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CITY OF VANCOUVER POLICY REPORT
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Report Date: |
February 14, 2005 | |
Author: |
Liz Jones | |
Phone No.: |
604.871.6169 | |
RTS No.: |
04900 | |
CC File No.: |
1551 | |
Meeting Date: |
March 31, 2005 |
TO: |
Standing Committee on City Services and Budgets |
FROM: |
General Manager of Corporate Services / Director of Finance |
SUBJECT: |
2005 Property Tax Options: Three-Year Land Averaging for Property Tax Calculations |
RECOMMENDATION
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 averaging as the 2005 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 31, 2005.
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 31, 2005.
C. THAT, should Council approve the continuation of the land assessment averaging program on March 31, 2005, the Director of Finance be authorized to make appropriate arrangements with the BC Assessment Authority for the production of an averaged 2005 taxation roll, at an approximate cost of $20,000; source of funding to be the 2005 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 2005.
Approval of the recommendations in this report will not authorize continuation of the averaging methodology in 2005. These recommendations 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 known prior to a Council decision to proceed. As noted in the recommendations, the bylaw would be submitted for consideration on March 31, 2005 at which time input from the public would be heard.
BACKGROUND
In each year since 1989, Council has chosen to adjust the market value property taxation system in order to mitigate the impacts of shifts in taxation within the business (Class 06) and residential (Class 01) 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 use 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 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 increases in land value over a two year period as a means of mitigating large increases in taxes. As with averaging, improvement values used in this calculation are always current year values. The phasing option has never shown to be as effective as averaging for mitigating changes in property taxes and Council agreed several years ago not to consider it further.
The table in Appendix A summarizes the measures that have been taken by Council in recent year to smooth large year-over-year property tax changes.
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 in over time 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
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MARKET VALUE OPTION |
THREE-YEAR LAND VALUE AVERAGING OPTION | ||
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2005 assessed land value
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Average of assessed land value for 2003, 2004, & 2005* |
* Note: the average is always taken for the current year and the two prior years.
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:
a) 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.
b) 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 tax is collected from the entire class as would have been the case had averaging not been used.
From the perspective of the taxing authority, averaging is revenue neutral within the class being averaged, i.e. no more tax revenue is 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 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, averaged taxable values will be higher than unaveraged values and these properties will pay more tax than they would if averaging was not utilized. These impacts are demonstrated in the modelling results presented later in this report.
There are a number of criteria, both legislative and administrative, that are utilized in applying land value averaging to the assessment roll. These criteria are:
· 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 are not eligible to be averaged 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. This introduces one of the down-sides of averaging in that the City must bear any additional costs that arise from assessment appeals on properties that are averaged. Since the averaging program was initiated in 1993, these costs have exceeded $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, 2005.
· 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 2005
There are three potential reasons for a change in taxes for an individual property from 2004 to 2005:
· New Construction value added in 2005 - Many existing properties will undergo major upgrading or complete replacement of improvements that will significantly increase improvement values. This increased value will result in additional taxes in 2005, as well as an increase in tax revenue for the City.
· Change in taxable value from 2004 to 2005 - 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 prior to a Council-approved increase in the general tax levy. 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 0% tax increase.
Modelling has been done to compare the impacts on 2005 general taxes using an approach based on market assessed values compared to the averaged value approach for Class 01 Residential, Class 06 Business and Other, and Class 05 Light Industry. The following should be noted about the modelling approach:
· The modelling utilizes the Completed 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 2005 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, no information is currently available 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 reclassifications.
