presentation to canadian property tax association toronto, ontario enid slack
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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 - PowerPoint PPT PresentationTRANSCRIPT
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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