SUPPORTS ITEM NO. 3
                                                CS&B COMMITTEE AGENDA
                                                FEBRUARY 27, 1997     
                                 POLICY REPORT
                               PROPERTY TAXATION

                                           Date:  February 15, 1997
                                           CC File No. 1552-1

   TO:       Standing Committee on City Services and Budgets

   FROM:     Director of Finance

   SUBJECT:  1997 Property Tax Calculations


   RECOMMENDATIONS

        A.   THAT Council approve three-year averaging as the 1997 property
             tax  calculation methodology  for  Residential (Class  1)  and
             Business and  Other (Class 6)  properties as discussed  in the
             report,  and that the property  taxes on the  other classes of
             property (Classes 2, 4, 5, 8 and 9) be calculated using market
             assessment values.

        B.   THAT the Directors of Finance and Legal Services 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  the
             appropriate arrangements with the BC Assessment  Authority for
             the  production of  an  averaged  1997  taxation  roll  at  an
             approximate cost of $15,000,  with funding approved in advance
             of the 1997 operating budget.

        D.   THAT  the  Director of  Finance  be  authorised  to place  the
             required  advertisements in  a local  newspaper  notifying the
             City s  taxpayers of Council s  intent to implement three-year
             averaging  and  showing the  effects  of  averaging on  sample
             properties within the City.

   GENERAL MANAGER S COMMENTS

        The General Manager of Corporate Services RECOMMENDS approval of A,
        B, C and D, noting that  land assessment averaging must be approved
        now to meet legal time lines.
        Council members will  note that  even after averaging,  there is  a
        significant  number of properties with tax increases of over 10% in
        the  Business Class.   This  results from  a combination  of uneven
        changes in assessment values  across the neighbourhoods producing a
        tax shift, along with the  absence, at this point, of any form of a
        1997  tax  credit program  to reduce  the  impact of  these shifts.
        Staff will report on additional tax policy options at a later date.

   COUNCIL POLICY

   Council policy has been  to keep property taxes at affordable  levels by
   holding year-over-year  tax increases to inflationary levels.   In 1996,
   there  was no  increase  to the  general  tax levy.    Given the  recent
   provincial  budget  cutbacks  in  revenue-sharing, Council  has  made  a
   decision to increase the overall tax levy by 4.5% for 1997.  Council has
   not yet decided how  to apportion that increase among  property classes.
   Consequently,  this  report is  based on  the  assumption that  the 4.5%
   increase is spread evenly among all property classes.

   From  1983  to  1994,  Council maintained  the  taxation  burden between
   property  classes  at the  levels which  existed  in 1983,  allowing for
   adjustments to  the burden  levels resulting from  reclassification, new
   construction or zoning  changes.   In 1994, Council  altered the  burden
   proportions slightly by  shifting approximately 1%  of total taxes  from
   the  business class  to the residential  class.  In  1995, Council again
   shifted approximately 1%  of the total tax burden,  proportionately from
   the utilities, major  industry, light industry  and business classes  to
   the residential class. 

   In 1996,  the Citizens  Advisory Group on  Property Taxation recommended
   that Council shift  an additional $3.2 million of the general tax burden
   proportionately  from  the non-residential  classes  to  the residential
   class.  Council,  however, decided not to  undertake a further shift  in
   the tax burden for the 1996 taxation year.

   Since 1992,  the residential,  recreational and  farm classes have  been
   grouped together in  order to  establish a common  tax rate for  billing
   purposes.

   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  three-year land
   averaging  and land  phasing, alongside the  taxation system  based upon
   market  assessment  values.    This report  recommends  three-year  land
   assessment  averaging   as  the  preferred  1997   taxation  option  for
   residential and business properties.

   BACKGROUND

   In each year since 1989,  City Council has chosen to take  some means of
   intervention to market value property taxation, in order to mitigate the
   impacts  of large shifts in taxation within the business and residential
   property  classes, which  have resulted  from uneven  assessment changes
   within each of these classes.  

   In 1992, the provincial government introduced new legislation applicable
   to  future taxation years, which allowed for the provision of three-year
   land value assessment  averaging and  a return to  an annual  assessment
   roll.   Land value  phasing ( peak  shaving ) was  also  included as  an
   alternate  option   for  improving  the  year-over-year   stability  and
   predictability of property taxes.

