POLICY REPORT
FINANCE

Date: February 28, 2000
Author/Local: G. Merchant/7250

RTS No. 01272

CC File No. 1551

CS&B: March 9, 2000

TO:	Standing Committee on City Services and Budgets
FROM:	General Manager of Corporate Services / Director of Finance
SUBJECT:	2000 Property Tax Options: Three-Year Land Averaging for Property Tax Calculations

RECOMMENDATIONS

A. THAT Council approve the continuation of three-year land value averaging as the 2000 property tax calculation methodology for the residential (Class 1) and business/other (Class 6) properties as discussed in this report, and that the property taxes for all other classes (Classes 2, 4, 5, 8 and 9) be calculated using market assessed values.

B. THAT the Directors of Finance and Legal Services be instructed to submit a by-law to Council, for approval before March 31st of this year, which sets out the particulars of averaging in accordance with the provisions of the Vancouver Charter.

C. THAT Council instruct the Director of Finance to make appropriate arrangements with the BC Assessment Authority for the production of an averaged 2000 taxation roll, at an approximate cost of $20,000; source of funding to be the 2000 Operating Budget.

D. THAT the Director of Finance be authorised to place the required advertisements in a local newspaper notifying the City’s taxpayers of Council’s intent to implement three-year land averaging and showing the effects of averaging on sample properties within the City.

COUNCIL POLICY

Since 1993, Council has used three-year averaged land values in the calculation of residential and business property taxes, as a means of buffering the tax impacts of large year-over-year changes in land values for individual properties.

PURPOSE

The purpose of this report is to review the effects of utilizing three-year land averaging, compared to the traditional taxation system based upon market assessment values in calculating 2000 property taxes for Class 01 and 06. This report recommends three-year land assessment averaging as the preferred 2000 taxation option for these classes.

BACKGROUND

In each year since 1989, Council has chosen to intervene in the market value property taxation system in order to mitigate the impacts of large shifts in taxation within the business and residential property classes which have resulted from uneven assessment changes within each of these classes.

In 1992, the provincial government introduced legislation, which allows for the provision of three-year land value assessment averaging. In each year since 1993, Council has chosen to use averaged land values in the calculation of property taxes for the business (Class 6) and residential (Class 1) classes.

The Property Tax Task Force, a group formed by Council in 1994 to review property tax issues in Vancouver, recommended in their April 1994 report that "...Council support the ongoing use of three-year land value averaging as a tool to buffer the impacts of large assessed value changes."

The table in Appendix A summarises the measures that have been taken by Council in order to smooth large year-over-year tax changes in recent years.

DISCUSSION

1. Rationale and Methodology

The primary reason for utilizing a mechanism such as assessment averaging is to smooth the impact of year-over-year changes in assessed values on property taxation. It is particularly effective where there are large changes in value, since the effect is to phase the impact that these changes can have on property taxes.

The following table compares the method of calculating property taxes under the pure market value and averaged value systems.

Calculation of Property Taxes Based on
Market Value and on Land Value Averaging Method

ASSESSED MARKET VALUE	THREE-YEAR LAND VALUE AVERAGING
Assessed 2000 land value + Assessed 2000 improvement value

= Total 2000 taxable value
x Tax rate (market)
= 2000 general taxes

Under the market value system, taxes are calculated by multiplying the current-year assessed value of a property by the tax rate for the property class. While the same basic principle applies using three year assessment averaging, there are two differences in the calculation of taxes. First, taxable value is determined by averaging the land value component of a property's assessment over the current and two prior years and adding this average to its current year assessed value of the property improvements. Second, since averaging changes the total value in the class on which taxes are levied, an adjusted tax rate is computed for the class and applied to this averaged taxable value to calculate the tax bill.

Averaging is revenue neutral overall and within the class being averaged, that is the same amount of total tax is collected, with or without averaging. However, there are shifts of taxes among properties within the averaged class that are not present if averaging is not utilized. For properties with the largest increases in value, averaging restricts the growth in taxable value from year to year and, therefore, shifts taxes to properties with smaller changes in value. Conversely, for properties with the largest decreases in assessed value, taxablevalues are averaged up and these properties pay more tax than they would if averaging was not utilized. However, over time, as values equalize across a class of properties, each property can be expected to pay the same total amount of tax under an averaging scenario as it would without averaging.

There are a number of criteria that are applied in applying land value averaging to the assessment roll.

… Averaging may be applied to any property class except those valued by special rates (e.g. Class 02, Utilities; Class 09, Farm; and, Class 04, Major Industry). As noted, Council has applied assessment averaging to Class 01 Residential and Class 6 Business & Other.
… Averaging is applicable to the calculation of all tax levies, not just municipal taxes, on a revenue-neutral basis. This means that the tax rate derived from averaging or phasing will produce the same amount of tax revenue as would be produced using unmodified values. Because averaging affects the values used for calculating the taxes of all taxing authorities, a decision to average a class requires Council to approve resolutions adjusting these rates to ensure revenue neutrality.
… Properties that are vacant or have a change of use or new construction are not eligible for averaging in the current year. In the modelling included in this report, these properties have been screened out of the sample.
… Taxpayers must be notified of the impacts of averaging, at least two weeks in advance of the adoption of the enabling by-law. This notice must be published in two consecutive issues of a newspaper, showing the resulting taxes on sample properties within the City.
… Averaging by-laws must be adopted before March 31, 2000.
… A separate Court of Revision is required to be held after the tax billing date to accommodate appeals to the application of the averaging by-law. We would attempt to combine this Court with the fall Court of Revision on local improvements, if one is scheduled, in order to avoid a separate sitting. Council was not required to sit as a Court of Revision to hear averaging appeals from 1993 through 1999, as staff were able to handle all appeals within the administrative process provided for in the Charter.

