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BILL # HB 2665 |
TITLE: veterans; disability; exemption; property tax |
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SPONSOR: Payne |
STATUS: As Introduced |
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PREPARED BY: Lydia Chew |
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HB 2665 and its companion bill, HCR 2027, would provide a full property tax exemption for veterans with service-connected disability ratings of 100%. Since HCR 2027 would amend the Arizona Constitution, it would require voter approval at the next general election. The enactment of HB 2665 is conditional upon the passage of HCR 2027. If HCR 2027 is approved, the proposal would become effective beginning in tax year (TY) 2023.
The proposal would provide a full property exemption to veterans with service-connected disabilities of 100%. These exemptions would not be subject to income or assessment limits.
Estimated Impact
We estimate that the legislation would have a net General Fund cost of $6.3 million, beginning in FY 2024, prior to the application of Truth-in-Taxation (TNT) provisions. The proposal would reduce net assessed valuation (NAV), which would increase the state’s Basic State Aid cost for K-12 schools. At the same time, the bill would also reduce the cost of the Homeowner’s Rebate (HOR) program, under which the state pays 50% of a homeowner’s primary school district tax.
This $6.3 million net cost increase could be more than offset by savings under the automatic school tax rate adjustments provided under TNT. If such TNT savings were incorporated, the General Fund would realize a net savings of $(3.0) million, beginning in FY 2024.
The General Fund net savings under TNT would occur for the following reasons. First, the TNT calculation automatically increases the statutory K-12 school tax rates, the Qualifying Tax Rate (QTR) and State Equalization Tax Rate (SETR), to offset the decrease in levies that would otherwise result from the net assessed value (NAV) loss attributable to the proposal. This rate increase has the effect of eliminating the Basic State Aid cost increase that would otherwise occur under the proposal.
Second, since the TNT calculation would result in a higher QTR under the proposal than under current law, there
would be a shift of the property tax collections from veterans with disabilities to other property taxpayers, especially owners of non-residential property. As described in more detail in the Analysis section below, this tax shift has the effect of reducing the state cost for the HOR program.
The tax shift under the bill assumes that local governments respond to the NAV reduction by increasing their tax rates rather than lowering their spending.
Background – Under current law, widows, widowers, and persons with total and permanent disabilities are eligible
(Continued)
to receive a property tax exemption. The exemption is subject to both income and property assessment limits, which are adjusted for inflation each year. For TY 2022, the assessed value of the property cannot exceed $28,459, which corresponds to a limited property value (LPV) of $284,590. In TY 2022, the maximum allowable exemption amount for widows, widowers, and persons with total and permanent disabilities is $4,188.
The proposal would provide a full property exemption to veterans with service-connected disabilities of 100%. These exemptions would not be subject to income or assessment limits.
Cost Estimate – According to the Arizona Department of Veterans’ Services, there are 23,268 veterans with disability ratings of 100% in Arizona. The Housing Assistance Council estimates that the homeownership rate among Arizona veterans is 76.6%. Based on this estimate, our analysis assumes that 17,823 of the 23,268 Arizona veterans with disability ratings of 100% reside in homes owned by them.
We assume that the exemption for these homeowners would be $20,076 (the average statewide NAV for Class 3 property). This means that, under this proposal, approximately $(357.8) million in statewide NAV would be exempt for veterans with 100% disability ratings [= 17,823 properties x $20,076].
However, we further assume that veterans with disability ratings of 100% who are eligible under the current income and assessment limits are already using the existing $4,188 property tax exemption for persons with total and permanent disabilities.
Currently, to qualify for the exemption, the veteran's household income cannot exceed $34,301 (or $41,151, if minor children or children with total and permanent disabilities reside in the household). For the purpose of determining eligibility, this amount does not include cash public assistance, social security payments, and veterans' disability pensions. According to the American Community Survey (ACS), approximately 75% of Arizona veterans have wages or salary income of less than $34,301 (in 2020 inflation-adjusted dollars). Wages or salary income excludes cash public assistance, social security payments, and retirement income. As a result, we assume that 75% of the 17,823 homeowners that are veterans with disabilities have income below the current income limit. This means that the number of income-eligible veterans under current law is 13,276.
In addition, to qualify for the current exemption, the home's LPV cannot exceed $284,590. The average statewide LPV of a primary residence is $200,756. Our analysis assumes that 80% of the 13,276 homes owned by income-eligible veterans with disability ratings of 100%, or 10,621 properties, have a LPV of $284,590 or less.
As a result, under current law, approximately $(44.5) million in NAV owned by veterans with 100% disability ratings is exempt under the exemption for persons with total and permanent disabilities [= 10,621 properties x $4,188].
Therefore, after accounting for the impact of the current exemption, the net NAV reduction is an estimated $(313.3) million [= $357.8 million - $44.5 million] in TY 2023. This would result in a direct cost increase of the BSA program by $11.4 million, beginning in FY 2024. The $(313.3) million Class 3 (primary residence) NAV reduction would also have the effect of reducing the cost of the Homeowner's Rebate (HOR) by an estimated $(5.0) million. The direct net impact on the 2 state programs is a cost increase of $6.3 million, beginning in FY 2024.
