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Theory and Practice of Property Tax Relief: Recommendations of the Vancouver Property Tax Policy Review Commission. Presentation to Canadian Property Tax Association Toronto, Ontario Enid Slack Institute on Municipal Finance and Governance Munk Centre for International Studies

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Theory and Practice of Property Tax Relief: Recommendations of the Vancouver Property Tax Policy Review Commission

Presentation to Canadian Property Tax Association

Toronto, Ontario

Enid Slack

Institute on Municipal Finance and Governance

Munk Centre for International Studies

University of Toronto

February 11, 2008

theory and practice of property tax relief
Theory and Practice of Property Tax Relief
  • Review of the Report of the Vancouver Property Tax Policy Review Commission
  • How do you resolve the conflict between economics and politics?
    • Economic theory does not support most property tax relief measures
    • Reality is that taxpayers are complaining about unfair tax increases and politicians feel the need to respond
outline of presentation
Outline of Presentation
  • Description of Vancouver property tax system
  • Two issues addressed by Commission
  • What we heard
  • Principles for analysis
  • Summary of analysis and recommendations
  • Concluding comments on conflict between theory and practice of property tax relief
vancouver s property tax system
Vancouver’s Property Tax System
  • Annual market value assessment (in place for many years)
  • 8 property classes (major ones are residential at 83% of total and business at 16%)
  • Distribution of tax burden by class determined by council using “fixed share” approach
  • 3-year land averaging to phase in impact of changes in assessed value
  • Home owner grant and property tax deferral program
two issues
Two Issues
  • Vancouver Property Tax Policy Review Commission was asked to tackle two issues:
    • Fair share: tax shares of residential versus non-residential properties (in 2006, council set the share at 45% residential and 55% non-residential)
    • Volatility: large, unanticipated year-over-year increases in property taxes
fair share what did we hear
Fair Share: What did we hear?
  • Business taxes too high relative to residential
  • Business tax is high relative to other jurisdictions
  • Taxes are adversely impacting development
  • Risk losing small independent businesses
  • Consumption of services is a better basis for tax distribution
volatility what did we hear
Volatility: What did we hear?
  • “Hot properties” (properties facing large unanticipated increases) are creating serious problems
  • Need to “flatten” the spikes
  • Under-developed properties are particularly impacted
  • Problem is compounded by long term net leases
principles used to analyze options
Principles used to analyze options
  • Fairness, based on benefits received
    • Pay for what you receive
  • Fairness, based on ability to pay
    • At issue is “who ultimately pays”
  • Neutrality (minimize side effects)
  • Accountability
  • Stability and predictability
  • Simplicity and ease of administration
fair share key questions
Fair Share: Key Questions
  • Are business property taxes high relative to:
    • services that business receives?
    • other major cities in Canada?
    • other municipalities in the GVRD?
  • Is there evidence that commercial investment and development has been negatively affected?
    • Have rental values or vacancy rates of commercial properties been negatively affected?
    • Is there any evidence that businesses are leaving Vancouver because of property taxation?
are business property taxes high relative to the services that business receives
Are business property taxes high relative to the services that business receives?
  • MMK study estimated that businesses pay $2.42 per $1.00 of services while residential pays $0.56
  • Tax share would roughly be 70% residential; 30% non-residential based on MMK analsysis
  • Consumption studies do not estimate significant indirect benefits to businesses
how do vancouver business taxes compare with other major cities in canada
How do Vancouver business taxes compare with other major cities in Canada?
  • Total city-levied taxes per square foot of occupied space are lower in Vancouver than in Calgary or Toronto
  • Tax differentials across Canada unlikely a major consideration in location decisions
how do vancouver s business taxes compare with other municipalities in the gvrd
How do Vancouver\'s business taxes compare with other municipalities in the GVRD?
  • Businesses of all types do pay more taxes per square foot in Vancouver than elsewhere in GVRD
  • Taxes as a whole are higher in Vancouver in per capita terms
is there evidence commercial investment has been negatively affected
Is there evidence commercial investment has been negatively affected?
  • The bleak picture of rapidly declining commercial investment in Vancouver presented at the hearings was not borne out by the evidence
  • There has been a decline in commercial investment relative to other municipalities but the level of commercial investment is strong
is there evidence that commercial rental values or vacancy rates have been negatively affected
Is there evidence that commercial rental values or vacancy rates have been negatively affected?
  • The property market in Vancouver is strong and, if property taxes are having a negative impact, it has not been significant
fair share conclusions
Fair Share: Conclusions
  • Business taxes are high relative to neighbouring municipalities
  • Little evidence to suggest this has a negative impact on business investment or demand for space in the City
  • At risk of potential loss of competitiveness within the region
fair share policy options
Fair Share: Policy Options
  • Alter the share
  • Create a small business class
    • How to define a small business
    • Equity among small businesses using different amounts of space
    • Significant addition to administration
  • Implement a basic business tax credit
    • Problem of focusing the assistance
fair share recommendations
Fair Share: Recommendations
  • The tax share paid by non-residential property (Classes 5 and 6) should be reduced from its current level (55%) to 48%
