Fiscal Note
BILL # HB 2406 TITLE: property tax; exemption; combat veterans
SPONSOR: Kolodin STATUS: House Engrossed
PREPARED BY: Hans Olofsson
Description
The House Engrossed version of HB 2406 would provide a full property tax exemption on the home of a combat veteran
with a service-connected disability that is combat related and is rated as 100% by the U.S. Department of Veterans Affairs.
There is no property assessment limit or income limit for these combat veterans to qualify for the exemption under HB
2406.
In addition, the bill provides that a county, municipality, community college district and school district cannot increase
their primary property taxes to offset the loss of tax levies resulting from the exemption. The bill would become effective
in Tax Year (TY) 2026.
Estimated Impact
We estimate that the bill would have a net General Fund cost of $1.85 million, beginning in FY 2027, prior to the
application of the Truth-in-Taxation (TNT) provisions for equalization assistance to K-12 school districts. The bill would
reduce net assessed valuation (NAV), which would increase the state’s Basic State Aid (BSA) 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 $1.85 million net cost increase could be more than offset by savings under the automatic school tax rate adjustments
provided under TNT pursuant to A.R.S. § 41-1276. If such TNT savings were incorporated, the General Fund would realize
a net savings of $(1.1) million, beginning in FY 2027.
The General Fund net savings under TNT would occur for the following reasons. First, the TNT calculation automatically
increases the statutory K-12 tax rate, known as the Qualifying Tax Rate (QTR), to offset the decrease in QTR levies that
would otherwise result from the NAV loss attributable to the bill. This rate increase effectively eliminates the BSA cost
increase that would otherwise occur under the bill.
Second, since the TNT calculation would automatically result in a higher QTR, the amount of QTR levied on property other
than that owned by veterans receiving the full exemption under HB 2406 (such as commercial and industrial property)
would be higher under the bill than under current law. This QTR levy shift has the effect of reducing the state cost for the
HOR program. (Note that while HB 2406 would disallow taxing jurisdictions from the type of tax shift described above for
the primary taxes that they levy pursuant to A.R.S. § 42-17151, Legislative Council does not believe that this provision
under the bill would apply to the QTR calculated under A.R.S. § 41-1276.)
Analysis
Background
Under current law, an honorably discharged veteran of the uniformed services who has a service- or nonservice-
connected disability is 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. The exemption amount is limited as well. As with - 2 -
the income and assessment limits, the exemption limit is also indexed to inflation. In Tax Year (TY) 2025, the maximum
allowable exemption amount is $4,748. To be eligible, the assessed value of the property cannot exceed $31,347, which
corresponds to a limited property value (LPV) of $313,470. In addition, household income cannot exceed $38,843 (or
$46,600 if minor children or children with total and permanent disabilities reside in the household).
The amount of the exemption under current law is in direct proportion to the percentage rating of the veteran's disability.
As an example, a veteran with a disability rating of 50% would receive a property tax exemption equal to 50% of the
maximum allowable exemption of $4,748, or $2,374. The main provisions of the exemption under current law are
summarized in Table 1 below.
Table 1 Disabled Veterans Property Tax Exemption – Current Law
Disability Type Disability Rating Exemption Limit
1/
Assessment Limit
1/
Income Limit
1/,2/
Service-Connected 100% $4,748 $31,347 $38,843 / $46,600
Service-Connected 10% to 90% $4,748 x Rating $31,347 $38,843 / $46,600
Nonservice-Connected 100% $4,748 $31,347 $38,843 / $46,600
Nonservice-Connected 10% to 90% $4,748 x Rating $31,347 $38,843 / $46,600
_________
1/ The amounts listed in the table have been adjusted for inflation. The exemption limit provided in statutes prior to the
annual inflation adjustment is $4,188 while the assessment and income limits in statutes are $28,459 and $34,901/$41,870,
respectively.
2/ The lower income limit applies if no children under age 18 reside in the household. The upper income limit applies if
minor children or children with total and permanent disabilities reside in the household.
