ADMINISTRATIVE REPORT

Date: August 22, 2003
Author/Local: Karen Levitt/

604-873-7251

RTS No. 3584
CC File No.: 1551/8109
Meeting Date: September 11, 2003

TO:

Standing Committee on City Services and Budgets

FROM:

General Manager of Corporate Services

SUBJECT:

Provincial Proposal to Reduce Property Taxes for Port Industry Firms

RECOMMENDATION

COUNCIL POLICY

In the past, Council has expressed its opposition to provincial intervention into the City's property tax policies, an area over which British Columbia municipalities are meant to have full autonomy. The most recent instance of this was in the mid-1990s, when the Province implemented Bill 55, legislation that limited the amount of property taxes paid by railway industry firms.

In January 2003, Council endorsed a position on the property taxation of ports and port industries that was submitted to the provincial government on behalf a number of BC port-host municipalities (attached in Appendix B).

PURPOSE

For a number of years port industries have been appealing to the provincial government with the message that the property taxes they pay are too high. In June 2003 the Province responded to these appeals by proposing an intervention to municipal property tax policy that would limit the amount of property taxes paid by firms that operate within the port industry, such as wharf and terminal operators. The current report describes this provincial proposal, discusses the implications of the proposed changes, and provides Council the opportunity to communicate its position on the proposal to the Province.

BACKGROUND

The Provincial Proposal
The proposed changes are intended to lower taxes for privately held port-industry companies only, and do not affect the payments-in-lieu-of-taxes (PILTs) paid by federal port authorities. There are three elements to the proposal:

The logic of the five-year term of the tax rate cap (and the associated compensation) is that since port industries argue that property taxes are a significant impediment to their making capital investments, this will provide them a window of opportunity to make these new investments.

Timing of Implementation
At the time this report is being written, the Province is still undertaking consultation with affected municipalities, industry representatives and other stakeholders, and has not yet indicated the timing of a final decision regarding the proposed changes. However, it does appear that they are moving quickly toward a decision and implementation of the changes.

Regional Involvement
Over the past two years senior staff from the municipalities that host ports in the Lower Mainland have been meeting regularly in order to coordinate their efforts concerning port taxation issues. The GVRD Board passed a resolution in July 2003 opposing the current provincial proposal to lower property taxes paid by port industry firms, attached in Appendix C.

Recent Related Reports to Council

The topic of port industry property taxation has come before Council twice over the past year. In January 2003 Council endorsed and submitted to the Province a position statement on port taxation that was prepared by all Lower Mainland port-host municipalities. At that time Council heard from industry representatives from the BC Wharf Operators Association and TSI Terminal Systems. Then in March 2003, the President and CEO of the Vancouver Port Authority (VPA) spoke to Council about the long-range development plans for the VPA, and about issues they face regarding their future competitiveness.

Property Taxation & Other Competitiveness Factors
The subject of property taxes paid by port industries is part of the much larger issue of the long-term competitiveness of Canadian ports vis-à-vis their American counterparts. For a number of years, federal port authorities and associated industries have been appealing to the senior governments and mounting public awareness campaigns on this topic.

Over recent years a number of studies have been conducted to explore the many factors that contribute to ports' international competitiveness. Comparisons between American and Canadian ports are complex and difficult, since the transportation and marine industries structures are fundamentally different in the two countries. As part of the overall picture, property taxation plays a relatively minor role in determining whether Canadian west coast ports are competitive against American ones.

The following is a selection of the important competitiveness factors for Canadian ports:

Class 4 Port Properties as a Part of the City of Vancouver Tax Base
Port properties make up over 80% of the Major Industrial tax class. The table below provides a snapshot of the relative importance of port properties in the City's tax base, in 2003. This table does not include property that is owned and occupied by the federal port authorities, since these properties are not taxable, and the payments-in-lieu-of-taxes they pay are not in any way affected by the proposed changes being discussed in this report.

TABLE 1. TAXABLE VALUE & TAXES PAID BY PORT PROPERTIES ($ MILLIONS)

 

2003
TAXABLE
VALUE

2003 PROPERTY TAXES / COV PORTION ONLY

Class 4 - Port Properties

$192

$5.3

Class 4 - All Properties (including port properties)

$232

$6.5

Total All Classes

$130,054

$418.1

Port Properties as a Share of Class 4

83%

82%

Port Properties as a Share of the Entire Tax Base

0.1%

1.3%

DISCUSSION

Estimated Impacts on the City of Vancouver
The City's 2003 Class 4 tax rate is $27.72, which means that the proposed rate cap would have very little impact on the City's current tax revenues. Provincial staff have estimated that the City will lose approximately $40,000 in tax revenues due to the rate cap, for which provincial compensation will be received.

