WHY IT’S TIME TO RETHINK OUR PROPERTY TAX REGIMES

Taxpayer discontent stems from the way they are devised, imposed and collected, say Murtaza Haider and Stephen Moranis.

Owners of more expensive homes pay higher property taxes.

But in return, those paying higher property taxes do not necessarily receive more or better local services than those neighbours who pay less.

That is one of several shortcomings in the way property taxes are devised, imposed and collected that contribute to a frequent sense of discontent among taxpayers.

Property taxes are usually levied to support local services and to create a direct link between where tax revenues are raised and spent. Services like public transit, policing, snow or waste removal and education are often paid for, in full or partially, by residents through property taxes and user fees.

However, unlike user fees, there is not always a direct link between the amount, frequency, and quality of service received by an individual homeowner and the property taxes they pay.

A comparative analysis of property tax regimes by two leading Canadian urban economists, Enid Slack and Richard Bird at the University of Toronto, reveal a variety of norms around the world, including some regions, such as Ireland, where households self-assess their own property values.

Professors Bird and Slack highlight several general shortcomings in property tax regimes. Property taxes, they argue, are “unrelated” to the ability of the homeowner to pay. They are also “unsuitable,” because the revenue raised supports services that have nothing to do with property, per se. Finally, they are “inadequate,” as they fail to fully provide the financial means needed to support local services.

The huge bureaucracies set up to assess property values also impose large costs on taxpayers, and the debate over who should assess land and property values and set tax rates is far from settled.

Property taxes can be contentious especially when owners disagree with the assessed values. An example of an exponential increase in commercial property taxes was observed in Toronto when some downtown retailers saw their property tax bills skyrocket after the Municipal Property Assessment Corporation (MPAC) assessed the retail properties for the highest possible land use, i.e., condominiums. Only when the retailers appeared set for a tax revolt did the MPAC retreat and reassess the values.

Part of the disconnect over property taxes arises because both land and the structure built on it (so-called “improvements”) are taxed together.

Since the same tax rate, known as the Millage rate, applies to all residential properties in a municipality, owners of high-valued dwellings end up paying more.

Some will argue that the owners of expensive homes are likely to be well off and hence can pay higher property taxes. But wealth and income taxes are separate from taxes on real property. If one insists on levying higher taxes on the well-off, we must then call the property tax what it really is: an indirect wealth or income tax.

At the same time, owners of larger or more expensive homes pay proportionately for their consumption of water, hydro, or gas. The size of the dwelling is not a factor in what a household receives in municipal services, but it impacts the cost of utilities they consume.

How would municipal revenue and services change if “property taxes” were split and levied separately on the land itself and the value of the structure built upon it?

In a 2016 paper published by the Centre for the Study of Commercial Activity at Ryerson University, Maurice Yeates, Tony Hernandez, and Matthew Emmons offer a comprehensive review of property tax rates across Canada.

Among their key observations, they describe a potential regime that separates the unimproved capital value (land value) from the improved capital value (structure) and that taxes the unimproved value more aggressively than the improved value. Such a regime would encourage owners to improve the built component when they realize that the bulk of the property tax is based on land value

Separating unimproved land value from the property value and taxing it more aggressively would make urban land more expensive to hold, but cheaper to build upon.

That could help address the housing supply challenges exacerbating housing affordability challenges in urban Canada.

FRANK GUNN / THE CANADIAN PRESS FILES Owners of more expensive homes pay more in their property taxes even though they don’t necessarily receive more or better services than homeowners in less expensive homes under the current system of calculating taxes paid to municipalities.