Introduction - Report FAFS07-004 -Tax Policy
Page 1
TO:Members of the Budget Committee
FROM:Brian Horton, Director of Finance and Administrative Services
MEETING DATE:April 26, 2007
SUBJECT:Report FAFS07-004
2007 tAX POLICIES
PURPOSE
To provide a detailed historical review of assessment and taxation legislated changes since 1998 and to propose a variety of tax policies to be implemented in 2007 and future years.
RECOMMENDATIONS
That Council approve the recommendations outlined in report FAFS07-004 dated April 26, 2007, of the Director of Finance and Administrative Servicesas follows:
a) That the 2007 tax ratios, as approved in the 2007 budget on February 26, 2007, and set out as follows be adopted:
Class / 2007 Tax RatiosResidential / 1.0000
Multi-residential / 2.0440
Commercial / 1.8912
Industrial / 2.6300
Pipelines / 1.2706
Farm Property / 0.2500
b)i) That starting in 2008, one-half of the revenue generated from the real assessment growth in the multi-residential, commercial and industrial classes be given back to that particular class as a tax ratio reduction with a goal that the tax ratios for the multi-residential, commercial and industrial classes be reduced until they equal 1.50.
ii) That this process be reviewed each year and endorsed by Council as part of the budget process.
c) That a system of graduated tax rates within the commercial and industrial classes not be implemented.
d)That the capping policy for 2007 for the multi-residential, commercial and industrial classes be based on a maximum increase threshold at the greater of:
i) 10% of the previous year’s annualized capped taxes and
ii) 5% of the previous year’s annualized CVA tax for the eligible property
iii) Imposing a threshold adjustment for capped properties where the required billing adjustment (credits only) is within $250 of the properties’ CVA tax; in this instance, no capping credit would be applied, and affected property would be billed at their full CVA tax level.
e) That a 90% threshold on the tax level for eligible new construction for 2007 be established.
f) That the tax reductions for mandated subclasses of vacant units remain at 30% for the commercial class and 35% for the industrial class.
g) That the 2007 tax rate for farmland awaiting development subclasses be established at 25% of the residential rate.
h)That a by-law be passed at the April 30, 2007 Council meeting authorizing the 2007 tax policies as set out in report FAFS07-004.
BUDGET AND FINANCIAL IMPLICATIONS
Approving the recommendations will not alter the net tax levy requirements as reflected in the 2007 budget approved February 26, 2007. Recommendation (b) will however, beginning in 2008, increase the tax burden paid by the residential class and lower the tax burden for the multi-residential, commercial and industrial classes
BACKGROUND
INTRODUCTION
Council is required on an annual basis to make certain tax policy decisions that will affect the apportionment of the tax burden both within and between tax classes. The statutory deadline for passing a tax policy by-law each year is April 30th. Since 1999, the tax policy discussion and recommendations have been part of the City’s annual Operating Budget discussions.
The 2007 budget process was presented to the new Council in early January. It was decided that the tax policy discussion should be based on a separate report and allow Council to focus on establishing a net tax levy requirement as Phase One of the 2007 budget process.
This report can be considered Phase Two of the 2007 budget process and provides a summary for Council and the community on the various legislated changes that have occurred since the assessment / tax reforms were introduced in 1998. It also provides an analysis for Council to make some current tax policy decisions affecting the 2007 and future tax years.
The report is presented in five separate parts as follows:
TopicPage Number
Part 1Property Assessment & Taxation – Pre 1998 6
Part 21998 Tax Reforms and Council’s past decisions 19
a) Tax Ratios
b) Optional Tax Classes
c) Graduated Tax Rates
d) Capping
Part 3Analysis of Third Party Studies (CFIB report/BMA Study) 37
Part 4Education Tax Rates 48
Part 5Current Tax Policy Tools & Recommendations 55
Parts 1 through 4 provide historical and current and current information all provided to give Council some historical perspective as it evaluates the specific recommendations outlined in Part 5.
Recommendation (b) re tax ratios is the key tax policy decision Council is being asked to approve in this report that is a change from previous years policy. An analysis of the pros and cons of that recommendation is in Part 5 of the report.
The recommendation establishes a new tax policy with respect to setting tax ratios starting in 2008. It sets a long-term goal of reducing the tax ratios for the multi-residential, commercial and industrial from their current levels to 1.50 by giving them back the equivalent value of one-half of the revenue generated from any real growth in their class as a tax ratio reduction. Giving the benefit back to the business class taxpayers means it cannot be shared with the other classes such as residential class and will be of concern to some.
Recommendations (c) through (g) essentially confirm existing policies.
This report has been prepared with the help of Municipal Tax Equity (MTE) Consultants Inc., the City’s tax consultants, who provided some of the analysis and have reviewed this final report. The report also uses some the “BMA Municipal Study – 2006” results prepared by BMA Management Consulting Inc.
Staff will be providing a presentation on April 26th to help Council work through the report and tax policy decisions required.
