QQQQ 960426 BLUE
File Reference Number: 1554 TT 960509
SUPPORTS ITEM NO. 3
CS&B COMMITTEE AGENDA
MAY 9, 1996
POLICY REPORT
PROPERTY TAXATION
Date: April 26, 1996
TO: Standing Committee on City Services and Budgets
FROM: General Manager of Corporate Services, in
consultation with the Citizens' Advisory Group
on Property Taxation
SUBJECT: Additional Taxation Policy Considerations for 1996
RECOMMENDATION
A. THAT Council instruct the Director of Finance to introduce a
1996 Property Tax Limitation Program for Business (Class 6)
properties, along the lines discussed in this report. The
Limitation Program would be enabled under Section 173 of the
Vancouver Charter and would require that Council pass a tax
limitation by-law with a two-thirds majority.
B. THAT Council instruct the Director of Legal Services to
prepare a 1996 Property Tax Limitation by-law applicable to
Business (Class 6) properties containing the tax capping
parameters outlined in this report for submission back to
Council for approval.
CONSIDERATION
The Citizens' Advisory Group on Property Taxation submits the
following recommendation for CONSIDERATION. The Chair and other
members of the Group may wish to address Council on this issue.
C. THAT Council approve a $3.2 million shift of tax burden
(approximately 1% of the City's 1995 general purposes tax
levy) proportionately from the Utilities (Class 2), Business
(Class 6), Major Industry (Class 4), Light Industry (Class
5) properties to Residential (Class 1) properties in 1996.
GENERAL MANAGER'S COMMENTS
The General Manager of Corporate Services RECOMMENDS approval of
A and B and advances C for CONSIDERATION as a recommendation from
the Citizens' Advisory Group on Property Taxation.
The Advisory Group has met three times leading up to the
production of this report. In terms of Recommendations A and B
outlined above, the Advisory Group is unanimous in supporting
these actions. In terms of Recommendation C, a majority of the
Advisory Group favour the continuation of shifting 1% of the
City's general purposes tax burden annually and proportionately
from the non-residential property classes to the residential
property class over a five year period which began in 1995. The
Advisory Group also believes that the implementation of the solid
waste and sewer utilities will form an important part of the tax
burden rate-of-adjustment mechanism and expressed a concern over
the delay in the implementation schedule. Moreover, the Advisory
Group has indicated that they would like to report back to
Council at a later date on the implementation strategy previously
approved by Council for those utilities.
Clearly, the decision to continue with the 1% tax burden shift
rests with Council. In my opinion, there is no strong evidence
which suggests that the tax load, as a percentage of the City's
general purposes tax levy, now borne by the residential and
non-residential classes is inappropriate on a historical basis.
The problem arguably rests with how the tax burden is shared
amongst the individual properties within a property class based
on the year-over-year volatility of property assessments. As
Council already knows, land averaging was introduced to dampen
large annual swings in property taxes caused by uneven property
assessments, and to that end it has been successful. Council
should also note that Recommendation C comes with an approximate
2.4% tax increase for residential properties alongside a 0%
inflation/growth tax increase related to the City's 1996
operating budget, resulting in an average increase of about 1%.
A table showing the impact of a $3.2 million shift to residential
properties can be found on page 7 of this report. Charts 7, 8
and 9 of the report Appendix show the historical tax shares,
assessment shares and tax rates for comparison purposes.
COUNCIL POLICY
Council policy has been to keep property taxes affordable by following
a practice of holding year-over-year tax increases at inflationary
levels. For 1996, Council has held the increase in the City's general
purposes tax levy to zero percent, while passing through a slight
increase (0.1%) in the GVS&DD levy to the taxpayers. Council has also
decided that taxes will be raised to offset any loss in provincial
revenue-sharing should that occur.
From 1983 to 1994, Council has maintained the taxation burden sharing
ratios between property classes which existed in 1983, allowing
adjustments to the burden ratios resulting from new construction,
reclassification and zoning changes. In 1994, Council approved a $3
million shift of the City's general purposes tax burden from Class 6
Business to Class 1 Residential properties. In 1995, Council approved
a further shift of $3 million, proportionately from the
non-residential classes to the residential class.
In 1992, Council folded the residential, recreational and farm classes
together to establish a common tax rate for billing purposes, before
any tax limitation measures are applied.