Estimated Net Assessed Value (NAV) Loss
According to the Arizona Department of Veterans’ Services (ADVS), there are 154,083 veterans in Arizona with disability
ratings from 10% to 100%. This figure includes both veterans with service-connected and nonservice-connected disability.
The distribution of veterans with each disability rating is displayed in Table 2 below. Of the 154,083 disabled veterans in
the state, 37,970 have a disability rating of 100%.
Table 2
Arizona Veterans with Disabilities
Disability Rating Veterans
10% 23,079
20% 9,721
30% 9,065
40% 9,523
50% 7,565
60% 11,807
70% 14,279
80% 15,452
90% 15,622
100% 37,970
Total 154,083
The full property tax exemption under the bill would apply only to combat veterans with 100% service-connected
disability that is combat related. Other disabled veterans would continue to receive the same exemption as under current
law.
The information provided by ADVS does not delineate between veterans who have service-connected versus nonservice-
connected disability. However, according to the American Community Survey (ACS) published by the U.S. Census Bureau,
in the period from 2008 to 2022, 29.5% of disabled veterans had service-connected disability. Based on the ACS data, we
estimate that of the 37,970 Arizona veterans with 100% disability rating, 11,201 veterans have service-connected
disability while the remaining 26,769 veterans have nonservice-connected disability. - 3 -
ADVS is not aware of any data that specifically shows a breakdown of veterans into categories of combat versus non-
combat veterans. There is, however, data on veterans who served during periods of peace versus periods of war. This
information indicates that 80% of all veterans (disabled or otherwise) in Arizona are what the U.S. Department of
Veterans refers to as "wartime veterans" while the remaining 20% are "peacetime veterans." Due to a lack of more
specific data on the veteran population, we have assumed in our analysis that 80% of the 11,201 veterans with 100%
service-connected disability, or 8,961 veterans, have disability that is combat related.
According to estimates by the Housing Assistance Council, the homeownership rate among Arizona veterans is 77.8%.
Based on this estimate, our analysis assumes that 6,972 of the 8,961 Arizona combat veterans with 100% disability rating
reside in homes owned by them. Under the bill, these 6,972 homes would be fully exempt from property tax irrespective
of the assessed value of their homes or the annual income of these veterans. Since we are not able to determine from
available data, which homes are owned by combat veterans with 100% disability rating, we have assumed (for the
purpose of this analysis) that the total statewide NAV for all these homes combined is equal to the number of properties
owned by 100% disabled combat veterans (6,972 parcels) multiplied by the statewide average per-parcel NAV of $23,100.
Based on this assumption, we estimate the total statewide NAV for the 6,972 properties owned by these combat veterans
to be $161 million. Since the bill would provide a full property tax exemption, the total statewide NAV exemption under
HB 2406 is also an estimated $161 million.
Under current law, the homes owned by combat veterans with 100% disability are eligible for the maximum exemption of
$4,748 (rather than the full exemption under HB 2406). However, if the NAV of their home exceeds $31,347 ($313,470 in
terms of limited property value) or their annual income is greater than $38,843 ($46,600 if minor children reside in the
household), they do not qualify for the property exemption (see Table 1). We are not aware of any information that
specifically provides the income levels of 100% disabled combat veterans or the assessed value of their homes. However,
considering the severity and degree of their disability as rated the by U.S. Department of Veterans Affairs, we believe that
it is reasonable to assume that most, if not all, these veterans earn an income that is less than or equal to the maximum
allowable amount and their homes are assessed at or below the current assessment limit. For this reason, we estimate
that all combat veterans with a 100% disability rating in the state currently receive the maximum exemption of $4,748
provided under current law. Statewide, this translates into a total NAV exemption of $33 million [= 6,972 properties x
$4,748 maximum exemption]. This means that based on the assumptions outlined above, we estimate that HB 2406
would result in a statewide NAV loss of $(128) million [= $33 million - $161 million] relative to current law.