Part 1 - Report FAFS07-004 -Tax Policy
Property Assessment and Taxation – Pre 1998
Page 1
Part 1 - Property Assessment and Taxation – pre 1998
Part 1of this report sets out the history of the Property Tax Assessment and Taxation System as it existed prior to 1998. It provides some key background information and explains where some of the inequities in the new tax system came from.
Assessment
Property in Ontario has been assessed for municipal taxation purposes for more than 200 years. Responsibility for assessment originally came under the jurisdiction of the Province of Upper Canada but was transferred to the municipalities in 1849.
Part 1 - Report FAFS07-004 -Tax Policy
Property Assessment and Taxation – Pre 1998
Page 1
As the municipalities developed their own systems for property evaluation, discrepancies arose between municipalities and between different areas within the same municipalities. It soon became apparent that similar properties could receive widely divergent assessments.
In 1967, an Ontario Committee on Taxation report highlighted the many inequities of the assessment system. In response, the government assumed responsibility for property assessment in 1970 to standardize assessment across all Ontario municipalities.
The government's goal was to provide the people of Ontario, through their municipalities, with uniform assessment policies and practices, and with a consistently high level of service. As part of the process all municipalities were to be included under the same assessment system, called "market-value assessment."
Market value assessment was offered to municipal governments across Ontario to be initiated on a voluntary basis. Over 91 percent of Ontario municipalities updated their assessments by making the transition to market value assessment with manyundergoing regularly scheduled re-assessments.
Many inequities continued to exist, however, between municipalities. Property assessments were calculated differently in some regions of the province. There were municipalities in which the assessed value of a property was based on an estimation of its market value, while in others, such as the City of Peterborough, it was based on a percentage of the actual market value as of a certain year. For Peterborough, the re-assessment year was 1975. Still, in other municipalities, assessed value was based on an approximation of what the value of the property was in the year the municipality was last assessed - sometimes as long as 50 years ago.
This patchwork of assessment resulted in people with similar properties, sometimes in the same municipality, paying different amounts of property tax.
Discount Factors
The City of Peterborough’s assessed values used for the taxation years 1997 and earlier were based on 1975 market values weighted by “discount factors”. The factors applied to five classes of property as set out below:
Chart P1-1
Discount factors by class
Class / FactorMulti-residential / 18.580%
Residential / 11.653%
Commercial / 16.469%
Industrial / 20.808%
Farm / 10.948%
For example, if a multi-residential building had a 1975 market value of $100,000, the 1997 assessed value appearing on the assessment notice would be $18,580 ($100,000 x 18.580%).
The factor method of assessment based on 1975 market value was first introduced for the 1980 taxation year as part of a re-assessment which was undertaken. The discounting was an option allowed under the provisions of the Assessment Act dealing with re-assessments, which ensured the total assessment within each of the five classes did not change, and that the total tax burden of each class did not change. The factors ensured properties of similar value in each one of the five classes bore similar tax burdens. The higher the discount factor, the greater the assessed value turns out to be.
Actual assessment data from 1975 is not available, but the 11.653% discount factor would have been calculated in a manner similar to the following example which uses hypothetical before and after assessed figures:
A) Total assessed value in residential class before re-assessment 10,000,000
B) Total market value of properties in residential class as of 1975 85,814,812
C) Discount Factor (A /B) 11.653%
D) Total assessment in class after applying discount factor 10,000,000
(B X C)
The effect of this approach was that properties within the class could experience increases and decreases related to re-assessment but the total tax levied on the entire class did not change.
In cases of new construction, such as a new home built in 1997, the assessors would have to estimate the market value of the home in 1997 by comparing the new home to similar sized homes that existed in 1975 and assign similar assessed values. Similarly, for new industrial or commercial properties built in 1997, assessors would rely on 1975 costing methods to come up with 1975 values for the buildings and use the 1975 assessed value for the land.
Over time, the method became more and more difficult to defend and to explain to property owners. Inequitable assessed values for similar properties within a class became evident.
Average tax payer house assessed at $5,000 had 1975 market value of $42,907
For many years, prior to 1997, it was assumed the average house in the City of Peterborough had been assessed at $5,000. The $5,000 assessed value represented 11.653% of the 1975 market value of the property which meant the market value would have been $42,907 back in 1975. Anyone who knew the assessed value of their home could calculate the 1975 market value by dividing the assessed value by the .11653% factor.
Discounting lead to inequities in assessed values of similar valued properties in different classes
In theory, property taxation was based on a persons’ wealth which is measured by the value of the property owned. The higher the value of the property, the higher the level of taxation should be on the property. Discounting market value, however, lead to significantly different tax burdens for properties within different property classes - even though properties may have the same market value as of 1975.
This is highlighted on Chart P1-2 which shows the effect discount factors had on properties in the five classes with the same $100,000 market value from 1975. As can been seen, assessed values ranged from $10,948 for properties in the farm class to $20,808 for properties in the industrial class even though all properties had the same $100,000 market value.
Chart P1-2
Assessed Value for $100,000 Market Value
Business Occupancy Tax (BOT)
Since 1904, business tax had been levied on Commercial and Industrial properties based on assessment determined by multiplying applicable property assessment by a “business occupancy percentage” that ranged from 75% to 25% depending on the nature of the business. At the time of its introduction, the BOT percentage was representative of the enterprise’s ability to pay.