   In each  year since 1993, Council has chosen to use 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 I summarises the measures that have  been taken by
   Council  in order to smooth  large year-over-year tax  changes in recent
   years.

   A Note on Tax Capping

   The  tax  capping  program  was  originally  introduced  in  1989  as  a
   short-term   emergency  measure   intended   to  alleviate   very   high
   year-over-year  tax  increases  for   certain  properties.    These  tax
   increases were the  result of extreme  year-over-year changes in  market
   value, in certain areas of the  city.  However, tax capping obscures the
   effects of  a market value  based taxation  system, and  the longer  the
   capping  program  remains in  place  the further  away  the relationship
   between property taxes and market  value becomes.  As this  happens, the
   tax capping program becomes more difficult to remove, because individual
   properties  can have very high tax increases resulting directly from the
   removal of a tax cap.  
   In  their  March 1995  report  to  Council, KPMG  Management  Consulting
   recommended  that tax  capping  be phased  out  through an  approach  of
   systematically  increasing the qualifying criteria for  receipt of a tax
   credit,   and  decreasing  the  maximum  tax  credit  available  for  an
   individual   property.     Council   adopted  this   recommendation  for
   implementation in the 1995  taxation year, and has employed  a phase-out
   program over 1995 and 1996.
   The Director  of Finance will report  to Council on  the continuation of
   phasing out tax capping in the 1997 taxation year at a later date.  This
   present report deals only with the questions of land value averaging and
   land phasing as means of smoothing year-over-year tax changes.

   DISCUSSION

   The  details of the two alternate taxation options, land value averaging
   and land value phasing, are discussed below.

   1. Land Value Averaging

   Market  value  based  taxes are  computed  by  multiplying a  property s
   assessed value by  the tax rate for the property  class.  In comparison,
   taxes  using   three-year  averaging  are  calculated   by  averaging  a
   property s land assessments  for the  past three years  (1995, 1996  and
   1997)  and adding  this  average to  its  current year  (1997)  assessed
   improvement  value.   The relevant  tax  rate is  then  applied to  this
   taxable value.

   Calculation of Tax Rates Under Land Value Averaging

   ASSESSED MARKET VALUE                   THREE-YEAR LAND VALUE AVERAGING

                                              average of assessed land value for
      assessed 1997 land value                1995, 1996 & 1997

    + assessed 1997 improvement value       + assessed 1997 improvement value
    = total 1997 taxable value              = total 1997 taxable value

    x tax rate (market)                     x tax rate (averaged)
    = 1997 general taxes                 = 1997 general taxes



   2. Land Value Phasing


   Phasing applies to current (1997) land values only, and is determined by
   a formula established by provincial legislation.  Council has discretion
   in deciding the  amount of land  value that is sheltered  from taxation.
   The range  of shelter is from 50% to 66%  of the land value increase for
   an individual property that is  in excess of the average change  in land
   value  for the  entire class.   As  with averaging,  the current  (1997)
   assessed improvement value is added to the adjusted land value to arrive
   at a combined value for taxation purposes.  

   Phasing  is a  peak shaving  mechanism, as  compared to  averaging which
   works  to smooth  the impacts  of both  increases and decreases  in land
   assessments.  In  past years, land value phasing has not proven to be as
   effective  as has  averaging in reducing  the number  of properties with
   very  high tax  increases,  and as  such land  value averaging  has been
   chosen over this mechanism in each year since 1993.


   3. Implementation Rules


   The following rules  apply to the use of either  land value averaging or
   land value phasing.
   -Averaging or phasing may be applied to more than one class of property,
   but  not to classes  valued by special  rates (e.g.  utilities, farm and
   major industry).

   -Averaging or phasing 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 or  phasing will produce  the same
   amount of tax revenue as would be produced using unmodified values.
   -Averaging or phasing by-laws must be adopted before March 31, 1997.

