POLICY REPORT

PROPERTY TAXATION

Date: February 10, 1998 Author/Local: K. Levitt/7251

C. C. File: 1552

TO: Standing Committee on City Services and Budgets

FROM: Director of Finance

SUBJECT: Three-Year Land Value Averaging for 1998 Property Tax Calculations

RECOMMENDATIONS

A.THAT Council approve three-year land value averaging as the 1998 property tax calculation methodology for the residential (Class 1) and business/other (Class 6) properties as discussed in this report, and that the property taxes for all other classes (Classes 2, 4, 5, 8 and 9) be calculated using market assessed 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 appropriate arrangements with the BC Assessment Authority for the production of an averaged 1998 taxation roll, at an approximate cost of $20,000, with funding approved in advance of the 1998 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 land averaging and showing the effects of averaging on sample properties within the City.

NOTE: APPENDICES ON FILE IN CITY CLERK'S OFFICE

CITY MANAGER’S COMMENTS

The City Manager RECOMMENDS approval of A, B, C and D, noting that land assessment averaging must be approved now to meet legal time lines.

COUNCIL POLICY

Council policy has been to keep property taxes at affordable levels by holding year-over-year tax increases to inflationary levels. In 1997, there was a 4.5% increase to the overall tax levy, applied differentially to property classes. The Class 1 (residential) general tax levy was increased by 6.6%, and the levies of all other classes was increased by 3.0%. The increase to the tax levy in 1997 was the result of sudden provincial cutbacks in revenue-sharing.

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 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. There was no burden shift in 1996, and in 1997 the differential tax increase resulting in a shift of approximately $2.9 million onto the residential class, from all other classes. As of 1997, the residential class paid 43% of the general tax levy, the business class 53%, and the remaining classes 4%.

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.

Council has approved the implementation of a solid waste utility for 1998, plus the collection of a charge that offsets recycling costs. The net impact of the solid waste utility implementation is neutral: the costs of solid waste services ($8.4 million) are moved off the residential property tax levy and substituted with user fees. However, within the residential class, this change will result in a net increase in costs to some properties and a decrease to others.

A separate, but related, change to be implemented in 1998 is the collection of funds to offset the costs of the municipal recycling program ($3.8 million). This charge will be collected as part of the solid waste utility fee. Unlike the recovery of solid waste costs, this represents a new charge to those residential taxpayers that will pay the utility fee.

PURPOSE

The purpose of this report is to review the effects of three-year land averaging, compared to the traditional taxation system based upon market assessment values. This report recommends three-year land assessment averaging as the preferred 1998 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, which allows 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 Land Phasing

Phasing applies to current year land values only, and is determined by a formula established by provincial legislation. Council has discretion in deciding the amount of land value thatis 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 (1998) 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 every year the impacts of land value averaging and land value phasing have been analysed (since 1993), averaging has proven to be more effective than phasing in reducing the number of properties with very high tax increases. Therefore, phasing has not been considered as a taxation option for 1998.

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. There was no capping applied to the residential class in 1997, and a very moderate cap was applied to the business class (25% cap with a $5,000 maximum credit).

The Director of Finance will report to Council on tax capping along with other taxation issues for the 1998 taxation year at a later date. This current report deals only with the questions of land value averaging as means of smoothing year-over-year tax changes.

DISCUSSION

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 (1996, 1997 and 1998) and adding this average to its current year (1998) assessed improvement value. The relevant tax rate is then applied to this taxable value.

Calculation of Tax Rates Based on Market Value and on Land Value Averaging Method

ASSESSED MARKET VALUE	THREE-YEAR LAND VALUE AVERAGING
assessed 1997 land value + assessed 1997 improvement value = total 1997 taxable value x tax rate (market) = 1997 general taxes	average of assessed land value for 1995, 1996 & 1997 + assessed 1997 improvement value = total 1997 taxable value x tax rate (averaged) = 1997 general taxes

Implementation Rules

The following rules apply to the use land value averaging.

-Averaging 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 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 by-laws must be adopted before March 31, 1998.

