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