PURPOSE
The purpose of this report is to recommend additional taxation policy
considerations to Council for implementation in the 1996 taxation
year.
BACKGROUND
In recent years, increases to the City's general purposes tax levy
have been limited to the rate of inflation. In spite of this, taxes
on some properties have fluctuated greatly due to marked
year-over-year changes in assessed values. In order to provide
temporary relief from the biggest increases, City Council chose to
limit tax increases in 1989. In each year since, tax increases have
been capped for Class 1 Residential and/or Class 6 Business
properties.
History of Capping Year-Over-Year Tax Increases
Class 1 Residential Class 6 Business
1989 provincial legislation 40.0% cap
1990 no capping 10.1% cap
1991 5.5% cap 7.5% cap; $400,000 max
credit
1992 6.0% cap; $5,000 max credit 10.0% cap; $100,000 max
credit
1993 25.0% cap; select properties 25.0% cap; select
properties
1994 10.0% cap; $500 max credit 10.0% cap; $15,000 max
credit
1995 no capping 15.0% cap; $10,000 max
credit
1. Property Tax Task Force & KPMG Consumption Study
In its April 1994 report to Council, the Property Tax Task Force
presented Council with fourteen recommendations dealing with the
existing assessment and taxation systems, suggesting improvements to
each. Council approved two of the Task Force recommendations for
implementation in the 1994 taxation year, concerning a slight shift of
the tax burden from commercial to residential properties, and a tax
increase capping program for commercial and residential properties.
Among its other recommendations, the Task Force proposed a study of
consumption of City services as related to taxes paid by each property
class. Council established an Advisory Panel as a means of providing
community perspectives into the study. This Panel was made up of
members of the Property Tax Task Force who wished to participate, and
was later expanded by three members to better reflect a cross-section
of community interests.
The consumption study was commissioned in December 1994, and in April
1995, KPMG Management Consulting submitted its report to Council,
accompanied by a staff report from the Director of Finance and a
report from the Chair of the Advisory Panel. City Council received
the consultant's report for information, and instructed the Director
of Finance to report back on short-term policy measures to be
implemented for the 1995 taxation year that specifically addressed the
issues of a shift in the tax burden and of tax capping.
In addition, Council instructed the Director of Finance to report back
on a longer-term taxation policy that would take into account the
recommendations and findings of the consumption study, along with the
recommendations of the Advisory Panel arising from the consumption
study. The development of a longer term taxation policy was to
address the following considerations: taxation policy based on
benefits, services and ability to pay; tax write-off opportunities;
and differential tax rates within classes of property. This work has
awaited the creation of the Citizens' Advisory Group on Property
Taxation, and with that task now accomplished, it will be started
almost immediately.
The Property Tax Task Force report and the KPMG Consumption report are
on file with the City Clerk.
2. The 1995 Taxation Year
In 1995, taxes for residential properties were based on three-year
averaged land values, and no tax capping was applied. Taxes for
business properties were also based upon three-year averaged land
values, in conjunction with a 15% tax limitation program and a $10,000
maximum tax credit. In addition, approximately $3 million was shifted
proportionately from the non-residential classes (Utilities, Major
Industry, Light Industry, and Business) to the residential class.
DISCUSSION
This report presents the results of modelling several tax capping
options for 1996, using stricter qualification criteria than used last
year, and, as well, examines the impacts of shifting an additional
$3.2 million (1% of the City's 1995 general purposes property tax
levy) off the non-residential classes and onto the residential class
as recommended by the Citizens' Advisory Group on Property Taxation.
1. Shifting Tax Burdens
In its report submitted to Council on April 13, 1995, KPMG Management
Consulting recommended a number of priorities for further action. In
the short run, the consultant proposed rate-of-adjustment options for
shifting the tax burden off non-residential properties over the next
five years for Council's consideration. The Chair of the Advisory
Panel also recommended a policy change for each taxation year from
1995 to 1999 that would involve an annual shift from non-residential
to residential property taxpayers equal to one percent of the overall
tax levy. While there was not unanimous agreement by the members of
the Advisory Panel on further shifting the City's general purposes tax
burden from non-residential to residential properties, a majority of
the members favoured that action.
In 1994, Council approved a $3 million tax burden shift from business
to residential properties. In 1995, Council approved the shift of an
additional $3 million, proportionately from all non-residential
properties to residential properties.