However, there are two port berth corridors on the Vancouver tax roll, and exempting these improvements would result in a significant loss in tax revenue for Vancouver. These exemptions would remove approximately $28.2 million of assessed value from Vancouver's tax base, and the City would lose approximately $800,000 in associated taxes (this is the municipal portion only). If these lost revenues were to be collected from among all other City of Vancouver taxpayers, this translates into a 0.2% tax increase.

In addition to this significant loss of tax revenues, the principles that underlie the proposed changes are also of great concern, as outlined in the next section.

Assessment of the Proposed Changes
The following is an assessment of the principles that underlie the provincial proposal to dictate taxation policy to municipalities by way of a tax rate cap.

The Province Should Not Dictate Municipal Tax Policy
The Province appears to be moving forward with this proposal despite much protest from municipalities. City staff are opposed to the proposal on the basis that:

Province Should Provide Direct Subsidy
If the Province believes it is appropriate to subsidise this industry, then it should provide the subsidy directly to the relevant companies, rather than create an awkward time-limited, two-step mechanism that imposes a municipal tax rate cap and then compensates municipalities for the impacts of this cap.

It is noted that if the Province were to provide a direct subsidy to specific companies, this would have to be done with an agreement between the municipalities and the Province that would limit tax increases for these properties for the period of the subsidy, to avoid municipalities raising taxes indiscriminately.

Municipal Taxpayers Least Appropriate Group to Provide Subsidy
Insofar as it may be appropriate to subsidise this particular industry as it is part of the national transportation infrastructure, municipal taxpayers are the least appropriate pool of taxpayers to pay for this subsidy, for the following four reasons.

CONCLUSION

The proposed tax-exemption of port berth corridor improvements will result in an annual loss of approximately $800,000 in tax revenues for the City of Vancouver. The proposed tax rate cap for port properties in the major industry tax class will not cause a significant revenue loss for the City, but does potentially indicate a worrisome trend of the Province dictating municipal property tax policy.

* * * * *

 

Appendix A
List of Stakeholders Involved in Port Taxation Issue

As background, here is a list of stakeholders involved in this proposal.

1. Federal Port Authorities in BC - Concerned with many issues concerning competitiveness, part for-profit entities, part national infrastructure.

2. Port Industries - Private companies that operate on either leased port-owned land or privately-owned land near ports. Are private businesses concerned with profits, position is that property taxes hinder necessary capital investment, not so concerned with who subsidises as long as costs are decreased.

3. Industry Associations & Interest Groups - Represent their members' interests.

4. Provincial Government - Generally stay out of municipal tax policy, but have been subjected to intense industry lobbying, and are seeking a "fair" solution to the problem.

5. Federal Government - Have primary responsibility for port and transportation affairs, just completed Canada Marine Act review which contains recommendations to address some port competitiveness issues, but not this issue of subsiding property taxes. We don't yet know which, if any, recommendations will be adopted.

6. GVRD - Initially involved in trying to solve problem by coordinating a working group representing all stakeholders, were not successful. GVRD Board passed a resolution in July 2003 opposing current provincial proposal.

7. Affected Municipalities - Do not want provincial government to intervene in tax policy, generally feel issue of port competitiveness should be dealt with at the senior government level.

Appendix B
Municipal Position on Port Property Taxation,
Approved by Vancouver City Council, January 16, 2003

Property Taxation on Ports & Port Industries:
Comments for Consideration in Provincial Review
Submitted on Behalf of City Of Port Moody, District Of North Vancouver, City Of North Vancouver, City Of Vancouver, City Of Burnaby, Corporation Of Delta, City Of Richmond

Our ports are significant economic generators for the entire country
We recognise that our local port authorities are very important economic generators for the city, region, province and country, and we value the presence of these industries within our municipal boundaries.

Ports are primarily a federal responsibility
The responsibility of Canadian ports falls under federal jurisdiction - the Ministry of Transportation - and therefore the responsibility of keeping the ports competitive is primarily a federal responsibility. We acknowledge and appreciate that the Minister of Transportation, the Honourable David Collenette, has appointed a four-member expert panel to undertake consultations with stakeholders in an effort to review the Canada Marine Act (CMA) to identify recommendations for improvement.

However, our position is that competitive gains or CMA recommendations should not be at the expense of the host municipalities. The benefits of the ports are realised in all regions of Canada, and the federal government should take the lead role in addressing ports' competitiveness problems, rather than download these responsibilities onto municipalities. Most of the competitiveness issues that have been raised by ports fall under the domain of federal responsibilities, and require subsidy or investment level on the part of the Canadian federal government, as is provided by the US federal government.

