Association Education Topic: Property Taxes

As mentioned in an email to faculty, the Faculty Association will be sending periodic educational messages.  This first one pertains to where MCCCD gets the bulk of its funding: property taxes.

Most people are completely mistaken about how our property taxes work.  A general misunderstanding of how something works leads to faulty decision-making, so let’s explore the topic together.

Rate vs Levy

In most of the country, property taxes are set as a percentage of the value of the property. You assess a 0.2% property tax against a $150,000 home, and that collects 0.002 x $150,000 = $300. The downside of this approach is that property taxes swing wildly when property values change. If your home value falls to $100,000, your tax bill falls to 0.002 x $100,000 = $200, and the money collected by the government agency falls along with it. A property value increase reverses the situation, making government agencies flush with cash and increasing tax costs for homeowners, even potentially causing them to lose their homes because they can’t pay their taxes.

Arizona does things differently, and smarter. Instead of setting a tax rate, we assess a tax levy. Imagine that collectively the Maricopa government agencies need $500 million to operate this year. The county determines the cumulative value of all properties in Maricopa county to be $400 billion. Dividing $500 million by $400 billion gives 0.125% as the property tax rate that would generate $500 million in property taxes, and that becomes the property tax rate for all Maricopa properties for the year. If next year’s property values increase to $500 billion but the desired levy stays at $500 million, then the property tax rate that generates $500 million falls to 0.1% ($500 million divided by $500 billion). From an individual’s perspective, if your property values change the same way as the average in the county, your property tax bill doesn’t budge. Maybe you had a $200,000 home before, and you were paying 0.125% of $200,000, or $250 in property taxes. Now, your home value is $250,000, but the property tax rate automatically fell to 0.1%, meaning your property tax bill is $250,000 x 0.001 = $250, the same as before.

Market Value vs Assessed Value

Another wrinkle to know: Maricopa property tax rates are set as a percentage of the “assessed value” of the property, not the market value. This quirk explains why on paper Maricopa’s property taxes look much more expensive than they actually are. Our property tax rate in Maricopa county averages 6.1% of assessed value, which sounds incredibly painful. If you have a $200,000 home, a 6.1% property tax rate sounds like the county collects $12,200 per year in property taxes! It’s no wonder that people are up in arms about how we need to get our taxes lower. However, that 6.1% property tax rate is against the assessed value of the property, and the assessed value is lower than the market value. Specifically, Maricopa county sets the “assessment ratio” for owner-occupied residential property at 10% of the Full Cash Value (i.e., market value). So, our property tax rate is 6.1% of the assessed value, meaning 6.1% of 10% of the market value — in other words, Maricopa’s current property tax rate is actually 0.61% of the market value of a home. That means that the person with the $200,000 home is actually paying just $1,220 in property taxes per year. Also note that 0.61% is one of the lowest property tax rates in the nation — the national average is 1.07%.

Property Taxes vs MCCCD Tax

Of course, you should realize that MCCCD is just one of many different municipal government organizations that collect property taxes in Maricopa county. That 0.61% is the sum total of the property taxes of all the county’s different government organizations. Annually, MCCCD currently collects 0.11112% of the market values of properties in Maricopa County as a “primary levy” (the main and ongoing part), plus an additional 0.01145% as a “secondary levy” (exclusively for paying off our existing bonds), giving a total tax rate of 0.12257% — so on a $200,000 home, MCCCD’s tax levy collects $245.14 per year.

MCCCD Tax Levy Increases

Now, let’s talk about tax increases. Each year, MCCCD has the right (but not the obligation) to permanently increase our tax levy by up to 2%. If we choose to increase the levy, then the total tax dollars we collect will increase by 2%. Since our levy is currently $541 million, a 2% increase would boost MCCCD’s revenues by $10.8 million per year. (If we choose NOT to increase the levy, we retain the right to permanently increase property taxes later on to make up the shortfall. That accumulated total is called our “tax levy capacity.” Over the years, we have not taken full advantage of our right to boost the property tax rate; as a result, we have built up a tax levy capacity of $67.8 million, meaning that at any point, our Governing Board could choose to permanently boost our annual property tax revenue by $67.8 million.)

Many Arizonans vehemently oppose MCCCD raising property taxes on the grounds that if the District exercises its right to raise property taxes by 2%, then someone who owned a $200,000 home would have to pay an extra $4,000 per year just to pay our colleges. As you probably could have guessed, this line of reasoning is massively, breathtakingly, incredibly wrong. Looking above, you can see that our current property tax rate on a $200,000 home collects $245.14 per year. If we increased our levy by 2%, the total amount collected would rise by 2% per year from every property in Maricopa — for that homeowner, their property tax payment to MCCCD would rise to $250.04. In other words, if we increased the levy by 2%, the owner of a $200,000 property would have to pay an extra $4.90 per year in property taxes to fund the change.

New Construction

Lastly, let’s consider new construction. When new property gets built, that actually DOES increase the property taxes collected. The County Assessor’s office establishes the value of all properties in the county as of the previous January 1st to determine the net assessed value of all property in the county. Then, in August, the tax rate gets set for the next year. That means that all construction that occurs during this window doesn’t get calculated into the determination of the property tax rate, but the same tax rate gets applied to that new construction. As a result, MCCCD increases its tax levy by about $12-$16 million per year simply by collecting the standard tax rate on those new properties. Barring an actual increase in our property tax rate, this is the only way for MCCCD to actually boost our property tax revenue.

A few references for you, if you’re interested:

SmartAsset’s page on Arizona Property Taxes

Arizona-eHomes guide to Property Taxes in Arizona

AZGolfHomes has a detailed primer on taxes and timing

Actual tax levies for Maricopa County by year