POLICY REPORT
FINANCE

Date: February 25, 1999
Author/Local: K. Levitt/7251

RTS No. 00531

CC File No. 1551

TO:	Standing Committee on City Services and Budgets
FROM:	Director of Finance
SUBJECT:	Three-Year Land Averaging for 1999 Property Tax Calculations

RECOMMENDATIONS

A. THAT Council approve the continuation of three-year land value averaging as the 1999 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 1999 taxation roll, at an approximate cost of $20,000.

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.

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 POLICY

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, compared to the traditional taxation system based upon market assessment values. This report recommends three-year land assessment averaging as the preferred 1999 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 legislation, which allows for the provision of three-year land value assessment averaging. 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 A 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

In 1989, tax capping was introduced as a short-term emergency measure, intended to alleviate very high year-over-year tax increases for certain properties. With the alternative provision of land averaging, Council resolved to phase out tax capping, and 1998 was the first year that a tax cap was applied to neither residential nor business class properties. This ten-year phase out period illustrates how difficult it is to remove tax capping once it has been implemented.

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.

Since tax capping was successfully phased out last year, it will not be considered for 1999. The 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 current-year 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 (1997, 1998 and 1999) and adding this average to its current year (1999) assessed improvement value. An adjusted tax rate is then applied to this taxable value. The same amount of total taxes are collected from each property class, regardless of whether averaging is applied or not. This is the reason different tax rates are applied to market versus three-year land averaged property values.

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

ASSESSED MARKET VALUE	THREE-YEAR LAND VALUE AVERAGING
Assessed 1999 land value + Assessed 1999 improvement value = Total 1999 taxable value x Tax rate (market) = 1999 general taxes	Average of assessed land value for 1997, 1998 & 1999 + Assessed 1999 improvement value = Total 1999 taxable value x Tax rate (averaged) = 1999 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, 1999.

· 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 from 1993 through 1998, as staff were able to handle all appeals within the administrative process provided for in the Charter.

MODELLING THE OPTIONS

Statistical modelling has been done to compare tax impacts using an unmodified system (market assessed values) versus land averaged values as the basis for 1999 general taxes. These impacts are set out for the residential and business classes in Appendices C to H.

Appendices C and F of this report set out graphically the taxation distributions, in percentage intervals for residential and business properties, comparing the market value versus the averaging options. The tax changes are based upon comparisons with actual 1998 general purposes taxes. Note that in 1998, three-year averaging was applied to residential and business properties, and no tax capping was applied to either class. Therefore, no properties received tax credits in 1998.

The 1999 tax estimates 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 1999 property valuations for tax billing purposes. The sample used for the tax modelling exercise set out in this report is screened to exclude new construction, reclassified properties, vacant land, and all properties not eligible for land value averaging, which would skew results if included.

MODELLING RESULTS

There are three potential reasons for a change in taxes for a individual residential or business property from 1998 to 1999.

1. Change in taxable value from 1998 to 1999 - On the whole, Class 1 taxable values have decreased by 5.3%, and Class 6 values have increased by 0.5% (based on Consolidated Roll figures). However, underlying these averages, there are many properties with increases and many with decreases in assessed values.

2. Council-Directed Tax Increase - The analyses in this report assume a 3.4% increase is applied to the overall tax levy.

3. Application of Land Averaging - A property may experience a tax increase due to the application of averaging. This is true for those properties whose assessed values have decreased significantly over either of the past two years. For these properties, the application of averaging in the current year will result in higher taxes than would result from using the current market year taxable value.

In the analysis shown in the appendices, 1998 actual taxes paid are compared to estimated 1999 taxes. Neither solid waste utility charges nor water utility charges are included. (Solid waste utility charges have not increased from 1998 to 1999, and the flat and metered rates for water usage have increased by 5.6% over 1998.)

Residential Class

The graph in Appendix C shows that applying the three-year averaging option reduces the number of Class 1 properties with year-over-year tax increases of over 10% by about 24,800 properties. Overall, 65% of the residential properties benefit from the application of averaging (that is, property taxes are lower using 1999 averaged values than they would otherwise be, using non-averaged values).

Business Class

Appendix G shows that there is also an advantage to applying averaging to Class 6 in 1998. Using averaging as compared to using market values in computing property taxes, there are about 300 fewer properties that have tax increases of over 10%. Of the overall Class 6 sample, 68% of the properties benefit from the application of averaging (that is, property taxes are lower using 1999 averaged values than they would otherwise be, using non-averaged values).

Application of Averaging in 1999

As has been endorsed by the Director of Finance for the past several years, there exists a strong argument for applying land averaging continually from year to year, on the basis of consistency and equity. Land averaging serves to help ease in large increases in taxes resulting from increased land values. It similarly eases in tax decreases that result from decreased land values. Selectively employing land averaging in certain years and not in others could either advantage or disadvantage individual properties, depending on the market circumstances.

The Director of Finance is therefore recommending that for the 1999 taxation year, three year land value averaging once again be applied to both the residential and business classes.

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.

The Director of Finance is again recommending that the Assessment Authority be contracted to produce the 1999 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. In the current year, land value averaging benefits approximately two thirds of the properties in each of the residential and business classes. The Director of Finance therefore recommends that three-year land value averaging be used as the basis for 1999 property taxes.

APPENDIX A

SUMMARY OF MAJOR PROPERTY TAXATION POLICY DECISIONS SINCE 1989
CITY OF VANCOUVER

	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% · No limit on tax credit	· Capped tax increases at 7.5% · $400,000 limit on tax credit
1992	· Capped tax increases at 6.0% · $5,000 limit on tax credit	· Capped tax increases at 10.0% · $100,000 limit on tax credit
1993	· Implemented three-year land value averaging · Tax increases capped at 25% for select properties	· Implemented three-year land value averaging · Tax increases capped at 25% for select properties
1994	· Continued three year land value averaging · Tax increases capped at 10% for select properties · $500 limit on tax credit	· Continued three year land value averaging · Tax increases capped at 10% for select properties · $15,000 limit on tax credit
1995	· Continued three year land value averaging · No tax capping	· Continued three year land value averaging · 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 · No tax capping	· Continued three year land value averaging · Tax increases capped at 20% for select properties under a phasing out methodology · $7,500 limit on tax credit
1997	· Continued three year land value averaging · No tax capping	· Continued three year land value averaging · Tax increases capped at 25% for select properties under a phasing out methodology · $5,000 limit on tax credit · Last year of tax increase capping
1998	· Continued three year land value averaging · Implementation of solid waste utility	· Continued three year land value averaging

ATTACHMENTS TO THIS DOCUMENT THAT DO NOT HAVE ELECTRONIC COPY ARE AVAILABLE ON FILE IN THE CITY CLERK'S OFFICE

* * * * *

(c) 1998 City of Vancouver