Chart P1-3 identifies the major BOT rates that applied under the pre 1998 assessment system. As can be seen, the percentages were very arbitrary and were difficult to justify when questioned by business operators. The apparent unfairness of the BOT was one of the major reasons cited by the province for the need for tax reform.
Chart P1-3
Business occupancy tax rates
1 / A distiller, a wholesale merchant, brewer, insurance company, loan trust corporation, land company, loaning land corporation, bank, banker, credit union, caisse populaire or any other financial business, the business of selling or distributing goods, wares and merchandise through a chain of more than five retail stores or shops in Ontario, directly or indirectly owned, controlled or operated by the seller or distributor / 75%2 / A manufacturer, including the business of a flour miller, maltster, a concentrator or smelter of ore or metals, and the business of obtaining minerals from the ground / 60%
3 / A department store or the business of selling goods or services through a chain of more than five stores, shops or outlets in Ontario, except a hotel or motel / 50%
4 / A barrister, solicitor, notary public, conveyancer, physician, surgeon, optometrist, ophthalmic dispenser, physiotherapist, podiatrist, dentist or veterinarian, or a civil, mining, consulting, mechanical or electrical engineer, surveyor, contractor, builder, advertising agent, private investigator, employment agent, accountant, assignee, auditor, osteopath, chiropractor, massagist, architect or any person carrying on business as an agent, a radio or television broadcasting station, a newspaper, a photographer, lithographer, printer or publisher / 50%
5 / A telegraph or telephone company, or a transportation system, or the transmission of water or of steam, heat or electricity for the purposes of light, heat or power, / 30%
6 / Car parking / 25%
7 / All other not specifically mentioned / 30%
Chart P1-4 shows the impact of using different business occupancy percentages to five commercial properties with the same $10,000 commercial assessment. The business assessment ranges from a low of $2,500 for the parking lot to $7,500 for the bank.
P1-4
Business Occupancy Rates and Taxable Assessment
Average Business Occupancy Percentage was 48%
For the five properties outlined in Chart P1-4, the average business occupancy percentage was 48% calculated by dividing the total business assessment by the total commercial assessment. (24,000 / 50,000 = 48%).
A similar calculation could be performed using total City-wide assessment figures for 1997 as shown in Chart P1-5.
Chart P1-5
Average Business Occupancy Tax Percentage
Commercial Assm’t / Business Assm’t / Avg BOT %$44.8 M / $19.2 M / 42.9% (19.2/44.8)
The resulting average 43% BOT figure is important as it became somewhat of a benchmark figure under the new system. The BOT was eliminated and generally, the commercial and industrial property owners became responsible for the former business tax. But this calculation was not done on a property by property basis, but rather across the municipality as a whole. Across the corporation, commercial and industrial owners might expect to have seen a 43% increase in their property tax, but individual results varied depending on the mix of business percentages that applied to their properties.
Mill rates
Once assessed values were determined, municipalities calculated mill rates to apply to assessed values to raise their net tax requirements.
The term “mill rate” referred to the amount of tax dollars a municipality would collect for every $1,000 of assessment. There was a residential mill rate that applied to residential assessment and a commercial mill rate that applied to commercial, industrial, and business assessment. By legislation, residential mill rates were discounted so they equalled 85% of the commercial, industrial and business mill rates.
To calculate mill rates, the net tax levy requirement and assessment totals must be determined. Chart P1-6 sets out the calculation that was used to calculate the general municipal mill rates for the draft 1998 budget before the reforms took place.
Chart P1-6
1998 General Mill Rate Calculation
The 15% differential between the residential and commercial rate is dictated by legislation and is the same for all municipalities.
Average household 1997 tax levy example
Chart P1-7 shows the 1997 municipal and education taxes that would have been levied on an average house assessed at $5,000 and highlights some of the concepts already discussed. To summarize, the market value of the property in 1975 was $42,907. The discount factor applied to the 1975 market value was 11.653% to calculate the $5,000 assessed value for 1997 taxation purposes. The municipal mill rate shown in the chart includes the general and garbage mill rates for 1997 calculated in a manner similar to the method set out in Chart P1-6. The education mill rate was also calculated in the same manner as the municipal rates only the education board’s 1997 requisitions was substituted for the net municipal levy required and segregate assessment applicable to each board.
P1-7
Average Residential Example
As can be seen, the 1997 municipal and education mill rates are very close to being equal which means the average taxpayer’s total 1997 tax bill was split essentially 50% for municipal and 50% for education purposes.
Commercial property 1997 tax levy example
The commercial example is more complex as set out in Chart P1-8 which shows property and business tax levies for a commercial property with 5 tenants. The market value of this property back in 1975 is assumed to be $115,400. The discount factor for commercial property is 16.469% and results in a $19,000 assessed value for 1997 tax purposes. The mill rates have been calculated in a manner similar to Chart P1-6 calculations.
Chart P1-8