By Jennifer Stielow
A recent audit by the Arizona Auditor General (AG) revealed many critical flaws surrounding the calculation, collection, distribution, and reporting of the Government Property Lease Excise Tax (GPLET).
According to the AG’s review of 268 leases, nearly half are currently under eight-year abatement; and therefore, no revenue is being collected. Forty-five percent of the leases examined are paying GPLET under the rate structure that existed prior to 2010 that imposes a dramatically lower tax burden than the current GPLET rates. Of all the leases audited, only 16 (6%) are subject to the new GPLET rates. As a result, the AG found that the 2010 GPLET revisions have not resulted in increased revenue as expected because so few leases pay tax under the new rate structure.
Additionally, the AG found many examples where the incorrect GPLET was calculated because either the wrong rates were used and/or not all of the property subject to GPLET was included. In fact, in certain instances lessees failed to remit GPLET payments altogether.
The audit also found that the distribution of GPLET revenues by county treasurers was done incorrectly by using the distribution percentages for property tax rather than GPLET, which are different. Furthermore, although county treasurers are required to assess penalties and interest on delinquent payments, none did so.
There are several reporting requirements under GPLET, one of which requires county assessors to annually report the value of all GPLET property, which includes properties under abatement, to the Arizona Department of Education (ADE). The AG found that only three of the seven counties that have GPLET deals reported the valuation of GPLET properties to ADE. This is a major cause for concern since underreporting GPLET values to ADE requires the state general fund to pay more in state aid payments to school districts than otherwise required. Overall, auditors’ interviews with city, town, and county officials indicated a general lack of understanding of GPLET requirements and recommended the Legislature modify statutes to address GPLET deficiencies.
This special audit was a requirement of the 2010 legislation that enacted several revisions to GPLET. The purpose of the audit was to determine if the revisions resulted in a viable revenue source in lieu of an ad valorem property tax on possessory interests for counties, cities and towns, community colleges, and school districts.
Originally enacted in 1996 as a successor to the possessory interest tax, GPLET allows government to enter into lease agreements with private entities to use government-owned property for private use and be subject to an excise tax in lieu of a property tax. By 2010, cities had dramatically expanded their use of the eight-year abatement. Additionally, the tax liability under the existing GPLET rate structure was not only considerably lower compared to the property tax, but the entire tax obligation disappeared at fifty years.
In an effort to address some of the inequities with GPLET, the 2010 legislation limited the size of Central Business District (CBD) boundaries for leases who qualify for the eight-year abatement. A new rate structure was implemented that nearly doubled the existing rates, and while rates under the old structure dropped 20% every ten years until reaching zero by the fiftieth year, the new rates are adjusted annually by the producer price index for new construction indefinitely. Finally, the legislation prospectively limited GPLET deals to a maximum of 25 years, including any abatement period, at which time the government lessor is required to convey the property to the prime lessee and the property is then placed on the property tax rolls.
The Arizona Tax Research Association (ATRA) is the only statewide taxpayer organization representing a cross section of Arizona individuals and businesses. Organized in 1940, ATRA is the largest and most respected independent and accurate source of public finance and tax policy information. ATRA represents taxpayers before policy makers at the state and local level. ATRA’s fundamental belief is that every governmental expenditure is directly related to a tax. ATRA’s goal is efficient statewide government and the effective use of tax dollars through sound fiscal policies.