County Officials Foresee Tax Increase

from Arizona Daily Star ..

By ERICA MELTZER

Move starting in 2 years may be needed to make up for sinking property values

Pima County could be forced to increase property taxes repeatedly starting in two years to avoid making $10 million or more in cuts annually to make up for plummeting property values.

Just when city and state governments expect to see sales taxes bounce back thanks to a recovering economy, Pima County expects to get hit with the largest drop in its tax base in at least the last 40 years.

Even in the aftermath of the savings-and-loan scandal, property values remained nearly flat, with the primary value declining just 1.4 percent and the secondary 4.2 percent for the five years between 1989 and 1993.

But county officials are forecasting declines in the primary assessed value of $800 million and in the secondary of $1.4 billion between next fiscal year and 2013. That's a 7 percent and a 14 percent decline, respectively.

For the county, that means $35 million in tax revenue lost between now and 2013 if tax rates are left where they are.

County Administrator Chuck Huckelberry said that might not seem like a lot of money in the context of a $1.3 billion budget. But it's a direct hit to the fund that provides the most basic county services, he said - justice and law enforcement.

Those also are the areas where it's hardest to cut costs or reduce services, he said.

"In and of itself, it's not that much," Huckelberry said. "When you couple it with increased demand and need for services and inflation, it becomes significant."

Just to keep up with inflation, Huckelberry said, the county needs the tax base to grow by about 6 percent a year.

And while inflation is low right now, Huckelberry said he expects it to start creeping up again as the economy improves in 2011 and 2012, just as the county is feeling the full brunt of the decrease in the tax base.

The paradox arises because property tax valuations are based on market conditions from 18 months to two years ago. That means the 2009 valuations - the values the county will use to set the tax rate this summer - reflect market conditions in 2007, a year for which the total tax base still increased. As a result, Huckelberry has proposed a 7-cent decrease in the tax rate.

Valuations for 2010, which were sent to homeowners this spring, are mostly flat, reflecting just a very slight decrease. Those are the values that will be used to develop the budgets and tax rates for the 2010-2011 budget.

In past downturns, any loss in the property tax base was offset by increases in state shared sales tax revenue and vehicle license tax money.

After seeing a $14 million decline in those revenues this year, the county forecasts an increase of some $24 million during 2011, 2012 and 2013.

That will partially offset the impact of the drop in property tax revenues, but much of that money will just fill the hole being created now.

The county already has cut department budgets, laid off workers and instituted a hiring freeze to make up for cuts in state shared revenue.

Huckelberry stressed these forecasts are only a best guess, and the actual numbers may be different.

But he said it's important for county officials to have a clear idea of the challenges ahead. Many people view county government as more stable than city or state government, which rely more on the more volatile sales tax.

In a normal economy, that view would be true, he said, but the crisis in the housing market means the county faces an unusual situation.

The decline in the property tax base also has significant implications for a future bond election. The county historically has been able to promise voters it will not increase the tax rate used to pay for new construction projects because it staggers issuing new debt as old debt is retired.

But next year's budget already calls for an increase in the debt service tax rate, though it still will be well below what the county promised voters in 2004.

Whether it can stay that low with a 14 percent decline in full cash values could prove to be more problematic.

Contact reporter Erica Meltzer at 807-7790 or emeltzer@azstarnet.com.

Originally published by ERICA MELTZER, ARIZONA DAILY STAR.

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