The results of this modelling are set out in Appendices B to G as follows:
Appendix B - Distribution of Estimated Changes in 2005 Property Taxes With and Without Averaging - Class 1 Residential
Appendix C - Change in General Purpose Property Taxes By Neighbourhood With and Without Averaging, 2005 Versus 2004 - Class 1 Residential
Appendix D - Change in General Purpose Property Taxes For Average Property Per Neighbourhood With and Without Averaging, 2005 Versus 2004 - Class 1 Residential
Appendix E - Distribution of Estimated Changes in 2005 Property Taxes With and Without Averaging - Class 6 Business and Other
Appendix F - Change in General Purpose Property Taxes By Neighbourhood With and Without Averaging, 2005 Versus 2004 - Class 6 Business and Other
Appendix G - Change in General Purpose Property Taxes For Average Property Per Neighbourhood With and Without Averaging, 2005 Versus 2004 - Class 6 Business and Other
The results of the modelling are as follows:
Residential Class
The Completed Roll indicates an overall increase in value for Class 01 Residential of 20.2%. Approximately 2.6% of this increase is related to new construction, while 0.2% is related to class transfers, leaving 17.4% reflecting increased market value. However, there continues to be a significant variance around the average change for many properties across the City, with some experiencing significant increases and other significant decreases. Without averaging, properties with an increase in value below approximately 17.4% can expect to see a reduced property tax bill (before a Council directed increase) while properties experiencing an increase above 17.4% would see a tax increase.
The following table summarizes the impacts of averaging on property values and on tax rates in the residential class:
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Assessed Values |
Tax Rate
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Comments | |
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Market Value |
$78.4 billion |
$2.4470 |
· Taxable Value up 20.2%
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Averaged Value |
$71.0 billion |
$2.6997 |
· Averaged Value 10.3% lower than Completed Roll.
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Appendices B, C and D demonstrate this impact of averaging for the class as a whole and by assessment neighbourhood.
The modelling showed that approximately 100,600 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. This is compared to approximately 44,200 properties that will pay higher taxes than they would if averaging was not applied. Most notably 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 30,000 properties.
Business Class
The Completed Roll shows an increase in value for Class 06 Business & Other properties of 8.3% over 2004. However, applying averaging to the land component reduces the total value of this class by 5.8% resulting in a slightly higher tax rate to ensure revenue neutrality. These changes are identified in the following table:
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Assessed Values |
Tax Rate
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Comments | |
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Market Value |
$15.5 billion |
$15.00659 |
· Taxable value up 8.3%
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Averaged Value |
$14.6 billion |
$15.88412 |
· Averaged value 5.8% lower than Completed Roll.
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The modelling showed that approximately 4,200 properties benefit from the application of averaging, paying lower property tax than they would using non-averaged values. Applying the averaging option reduces the number of Class 6 properties with year-over-year tax increases of 12% or more by over 1,400 properties.
The impacts of averaging for Class 06 are illustrated in Appendices E, F and G.
Light Industry Class
Council has not applied averaging to Class 05 Light Industry properties in the past. Staff has modelled the impacts of land averaging in Class 5 this year, due to requests from advocates for light industrial property owners and given the increases in land values in recent years. Applying averaging in 2005 to the land component reduces the total value of this class by 5.8% resulting in a slightly higher tax rate to ensure revenue neutrality. The modelling showed that less than half of the properties (approximately 120) benefit from the application of averaging, paying lower property tax than they would if non-averaged values were used.
4. Recommended Option for 2005: Three Year Land Value Assessment Averaging for Class 01 and Class 06.
As noted above, the City has utilized three year averaging for several years and there exists a strong argument for applying land averaging continually from year to year, on the basis of consistency and equity. 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 recommends that, if Council wishes to provide some mitigation for those properties with the largest increases in property value for the 2005 taxation year, three year land value averaging be applied to both Class 01 Residential and Class 06 Business & Other.
Three year land averaging is not recommended for Class 05 as it only benefits a limited number of properties and it results in more properties experiencing larger tax increases than if market values are used.
Recommendation A instructs the Director of Legal Services to prepare a bylaw to implement the averaging program for 2005. Should Council approve this recommendation, the City will advise taxpayers of this action through newspaper advertisements in a local newspaper on two consecutive days at least two weeks in advance of the bylaw being considered. Any input received from taxpayers will be heard at City Services and Budget Committee on March 31, 2005, at which time Council will be required to approve the bylaw if the averaging program is to proceed.
5. Production of the 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 land averaging on March 31, 2005, Recommendation C authorizes the Director of Finance to contract with the Assessment Authority to produce the 2005 averaged assessment roll with funding provided from the 2005 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 70% of the properties in the residential class, and 42% of the properties in the business class. The Director of Finance therefore recommends that three-year land value averaging be used as the basis for 2005 property taxes for Class 01 Residential and Class 06 Business and Other.
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