2000 Taxation Options: Taxation of Property Classes 05 and 06

Council has maintained a policy of assessing each class of property a fixed share of the general purposes property tax levy. The allocation of the tax burden has been reviewed annually by Council at the time tax rates are set, with adjustments as deemed appropriate.

Council has supported the blending of tax rates for Class 05 and Class 06, with the timing of this change to be coincident with the introduction of BOD/TSS charges.

The purpose of this report is to provide Council with information related to the taxation of property classes 05 (Light Industrial) and 06 (Commercial & Other) and to offer options for reducing the disparity between the rates at which they are taxed for general purposes.
BACKGROUND

The Assessment Act and Regulations govern the assessment and classification of property in British Columbia. The BC Assessment Authority (BCAA) is charged with the responsibility to both classify and determine assessed values. Classification is primarily based on actual use, while assessed values are determined on the basis of market forces, or in the case of Class 2 (Utilities) and Class 4 (Heavy Industry) on the basis of factors that are more appropriate to the specialized properties that populate the classes.

Municipal Councils are required to use both the classification and assessments provided by the BCAA for taxation purposes. Since 1984, municipalities have had the authority to distinguish among the classes of property in establishing tax rates.

Shortly after receiving variable taxing authority, Council established a policy of fixed taxation burdens among the property classes in which each class is responsible for a fixed share of the property tax levy. With the exception of specific actions approved by Council, these burdens have remained essentially unchanged. The most significant changes have occurred since 1994 as a result of Council decisions to shift approximately four percent of the tax levy from non residential classes to the residential class.

The Light Industrial Class was created in 1988, through a split of the former Industrial Class into heavy and light categories. This division recognized the significant differences among properties in the Industrial class which ranged from small manufacturing concerns to the large sawmills. At the time this division took place, the City’s industrial class levy was also divided and, over the years, the policy of fixed burdens has been applied.

The following table summarizes the assessed values, tax rates, tax levies and burden shares of each of the classes on the Assessment Roll for 1999.

Class		Assessed Value	Tax Rate	Tax Levy	% Share
Class 1	Residential	$51,144,758,018	2.88336	$155,022,140	42.3
Class 2	Utilities	189,205,323	30.82717	5,832,665	1.6
Class 4	Heavy Industry	153,964,600	30.72090	4,729,931	1.3
Class 05	Light Industry	111,724,800	28.80943	3,218,728	0.9
Class 06	Business	13,246,016,096	14.89519	197,528,194	53.8
Class 8	Seasonal	8,375,100	3.03104	264,837	<0.1
Class 9	Farm	75,800	3.03104	230	<0.1
		$64,933,119,737		$366,596,367

Details of the tax rates and tax levies for all property classes and all taxing authorities is attached as Apppendix A.

Since 1993, Council has averaged the land values in classes 01 and 06 for the purposes of developing tax rates. The initiative for this action was the volatility of the assessed values in these classes from year to year. Land value averaging tends to level out the impact of these changes on taxes from year to year, although over a complete assessment cycle, each property would pay the same taxes as if it had not been averaged.

In 1997, a proposal was put forward by the Citizens’ Advisory Group on Property Taxation (CAGPT) to end the differential between the tax rates in Class 05 and Class 06. In effect, the group recommended that Council blend the two classes together for taxation purposes, thereby generating a the same tax rate for both classes. This recommendation was based on discussions with the BCAA about the differences between the two property classes which can be summarized as follows:

… Small Class: The light industrial class contains few properties. In 1999, there were 147 properties in the class with a total assessed value of $111 million. The tax levy for this class was $3.2 million.
… Same Valuation Method: The valuation approach utilized by the BCAA in each of these classes is identical.
… Little Distinction Between Properties: Since the split of the former Industrial class in 1988, there has been less of a distinction between light industrial and business class properties. Often the physical attributes of properties in the these two classes are identical, which results in an apparent inequity. For example, a strata warehouse used for storage of product will be classified as Business & Other, while an adjacent unit used for the a manufacturing or processing using these same materials, will be classified Light Industrial.
… Less Stable Tax Base: Likely for the reasons above, light industrial property owners tend to appeal their assessments more often. A smaller distinction between the tax rates in the two classes would likely eliminate many of these appeals bringing more stability to the tax rate in the class.
… Regional Disparity: The disparity in the tax rates of Class 05 to Class 06 is among the highest in the region. Appendix B summarizes the ratios in several other municipalities with which Vancouver competes for businesses classified light industrial.

Council did not blend the Class 05 and Class 06 tax rates in 1997, instead choosing to tie the blending to the introduction of BOD/TSS charges for several properties in Class 05. In 1998, on the recommendation of the Director of Finance, Council passed the following motion:

Introduction of BOD/TSS charges was subsequently delayed and in 1999 Council passed the following motion related to the blending of the class tax rates:

This decision hinged in part on the fact that the City would not be implementing the BOD/TSS charges and on the fact that blending the rates would generate significant savings for several large light industrial users, including Molson’s Brewery, West Coast Reduction and Larfarge and Ocean construction supplies operations, and would result in a reduction in payment in lieu of taxes revenues from exempt properties that would have required a tax increase to offset.