The presence of the ports creates real costs for municipalities
There are significant municipal costs associated with the provision of services to ports and port industries, including police and fire services, and land use planning. It is important to note that some of these costs, while significant, are not necessarily direct cash outlays but rather are embedded/implied in peak staffing requirements or potential liability costs associated with emergency response on port lands.

Revenues from property tax and PILTs are crucial for municipalities
In order to help offset the costs of providing services to ports and port industries, it is absolutely necessary that ports and their tenants pay property taxes and payments in lieu of taxes (PILTs) in full and on time. If these revenues were to be decreased or eliminated, this would directly increase the financial burden on other local property taxpayers, and in addition, the provision of municipal services to port authorities and their tenants may ultimately be compromised.

Property taxes and/or PILTs are not the main obstacle to port competitiveness
Because there are so many differences in competitive factors between US and Canadian ports, we cannot just compare property taxes paid by ports in these two countries in isolation. Several factors under the control of the federal government could greatly improve port authorities' and related industries' competitiveness and their ability to make appropriate capital investments, and in dollar terms these would have a much greater benefit to ports than the reduction or elimination of municipal taxes and/or PILTs. These include:

Tax rate capping is not the solution
Municipalities basically have one major source of revenue to finance the services they deliver: property taxes. Any radical change to the property tax system will have extensive consequences for local governments. Municipalities are not structured in a way that lends itself to the use of property tax schemes or incentives to stimulate economic activity. When property tax revenues are decreased, there is no offsetting revenue generated elsewhere for a municipality. By comparison, federal government tax exemptions can be designed to stimulate investment activity, which in turn will generate a net gain via increased corporate income taxes.

A tax class shift is not the solution
The port municipalities do not support the concept of shifting Class 4 major industrial port properties to lower tax rate property classes, such as the light industrial or business class. The outcome of this approach would be only to generate a very significant loss in tax revenues that would have to be borne by the other property classes. Municipalities are going concerns operating with budgets that have been developed over many years, assuming a certain level of taxation from various established sources. Cities financial health rely on these revenue streams being sustained.

An argument that has been put forward port industry lobbyists that the ratio of Class 1 resident tax rates to Class 4 heavy industrial rates is as high as 10 to 1. While this fact is accurate, it needs to be understood in the following context. Taxation as measured in dollars per square foot of land is similar for both residential and heavy industry, because industrial land is assessed at approximately 10% of the value of residential land.

The BC assessment/tax system does not need major revision
The port municipalities' position on this issue is that allowances have already been made to accommodate Class 4 major industrial properties (exemptions on some infrastructure, favourable
depreciation period), which came out of negotiations with port industries several years ago. The current structure recognizes and incorporates many of the recommendations from these past discussions. Additionally, the BC assessment scheme is recognized as one of the fairest and easiest to administer property assessment processes in the world.

The MFA credit rating is potentially at risk
If autonomy over taxation - that is, the ability of each city to set its own tax rates - is compromised via senior government dictating or limiting rate setting policy, it is possible that the credit rating of municipalities (through the MFA) may slip below its current AAA rating, which would result increased borrowing costs for all BC municipalities, Translink and the GVRD. This is because credit rating agencies will evaluate such a change as a restriction on the BC municipal sector's ability to repay its debt. There is precedent for this: in February 2002, Standard and Poors stated: "The ratings (of the MFA) also are supported by the MFABC member municipalities' strong liquidity and tax rate-setting autonomy over their local assessment bases."

Port downloading has already been absorbed by municipal governments
Through the downloading federal costs and responsibilities in recent years, such as disputes over PILT payments, the discontinuation of port policing, minimal funding of infrastructure and roads, etc., port municipalities are already contributing significantly to ports' competitiveness.

Municipal taxpayers should not subsidise a federal infrastructure facility
If it is determined that ports and or port industries should not pay property taxes, it is the federal government that should fund this subsidy, not local property taxpayers. The following three arguments strongly support this assertion.

It is noted this inequity is exacerbated in a situation in which ports would be required to remit an annual stipend to the federal government and at the same time be exempted from paying local property taxes. This would amount to a transfer of funds generated using a regressive tax source (from municipal governments) to the federal government, which has access to progressive tax sources. By any objective standard, this is unfair and counters basic principles of equity in taxation that are valued throughout Canadian society.

Appendix C
GVRD Resolution on Provincial Proposal re: Port Industry Taxation


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