Estimated General Fund Cost
Based on the analysis above, we estimate that the bill would result in a statewide NAV reduction of $(128) million
compared to current law. The estimated NAV reduction would result in a direct cost increase of the K-12 Basic State Aid
(BSA) program by $3.7 million annually, beginning in FY 2027. The $(128) million Class 3 (primary residence) NAV
reduction would also have the effect of reducing the cost of the Homeowner's Rebate (HOR) program by an estimated
$(1.85) million. Therefore, the direct net impact on the 2 state programs is a cost increase of $1.85 million, beginning in
FY 2027.
Truth-in-Taxation (TNT) Impacts
The NAV reduction under the bill would also have an impact on the state’s TNT program. Under TNT, the Qualifying Tax
Rate (QTR) is 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 $(128) million NAV loss, the
TNT adjustment would result in the QTR being an estimated 0.41¢ higher in FY 2027 under the bill than under current law.
The QTR increase of 0.41¢ under TNT would generate a small net savings of $(74,400) for the K-12 Basic State Aid (BSA)
program. This savings is attributable to the higher QTR generated on new construction under the bill than under current
law. After including the impact of TNT, the bill would produce a net General Fund savings of $(1.1) million, of which
$(74,400) is for the BSA program and $(1,001,700) is for the Homeowner's Rebate (HOR) program.
The $(1.1) million General Fund savings is primarily attributable to 2 factors: (1) the lower NAV for Class 3 property owned
by 100% disabled combat veterans under the expanded exemption and (2) the higher QTR resulting from the TNT
adjustment pursuant to A.R.S. § 41-1276. The combined effect of these 2 factors is summarized in Table 3 below.
- 4 -
Table 3
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 $2,077,700 $0 $2,077,700
Class 3 – other than combat veterans with 100% disability rating 1,578,700 789,300 789,400
Class 3 – combat veterans with 100% disability rating (3,582,000) (1,791,000) (1,791,000)
Total Net Change
1/
$74,400 $(1,001,700) $1,076,100
__
1/ Numbers may not add up due to rounding
The combination of lower Class 3 NAV and higher QTR would result in a QTR levy decrease (under the statutory K-12
funding formula) of $(3.58) million for combat veterans with 100% disability rating receiving the expanded exemption
under the bill. As shown in Table 3, the $(3.58) million savings incurred by combat veterans with 100% disability rating
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 $1.58 million and $2.08 million, respectively. (The total net QTR levy increase of
$74,400 is due to the higher QTR levied on new construction under the bill than under current law.) These are the
statutory QTR levy 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.
As shown in Table 3, of the $1.58 million QTR increase on other Class 3 property, $789,300 would be paid by the General
Fund in the form of higher HOR cost, while the remaining $789,400 would be paid by homeowners not receiving the
exemption. Therefore, the QTR levy shift to other Class 3 property, net of HOR, would be $789,400. Since commercial and
other non-Class 3 properties do not receive HOR, the QTR levy shift for this category would remain at $2.08 million. The
$(3.58) million QTR levy reduction on homes owned by combat veterans with 100% disability rating would not be fully
realized by them. Instead, the state General Fund would receive 50% of this savings, or $(1.79) million. The remaining
$(1.79) million represents the net savings realized by the combat veterans.
In summary, the state General Fund impact of the bill depends on whether the TNT impact is included or not. In the
absence of a TNT adjustment, the projected General Fund cost is estimated to be $1.85 million, beginning in FY 2027. If
the QTR is adjusted to account for TNT, however, the bill would generate net General Fund savings of $(1.1) million,
beginning in FY 2027. This amount includes the combined savings from both the BSA and the HOR programs. The General
Fund savings would primarily occur due to a QTR levy shift under A.R.S. § 41-1276 from combat veterans with 100%
disability rating to other property owners. To a smaller extent, such savings would also be generated from higher QTR
levies on property added to the tax roll for the first time in FY 2027.
Local Government Impact
HB 2406 mandates that local taxing jurisdictions cannot increase their primary property taxes under A.R.S. § 42-17151 to
offset the loss of tax levies resulting from the expanded property exemption under the bill. For this reason, local taxing
jurisdictions in the state with properties qualifying for the exemption under the bill would see some reductions of their
primary property tax levies.
3/13/25