The table below sets out the results of these burden shifts, by
showing how the share of assessed value has changed, as compared to
the share of the general tax levy.
Class 1 - Residential
% of Assessed Value % of General Tax Levy
1993 76.4% 39.3%
1994 79.3% 40.0%
1995 80.5% 41.4%
Class 6 - Business
% of Assessed Value % of General Tax Levy
1993 22.4% 55.8%
1994 19.5% 54.8%
1995 18.4% 53.4%
The following table shows the share of the authenticated assessment
roll, as compared to the share of the City's 1995 general purposes tax
levy, for each property class.
Share of 1995 General Share of
'96 Roll Levy ($000) '95 Levy
Residential 80.5% $133,142 41.4%
Utilities .4% 6,997 2.2%
Major Industry .3% 6,189 1.9%
Light Industry .2% 3,150 1.0%
Business/Other 18.4% 171,443 53.4%
Recreational .2% 321 0.1%
Farm .0% 0 0.0%
TOTALS 100.0% $321,242 100.0%
The total taxable value contained in the 1996 Authenticated Assessment
Roll is $65,767,820,811.
The intent of the burden shift recommended by the Task Force was to
have the share of the tax burden better reflect the share of the
City's total assessed value tax base. The KPMG consumption study
explored the relationship between the share of the tax burden and the
share of services consumed. The consultants concluded that the
Residential Class consumed 71% of all tax-supported City services, and
paid 40% of the tax burden, as compared to the non-residential
classes, which consumed 29% of all services while paying 60% of the
tax burden (1994 figures).
In his report to Council on this topic last year, the Director of
Finance suggested that the continuation of the shifting policy be held
until further work is done in the area of utilities, and a more
thorough analysis of the work of the Consumption Report and of the
Property Tax Task Force has been undertaken.
The Citizens' Advisory Group on Property Taxation, which was recently
formed by Council to replace the Property Tax Advisory Panel, supports
an additional one percent burden shift for the 1996 taxation year.
The majority of the Group supported the following recommendation, with
two members of those present opposed:
The Citizens Advisory Group on Property Taxation supports
the recommendation previously made by the Property Tax
Advisory Panel, regarding the continuation of a shift in the
relative tax burdens equal to one percent of the total tax
levy, proportionately from all non-residential classes to
the residential class, for the 1996 taxation year.
In that regard, the following table shows the impact of a further $3.2
million shift of tax burden to the residential class, proportionately
from the non-residential classes (Business, Utilities, Major Industry
and Light Industry). This table reflects a 0% increase in the general
tax levy for the 1996 taxation year.
Tax Rate Tax Rate No Shift Shift $ Difference % Difference
Business $14.403 $14.155 - $0.25 -1.7%
Residential $ 2.649 $ 2.712 + $0.06 +2.4%
The following table shows the residential property tax distributions
in terms of a year-over-year percentage change (1996 over 1995) in
total taxes. This table reflects a $3.2 million shift from the
non-residential classes, a 0% increase in the City's general purposes
tax levy for 1996, and an assumed 0% increase for all the other
levies.
Property Distribution -
Residential Class with $3.2 m Shift In
# Properties # Properties
Percent Change Interval No Shift With Shift
<= 0% 74,133 56,149
<= 2% 24,796 30,445
<= 5% 14,082 24,108
<= 7% 1,663 3,185
<= 10% 1,042 1,503
<= 20% 1,507 1,774
<= 30% 275 311
<= 50% 383 377
> 50% 845 874
TOTAL 118,726 118,726
Average Change in Taxes -0.6% +0.5%
Indicated Tax Rates $2.649 $2.712
The report Appendix material contains charts numbered 1 through 6 on
the business and residential tax distributions (all levies) produced
using averaged land assessments (previously approved by Council), with
and without a $3.2 million shift. These charts reflect no change in
the City's general purposes tax levy for 1996, and assume no tax
increase for all other tax levies.
2. Capping Property Taxes
The Property Tax Task Force reached a consensus in 1994 that capping
taxes to a determined percentage increase limit was appealing in the
short term, in that this prevented taxes on individual properties from
undergoing dramatic changes from year to year. The Task Force also
recognized that capping taxes masks the effects of uneven changes in
market values that underlie tax shifts and that once tax capping is
lifted the adjustment back to market level taxation would be very
difficult and painful. Given the foregoing, the Task Force concluded
that: "Tax capping is not a tool that should be used by City Council
on an ongoing basis to mask tax increases that are due to jumps in
actual market values."
