Policy & Positions Manual
Provincial Issues - Community, Sport and Cultural Development
Creating Equity In The Property Tax System Of British Columbia (2010)
The Chamber has expressed continued concern regarding the propensity of certain local governments to subsidize residential taxpayers by unfairly burdening business with property tax levies far in excess of the services they utilize. While we appreciate the challenges faced by local government with limited resources, raising those revenues by increasing costs to business is an unsustainable solution. The Chamber appreciates the efforts of a few municipalities, such as Powell River, Vancouver and Prince George, in addressing the concerns of business, however, we believe a more direct approach needs to be initiated by the provincial government in order to deal with the issue on a larger scale.
The tendency of local governments to apply an excessive tax burden to non-residential taxpayers has been well documented by experts in the field of municipal governance and taxation. Reports from the BC Chamber, MMK Consulting Inc., the Fraser Institute, the Canadian Federation of Independent Business, and Professor Robert Bish among others have clearly demonstrated that the level of property tax levied on the business class compared with the residential class is far beyond the level required to cover the cost of providing the services they consume.
For example, the consumption study by MMK Consulting in 2007 showed that non-residential property owners pay tax far in excess of the services they utilize. Vancouver non-residential property owners paid 57.4% of the property tax burden while consuming only 24% of municipal services. Interpreted, this means that residential property owners pay 56 cents for each dollar’s worth of service they consume, while non-residents pay $2.42 for each dollar consumed. This is a 4.3:1 consumption payment ratio.
Industrial properties have an even greater burden with the business to residential ratio going as high as 20:1. Recently Catalyst Paper Corporation took the municipality of North Cowichan to court in an attempt to prove that the level of municipal taxation was unreasonable, using their rate of consumption as a basis for the argument. In October 2009, the Supreme Court of BC ruled on the case, finding that although the municipality was acting within its legislative discretion in setting their tax rates at such a high level, Judge Voith recognized that the discrepancy between the consumption of the municipal services and the Class 4 tax rates is a structural issue that has widely been recognized as a problem. However, he further noted that the pace at which, and the extent to which, the reduction in the Class 4 rate is to take place is within the discretion of individual municipalities.
The finding of Judge Voith in the Catalyst v North Cowichan case resonates with the comments made by Professor Robert Bish that municipalities, “have used their discretion to impose higher and higher taxes on business properties relative to residential,” and further, “that the current taxing practices have not been successful in achieving the desirable balance of a favourable business climate along with municipal discretion.” It is a situation he notes, “may contribute to a potential disaster for (a) community.”
Prior to 1984, the British Columbian Provincial Government regulated ratios between residential and other property classes. This restricted local government’s ability to set arbitrary rates and restricted the difference between classes to between 2.6 and 3.5, depending on the class. The limits placed by the province did have the effect of restricting local governments in their decision and therefore provided at least a degree of fairness and stability.
In 1984, the Provincial Government granted local government full autonomy in the setting of rates between the various classes. Property classes were then expanded to the current nine classes we now have in British Columbia, which allowed municipalities have the maximum flexibility to allocate tax collection to distinct property types. In addition to the 1984 change, the Community Charter introduced in 2003, provided local governments further control over the methods of tax collection and the services that they may choose to fund.
This autonomy, combined with additional service pressures, has resulted in municipal governments becoming ever more reliant on property tax. Indeed, Canada now has one of the highest levels of dependence on property tax in the industrialized world. In terms of total tax burden, property tax represents 9.8% of all taxes paid in Canada and represents approximately 46% of total municipal revenues in BC.
It is important to note that the term property tax actually refers to a range of components levied on behalf of a range of different authorities; these are municipal, school, regional districts, hospitals, transportation authority, and others. It should also be noted that while these are all levied at the local level, only municipal components are fully under the control of the local governments, all others are set by the Provincial Government. The focus of this resolution is on the municipal portion.
Municipal tax is calculated on the basis of the market value, or "assessment", of land, improvements or both (i.e. house, barn, garage, yard) and the municipal "tax rate". Most local governments calculate taxes using the variable tax rate system where tax rates are based on a dollar figure per $1,000 dollars of assessed property value (i.e. $1.02/$1,000). Using this example, the property taxes payable on a $300,000 property would be $306.
Adding to this complexity is the structure of the tax itself. BC currently has nine distinct recognized classes of property.
The autonomy provided to local government, the variety of recipients of property tax, the setting of the mill rate, and the number of classes of property all lend themselves to a complex system that does not encourage openness and does not even get close to a level of transparency that is critical to prudent spending, community involvement and most importantly, good decision making.
Addressing the Problem
The government of BC has identified that there are significant problems with the property tax system. They expressed concern that tax reductions at the provincial level were being negated by tax increases at the municipal level. The result being a failure to make BC business as competitive as it can be.
In the 2009 Throne Speech it was stated that, “more needs to be done to ensure that provincial tax relief is not negated by local property tax hikes,” and that Government committed to develop new legislation that would protect provincial tax reductions. The following Budget Speech stated that, “In collaboration with the Union of BC Municipalities and its members, the government also plans to restructure current provincial/local funding arrangements to provide local governments with increased financial certainty in uncertain economic times.”
As a result of the Catalyst vs. North Cowichan ruling in the fall of 2009, the provincial government is concentrating its focus on municipal tax reform to class four properties (major industry). While this is the most pressing area of concern and one that profoundly impacts the competitiveness of our province for investment in major industry, the Chamber maintains that the challenge for class four needs to be addresses within the broader context of all classes. Taken in isolation, there is the danger that changes made to improve the tax fairness for class four will result in a potential tax shift to other business classes while maintaining the protection of tax levels for class one.
