Theory and Practice of Property Tax Relief: Recommendations of the Vancouver Property Tax Policy Review CommissionPresentation to Canadian Property Tax Association

Toronto, Ontario

Enid SlackInstitute on Municipal Finance and GovernanceMunk Centre for International StudiesUniversity of TorontoFebruary 11, 2008

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

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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

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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

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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

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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

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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

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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

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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?

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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?

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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

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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)

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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

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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

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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

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Volatility: Policy Options

Mainly analyzed three broad mechanisms:

Averaging, both 3-year and 5-year

Capping

Phase-in

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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

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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

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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)

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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

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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

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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

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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

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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)

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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

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