Fiscal Note
BILL # SCR 1009 TITLE: property tax exemption; veterans; disabilities
SPONSOR: Rogers STATUS: As Introduced
PREPARED BY: Lydia Chew
Description
SCR 1009 and its companion bill, SB 1034, would provide a property tax exemption for veterans with disabilities.
Since SCR 1009 would amend the Arizona Constitution, it would require voter approval at the next general
election. The enactment of SB 1034 is conditional upon the passage of SCR 1009. If SCR 1009 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% or
who are legally blind, or the unmarried surviving spouse of such a veteran. The proposed legislation would also
provide a property exemption of up to $5,000 to veterans with service-connected disabilities of 10% or more.
These exemptions would not be subject to income limits.
Estimated Impact
We estimate that the legislation would have a net General Fund cost of $11.3 million, beginning in FY 2024. 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 $11.3 million net cost increase could be more than offset by savings under the automatic school tax rate
adjustments provided by under the state’s Truth-in-Taxation (TNT) provisions. If such TNT savings were
incorporated, the General Fund would realize a net savings of $(5.4) 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 burden of 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.
(Continued)
- 2 -
Analysis
Background – Under current law, widows, widowers, and persons with total and permanent disabilities are eligible
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% or
who are legally blind, or the unmarried surviving spouse of such a veteran. It would also provide a property
exemption of up to $5,000 to veterans with service-connected disabilities of 10% or more. These exemptions
would not be subject to income limits. A person who qualifies for more than one exemption (e.g., if a person is
both a widower and a veteran with a disability) would be eligible to claim only one such exemption.
Cost Estimate – According to the Arizona Department of Veterans’ Services, there are 110,345 veterans with
disability ratings of at least 10%, but less than 100%, in Arizona. There are also 23,268 veterans with disability
ratings of 100% in Arizona. Our analysis assumes that veterans with disability ratings of 100% are already using the
existing $4,188 property tax exemption for persons with total and permanent disability.
According to estimates by the Housing Assistance Council, the homeownership rate among Arizona veterans is
76.6%. Based on this estimate, our analysis assumes that 84,524 of the 110,345 Arizona veterans with disability
ratings of between 10% and 90% and 17,823 of the 23,268 Arizona veterans with disability ratings of 100% reside
in homes owned by them.
In addition, to qualify for the 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 84,524 homes owned by veterans with
disability ratings of between 10% and 90%, or 67,619 properties, and 80% of the 17,823 homes owned by veterans
with disability ratings of 100%, or 14,259 properties, have a LPV of $284,590 or less.
We assume that the exemption for eligible veterans with 100% disability ratings would be $20,076 (the average
statewide NAV for Class 3 property) and the exemption for eligible veterans with between 10% and 90% disability
ratings will be $5,000. This means that, under this proposal, approximately $(564.6) million in statewide NAV will
be exempt [= (14,259 properties x ($20,076 - $4,188) for 100% disability ratings) + (67,619 properties x $5,000 for
between 10% and 90% disability ratings)].
By reducing NAV by $(564.6) million in TY 2023, the proposal would result in a direct cost increase of the BSA
program by $20.4 million, beginning in FY 2024. The $(564.6) 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 $(9.0) million.
The direct net impact on the 2 state programs is a cost increase of $11.3 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 $(564.6) million NAV loss, the TNT adjustment would result in the QTR and SETR being an
estimated 2.34¢ and 0.28¢ higher, respectively, in FY 2024 under the proposal than under current law. The higher
QTR of 2.34¢ and SETR of 0.28¢ under TNT would generate a small net savings of $(526,000) for the BSA program.
This savings is attributable to the higher QTR and SETR generated on new construction under the proposal than
under current law. After including the impact of TNT, the proposal would produce a net General Fund savings of
$(5.4) million, of which $(526,000) is for the BSA program and the remaining $(4.9) million is for the HOR program.
(Continued) - 3 -
The $(5.4) million General Fund savings is primarily attributable to 2 factors: (1) the lower NAV for Class 3 property
owned by veterans with disabilities receiving the exemption and (2) the higher QTR resulting from the TNT
adjustment. The combined effect of these 2 factors is summarized in Table 1 below.
The combination of lower NAV and higher QTR would result in a QTR levy decrease of $(17.5) million for veterans
with disabilities receiving the exemption. As shown in Table 1, the $(17.5) 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 $7.7 million and $10.2 million, respectively. (The total
net QTR levy increase of $478,600 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.
Table 1
QTR Tax Shift and Change in HOR Cost
Property Class
Change in
QTR Levy
Change in
HOR Cost
Change in
Net QTR Levy
Non-Class 3 – commercial and other $10,228,100 $0 $10,228,100
Class 3 – other than veterans with disabilities 7,743,100 3,871,550 3,871,550
Class 3 – veterans with disabilities (17,492,600) (8,746,300) (8,746,300)
Total Net Change $478,600 $(4,874,850) $5,353,400
As shown in Table 1, of the $7.7 million QTR increase on other Class 3 property, $3.9 million would be paid by the
General Fund in the form of higher HOR cost, while the remaining $3.9 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 $3.9 million.
Since commercial and other non-Class 3 properties do not receive HOR, the tax shift for this category would
remain at $10.2 million. The $(17.5) 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 $(8.7)
million. The remaining $(8.7) million represents the net savings realized by veterans with disabilities.
In summary, the state General Fund impact of the proposal depends on whether the TNT impact is included or not.
In the absence of a TNT adjustment, the projected General Fund cost under the sample scenario is $11.3 million,
beginning in FY 2024. If the QTR and SETR are adjusted to account for TNT, however, the proposal would generate
net General Fund savings of $(5.4) million, beginning in FY 2024. This amount includes the combined savings from
both the BSA and the HOR programs. The General Fund savings would primarily occur due to a tax shift from
veterans with disabilities to other property owners. To a smaller extent, such savings would also be generated
from higher QTR and SETR levies on property added to the tax roll for the first time in FY 2024.
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.
(Continued) - 4 -
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 $(56.7) million. The higher QTR and SETR under the bill would generate total General
Fund savings of $(5.4) million, of which $(4.9) million would be attributable to HOR savings and $(526,000) to BSA
savings. 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 $(56.7) million and by the General
Fund of $(5.4) million would essentially be "paid for" in the form of a tax shift of $37.7 million to non-Class 3
property and $24.4 million to Class 3 property (other than that owned by veterans with disabilities), for a total of
$62.1 million.
Table 2
Maximum Potential Property Tax Shift
($ in Millions)
Property Class
Primary
Tax Shift
Secondary
Tax Shift
Total
Tax Shift
Non-Class 3 – commercial and other $24.5 $13.2 $37.7
Class 3 – other than veterans with disabilities 14.7 9.7 24.4
Class 3 – veterans with disabilities (33.8) (22.9) (56.7)
General Fund (5.4) 0.0 (5.4)
Total Net Change $0.0 $0.0 $0.0
1/31/22