POLICY REPORT
PROPERTY TAXATION

Date: February 16, 2001
Author/Local: G. Merchant/7250

RTS No. 01896

CC File No. 1552

CS&B: March 8, 2001

TO:	Standing Committee on City Services and Budgets
FROM:	General Manager of Corporate Services / Director of Finance
SUBJECT:	2001 Property Tax Options: Three-Year Land Averaging for Property Tax Calculations

RECOMMENDATION

A. THAT Council approve the continuation of three-year land value averaging as the 2001 property tax calculation methodology for 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 Director of Legal Services, in consultation with the Director of Finance, 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 2001 taxation roll, at an approximate cost of $20,000; source of funding to be the 2001 Operating Budget.

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 2001 property taxes for Class 01 and Class 06. It is recommended that three-year land assessment averaging continue as the preferred taxation option for these classes in 2001.

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 shifts in taxation within the business and residential property classes which have resulted from uneven assessment changes within these classes.

In 1992, the provincial government enacted legislation which allows for the use of three-year land value assessment averaging in the calculation of property taxes. In each year since 1993, Council has used 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 increases or decreases in values within a class of property, 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 approach and under the averaged value approach.

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

Under the market value system, taxes are calculated by multiplying the current assessed value land and improvements 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 the current assessed value of the property improvements. Second, since averaging changes the total value in the class on which taxes are levied, the tax rate that is applied to averaged values is adjusted to ensure that the same amount of taxes is generated from the entire class.

From the perspective of the taxing authority, averaging is revenue neutral within the class being averaged so that no more taxes are collected with or without averaging. However, as values of individual properties within classes being averaged, there are shifts of taxes among properties 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 experiencing smaller increases in value and to properties with declining values. Conversely, for properties with the largest decreases in assessed value, taxable values 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 06 Business & Other.
· 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.
· 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 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. One of the down sides of having to apply averaging to all classes comes when values comprising the average are subject to changes because of assessment appeals. Because the other taxing authorities are not participants in the averaging process, the City must bear any additional costs that arise from settling appeals on properties that are averaged. Since averaging was implemented at the City, approximately $500,000 in additional costs have been absorbed as a result of averaging.
· 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, 2001.
· 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. This Court, if necessary, would be combined with the fall Court of Revision on local improvements in order to avoid a separate sitting.

2. Modelling the Impacts of Averaging in 2001

Modelling has been done to compare the impacts on 2001 general taxes using an unmodified approach based on market assessed values versus the averaged value approach. The 2001 estimates are based on the Completed Roll recently produced by the BC Assessment Authority. While not the final assessment roll for the year, these values come close to reflecting the 2001 property values for tax billing purposes. The sample used for the tax modelling is screened to exclude all properties not eligible for land value averaging, including vacant land and properties with new construction or reclassifications.

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 the impact of the two taxation scenarios for residential and business properties in a graphical format. Projected taximpacts for each of the assessment neighbourhoods are presented in the appendices following C and F.

There are three potential reasons for a change in taxes for an individual property from 2000 to 2001:

· Change in taxable value from 2000 to 2001 - 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, there are always properties with increases and decreases in assessed values that vary from the average. 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 - A Council mandated increase in the tax levy reflects itself in higher taxes for all properties. As noted, this analysis assumes a 2.0% tax increase. In addition, the analysis reflects the impacts of the second year of phased implementation of sewer user fees. This implementation will result in an across the board tax reduction in the Residential Class of 5.1% and in the Business Class of 1.8%.
· Application of Land Averaging - A property may experience a tax increase because of the application of averaging. This is true for those properties whose assessed values have decreased 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. However, overall, averaging can be expected to increase the percentage of properties in the class that experience a change in value for taxation purposes closer to average for the class. In a relatively stable market, the benefits of averaging should move close to the 50% level of properties in the class.

The results of the modelling are as follows:

Residential Class

Overall, the change in taxable values in Class 01 is quite small compared to previous years, showing an increase of 2.1%. However, there continues to be a significant variance around the average change for many properties, with some experiencing significant increases and other significant decreases, all depending on market movement in their areas. This variance involves fewer properties that in previous years.

The following table summarizes the impacts of averaging on the roll and on tax ratesin the residential class:

Before averaging, the increase in value in the residential class over 2000 will result in a minor decrease in the basic tax rate for the class in order to generate the same taxation revenue as in the previous year. However, averaging of residential properties results in a slightly larger roll and a consequent slight 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 for the class as a whole and by assessment neighbourhood.