2. Modelling the Impacts of Averaging

Statistical modelling has been done to compare the impacts on 2000 general taxes using an unmodified system based on market assessed values versus the system based on averaged values. The 2000 estimates are based on the Completed Roll taxable value figures recently produced by the BC Assessment Authority. The Completed Roll values may be modifiedby the Court of Revision process or by Appeal Board decisions but the values essentially reflect the 2000 property valuations for tax billing purposes. The sample used for the tax modelling exercise set out in this report is screened to exclude new construction, reclassified properties, vacant land, and all properties not eligible for land value averaging, which would skew results if included.

The results of this modelling are set out in Appendices C to E for the residential class and Appendices F to H for the business class. Appendices C and F set out graphically the impact of the two taxation scenarios for residential and business properties. Projected tax impacts for each of the assessment neighbourhoods is presented in the appendices following C and F. The tax changes are based upon comparisons with actual 1999 general purposes taxes and assume a 3.0% increase is applied to the overall tax levy. While this may overstate the actual tax increase to be approved by Council, it does reflect the mid-range of the taxation guideline approved for use by staff in finalizing the 2000 Operating Budget.

There are three potential reasons for a change in taxes for an individual residential or business property from 1999 to 2000:

… Change in taxable value from 1999 to 2000 - On the whole, Class 1 taxable values have decreased by 0.8%, and Class 6 values have increased by 0.5% (based on Completed Roll totals). However, underlying these averages, there are many properties with increases and many with decreases in assessed values. The general principle is that where an individual property experiences a change in value at the average for the class, there will be no change in taxes. However, where values change at a rate less than the average, taxes will decline and where the change exceeds the average, taxes will increase.
… Council-Directed Tax Increase - As noted, this analysis assumes a 3.0% tax increase.
… Application of Land Averaging - A property may experience a tax increase due to the application of averaging. This is true for those properties whose assessed values have decreased significantly over either of the past two years. For these properties, the application of averaging in the current year will result in higher taxes than would result from using the current market year taxable value.

Overall, within a class of properties, the expectation is that averaging will increase the percentage of properties in the class that experience a change in taxes closer to average for the class. This impact results from mitigating the most significant tax changes, both increases and decreases. This result is confirmed in the modelling, as follows:

Residential Class

The reduction in overall value in the completed roll for the residential class will result in a minor increase in the basic tax rate for the class, before averaging. However, as values are declining in the class, averaging will result in a larger roll for taxation purposes and a reduction in the tax rate. Those properties with the largest increases will have their values “averaged down” and will pay lower taxes than they would if averaging was not utilized. Those properties with the largest decreases will have their values “averaged up” and will pay higher taxes than would be the case if averaging were not employed. Appendices C, D and E demonstrate this impact.

The graph in Appendix C shows that 53% of residential properties benefit from the application of averaging. That is, property taxes for these properties are lower using averaging than they would otherwise be, using non-averaged values. Most notably however, is that applying the three-year averaging option reduces the number of Class 01 properties with year-over-year tax increases of over 10% by about 16,500 properties.

Business Class

Appendix F shows that there is also an advantage to applying averaging to Class 6 in 2000. Of the overall Class 6 sample, 54% of the properties benefit from the application of averaging, paying lower property tax than they would using non-averaged values. Among those properties with the largest value increases, using averaging as compared to using market values in computing property taxes, there are about 330 fewer properties that have tax increases of over 10%.

3. Application of Averaging in 2000

As noted above, the City has utilized three year averaging for several years, and, irrespective of the impacts in 2000, there exists a strong argument for applying land averaging continually from year to year, on the basis of consistency and equity. Land averaging serves to help ease in large increases in taxes resulting from increased land values. It similarly eases tax decreases that result from decreased land values. Selectively employing land averaging in certain years and not in others could either advantage or disadvantage individual properties, depending on the market circumstances.

The Director of Finance, therefore recommends, that for the 2000 taxation year, three year land value averaging be applied to both Class 01 Residential and Class 06 Business & Other.

CITIZENS’ ADVISORY GROUP ON PROPERTY TAXATION

On February 29^th the Citizens’ Advisory Group will meet to discuss this report, and any recommendation from the group will be forwarded to Council.

PRODUCTION OF AN AVERAGED ROLL

In 1993, the BC Assessment Authority announced that it would supply an averaged or phased assessment roll to any municipal jurisdiction on a user-fee basis, at the cost of $0.12 per folio. The alternative would be for a municipality to duplicate the system design and programming work, using its own resources, to produce a similar product. The City has purchased its averaged roll in each year since 1993.

Recommendation B authorizes the Director of Finance to contract with the Assessment Authority to produce the 2000 averaged assessment roll, should Council approve three-year averaging. The cost of this service for Vancouver would be approximately $20,000. Funding is provided in the 2000 Operating Budget.

CONCLUSION

Land value averaging benefits those properties with the highest tax increases in both the residential and business classes. In the current year, land value averaging benefits slightly over half of the properties in each of the residential and business classes. The Director of Finance therefore recommends that three-year land value averaging be used as the basis for 2000 property taxes.

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APPENDIX A

SUMMARY OF MAJOR PROPERTY TAXATION POLICY DECISIONS SINCE 1989
CITY OF VANCOUVER

APPENDICES B, D, E, G AND H ON FILE IN THE CITY CLERK'S OFFICE

LINKS TO APPENDIX C AND APPENDIX F

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