The new state law on taxes for desegregation funding in Tucson may put the county at legal risk.
A provision in the latest budget signed by Gov. Doug Ducey shifts the burden of a tax for funding desegregation and student achievement efforts at public schools from Arizona state homeowners to only the TUSD homeowners in order to provide savings to the state. Prior to this, desegregation taxes were levied as a primary property tax, which means the state picked up the bill.
Programs funded by desegregation taxes are designed to meet the demands of a federal court order with the U.S. Department of Education’s Office for Civil Rights in districts that were found to have racial disparities in their schools.
A memo from Regina Nassen, Deputy Pima County Attorney, first reported and published in the Arizona Daily Independent, details how the new law shifts the tax burden and may contradict Arizona’s Constitution.
At issue is the difference between the primary and secondary property taxes.
The Nassen memo reads:
“At the end of this year’s legislative session, the Legislature passed SB 1529, attached. It requires a school district to “use revenues from secondary property taxes rather than primary property taxes to fund expenses of complying with or continuing to implement activities” required by a court desegregation order. It requires the secondary tax levied for these desegregation expenses to be “separately delineated on a property owner’s property tax statement.”
“This mandate conflicts, in certain respects, with other statutory provisions left intact by the Legislature, and appears to be inconsistent with an applicable Constitutional limitation. That conflict creates some questions that the County will have to address as part of its process of levying taxes and preparing tax bills. Why that is the case is quite complicated; we explain the issue below and make some recommendations regarding how to proceed.”
Section 18 and the 1% Limit.
“The Arizona Constitution, in section 18 of article 9 (“Section 18″) limits the total amount of property taxes levied by the county, city or town (in an incorporated area), school district, and community college district, on a parcel of residential real property, to I% of the property’s full cash value (the “l % Limit”). The only exceptions are for taxes levied to pay debt service on bonds or other debt instruments, and taxes that are approved by voters in an override election of some type those taxes are not included in the calculation, but the total of all other county, city/town, school, and community-college property taxes that apply to a particular parcel of residential real property cannot exceed the 1% limit.”
Enabling Legislation for Section 18.
“The 1% Limit was added to the Arizona Constitution, along with others, in 1980, as part of “Prop 13.” Section 18 requires the Arizona Legislature to “provide by law a system of property taxation consistent with the provisions of this section.” Ariz. Const. Art. 9, § 18 (8). As part of the enabling legislation for Section 18 and other restrictions added by Prop 13, the Legislature added the terms “primary property tax” and “secondary property tax” to the statutes, as a shorthand way to distinguish between the property taxes subject to the new limits, and those that are exempt from those limits.”
“In order to enact the 1% Limit, specifically, the Legislature enacted provisions in Title 15 (the school-district title) that have remained largely unchanged since that time. As part of that scheme, A.R.S. § 15-972 makes boards of supervisors responsible for determining, for each parcel of residential property, whet her the I% Limit will be exceeded by the cumulative, applicable taxes of the county, city or town, school district, and community college district in which the property is located. If the I% Limit is in fact exceeded, the statute requires the board to “apply a credit against the primary property taxes due from each such parcel in the amount in excess of article IX, section 18, Constitution of Arizona.” This amount is then deducted from the school district’s levy, and the State provides “additional state aid for education”. Additional State Aid) for the school district or districts in which such parcel of property is located” to make up for the reduction.”
“In SB 1529, the Legislature added a new subsection to A.R.S. § 15-910 that requires desegregation-related expenses to be paid from a district’s “secondary levy.” It appears that the Legislature intended to place the burden of these expenses on taxpayers within TUSD including residential property owners who would otherwise have at least a portion of that responsibility offset by the l % Limit credit- and as a result reduce the State ‘s responsibility for providing this funding in the form of Additional State Aid under § 15-972.”
