POLICY REPORT
PROPERTY TAXATION

Date: April 15, 2002
Author/Local: K Bayne

604-873-7223

RTS No. 02543

CC File No. 1551

CS&B: May 2, 2002

TO:	Standing Committee on City Services and Budgets
FROM:	General Manager of Corporate Services / Director of Finance
SUBJECT:	2002 Property Tax Options: Property Tax Distribution

CONSIDERATION

THAT Council approve a shift in the property tax distribution equal to approximately 1% of the 2002 general purposes tax levy (approximately $3.9 million), applied proportionately from Class 2 (utilities), Class 4 (major industrial), Class 5 (light industrial) and Class 6 (business/other) to Class 1 (residential) properties.

COUNCIL POLICY

Since the City received authority to establish the way in which the property tax levy is distributed among the property classes, Council has maintained a practice of holding relative shares of the levy constant. While there is no policy governing the shifting of the distribution among the classes, Council has made decisions on this shift on an annual basis based on recommendations from the Property Tax Advisory Committee (1994).

PURPOSE

The purpose of this report is to present the issue of shifting the distribution of the property tax levy between the non-residential and residential property classes.

BACKGROUND

Beginning in 1997, Council has made annual decisions to shift the distribution of the property tax levy from non-residential to residential properties. As noted below, this process follows from recommendations of the Property Tax Advisory Committee (1995) and the KPMG Consumption of Tax Supported City Services report. Shifts equivalent to approximately 1% of the tax levy have been approved in 1994, 1995, 1997 and 2000. In addition, in 1998, Council shifted approximately $3.8 million in costs to the residential class as part of the implementation of solid waste user fees. The impact of these decisions, prior to consideration of a further shift in the 2002 tax levy, is that approximately 6.5% of the tax levy has shifted from non-residential properties to residential properties. The relative share of the 2002 tax levy for Class 1 and Class 6 is estimated at 45.8% and 50.5% (including Solid Waste and Sewer user fees) respectively.

Residential and business property taxes in 2001 were based on three-year land averaged values. The overall tax levy was increased by 3.0%, evenly applied to all classes of property Council did not shift taxes from the non-residential classes to the residential class in 2001.

In 2002, taxable values in both Class 01, Residential and Class 06, Business & Other have been relatively stable, with the great majority of properties in these classes having changes to taxable value of under six percent. On March 7, 2002 Council approved the use of land averaged values in the calculation of taxable value for the residential and business classes. On April 11, Council balanced the 2002 Operating Budget by approving a property tax increase of approximately 4.1%.

DISCUSSION

The rationale for shifting the burden of taxation from the non-residential classes to the residential class is found in the 1995 report by the KPMG Consulting Group, Consumption of Tax-Supported City Services. This report recommended development of a "rate-of-adjustment policy" which would allow for a shift in the tax distribution from the non-residential classes to the residential class. While no specific target for the distribution of the tax levy was proposed in the report and none has been adopted by Council, the authors noted that, measured by consumption, non-residential properties should bear approximately 35% of the tax burden.

One of the important conclusions from the KPMG Study is that there is no "right" answer to the question of how the tax burden should be distributed among the property classes. In fact, ensuring that local circumstance and policy could be reflected in the tax distribution was one of the reasons why the choice was shifted to individual municipal Councils. In administering tax policy, each jurisdiction has used rationale that meet its individual needs.

From 1983, when municipalities received the authority to establish their own tax distributions, until 1994, Council generally maintained the relative taxation burden between property classes, allowing only for adjustments to the distribution resulting from reclassification, new construction or zoning changes. However, in its decisions since 1993, Council (see Appendix A for a listing of the major taxation program decision by Council) has acknowledged that the non-residential classes bear a disproportionate share of property taxation. As noted in the table below, these decisions have resulted in approximately 6.5% of the tax burden being shifted from the non-residential classes to the residential class since 1993.

Table 1. Relative Share of Tax Levy, Class 1 & Class 6

Notes to Table 1:

1. 1998 figures are affected by the implementation of the solid waste utility. Part of the new utility fee was for a recycling charge, which represented a $3.8 million increase in total paid by the residential class. For comparative purposes, these costs have been factored into the tax burden.

