Vancouver City Council

POLICY REPORT
PROPERTY TAXATION

Date: February 19, 2003
Author/Local: Ken Bayne / 7223

RTS No. 03207
CC File No. 1551
Meeting Date: February 25, 2003

TO:	Vancouver City Council
FROM:	General Manager of Corporate Services / Director of Finance
SUBJECT:	2003 Property Tax Options: Three-Year Land Averaging for Property Tax Calculations

RECOMMENDATIONS

A. THAT Council instruct the Director of Legal Services, in consultation with the Director of Finance to prepare a bylaw to authorize continuation of three-year land value averaging as the 2003 property tax calculation methodology for residential (Class 1) and business/other (Class 6) properties as discussed in this report;

FURTHER THAT the bylaw be submitted to Council for approval on March 27, 2003.

B. THAT the Director of Finance be authorized to place advertisements advising the public that Council is considering enacting an averaging bylaw and inviting input at City Services & Budgets Committee on March 27, 2003.

C. THAT, should Council approve the continuation of the land assessment averaging program on March 27, 2003, the Director of Finance be authorized to make appropriate arrangements with the BC Assessment Authority for the production of an averaged 2003 taxation roll, at an approximate cost of $20,000; source of funding to be the 2003 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 seek Council authority to prepare a bylaw that will authorize continuation of three-year land averaging as the method for calculating property taxes for Class 1 (Residential) and Class 6 (Business and Other) for 2003.

Approval of the recommendations in this report will not authorize continuation of the averaging methodology in 2003. These recommendation put in motion a process that will meet the requirements of the Vancouver Charter to advise the public that averaging is being considered by Council, of the impacts that averaging will have on sample properties in the City, and of the opportunity to make their views know prior to a Council decision to proceed. As noted in the recommendations, the bylaw would be submitted for consideration on March 27, 2003 at which time input from the public would be heard.

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. Land value averaging allows Council to make use of a three year average of the land value component of a property assessment (the current year and the two previous years) in calculating current taxes. Improvement values used in this calculation are always current year values.

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." 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 Vancouver Charter also gives Council the ability to use land value phasing as an alternative to land value averaging in calculating property taxes. Land value phasing allows Council to phase in an increase in land value over a two year period as a means of mitigating the normal growth in taxes. As with averaging, improvement values used in this calculation are always current year values. For several years, staff modelled the impacts of phasing and averaging for report to Council. However, the phasing option was never shown to be as effective as averaging on mitigating changes in property taxes and Council agreed several year ago not to consider it further.

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

MARKET VALUE OPTION	THREE-YEAR LAND VALUE AVERAGING OPTION
2003 assessed land value + 2003 assessed improvement value = 2003 total taxable value x Tax rate (market) = 2003 general taxes	Average of assessed land value for 2001, 2002 & 2003 + 2003 assessed improvement value = Total 2003 taxable value x Tax rate (averaged) = 2003 general taxes

Under the market value system, taxes are calculated by multiplying the current assessed value of 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, averaging does change the values of individual properties within classes being averaged and, as a result, there are shifts of taxes among properties within the averaged class that are not present if averaging is not utilized.

· For properties with the increases in land value above the average for the class, 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.

These impacts will be demonstrated in the modelling results presented later in this report. On a theoretical basis, as changes in value equalize across a class of property, individual properties can be expected to pay the same total amount of tax under an averaging scenario as they would without averaging.

There are a number of criteria that are utilized in applying land value averaging to the assessment roll. These criteria are both legislative and administrative.

· Averaging may be applied to any property class except those valued by special rates (e.g. Class 02, Utilities; Class 04, Major Industry; and, Class 09, Farm). 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 have been averaged. Since the averaging program was put initiated in 1993, these costs have exceed $500,000.
· 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, 2003.
· 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 2003

There are three potential reasons for a change in taxes for an individual property from 2002 to 2003:

· Change in taxable value from 2002 to 2003 - 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 this average. Where values change at a rate less than the average, taxes will decline and where the change exceeds the average, taxes will increase. It is the changes at the extremes that the averaging program is designed to assist.
· Council-Directed Tax Increase - A Council mandated increase in the tax levy reflects itself in higher taxes for all properties. The modelling presented here assumes a 2.5% tax increase.
· 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.

Modelling has been done to compare the impacts on 2003 general taxes using an unmodified approach based on market assessed values versus the averaged value approach. The following should be noted about the modelling approach:

· The 2003 estimates are based on the Completed Assessment Roll recently produced by the BC Assessment Authority. These values reflect the best information available at this time and should come close to reflecting the 2003 property values for tax billing purposes.

· The modelling has been completed for general purposes (municipal) taxes only. While averaging is applied to taxes levied by all taxing authorities, we have no information that would allow estimation of averaged tax rates that would apply. However, it can be expected that the number of properties impacted by averaging would be similar if the entire tax bill were modelled and the average change in taxes would be scaled up based on a larger tax bill.
· The sample used for the tax modelling is screened to exclude 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 B to D for the residential class and Appendices E to G for the business class. Appendices B and E set out the impact of the two taxation scenarios for residential and business properties in a graphical format. Projected tax impacts for each of the assessment neighbourhoods are presented in the appendices following B and E.