-Taxpayers must be notified of the impacts of averaging, 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 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 1996 or 1997, as staff were able to handle all appeals within the administrative process provided for in the Charter.

MODELLING THE OPTIONS

The impacts of land value averaging were modelled for Class 1 (Residential) and Class 6 (Business/Other) properties. Appendices III to VIII of this report set out the projected tax impacts on the City's 1998 general purposes taxes under the two 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 land averaged taxable values.

The 1998 general purposes taxes are projected assuming no increase in the tax levy. The 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 1998 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 taxation options. The tax changes are based upon comparisons with actual 1997 general purposes taxes, net of any prorated tax credit that was applied in 1997 (business class only). Note that three-year averaging was applied to Class 1 Residential and Class 6 Business properties in 1997, and tax increases were capped at 25% (to a maximum $5,000 credit) in Class 6.

MODELLING RESULTS

Residential Class

The graph in Appendix V shows that applying the three-year averaging option reduces the number of properties with year-over-year tax increases of over 10% by about 3,400 properties. Of the overall Class 1 sample, 58% of the properties benefit from the application of averaging (that is, property taxes are lower using 1998 averaged values than they would otherwise be, using non-averaged values). The average year-over-year change in general taxes is 4.3% without averaging and 4.1% with averaging.

In the analysis shown in the appendices, 1997 actual taxes paid are compared to estimated 1998 taxes plus the new solid waste utility charge. Therefore, there are three separate reasons for changes in taxes to an individual residential property.

I.Change in assessed value from 1997 to 1998 - On average, Class 1 assessed values have not changed over 1997 levels. However, although the average year-over-year change in value is zero, there are many properties with increases and many with decreases in assessed values. There is no strong relationship between property value and change in assessed value. Similarly, there is not a marked difference in average year-over-year changes to property values between westside and eastside neighbourhoods.

ii.Tax shift due to solid waste utility charge - With the implementation of the solid waste utility, $8.4 million is removed from the residential tax levy. This same amount is collected via a flat charge on residential properties that receive municipal solid waste services. While the impact of this change on the overall class is neutral, the cost to certain properties within the class will increase and for others will decrease, as a result in the change from collection of these funds based on assessed value to collection based on a flat user fee.

iii.Additional charge for recycling - 1998 will be the first year that recycling costs are collected, at $45 per single family residential property. The addition of this user fee represents a new charge for Class 1 properties, which adds approximately 2.6% to the total amount collected from this class over 1997 ($3.8 million added to 1997 residential tax levy of $149.3 million).

Business Class

Appendix VIII shows that there is a moderate advantage to applying averaging to Class 6 in 1998. Using averaging as compared to using market values in computing property taxes, there are about 200 fewer properties that have tax increases of over 10%. Of the overall Class 6 sample, 21% of the properties benefit from the application of averaging (that is, property taxes are lower using 1998 averaged values than they would otherwise be, using non-averaged values). The average year-over-year change in general taxes is -2.6% without averaging and -2.1% with averaging.

There still exists a strong argument for applying land averaging continually from year to year, 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. This is consistent with the recommendation made by the Property Tax Task Force in April 1994, 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 Citizens’ Advisory Group on Property Taxation has indicated that it supports land value averaging for the 1998 taxation year.

It is noted that approximately half of the properties in Class 6 with very high tax increases (over 20%) are those that received a tax credit in 1997. The analysis presented here assumes there will be no tax capping in 1998. Staff will be reporting to Council at a later date regarding the tax credit program for 1998.

Staff is therefore recommending that the land value averaging option once again be applied to both the residential and business classes for the 1998 taxation year.

PRODUCTION OF AN AVERAGED ROLL

In 1993, the BC Assessment Authority announced that it would supply an averaged or 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 1998 special roll, should Council approve three-year averaging. The cost of this service for Vancouver would be approximately $20,000.

CONCLUSION

Land value averaging benefits those properties with the highest tax increases in both the residential and business classes. The Director of Finance therefore recommends that three-year land value averaging be used as the basis for 1998 property taxes.

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(c) 1997 City of Vancouver