BILL #    SB 1248

TITLE:     property taxes; valuation; property modifications

SPONSOR:    Leach

STATUS:   As Amended by House WM

PREPARED BY:    Hans Olofsson

 

 

 

Description

 

Under current law, a property's Limited Property Value (LPV) is not allowed to increase by more than 5% from one valuation year to the next.  Moreover, a property's LPV cannot exceed its Full Cash Value (FCV).  In the Department of Revenue's (DOR) Assessment Procedures Manual, this calculation is referred to as "Rule A."

 

In cases when a property has been modified by new construction, or was subject to destruction or demolition of existing improvements since the prior valuation year, DOR's Assessment Procedures Manual may call for a different LPV calculation referred to as "Rule B."  Under "Rule B," a property's LPV is set at a level or percentage that is comparable to that of other properties of the same or similar use or classification.  Under DOR's current guidelines, Rule B is applied when a modification to the property, such as new construction, equals 10% or more of the prior valuation year's FCV for that property.  If the value of the modification is less than 10% of the prior year's FCV, Rule A applies.  

 

 SB 1248, as amended by the House Ways and Means Committee, would provide in statutes that the Rule B calculation be applied when the value of the modification is 15% or greater than the property's FCV in the preceding valuation year.  

 

The bill has a general effective date.

 

Estimated Impact

 

Based on information provided by the Maricopa County Assessor's Office, the JLBC Staff estimates that the bill would increase the cost of the K-12 state aid formula by $750,000 in FY 2021.  

 

Analysis

 

As noted above, under DOR's current guidelines, the Rule A applies when new construction to an existing property is less than 10% of the preceding valuation year's FCV.  If the value of new construction is 10% or greater, however, Rule B applies.

 

SB 1248 would raise the threshold for the Rule B calculation to 15% and codify this change in statutes.  Under this threshold, only additions to an existing property that equal or exceed 15% of the preceding year's FCV would be included as new construction on the property tax roll.  New construction valued at less than 15% of the prior year's FCV would be included as existing property on the tax roll.

 

While an addition to an existing property valued at between 10% and 15% of the preceding year's FCV would be included as new construction under DOR's current guidelines, it would not under the bill.  Instead, such addition would come under Rule A and be included under existing property on the tax roll.

 

According to data furnished by the Maricopa County Assessor's Office, the 15% Rule B calculation threshold under the bill would have the effect of reducing the net assessed valuation (NAV) of new construction by $(13.6) million countywide.  This amount represents 2.1% of the county's total Tax Year (TY) 2019 NAV from new construction of real property.  Based on this percentage, the JLBC Staff estimates that the statewide reduction of new construction NAV would be $(19.7) million under the bill.

 

 

(Continued)

Under the Basic State Aid formula, the state pays for the cost of K-12 education not generated through local property taxes.  The reduction in new construction NAV under the bill would have a direct impact on the General Fund by increasing the cost of K-12 funding under the Basic State Aid formula.  By reducing the statewide new construction NAV by an estimated $(19.7) million in TY 2020, the bill would result in a direct increase of the state share of K-12 funding by $750,000 in FY 2021.  Since the bill appears to affect new construction NAV only, there would be no offsetting TNT impact.    

 

Local Government Impact

 

The bill would reduce the amount of taxes local jurisdictions can levy on new construction.

 

3/15/19