  • The City should reduce the tax share borne by business by one percentage per year until the 48% is reached
  • Once the 48% is achieved, keep the share unchanged for five years unless the differential between Vancouver and neighbouring municipalities widens considerably and/or the balance of business investment shifts substantially
why these recommendations
Why these recommendations?
  • Judgment call about fair tax share: could not identify single indicator of appropriate tax share
  • Major considerations:
    • Benefits received
    • Impact on business investment
    • Accountability
volatility a within class issue
Volatility: A Within-Class Issue
  • What is a “hot spot”?
  • Does the evidence support the view that hot areas exist and persist?
  • Does the evidence support the view hot properties exist and persist?
  • Are the particular characteristics associated with hot properties?
  • Do hot properties impact landlords and tenants differently?
what is a hot spot
What is a “hot spot”?
  • Defined hot property as any property facing an unanticipated and significant year-over-year increases in property taxes.
  • Unanticipated is designed to exclude increases in taxes associated with new construction or rezoning
  • Defined significant as any increase greater than 10% above the class average increase
does the evidence support the view that hot areas exist and persist
Does the evidence support the view that hot areas exist and persist?
  • A few neighbourhoods experienced high relative increases of over 5%
  • Incidence of hot spots much higher for non-residential than residential properties
    • 3.6% of residential properties
    • 8.6% of non-residential properties
  • A few neighbourhoods experienced prolonged high relative rates (Downtown South and False Creek North)
does the evidence support the view hot properties exist and persist
Does the evidence support the view hot properties exist and persist?
  • Less than 2% of residential hot properties and 9% of non-residential properties were hot more than three years
are there particular characteristics associated with hot properties
Are there particular characteristics associated with hot properties?
  • We analyzed the impact of
    • Land-to-improvement ratio
    • Age of the improvements
    • Whether strata or non-strata
    • Value of the property
  • We found the incidence of hot properties is influenced by land-to improvement ratio
do hot properties impact landlords and tenants differently
Do hot properties impact landlords and tenants differently?
  • Need to understand who ultimately pays the property tax
  • When negotiating leases, landlords and tenants make forecasts that are incorporated in the overall expected occupancy costs
  • Unanticipated changes during the lease term create budgeting problems
volatility policy options
Volatility: Policy Options
  • Mainly analyzed three broad mechanisms:
    • Averaging, both 3-year and 5-year
    • Capping
    • Phase-in
averaging capping and phase in
Averaging, Capping and Phase-in
  • These three options have some common features:
    • Offer temporary relief
    • Can be applied to assessment of land, improvements, total or taxes
    • Could be limited to certain properties
    • To varying degree, weaken the link between current assessments and taxes
    • Have unintended consequences within the class
land averaging
Land Averaging
  • Both 3-year and 5-year land averaging reduce the incidence of hot properties, but do not eliminate the problem
  • Remaining hot properties still have very high relative year-over-year changes
  • Concern that averaging is not focused on hot properties
capping
Capping
  • Explored a capping mechanism applied only to the land component of hot properties
  • Capping reduced incidence of hot properties more than averaging, and reduced the relative year-over-year change for the remaining hot properties, but
  • A few capped properties took a very long time to come back to market levels (a common concern with capping mechanisms)
phase in
Phase-in
  • The city currently has available a phase-in mechanism
  • Analyzed a somewhat different version of phase-in focused:
    • only on hot properties (increases in value greater than the average for the class by more than 10%)
    • Phase in 80% of the increase
  • Phase-in reduced the number of hot properties and reduced the relative year-over-year increases for the remaining hot properties
volatility recommendations
Volatility: Recommendations
  • The City should adopt a restricted phase-in mechanism that would replace the three-year land averaging for classes 1, 5 and 6. The phase-in mechanism would apply only to properties that would otherwise experience a tax increase that is 10% or more above the class average, exclusive of new construction
  • The City should maintain the present 3 year land averaging for Classes 1, 5 and 6 until such time as a phase-in mechanism is developed
why these recommendations1
Why these recommendations?
  • 3-year land averaging does not target those with highest increases
  • 5-year land averaging is only a little better than 3-year land averaging
  • Capping takes too long to get to full market value
  • Phase-in is more targeted than averaging and takes less time to get to full market value than capping
response to the recommendations
Response to the Recommendations
  • Staff is neutral on tax share issue but accepts analysis
  • Staff does not support phase-in mechanism on the grounds that it would be too complex and too difficult to explain to taxpayers
  • Recommended council seek provincial approval for 5-year averaging but did not recommend adoption at this time
conclusions re theory and practice of property tax relief
Conclusions re: Theory and Practice of Property Tax Relief
  • Need to weigh the theoretical arguments opposed to tax relief against the reality of:
    • large, unanticipated increases that are politically unacceptable and
    • in many cases, multi-year net leases
  • Need to recognize that:
    • Annual market value system already in place
    • Existing property relief measures already distort the tax (e.g. land averaging)
conclusions re theory and practice of property tax relief1
Conclusions re: Theory and Practice of Property Tax Relief
  • In the end, try to devise property tax relief measures that distort the property tax system as little as possible and for as short a time as possible
ad