TNT Impacts – The NAV reduction under the proposal would also have an impact on the state’s TNT program. Under TNT, both the QTR and 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 forgo the TNT adjustment. Due to the $(313.3) million NAV loss, the TNT adjustment would result in the QTR and SETR being an estimated 1.30˘ and 0.16˘ higher, respectively, in FY 2024 under the proposal than under current law. The higher QTR of 1.30˘ and SETR of 0.16˘ under TNT would generate a small net savings of $(231,200) for the BSA program.
This amount is due to savings of $(204,900) from the higher QTR plus savings of $(26,300) due to the higher SETR generated on new construction under the proposal than under current law.
(Continued)
The combination of lower NAV and higher QTR would result in a QTR levy decrease of $(9.7) million for veterans with disabilities receiving the exemption. As shown in Table 1, the $(9.7) million savings incurred by veterans with disabilities would be shifted to other Class 3 (owner-occupied residential) as well as non-Class 3 (commercial, rental residential, etc.) property owners in the amount of $5.6 million and $4.3 million, respectively. (The total net QTR levy increase of $204,900 is due to the higher QTR levied on new construction under the proposal than under current law.) These are the tax shifts before the HOR is applied. Under the HOR program, the state pays 50% of the QTR levied on Class 3 property. The remaining 50% is paid by the homeowner. Other classes of property do not receive the 50% QTR reduction.
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Table 1 |
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QTR Tax Shift and Change in HOR Cost |
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Property Class |
Change in QTR Levy |
Change in HOR Cost |
Change in Net QTR Levy |
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Non-Class 3 – commercial and other |
$5,649,300 |
$0 |
$5,649,300 |
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Class 3 – other than veterans with disabilities |
4,276,800 |
2,138,400 |
2,138,400 |
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Class 3 – veterans with disabilities |
(9,721,200) |
(4,860,600) |
(4,860,600) |
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Total Net Change |
$204,900 1/ |
$(2,722,200) |
$2,927,100 |
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1/ Due to the higher QTR levied on new construction under the proposal relative to current law. |
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As shown in Table 1, of the $4.3 million QTR increase on other Class 3 property, $2.1 million would be paid by the General Fund in the form of higher HOR cost, while the remaining $2.1 million would be paid by homeowners not receiving the exemption. Therefore, the QTR tax shift to other Class 3 property, net of HOR, would be $2.1 million. Since commercial and other non-Class 3 properties do not receive HOR, the tax shift for this category would remain at $5.6 million. The $(9.7) million QTR levy reduction on homes owned by veterans with disabilities would not be fully realized by them. Instead, the state General Fund would receive 50% of this savings, or $(4.9) million. The remaining $(4.9) million represents the net savings realized by veterans with disabilities.
Local Government Impact
Apart from the QTR shift described above, the proposal could also result in a tax shift of other primary as well as secondary taxes levied by local taxing jurisdictions, such as counties, community college districts, cities, school districts and special taxing districts. The amount of such tax shifts would depend on the extent to which local taxing jurisdictions would raise their tax rates to make up for the loss of levies under the proposal.
Table 2 below shows the maximum potential shift of total (primary plus secondary) property taxes under the proposal.
The estimates included in Table 2 assume that taxing jurisdictions would levy the same amount under the proposal as under current law. Under this assumption, veterans with disabilities would have a total (primary plus secondary) tax reduction of $(31.6) million.
The reduced HOR cost combined with the higher QTR and SETR levied on new construction under the bill would generate total General Fund savings of $(3.0) million. (This amount is the sum of HOR savings of $(2.7) million, plus BSA savings of $(204,900) from the higher QTR levied on new construction, plus BSA savings of $(26,300) from the higher SETR levied on new construction.)
This means that under the assumption that local taxing jurisdictions would set their rates in a manner that would "hold them harmless," the savings realized by veterans with disabilities of $(31.6) million and by the General Fund
(Continued)
of $(3.0) million would essentially be "paid for" in the form of a tax shift of $20.9 million to non-Class 3 property and $13.7 million to Class 3 property (other than that owned by veterans with disabilities), for a total of $34.6 million.
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Table 2 |
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Maximum Potential Property Tax Shift |
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($ in Millions) |
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Property Class |
Primary Tax Shift |
Secondary Tax Shift |
Total |
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Non-Class 3 – commercial and other |
$13.6 |
$7.3 |
$20.9 |
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Class 3 – other than veterans with disabilities |
8.1 |
5.6 |
13.7 |
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Class 3 – veterans with disabilities |
(18.7) |
(12.9) |
(31.6) |
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General Fund |
(3.0) |
0.0 |
(3.0) |
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Total Net Change |
$0.0 |
$0.0 |
$0.0 |
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2/23/22