The Task Force recommended that a plan to phase out the use of tax
capping should be part of the consumption study, leading to a new tax
policy for the City. One of the short-run recommendations of the KPMG
report suggested that Council confirm and implement a preferred
approach for phasing out tax capping. The consultant presented four
options that could be used to gradually phase-out tax capping, but
indicated that the most promising options would continue to offer tax
capping to a broad base of properties, while gradually reducing and
eliminating the benefit.
Based on the foregoing, we have modelled various capping options for
possible implementation in 1996.
(a) Business Properties (Class 6)
The capping mechanism that is being recommended to Council this year
for business properties is based on increasing the year-over-year
bottom line tax increase hurdle rate from 15% (1995) to 20%, and
reducing the maximum amount of tax credit from $10,000 (1995) to
$7,500.
These new values reflect a one-third increase in the hurdle rate and a
25% decrease in the maximum tax credit available to an individual
property. The proposed tax capping program will increase the Class 6
tax rate over what it would have been without capping by $0.066 or
0.5% to $14.469 per thousand dollars of taxable value. The number of
commercial properties that would benefit from capping this year (about
530 properties) is reduced from the approximately 2,300 properties
that received a benefit in 1995. This result is consistent with the
phase-out approach recommended by KPMG Management Consulting.
The essential features of the proposed tax capping program are noted
below:
* a 20% year-over-year bottom line tax increase hurdle rate,
* a $7,500 limit on the tax credit to an individual property,
* an individual property is excluded from capping if:
- the property did not qualify for land assessment averaging
in 1996 pursuant to By-law No. 7543, or
- the property did not have an assessed value for improvements
in both the 1995 and 1996 taxation years, or
- the property was exempt from real property taxation in 1995,
or
- the 1996 assessed improvements value of the property has
increased by more than 10% over its 1995 improvements
assessment and such increase is, according to the records of
the B.C. Assessment Authority, attributable to a change in
the physical characteristics of the improvements,
* capping does not apply to sewer, water, local improvement or
other charges.
The proposed tax capping program produced the following Class 6
property tax frequency distributions in terms of a year-over-year
percentage change (1996 over 1995) in total taxes. This table
reflects a 0% increase in the City's general purposes tax levy for
1995, and an assumed 0% increase for all the other levies.
Property Distribution -
Business Class with 20% Tax Cap with $7,500 Maximum Credit
# Properties # Properties
Percent Change Interval No Capping With Capping
< 0% 4,642 4,577
0% - 10% 1,835 1,834
11% - 20% 546 1,011
21% - 30% 289 208
31% - 50% 291 91
> 50% 185 67
TOTAL 7,788 7,788
Average Change in Taxes 3.2% 1.9%
Indicated Tax Rates $14.403 $14.469
(b) Residential Properties
In 1995, the elimination of tax capping on residential properties was
achieved, and that class was returned to a market value based taxation
regime. Consistent with the Council's goal of phasing out tax
capping, no modelling was undertaken for this property class for 1996
and no tax limitation program is recommended.
SOCIAL IMPLICATIONS
Property taxation policy has a direct impact on children and families.
Since 1989, Council has attempted to dampen large year-over-year tax
increases, which are driven by real estate market conditions in the
City, in order to make housing (owned and rented) as affordable as
possible. Council action to date has also capped the growth of
commercial taxes with a view to preserving the business/residential
character of Vancouver's neighbourhoods.
CONCLUSION
This report outlines additional property tax policy options for
Council consideration before the appropriate 1996 tax rates are struck
to reflect a balanced operating budget. Following from the
recommendations set out in the consumption report prepared by KPMG
Management Consulting, this report presents a policy recommendation
dealing with the continuation of the phase-out program for capping
property taxes on commercial properties. The report also advances a
recommendation of the Citizens' Advisory Group on Property Taxation
around the shift of an additional $3.2 million of the City's general
purposes tax burden from non-residential to residential properties for
consideration.
A longer-term property tax policy for the City of Vancouver is to be
developed over the coming year by the Director of Finance, in
cooperation with the Citizens Advisory Group on Property Taxation.
* * * * *
APPENDICES - On file in the City Clerk's Office.