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