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

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


1
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

2
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

3
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

4
Vancouvers 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

5
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

6
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

7
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

8
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

9
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?

10
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

11
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

12
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

13
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

14
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

15
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

16
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

17
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

18
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

19
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?

20
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

21
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)

22
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

23
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

24
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

25
Volatility Policy Options
  • Mainly analyzed three broad mechanisms
  • Averaging, both 3-year and 5-year
  • Capping
  • Phase-in

26
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

27
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

28
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)

29
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

30
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

31
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

32
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

33
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)

34
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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