Despite a drop in residential real estate values, Arizona was among the top ten states in new, owner-occupied housing starts in 2007.
The construction industry has recently played a disproportionate role in Arizona's economy. As shown below, the construction industry's share of Arizona's economy was 50 percent bigger than construction's share of the U.S. economy in 2006.
On the upside, this statistic indicates that a lot of people want to come live, play, and work in Arizona. On the downside, relying disproportionately on the strength of one industry has shown itself to be risky. State and local budgets flew high on the strength of the residential construction industry. Now they are suffering, just as construction is.
Arizona's property tax structure contributes to this volatility. Residential property taxes are assessed at half the rate of commercial property taxes. As a result, commercial property, which constitutes less than a third of total property value in the state, pays nearly half of all property taxes according to the Arizona Tax Research Association.
To create a fully diversified economy, Arizona policymakers should pay close attention to what they tax. They've rolled out the welcome mat to the volatile construction industry, which is fine, but they need to do the same for other industries. If we want people in all those homes, we have to welcome other businesses too, and that means lowering taxes on commercial property.
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.
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