   -Taxpayers must be notified of the  impacts of averaging or phasing,  at
   least two  weeks in  advance of  the adoption  of a  by-law implementing
   either  of  these.   This notice  must be  published in  two consecutive
   issues of a newspaper, showing the resulting taxes on  sample properties
   within the City.
   -A separate  Court of Revision  is required,  to be held  after the  tax
   billing date, to accommodate appeals to the application of the averaging
   or phasing by-law.  We would attempt to combine this Court with the fall
   Court  of Revision on local improvements,  if one is scheduled, in order
   to avoid a separate sitting.  Council was not required to sit as a Court
   of Revision  to hear averaging appeals  in 1993, 1994, 1995  or 1996, as
   staff were able to handle all appeals within the  administrative process
   provided for in the Charter.


   MODELLING THE OPTIONS

   The  averaging  and   phasing  options   were  modelled   for  Class   1
   (Residential) and Class 6  (Business/Other) properties.  Appendices III,
   IV, VI and  VII of this report set out the  projected tax impacts on the
   City s  1997  general purposes  taxes  for each  of  the  three taxation
   calculation  options, for  residential and  business properties.   These
   appendices show,  by assessment  neighbourhood, the taxes  produced with
   the unmodified system (using assessed values as the basis for taxation),
   contrasted  against  those  produced  using the  averaging  and  phasing
   options.
   The 1997  general purposes taxes are projected  assuming a 4.5% increase
   in the tax  levy, apportioned evenly across all property classes.  These
   projections are  based on the  Consolidated Roll taxable  value figures,
   recently produced by the BC Assessment Authority.  The Consolidated Roll
   values may  be modified by the  Court of Revision process,  or by Appeal
   Board decisions,  but the values  essentially reflect the  1997 property
   valuations for  tax billing  purposes.   The  sample  used for  the  tax
   modelling  exercise  set  out  in  this  report  is  screened   for  new
   construction, reclassified properties, vacant  land, and all  properties
   not eligible  for land  value  averaging, which  would skew  results  if
   included.

   Appendices V  and VIII of this  report set out  graphically the taxation
   distributions, in  percentage  intervals for  residential  and  business
   properties, produced under each of the  three taxation options.  The tax
   changes  are based  upon comparisons with  actual 1996  general purposes
   taxes, net of  any (proportional) tax  credit that was applied  in 1996.
   Note that three-year  averaging was applied  to Class 1  Residential and
   Class 6 Business  properties in 1996, and  tax increases were  capped at
   20% (to a maximum $7,500 credit) in Class 6.


   SUMMARY OF MODELLING RESULTS
   Residential Class


   The  graph in  Appendix V  clearly shows  that the  three-year averaging
   option produces the best results for the Residential Class, in terms  of
   reducing the number of properties with very high tax increases (that is,
   over   10%).     Averaging  reduces   the  number  of   properties  with
   year-over-year tax increases of over 10% by about 8,700 properties.  

   Note,  however, that  because  the effect  of averaging  is to  pull the
   year-over-year change in taxes for each property toward the mean change,
   it has  the effect  of  reducing the  number  of properties  that  would
   otherwise experience  a tax decrease in 1997.  Because of this, the mean
   overall tax increase is actually raised with averaging, by approximately
   one percent.
   Business Class

   Appendix  VIII  shows  that  there  is  minimal  advantage  to  applying
   averaging to  Class 6 in  1997.   Using averaging as  compared to  using
   market  values in  computing property taxes,  there are  about 100 fewer
   properties  that have  tax increases of  over 10%.  Land value averaging
   reduces the property  taxes that would be paid  by those properties that
   would otherwise experience extreme tax increases, and results in a lower
   overall average increase for Class 6 (3.7% as compared to 4.2%).
   We note that more than half of  the properties in Class 6 with very high
   tax increases (over 20%) are  those that received a tax credit  in 1996.
   The  tax increase is the result of the credit being removed in 1997.  As
   noted  above,  staff  will  be reporting  to  Council  at  a later  date
   regarding the tax credit program for 1997.

   There still exists  a strong argument  for applying  this tax option  to
   Class 6  properties in 1997,  on the  basis of  consistency and  equity.
   Since land value  averaging dampens the tax impacts  of large changes in
   taxable value  in either direction in a given year, it can be reasonably
   argued  that, in the fullness of time,  a property is neither advantaged
   nor disadvantaged by averaging market value land assessment trends  on a
   continual  basis.    On  the  other  hand,  selectively  employing  land
   averaging in  certain years and not in  others could either advantage or
   disadvantage a property, depending on the market circumstances.
   We are therefore recommending that the land value averaging  option once
   again be  applied to both the  Residential and Business classes  for the
   1997 taxation year.

