bill's new appraisal method.    

Apart from the fiscal impact of the bill's new appraisal method for solar panels, DOR estimates that the implementation of HB 2493 would result in administrative costs of $6.35 million for the agency.  According to DOR, close to 7,200 tax accounts would have to be corrected if the bill were enacted.  This would include changing the valuation of the properties associated with these accounts over several years.  DOR expects that such implementation would take 105,000 hours to complete.  The JLBC Staff is still evaluating the reasonableness of DOR's administrative cost estimate.         

Local Government Impact

The bill would shift the tax burden to property owners not affected by the legislation and/or result in property tax losses for local governments.

3/15/19