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BILL # HB 2918 |
TITLE: tax rates; reductions |
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SPONSOR: Olson |
STATUS: House Engrossed |
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PREPARED BY: Benjamin Newcomb |
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HB 2918 reduces the rates for several tax categories including property tax, Transaction Privilege Tax (TPT), and individual income tax (IIT), as outlined below:
· For property tax, sets the qualifying tax rate (QTR) for TY 2025/FY 2026 at $1.54185 for non-unified school districts and $3.0837 for unified school districts. The rates would otherwise be $1.5606 and $3.1212, respectively, under current law.
· For TPT, lowers the state sales tax rate for select TPT classifications from 5.0% to 4.93%. This provision has a general effective date.
· For IIT, reduces the state rate from 2.5% to 2.47%, starting in Tax Year (TY) 2026. This will mainly affect FY 2027 revenues.
Estimated Impact
We estimate that the bill would have a total General Fund cost of $131.6 million in FY 2026, $206.2 million in FY 2027, and $215.3 million in FY 2028.
The reduction in QTR would cost the General Fund $21.3 million in FY 2026, and this amount would grow to $22.1 million by FY 2028. This impact reflects the increased cost of the Arizona Department of Education's Basic State Aid (BSA) and the Homeowner's Rebate (HOR) funding formulas. The lower state TPT rate is forecast to reduce General Fund revenue collections by $(110.3) million in FY 2026 and the revenue loss would increase to $(119.7) million by FY 2028. Reducing the IIT rate to 2.47% beginning in TY 2026, is projected to decrease IIT collections by $(69.6) million in FY 2027 and $(73.5) million in FY 2028. Table 1 shows the total impact of the bill through FY 2028.
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Table 1 |
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General Fund Impact of HB 2918 |
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$ in millions |
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FY 2026 |
FY 2027 |
FY 2028 |
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QTR 1/ |
$(21.3) |
$(21.7) |
$(22.1) |
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TPT |
(110.3) |
(114.9) |
(119.7) |
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IIT |
0.0 |
(69.6) |
(73.5) |
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Total |
$(131.6) |
$(206.2) |
$(215.3) |
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1/ Represents increases in General Fund costs rather than reduced revenue. |
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QTR Impact
The QTR is the statutory property tax rate used to determine the amount of state aid to K-12 schools. Under the January Baseline, these FY 2026 rates were estimated to be $1.5436 per $100 NAV for non-unified school districts and $3.0872 per $100 NAV for unified school districts. (These rates were subsequently revised to $1.5606/$3.1212 per $100 NAV as result of the Truth-in-Taxation (TNT) calculation in February.)
Under the bill, the FY 2026 QTR would be $1.54185 per $100 NAV for non-unified school districts and $3.0837 per $100 NAV for unified school districts, which would reduce FY 2026 school district property tax levies. Relative to the January Baseline NAV and QTR forecasts, the (0.35)¢ reduction in QTR would decrease the total QTR levy by $(26.4) million in FY 2026. Under the state's equalization assistance program, or Basic State Aid (BSA) formula, the loss in QTR levies (which is also referred to as the "local share" of the K-12 school funding formula) must be backfilled with a commensurate increase in General Fund spending to ensure the same amount of per pupil funding. Therefore, relative to the January Baseline, the FY 2026 BSA cost would be $26.4 million, which would grow to $27.5 million by FY 2028.
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 homeowner's rebate. The (0.35)¢ lower QTR levied on Class 3 property would decrease the HOR cost by an estimated $(5.2) million in FY 2026, $(5.3) million in FY 2027, and $(5.4) million in FY 2028. Combining the BSA and HOR impacts, the bill's QTR reduction would result in a net General Fund cost increase of $21.3 million in FY 2026, $21.7 million in FY 2027, and $22.1 million in FY 2028.
TPT Impact
HB 2918 would adjust the sales tax rate from 5.0% to 4.93% for 12 different TPT classifications. Based on the January Baseline TPT forecast, we estimate that the bill would reduce General Fund revenue by $(110.3) million in FY 2026, $(114.9) million in FY 2027, and $(119.7) million in FY 2028.
IIT Impact
We project that under the January Baseline the IIT taxable income will be $231.8 billion in FY 2027 and $244.9 million in FY 2028. Lowering the IIT rate from 2.5% to 2.47% is projected to reduce General Fund revenue by $(69.6) million in FY 2027 and $(73.5) million in FY 2028.
Local Government Impact
TPT
State TPT revenues are shared with local governments. We estimate that HB 2918 will reduce FY 2026 TPT distributions by $(32.2) million, including $(12.3) million for cities and $(19.9) million for counties in FY 2026. These losses are projected to grow to $(13.4) million and $(21.6) million, respectively, in FY 2028.
IIT
Incorporated cities and towns receive 18% of individual and corporate income tax collections from 2 years prior from the Urban Revenue Sharing (URS) Fund established by A.R.S. § 43-206. Since the bill would decrease statewide IIT revenue by $(69.5) million in FY 2027 and $(73.5) million in FY 2028, overall URS distributions to cities and towns would decrease by $(12.5) million in FY 2029 and $(13.2) million in FY 2030.
3/4/25