The results of the modelling are as follows:

Residential Class

Overall, the change in taxable values in Class 01 equate to an increase of 9.8% of which approximately 2% is related to new construction. 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. Based on the principle above, properties experiencing an increase in value below approximately 7.8% will see property taxes fall before a Council imposed increase while properties experiencing an increase above 7.8% will see a tax increase.

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

Assessed Values		Tax Rate per $000 of Value	Comments
Market Value	$58.4 million	$2.949	Assessment roll up 9.8% over 2002. Tax rate down from $3.098 in 2002.
Averaged Value	$56.0 million	$3.074	Averaged Roll 4.2% lower than the Completed Roll. Tax rate up 4.2% from market based rate

Before averaging, the increase in value in the residential class over 2002 will result in a decrease in the basic tax rate for the class in order to generate a 2.5% increase in the taxation revenue from the previous year. However, averaging of residential properties results in a slightly smaller roll and a consequent slight increase 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 B, C and D demonstrate this impact for the class as a whole and by assessment neighbourhood.

The graph in Appendix B shows that approximately 83,800 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 notable 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 26,500 properties. The other side of this benefit is that approximately 57,800 properties will pay higher taxes than they would if averaging was not applied.

Business Class

The completed roll for the business class is also up over 2002, by 1.7%. This requires a slightly higher tax rate in 2003 to generate a 2.5% increase in the taxation revenue from the previous year. The averaged roll in this class is 1.5% lower 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	$13.82 million	$15.84	Assessment roll up 1.7% from 2002. Tax rate up from $15.45 in 2002.
Averaged Value	$13.61 million	$16.08	Averaged Roll is 1.5% lower than the Completed Roll. Tax rate increases 1.5%.

Appendix E shows that for the overall Class 6 sample, less than 1/3 of properties (approximately 2,900) benefit from the application of averaging, paying lower property tax than they would using non-averaged values. If the hurdle is increased to properties facing tax increases of 12%, averaging reduces the number by almost 300.

3. Modelling of the Land Value Phasing Option

As noted in the Background section of this report, the Vancouver Charter authorizes Council to use an alternative mechanism for mitigating tax increase called Land Value Phasing. This approach is based on the following tax calculation:

THREE-YEAR LAND VALUE PHASING OPTION

2003 assessed land value - Phasing Reduction (50% to 66% of increase) + 2003 assessed improvement value = Total 2003 taxable value x Tax rate (phased) = 2003 general taxes

For many years, staff modelled both the averaging and phasing options, however, this modelling did not demonstrate that phasing offered the mitigation impacts provided by three year land averaging. As a result, phasing has not been considered as an option for several years.

Staff have undertaken modelling of the phasing option for 2003 to demonstrate how a phasing program would compare to land averaging as a method of mitigating large year over year tax increases. The following table summarizes the impacts of phasing with land averaging results for comparison:

Property Class / Tax Impact	Phasing	Averaging
Residential
higher taxes	82,000 (58%)	57,900 (41%)
lower taxes	59,700 (42%)	83,800 (59%)
Business & Other
higher taxes	8,000 (79%)	7,200 (71%)
lower taxes	2,100 (21%)	2,900 (29%)

As the table indicated, in the residential class, 42% of properties eligible for phasing benefitted from application of a 50% phasing reduction. In other words, of the 141,700 properties modelled, 42% would pay lower taxes with a phasing option while the balance would pay higher taxes. This compares with 59% of properties that would benefit under the land averaging option. Approximately twice as many residential properties would have property tax increases held below 6% with averaging (26,500) than with phasing (12,500) For the Business class, only 21% of the 10,000 properties modelled benefit from phasing compared to 29% for averaging.

If the intent is to provide the maximum mitigation for properties experiencing the largest percentage increased in assessed land values in 2003, the land averaging option provides the most effective approach.

3. Recommended Option for 2003: Three Year Land Value Assessment Averaging

As noted above, the City has utilized three year averaging for several years and, irrespective of the impacts in 2003, 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 2003 taxation year, three year land value averaging be applied to both Class 01 Residential and Class 06 Business & Other. Recommendation A instructs the Director of Legal Services to prepare a bylaw to continue the averaging program for 2003. The bylaw would be presented to Council on March 27, 2003. Should Council agree to this recommendation, the City will be required to advise taxpayers of this action through newspaper advertisements at least two weeks in advance. Any input received from taxpayers will be heard by Council at City Services & Budget Committee on March 27, 2003.

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 $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. Should Council approve three-year averaging on March 27, 2003, Recommendation C authorizes the Director of Finance to contract with the Assessment Authority to produce the 2003 averaged assessment roll, with funding provided in the 2003 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 60% of the properties in the residential classes and 30% of the properties in the business classes. The Director of Finance therefore recommends that three-year land value averaging be used as the basis for 2003 property taxes.

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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
1999-2001	· Continued three year land value averaging	· Continued three year land value averaging

 

LINK TO APPENDICES B TO G, INC.

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