POLICY REPORT
FINANCE

Date: April 13, 1999
Author/Local: K. Levitt 873-7251
RTS No. 629

CS&B Date: May 6, 1999

CC File No. 1551

TO:	Standing Committee on City Services and Budgets
FROM:	Director of Finance
SUBJECT:	1999 Property Tax Options

RECOMMENDATION

A. THAT for the purposes of general taxation in 1999, the Class 5 (light industrial) and Class 6 (business) tax rates not be consolidated and that the tax rates for the two classes be developed on a basis consistent with taxation methodology in previous years.

CONSIDERATION

B. THAT Council approve a shift in the tax burden equal to approximately 1% of the 1999 general purposes tax levy (approximately $3.55 million), proportionately from Class 2 (utilities), Class 4 (major industrial), Class 5 (light industrial) and Class 6 (business/other) to Class 1 (residential) properties

GENERAL MANAGER'S COMMENTS

The General Manager of Corporate Services RECOMMENDS approval of A and submits B for CONSIDERATION.

DIRECTOR OF FINANCE COMMENTS

The foregoing considerations have been submitted to Council, based on the request of the CAGPT. As this staff report explains, there is no existing Council policy to provide staff with direction on how to proceed on these matters.

Recommendation A deals with the issue of consolidating Class 5 and Class 6 for property tax purposes, resulting in a single tax rate for both classes. While there are some general arguments in favour of this consolidation, there are also some concerns and costs that must be considered. First, about half of the 150 properties in Class 5 are exempt from taxation and reduction in the tax rate on these properties will result in the loss of revenue from grants or rents-in-lieu of taxes that will have to be made up from an additional property tax increase. Second, the balance of Class 5 is dominated by a few unique properties such as Molson's Brewery, West Coast Reduction, Ocean Construction Supplies and Lafarge Canada which will be the largest beneficiaries of this consolidation. In fact, two thirds of the anticipated $1.5 million tax reduction in Class 5 will accrue to just 8 properties. These are many of the same properties that will be face potentially large cost increases when Council implements the BODS/TSS charges. Delaying the consolidation will allow Council to offset these cost increases with the taxation benefit. A final consideration in this decision is that the integration will result in a 0.8% tax increase for Class 6 properties, which will be in addition to the existing tax increase for 1999.

Consideration B deals with the issue of shifting the taxation burden from the non-residential classes to the residential class. While there is no policy governing the eventual split in the tax burden, Council has made decisions on this shift on an annual basis, based on recommendations from the Citizen's Advisory Group on Property Taxation. It should be noted that, prior to the shift, the 1999 Class 1 to Class 6 ratio is estimated at 45.1% to 51.2% (including Solid Waste user fees) representing a shift of 6% from the ratio in 1993. The additional tax increase for Class 1 properties, should Council decide to approve a further shift in 1999, will be 2.4% above the 3.4% already approved. It can be argued that this is not an appropriate action for 1999, given the existing tax increase for 1999, and on the heels of a significant burden shift made in 1998 within the residential class, with the introduction of the Solid Waste Utility.

COUNCIL POLICY

There is no standing policy on the issue of shifts to the relative shares of the taxation burden among property classes. Since 1994, Council has decided in each year whether to shift the tax burden among property classes, in the context of the other taxation issues at hand.

With respect to blended tax rates, Council passed the following motion in May 1998.

"THAT Council proceed with the implementation of BOD/TSS changes no later than 1999, and at that time, blend the Class 5 (light industrial) and Class 6 (business) tax rates to a single rate."

PURPOSE

The purpose of this report is to discuss various taxation policy options relevant to the 1999 taxation year.

BACKGROUND

1998 taxes for residential and business properties were based on three-year land averaged values. No tax capping was applied to either class. The overall tax levy was increased by two percent, evenly applied to all classes. A solid waste utility was introduced, which lowered the residential levy by $8.4 million. These costs of providing solid waste services to residential properties is recovered via user fees from 1998 onward.

