Property Tax Base Transfer Subcommitte October 30-31, 2002

1. Property Tax Base Transfer Subcommitte October 30-31, 2002

2. Outline • Taking stock: Are we on the right track?

3. Potential Property Tax Bases • Three candidates: 1) Income (or other similar measure of “underlying” fiscal capacity) 2) Simple market value 3) Stratified market value

4. Simple Market Value • At first glance, seems like the logical base for property taxes • Market value is taxed by municipalities and provinces (statutory base); therefore it seems like it should be used as the equalization base

5. Simple Market Value • Two main problems: 1) Does not take into account inter- provincial differences in property prices 2) Does not take into account rate pattern

6. Inter-Provincial Property Price Differences • This argument was emphasized earlier on in the renewal, but less so lately • However, still as relevant as ever

7. Inter-Provincial Property Price Differences • If argument is correct, then simple market value is not an appropriate base for property taxes • Therefore needs to be dealt with

8. Inter-Provincial Property Price Differences • Any nominal base will lead to inappropriate equalization when there are relevant price differences among • But price differences minimal for most things other than property

9. Bird and Slack, Canadian Tax Journal, 1990, p. 926: “The RTS [must] take into account the effect of differences in prices… If prices are higher [in one province], it is necessary to earn a higher income to attain a comparable standard of living, thus artificially increasing the tax base. Higher prices lead to larger bases, when bases are expressed in [nominal] dollar figures.…

10. … To obtain a comparable level of taxation, such bases should be deflated by the price differential – that is, by the ratio of the cost of living in the province relative to the cost of living in the rest of Canada. If this adjustment is not made, the ‘capacity’ estimates for all ‘high cost’ regions will be too high.” (Equalization: The RTS Revisited)

11. Inter-Provincial Property Price Differences • Consider the following hypothetical example: • prices double in non-receiving provinces • as a result all nominal equalization bases are inflated • equalization payments to receiving provinces increase

12. Property Price Differences • Nothing real changes in example • Yet equalization payments change because nominal equalization bases are “artificially” inflated • Shows that price differences distort nominal value measures of relative fiscal capacity

13. Property Price Differences • A “real” (as opposed to nominal) market value base might solve this problem • But this is not the only problem with simple market value base approach

15. Rate Structure Not Reflected in Simple Market Value • There is no simple one-to-one relationship between property value and property taxes • This point was demonstrated as far back as 1991 in B.C. paper and has been demonstrated repeatedly by federal government using various data sets

17. Rate Structure Not Reflected in Simple Market Value • Revenue sources for which the tax rate varies within provinces require a complex equalization base • Two examples of revenues sources for which each dollar of statutory rate is not taxed at same rate: personal income taxes; corporate income taxes

18. Rate Structure Not Reflected in Simple Market Value • Other examples: oil, mining, sales tax, capital tax, etc. • Complex bases are required for all of these • And same is true for property tax

23. Rate Structure Not Reflected in Simple Market Value • Simple market value not used as measure of fiscal capacity in other federations • For example, Australia uses regression approach that tries to achieve the same basic purpose as stratified base approach

24. Rate Structure Not Reflected in Simple Market Value • Counter-argument: • correlation between property tax rates and property values “merely” a statistical phenomenon • tax rates not a product of provincial policy decisions or legislation

25. Rate Structure Not Reflected in Simple Market Value • Reply: • effective income tax rates are also “merely” statistical • whether a product of provincial or municipal decisions not relevant • whether the product of deliberate policy choices also not relevant

26. Stratified Base • Some issues: • Inclusions/exclusions • How many strata and what boundaries? • Can data be produced on a yearly basis? (Proxy?) • Stratified base is one specific approach within a larger strategy

27. Inclusions / Exclusions • What property should be included and what property excluded from the base? • Assessment data coverage varies from province • Property subject to GIL presents a special problem

28. Strata: How Many and What Boundaries? • Is this a more significant issue for property tax than for some other bases? • There must be a logical basis on which an optimum set of strata can be chosen. But what is it? • Possible solution: HMIP approach

29. Can Data Be Produced On Yearly Basis? • Is it logistically possible to collect and process all the data required for a stratified base on a yearly basis? • Would Statistics Canada be prepared to take on the task? • Alternatives: proxy base or fixed parameters

30. Stratified Approach Within Larger Strategy • The stratified approach is one specific approach within a larger strategy