SUPPORTS ITEM NO.
CS&B COMMITTEE AGENDA
FEBRUARY 29, 1996
POLICY REPORT
PROPERTY TAXATION
Date: February 15, 1996
TO: Standing Committee on City Services and Budgets
FROM: Director of Finance
SUBJECT: 1996 Property Tax Calculations
RECOMMENDATION
A. THAT Council approve three-year averaging as the 1996
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 a single tax rate applied to 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 1996 taxation roll at an
approximate cost of $15,000, with funding approved in advance
of the 1996 operating budget.
D. THAT the Director of Finance be authorised to place the
required advertisements in the local newspapers 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,
however, that even after averaging, significant tax shifts would
occur between properties in the Business Class. This results
from a combination of uneven changes in assessment values across
the neighbourhoods, along with the absence, at this point, of any
form of a 1996 tax credit program, to reduce the impact of these
shifts. Staff will report on this program 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. For the
1996 taxation year, Council has committed to raising the overall tax
levy by no more than 1%.
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, from the utilities,
major industry, light industry and business classes proportionately to
the residential class.
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 property taxes, for residential and commercial
properties, 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. Based on the tax distributions produced
under the three options, this report recommends three-year land
assessment averaging as the preferred 1996 taxation option for
residential and commercial 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 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 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. 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.
The Director of Finance will report to Council on the continuation of
phasing out tax capping in the 1996 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 (1994, 1995 and
1996) and adding this average to its current year (1996) assessed
improvement value. The relevant tax rate is then applied to this
taxable value.
taxation based on assessed market taxation based upon three-year
value = land value averaging =
average of assessed land value
assessed 1996 land value for 1994, 1995 and 1996
+ assessed 1996 improvement value
+ assessed 1996 improvement value
= total 1996 taxable value = total 1996 taxable value
x tax rate
x tax rate
= 1996 general taxes = 1996 general taxes
2. Land Value Phasing
Phasing applies to current (1996) 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.
With land phasing, if the percent change in land value for an
individual property is greater than the average for its class, then
between 50% and 66% of the value of the increase over the average is
sheltered from taxation. As with averaging, the current (1996)
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 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,
1996.
- 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 or 1995, as staff were able to
handle all appeals within the administrative process provided for
in the Charter.
MODELING THE OPTIONS
The averaging and phasing options were modeled for Class 1
(Residential) and Class 6 (Business/Other) properties. Appendices III
through VI of this report set out the projected tax impacts on the
City s 1996 general purposes taxes for each of the three taxation
calculation options, for residential and business taxes. These
appendices show, by assessment neigh-bourhood, the taxes produced with
t h e u n m o d i f i e d s y s t e m ( u s i n g
assessed values as the basis for taxation), contrasted against those
produced using the averaging and phasing options.
The 1996 general purposes taxes are projected assuming a 1% tax
increase. These projections are based on the Consolidated Roll,
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 1996
property valuations for tax billing purposes. The sample used for the
tax modeling 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 VII and VIII of this report set out 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 1995 general
purposes taxes, net of any (proportional) tax credit that was applied
in 1995. Note that three-year averaging was applied to Class 1
Residential and Class 6 Business properties in 1995, and tax increases
were capped at 15% in Class 6.
SUMMARY OF MODELING RESULTS
The graph in Appendix VII 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%).
Appendix VIII shows that the beneficial effects of averaging in the
Business Class are not as significant in 1996. Using averaging as
compared to using market assessed values in computing property taxes,
roughly the same number of properties have tax increases of over 10%,
and, the average tax increase for the class is only about half a
percentage point lower.
Although the beneficial effects of land value averaging are not as
marked as they have been in the past years for the Business Class,
there is still a strong argument for applying this tax option to Class
6 properties in 1996 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
advantageor disadvantageaproperty, dependingonthe marketcircumstances.
We are therefore recommending that the land value averaging option
once again be applied to both the Residential and Business classes for
the 1996 taxation year.
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 1996 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 1996 taxation distributions produced under the three property tax
options available to Council this year suggest that three-year land
value averaging is the best option for residential and business
properties. The recommendations of this report reflect that
observation.
* * * * *
APPENDIX I
SUMMARY OF INTERVENTION TO MARKET-VALUE BASED PROPERTY TAXATION
CITY OF VANCOUVER, 1989 TO 1995
CLASS 1 RESIDENTIAL CLASS 6 BUSINESS/OTHER
1989 - capped land value increases at - capped tax increases at 40%
61%
1990 - no adjustment to taxation - capped tax increases at 10.1%
methodology
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 - implemented three-year land
value value
averaging averaging
- tax increases capped at 25% for - tax increases capped at 25% for
select select
properties properties
1994 - continued three year land value - continued three year land value
averaging averaging
- tax increases capped at 10% for - tax increases capped at 10% for
select select
properties properties
- $500 limit on tax credit - $15,000 limit on tax credit
1995 - continued three year land value - continued three year land value
averaging averaging
- no tax capping - tax increases capped at 15% for
select
properties under a phasing out
methodo-
logy
- $10,000 limit on tax credit