However, it must be recognized that both the immediate challenges of sustainable tax levels for class four, and the need to maintain equity to other classes, are essentially a short term approach to the much more complex problem of a tax system that is itself perhaps unsustainable. While necessary, a short term solution should be seen as a first step in a more comprehensive review of municipal taxation with the vision of developing a system that provides a fair tax distribution across all property classes in a sustainable system.
It is also important to recognize that while the tax system is unwieldy at best, with no similarly complex system anywhere in Canada, the environment in which municipalities must operate has itself become increasingly challenging. With the downloading of services to municipal governments and the infrastructure funding gap from senior levels of government, municipalities are pressed to provide citizen service and infrastructure maintenance and development with limited funding stream capacities. According to the Federation of Canadian Municipalities, only 8 cents of each tax dollar paid in Canada goes to municipalities. The rest goes to the federal and provincial governments.
Yet within the current system, the Chamber has welcomed the commitment of the provincial government to address issues of concern regarding municipal taxation. Particular areas to be addressed are:
Concern for Unsustainable Industrial Tax Rates
While the Chamber is concerned about the tax fairness for all non-residential property classes, we are particularly concerned about the exorbitant tax rates on industry (class four) in municipalities where they are set at an unsustainable level. The method of property taxation has no connection with the business revenue and the ability of the company to pay. This is particularly troublesome in industrial properties, where, as previously stated, ratios can be as high as 20:1. With such high tax rates, a shift in economic conditions can lead to industrial closure. In municipalities that are largely supported by one industry, this can be disastrous.
The Provincial Government has demonstrated its willingness to assist in addressing the issues of the industrial tax rate for eligible port properties, with the introduction of the Ports Property Tax Act introduced in 2004. This act set rate caps for designated port properties from its time of introduction until 2008. The Provincial Government paid cash compensation to the affected municipalities during that period, with the objective of the municipalities introducing phased tax adjustments to other classes, thereby relieving the government of compensatory payments at the end of 2008. Unfortunately, without a more structured program of tax changes, the Ports Property Tax Act and compensatory payment from the provincial government have had to be extended until 2018.
While the chamber was pleased with the relief the Ports Property Tax Act gave to those industrial businesses, it is not advisable that the provincial government take on additional compensation payments to municipalities as a part of property tax restructuring in the future.
Fair Tax Levels for all Business Classes
The virtually unchecked ability of local government to tax non-residential classes with no recourse or relationship to cost of service has proven to lead to those classes being penalized with unfair taxation compared to the voting residential taxpayer. Though the Catalyst v North Cowichan finding has shown that while municipalities have full discretion in taxation, and that consumption rates are not the only issue considered, it did highlight that the current weighing of issues in taxation decision is producing unbalanced results.
It is desirable for municipalities to set tax rates and be directly accountable to the electorate for doing so, but it is also unlikely that municipal government will on their own eliminate the current tax inequalities for non-residential tax payers. Thus some form of provincial regulation is required to achieve fairness. For example, tax reforms were introduced in Ontario bringing “fairness ratios” to ensure that large tax rate discrepancies between classes could not occur. Alternatively, the Government may consider reducing the number of business classes to one class, providing municipalities with greater pause to the high taxes currently levied on industrial classes. These are but two suggestions for reform; more options need to be explored. Nonetheless, a mechanism needs to be established to ensure a more fair method of determining tax, including the consideration of services consumed and fairness between classes of tax payers.
The complexity of municipal taxation makes it very difficult for taxpayers to compare one municipality to another. In addition, local governments are able to obfuscate the real amount of total taxation by shifting certain items to different taxing or fee schemes. The Chamber supports a clearer annual reporting system to taxpayers, outlining the overall cost to each category of taxpayer including property taxes, fee for service, consumption taxes, and parcel taxes as well as fees collected for other bodies including school, regional districts, hospitals, transportation authorities, and others. The reports should be consistently formatted to allow for comparisons between municipalities.
The Chamber also supports re-instating a Municipal Auditor General to do regular comprehensive value for money audits of municipal spending. The Chamber believes this concept is applicable to all municipalities and warrants the development of a Provincial Municipal Auditor General to ensure an independent review of municipal programs, spending, community plans and services.
While all municipalities in BC are required to have a financial audit and report this information publicly, the Chamber does not believe that this goes far enough in introducing a level of accountability and scrutiny to municipal decision making. The Chamber supports the notion of a Municipal Auditor General to do regular comprehensive value for money audits of municipal spending. The Chamber believes this concept is applicable to all municipalities and warrants the development of a Provincial Municipal Auditor General to ensure an independent review of municipal programs, spending, and services. Such an office would go a long way towards developing a culture of sound fiscal decision making while promoting balance between the level of taxes paid and the services consumed.
THE CHAMBER RECOMMENDS:
That the Provincial Government:
- embark upon a larger examination of the sustainability of our method of municipal funding with the goal of developing a more sustainable structure related to the tax-payers ability to pay;
- provide control and oversight on the level of property taxation levied to all taxpayer groups to ensure fair and equitable taxation practices;
- while introducing immediate relief to class four tax levels, provide equity to class four, six and one;
- introduce a structured, clear and consistent annual reporting system to taxpayers that outlines the total cost of municipal taxes, fees and levies as well as the cost of taxes collected for other authorities by municipal governments;
- establish a mechanism, such as a Provincial Municipal Auditor General, that allows for the continual review of local government taxation to ensure accountability and our continued competitiveness; and
- introduce changes with definitive timetables that provide certainty for taxpayers while allowing municipalities time to adjust and to ensure a smooth transition for the taxpayers.