The graph in Appendix C shows that 46% 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 6% by about 3,700 properties.

Business Class

The completed roll for the business class is also up over 2000, by 3.5%. As in the residential class, this would result in a slightly lower tax rate in 2001 to generate the same amount of taxation revenue from the class. The averaged roll in this class is 0.2% higher than the unaveraged roll and as a result, the tax rate is also higher than it would be if averaging were not employed. These changes are identified in the following table:

Assessed Values		Tax Rate per $000	Comments
Market Value	$13.65 million	$14.68	Roll up 3.5% from 2000. Rate down from $14.94 in 2000.
Averaged Value	$13.68 million	$14.66	Averaged Roll up 0.2% compared to Completed Roll totals, resulting in a 0.1% reduction in the tax rate.

Appendix F shows that for the overall Class 6 sample, 60% 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 120 fewer properties that have tax increases of over 6%.

3. Application of Averaging in 2001

As noted above, the City has utilized three year averaging for several years and, irrespective of the impacts in 2001, there exists a strong argument for applying land averaging continually from year to year, on the basis of consistency and equity. Land averaging helps to ease in large increases in taxes resulting from increased land values and delays 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 2001 taxation year, three year land value averaging be applied to both Class 01 Residential and Class 06 Business & Other.

Should Council approve the use of averaging in 2001, a bylaw will be required. Recommendation B instructs the Director of Legal Services to bring this bylaw forward by March 31, the last day for approval. Preceding introduction of the bylaw, the City will be required to advise taxpayers of this action through newspaper advertisements at least two weeks in advance.

CITIZENS' ADVISORY GROUP ON PROPERTY TAXATION

The Citizens Advisory Group on Property Taxation has supported the use of land averaging

in Class 01 and 06 for many years.

However, on February 13, 2001, the Citizens' Advisory Group met to discuss the results of the tax modelling. The group had concerns regarding the fairness of the averaging mechanism and, noting that 2001 was a good year to discontinue averaging because the assessment roll changed very little from 2000, passed a resolution by a 4-3 margin to recommend that Council not use averaging for the 2001 taxation year.

PRODUCTION OF AN AVERAGED ROLL

The use of averaging requires the development of an averaged assessment roll. Since 1993, the BC Assessment Authority has provided this roll to the City at a cost of approximately $0.12 per folio or $20,000. The alternative would be for the City to duplicate the system design and programming work, using its own resources, to produce a similar product. Recommendation C authorizes the Director of Finance to contract with the Assessment Authority to produce the 2001 averaged assessment roll, should Council approve three-year averaging with funding provided in the 2001 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 approximately 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 2001 property taxes.

* * * * *

APPENDIX A

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

	CLASS 1 RESIDENTIAL	CLASS 6 BUSINESS/OTHER
1989	· Capped land value increases at 61%	· Capped tax increases at 40%
1990	· No adjustment to taxation methodology	· Capped tax increases at 10.1%
1991	· Capped tax increases at 5.5% · No limit on tax credit	· Capped tax increases at 7.5% · $400,000 limit on tax credit
1992	· Capped tax increases at 6.0% · $5,000 limit on tax credit	· Capped tax increases at 10.0% · $100,000 limit on tax credit
1993	· Implemented three-year land value averaging · Tax increases capped at 25% for select properties	· Implemented three-year land value averaging · Tax increases capped at 25% for select properties
1994	· Continued three year land value averaging · Tax increases capped at 10% for select properties · $500 limit on tax credit	· Continued three year land value averaging · Tax increases capped at 10% for select properties · $15,000 limit on tax credit
1995	· Continued three year land value averaging · No tax capping	· Continued three year land value averaging · Tax increases capped at 15% for select properties under a phasing out methodology · $10,000 limit on tax credit
1996	· Continued three year land value averaging · No tax capping	· Continued three year land value averaging · Tax increases capped at 20% for select properties under a phasing out methodology · $7,500 limit on tax credit
1997	· Continued three year land value averaging · No tax capping	· Continued three year land value averaging · Tax increases capped at 25% for select properties under a phasing out methodology · $5,000 limit on tax credit · Last year of tax increase capping
1998	· Continued three year land value averaging · Implementation of solid waste utility	· Continued three year land value averaging
1999	· Continued three year land value averaging	· Continued three year land value averaging
2000	· Continued three year land value averaging	· Continued three year land value averaging

Appendix B on file in City Clerk's Office

Link to Appendix C

Link to Appendix D

Link to Appendix E

Link to Appendix F

Link to Appendix G

Link to Appendix H