Council’s decision was supported by the CAGPT, which put forward the following recommendation:

As part of the development of the 2000 Assessment Roll, the BCAA reviewed actual use in several warehouse areas of Vancouver. This review resulted in the identification of 213 Class 06 properties which, in whole or in part, were involved in activities more appropriately defined by the use criteria governing Class 05. As a result, the processing or manufacturing component of these properties, valued at approximately $125 million, were reclassified fromClass 06 to Class 05. A list of the properties involved is attached as Appendix C.

Unless some action is taken, the immediate impact of this reclassification is that these properties will face taxation at the Class 05 tax rate. For general municipal purposes taxation, the Class 05 tax rate is currently about 1.9 times the Class 06 rate, leading to a tax increase of 90% above the 1999 levels. Inclusive of all levies, the increase will be from $26.89 per thousand dollars of assessed value to $41.51, and increase of 57%.

Council has no ability to adjust the tax rates of other taxing authorities, however, Council can change the relationships among the tax rates for general municipal purposes.

There are a number of options for changing this relationship, however, given Council’s previous initiatives on this issue, this report looks at blending the rates in Class 05 and Class 06 into a single tax rate. The following outlines the rationale for blending these rates in 2000.

1. Council has expressed the intent to blend these two classes. This support has been expressed in a number of resolutions since 1997, with the blending tied to the implementation of BOD/TSS charges.

2. Implementation of BOD/TSS charges is recommended in 2000. This implementation has been tied to the blending of tax rates in these two classes and, in a separate report, staff have recommended implementation of these charges beginning in 2000, contingent on blending the rates.

3. The Citizen’s Advisory Group on Property Taxation supports a smaller differential between Class 05 and Class 06. Attached as Appendix D is a letter from the Chair of the CAGPT which relates the recommendation of the group that Council address the disparity in the tax rates between these two classes.

4. The lack of distinction between the two classes and the small size of Class 05 do not justify the current disparity in tax rates. Moreover, blending these two classes will make them more easily administered from an assessment and classification and a taxation perspective since classification will no longer be a significant issue.

5. Reducing the disparity between the two classes is consistent with Council’s land use policies. In March 1995, Council approved the Industrial Lands Strategy wich seeks to retain most of the City’s existing industrial land base. The disparity between the tax rates for Class 05 and 06 has been seen as a obstacle to the maintenance and development of light industrial uses in the City.

Based on a review of the 2000 Assessment Roll and prior to consideration of a general purposes tax increase for 2000, the following would be the impact of blending the two classes for calculating tax rates;

… Properties in Class 05 receive the benefit of a tax rate that is about 30% lower than would be the case if no blending occurred. While the overall revenue from Class 05 will be similar to the amount raised in 1999, it will be spread over almost three times the number of properties and twice the assessed value.

… Properties in Class 06 will experience a tax increase. Although the tax increase is not very significant, the tax rate for this class will increase by about 0.67% as a result of blending.
… All of the exempt properties in Class 05 will also receive the benefit of a blended tax rate. This impact will result in a loss of an estimated $1.0 million in payment-in-lieu of taxes revenue which will require an additional tax increase. In order to offset this loss, all classes of property have been allocated a share of the $1.0 million based on the current distribution of the tax levy. For all property classes this represents a tax increase of approximately 0.25%. This is included in the changes indicated above for Class 05 and 06.

As noted above, since 1993 Council has averaged the land values in Class 06 for tax purposes. Values in Class 05 have never been blended. Moreover, under the rules established for averaging, properties with new construction or a change of use from one year to the next are not eligible for averaging. This means that although the properties that are shifting from Class 06 to Class 05 may have been eligible for averaging in 1999, they would not be eligible for land averaging in Class 05.

Staff do not recommend that Council extend averaging to Class 05, although the assessment averaging provisions in the Vancouver Charter allow it. Based on the initial modelling for the upcoming averaging report to Council, the impacts of land averaging in Class 06 will be minimal in 2000, meaning that after averaging, there will be only a minor difference between the tax rates in Classes 05 and 06.

This report summarizes the rationale and impacts of blending Class 05 (Light Industrial) and Class 06 (Business & Other) for the purposes of developing a tax rate for 2000. This initiative follows from recommendations put forward by the Citizens’ Advisory Group on Property Taxation in 1997 and from Council approval to blend these two classes at the same time as BOD/TSS charges are implemented. Blending of the rates is submitted for Council’s consideration.


TO:	City Services and Budgets Committee
FROM:	General Manager of Corporate Services / Director of Finance
SUBJECT:	2000 Taxation Options: Taxation of Property Classes 05 and 06


	No Blending		With Blending
	Tax Rate	Tax Levy	Tax Rate	Tax Levy
Class 05	21.021	4,660,419	14.984	3,340,100
Class 06	14.882	198,044,873	14.984	$199,390,700