2. 2000 and 2001 figures are affected by the implementation of the sewer utility. Over this two year period, $25 million in sewer costs have been shifted from the tax levy to user fees applicable to both Class 1 ($17.2 million) and Class 6 ($8.2 million).

3. The other property classes account for the remaining 4% to 6% of the tax levy (utilities, light industrial, major industrial, recreational/seasonal and farm).

In 2002, the relative shares of the tax levy for Class 01 and Class 06 are anticipated to be approximately 45.8% and 50.5%, respectively, prior to consideration of a further shift.

The following analysis looks at the impacts of a further shift of the property tax levy from non-residential properties to residential properties. The results of the base case and the "shift" scenario are shown graphically in Appendices B and C.

The tax modelling is based on samples of Class 1 and Class 6 properties that have been screened to eliminate those that are not eligible for land assessment averaging. Only impacts on the general purpose tax levy are modelled. Impacts on the other non-residential classes have not been modelled, however, it is expected that the impact on these classes would be similar to the impact on Class 06. As they share a common tax rate, the impacts on Classes 08 and 09 would be similar to the impact on Class 01.

1. The Base Case

The base case represents the impact of the following actions approved by Council:

· Three-year land averaging for the residential and business classes
· a 4.0% increase to the tax levy. (This modelling was completed prior to finalization of the Operating Budget and uses a 4.0% tax increase for 2002 compared to the current estimate of 4.1%.)

Based on these assumptions and with no shift in tax burden, the average change in taxes for the properties sampled is an increase of 4.1% for the residential class and an increase of 3.9% for the business class. This variation from a the 4.0% tax increase assumptions results from normal changes in the assessment roll from 2001 to 2002.

2. Shift of the Relative Share of the Tax Levy

The "shift" scenario involves the shifting of 1% of the 2002 general purposes property tax levy - $3.9 million - from the non-residential property classes to the residential property class. The impacts of a shift are summarized in Tables 2 and 3 below for Class 6, Business and Class 1, Residential.

Table 2. Impacts of One Percent Shift in Levy, Class 1 Residential

As noted, the shift in tax burden to Class 01 will result in the effective tax impact being increased from a 4.1% tax increase to a 6.5% tax increase. As Classes 08 and 09 share a common tax rate with Class 01, the impact on these classes will be similar to Class 01. The impact of this shift on residential properties is reflected graphically in Appendix B.

Table 3. Impacts of One Percent Shift in Levy, Class 6 Business

As noted, the shift in tax burden to Class 06 will result in the effective tax impact being reduced from a 3.9% increase to a 2.1% increase. The other non-residential property classes (light industrial, major industrial and utilities) will also experience a 1.8% decrease in their levy and tax rates as a result of a burden shift. The impact of this shift on non-residential properties is reflected graphically in Appendix C.

CONCLUSION

Shifting the burden of taxation from the non-residential to the residential classes will impact the effective change in taxes borne by these classes in 2002. As Council has not adopted a specific policy respecting changes to the distribution of the property tax levy, the General Manager of Corporate of Services submits a one percent shift of the tax burden (approximately $3.9 million) from the non-residential classes to the residential class to Council for consideration.

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APPENDIX A
SUMMARY OF MAJOR PROPERTY TAXATION POLICY DECISIONS SINCE 1989

	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 · shift $3.0 million from non residential	· Continued three year land value averaging · Tax increases capped at 10% for select properties · $15,000 limit on tax credit · shift $3.0 million to residential
1995	· Continued three year land value averaging · No tax capping · shift $3.0 million from non residential	· 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 · shift $3.0 million to residential
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 · shift $2.9 million from non-residential	· Continued three year land value averaging · Tax increase capped at 25% for select properties under a phasing out methodology · $5,000 limit on tax credit · shift $2.9 million to residential
1998	· Continued three year land value averaging · Implementation of solid waste utility · add $3.8 million in recycling charges	· 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 · shift $3.7 million from non-residential	· Continued three year land value averaging · shift $3.7 million to residential
2001	· Continued three year land value averaging	· Continued three year land value averaging