   A Note Regarding Land Phasing


   In each  year since  1993,  statistical modelling  has shown  that  land
   phasing has not been as effective as land  value averaging in mitigating
   tax increases in Vancouver.  Because of this, staff will be recommending
   to Council later this year that land phasing not be considered as a  tax
   option in future  years.  This will greatly simplify the presentation of
   tax options to Council.   PRODUCTION OF AN AVERAGED ROLL
   In 1993, the BC Assessment  Authority announced that it would  supply an
   averaged/phased  assessment  roll to  any  municipal  jurisdiction on  a
   user-fee basis, at the cost  of $0.12 per folio.  The  alternative would
   be for a  municipality to  duplicate the system  design and  programming
   work, using its  own resources, to produce a similar  product.  The City
   has purchased this service in each year since 1993 for the reasons noted
   below.  These reasons continue to be applicable in the current year.

   -The BC Assessment Authority has already done the programming work.  The
   City would need to reschedule programming resources from other important
   work to produce the special roll.
   -The Assessment Authority s files contain more property information than
   the City s tax database.  This detail is necessary to qualify a property
   for averaging, and the  City would likely have fewer  successful appeals
   on  the application of  its averaging by-law  based upon  a special roll
   produced  by the  BCAA.   Special conditions  which preclude  a property
   being averaged include:

   -vacant land only
   -a change of zoning

   -subdivision
   -consolidation

   -change from long-term resident status
   The  Director  of Finance  is  again  recommending that  the  Assessment
   Authority be contracted to produce the 1997 special roll, should Council
   approve  three-year averaging.  The  cost of this  service for Vancouver
   would be approximately $15,000.

   SOCIOECONOMIC IMPLICATIONS
   Property  taxation policy has a direct impact on children, families, and
   ultimately  every  resident  in  Vancouver,  whether  a  residential  or
   commercial property  owner or tenant.  Property taxes are a capital tax,
   and as such are  not directly related to  either income or  consumption.
   Council therefore  has no direct  control over  the extent to  which its
   property taxation policy is regressive or progressive.  

   Since 1989,  Council has  attempted to  dampen large year-over-year  tax
   increases, which have  been driven by the  fluctuating market conditions
   prevalent in Vancouver.   The intention of these interventions  has been
   to make both owned and rented housing as affordable as  possible, and to
   mitigate the  negative effects  that high and/or  unpredictable property
   taxes can have on business owners.
   CONCLUSION


   The   1997   taxation    distributions   produced   under   the    three
   assessment-based  property tax  options available  to Council  this year
   suggest that three-year land value averaging is the best option, in that
   it  lowers the number of  properties that experience  extremely high tax
   increases.  While this effect is not as marked in Class 6 (Business), it
   is still recommended in order  to maintain consistency from year-to-year
   in taxation policy.


   *     *     *     *     *

                                                                   APPENDIX I


                                   SUMMARY OF INTERVENTION TO MARKET-VALUE BASED PROPERTY TAXATION
                                                   CITY OF VANCOUVER, 1989 TO 1996


                  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%                     - capped tax increases at 7.5%
                  - no limit on tax credit                           - $400,000 limit on tax credit
     1992         - capped tax increases at 6.0%                     - capped tax increases at 10.0%

                  - $5,000 limit on tax credit                       - $100,000 limit on tax credit
     1993         - implemented three-year land value averaging      - implemented three-year land value averaging
                  - tax increases capped at 25% for select           - tax increases capped at 25% for select
                    properties                                         properties
     1994         - continued three year land value averaging        - continued three year land value averaging

                  - tax increases capped at 10% for select           - tax increases capped at 10% for select
                    properties                                         properties
                  - $500 limit on tax credit                         - $15,000 limit on tax credit
     1995         - continued three year land value averaging        - continued three year land value averaging

                  - no tax capping                                   - 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        - continued three year land value averaging

                  - no tax capping                                   - tax increases capped at 20% for select
                                                                       properties under a phasing out methodology
                                                                     - $7,500 limit on tax credit