“The problem is that the Legislature did not, as part of SB 1529, change the language in § 15-972 regarding how the board of supervisors is required to determine the I % Limit credit, and the resulting amount of Additional State Aid that the State is obligate d to pay. Nor did it change the definition of “secondary property taxes,” which clearly does not include a school district property tax levied to pay desegregation expenses. Such a tax is just as clearly subject to the constitutional limit, which the Legislature did not – and of course could not – change. Such a tax is not levied for the payment of long-term debt obligations, or pursuant to an override election. Therefore, despite the apparent Legislative intent, there appears to be no actual legal basis on which the Board of Supervisors can alter the way it calculates the 1% Limit credit and the corresponding Additional State Aid.”
Consequences and Recommendations.
“It is the opinion of this office that the Board’s obligations are in fact quite clear regarding how to calculate the 1% Limit credit and resulting Additional State Aid for TUSD. Unfortunately, the 2016 passage of SB 1487 (relevant passages of which are codified at A.R.S. § 41- 194.01), raises the stakes for a board of supervisors that attempts to follow the statutes as currently configured, in possible contravention of an implied legislative intent that was not adequately codified and is inconsistent with controlling Constitutional provisions. Based on the allegation of a single member of the Legislature that Pima County – despite the absence of any pecuniary interest in the issue – is incorrectly applying State law by including TUSD’s desegregation expenses in the taxes subject to the l % Limit, the Arizona Attorney General can unilaterally cause payment of the County’s state shared revenues to be suspended (subject, however, to legal challenge by the County).”
“Opposite that potential fire is the proverbial frying pan – if the County, following the implied legislative intent, does not include TUSD’s “secondary” desegregation tax in the 1% Limit calculation, and this results in a violation of the 1% Limit with respect to residential properties within TUSD, it will potentially be liable to those residential property owners for reimbursement of an arguably illegal secondary property tax. A successful defense to that lawsuit may be more difficult to formulate.”
“Under these circumstances, we believe it would be in the County’s interest to proactively address the issue with the Arizona Attorney General, hopefully gaining some assurance, in advance of the levy and the subsequent tax-bill preparation, that an action under§ 41-194.01 won’t be forthcoming if the County follows the Constitutional mandate. Accordingly, we recommend that the Board authorize Staff and the County Attorney’s Office to coordinate in an effort to obtain an opinion from the Arizona Attorney General, in as expedited a manner as possible, about how that office believes the Board should calculate the 1% Limit under § 15- 972(E) and Section 18.”
Combined with other local taxes, TUSD’s desegregation tax — which totals $64 million — exceeds the 1 percent cap. So, lawmakers have long made up the difference by requiring the county to give homeowners a credit and giving the remaining $16 to $18 million that was collected over the 1 percent cap to the district via “additional state aid”.
The budget, approved in May by lawmakers, classified the desegregation levy as a secondary tax. But, unlike bonds and overrides, voters get no say in whether they are taxed for it.
The Pima County Board of Supervisors voted on May 22 to release the Nassen memo publicly and seek an opinion from the Attorney General’s Office to determine whether the county should follow the new law or if it violates the Constitution.
If it doesn’t collect the tax, a recent state law allows lawmakers to order the Attorney General’s Office to investigate whether the county is breaking the law and possibly withhold 10 percent of its revenue from the state. If they do collect the tax, and it’s later deemed illegal, the county could be on the hook for reimbursing homeowners.
For homeowners in TUSD, the change means their property taxes will go up by $126 per assessed $100,000 value, according to the county. That’s revised from an earlier estimate by Pima County Superintendent of Schools Dustin Williams, who originally estimated the tax would cost $240 per $100,000 of assessed value.
Pima County Administrator Chuck Huckelberry said he’s attempting to work with the Arizona Attorney General’s Office to get an opinion on whether the county can legally implement the tax shift. But they need that opinion before Aug. 20, when county supervisors are required to set the annual tax rates.
If he can’t get a clear-cut opinion by then, Huckelberry believes the board is leaning toward not collecting the tax at all.
But that would mean TUSD would lose about a quarter of its desegregation funding.