1999 is the least complex taxation year Vancouver has seen over the last decade. Taxable values in both the residential and business class have been relatively stable over 1998 levels, with the great majority of properties in these classes having changes to taxable value of under five percent. Consistent with the past few years, land averaged values are to be used in the calculation of taxable value, for the residential and business classes. Council has approved a 3.4% tax increase over 1998.

TAX IMPACTS: BASE CASE

The base case represents existing tax policy: three-year land averaging for the residential and business classes and a 3.4% increase to the overall tax levy. The two charts in Appendix B show the tax distributions for Class 1 and Class 6 for the base case. With no shift in tax burden, the average change in taxes in the residential class is $39 or 4.1%, and in the business class is $698 or 2.2%.

TAX IMPACTS: SHIFT RELATIVE SHARE OF TAX LEVY AMONG CLASSES

The rationale for the one percent burden shift to the residential class is found in the 1995 report by the KPMG Consulting Group, Consumption of Tax-Supported City Services. The authors of this report recommend developing a rate-of-adjustment policy which allows for a shift in the tax burden to the residential class. The majority of the members of the Citizens' Advisory Group on Property Taxation support this policy, as set out in the April1999 letter from the Chair (Appendix A).

To date, Council has not adopted any policy on a target for the distribution of the tax levy by property class, however, the issue has been presented to Council on an annual basis with shifts being approved in four of the last five years.

From 1983 to 1994, Council maintained the relative 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 four of the years since 1994, Council has altered the relative shares of the tax levy, shown below.

Table 1. Relative Share of Tax Levy, Class 1 & Class 6

	% TAX LEVY	% TAX LEVY	TAX RATE	FACTORS
1990	39.4%	54.9%	4.1	-
1991	39.4%	55.3%	4.2	-
1992	39.4%	55.4%	4.7	-
1993	39.3%	55.8%	4.5	-
1994	40.0%	54.8%	5.3	Shift $3.0 million to Class 1
1995	41.4%	53.4%	5.5	Shift $3.0 million to Class 1
1996	41.9%	53.2%	5.5	-
1997	42.9%	52.6%	5.2	Shift $2.9 million to Class 1
1998	41.8%	54.0%	5.4	Implement Solid Waste Utility
1998, incl SWU fees	43.8%	52.2%	5.4	Shows shares including $12.2 million in SWU fees
1999, incl SWU fees -No shift	44.2%	52.1%	5.1	Shows shares including $12.2 million in SWU fees, no tax shift
1999, incl SWU fees - 1% shift	45.1%	51.2%	4.9	Shows shares including $12.2 million in SWU fees, 1% tax shift

NOTES TO TABLE 1

1. Note that the tax rate ratio is affected by interventions such as land averaging and tax capping.

2. 1998 figures are significantly affected by the implementation of the solid waste utility in this year. Part of the new utility fee for was a recycling charge, which represented a $3.8 million increase in total paid by the residential class. If these fees are incorporated into the analysis of relative tax burdens, the share of the total paid by the residential class is 43.7% and by the business class 52.2%.
3. The other property classes account for the remaining 4% - 6% of the tax levy (utilities, lightindustrial, major industrial, recreational/seasonal and farm).

The charts in Appendix C compare the tax distributions under the base case, versus a $3.7 million shift in the tax burden to the residential class. The impacts of a shift are summarised in Tables 2 and 3, for the business and residential classes. All of the other non-residential property classes (light industrial, major industrial and utilities) will also experience a 1.7% decrease in their levy and tax rates as a result of a burden shift.

The analyses presented here are based on sub-samples of Class 1 and Class 6 properties, screened to eliminate those that have been transferred into the class in the last year, are exempt from taxation, are vacant, have new construction, and/or did not pay taxes in the previous year.

Table 2. Impacts of One Percent Shift in Levy, Class 1 Residential

	Base Case	1% Shift	$ Change	% Change
Tax Rate	$2.882	$2.950	$0.07	2.4%
Tax Levy	$155.3 m	$159.0 m	$3.7 m	2.4%
Average 1999/1998 change in taxes	4.1%	6.5%	-	2.4%
Average 1999/1998 change in taxes	$39	$66	$37	-
# properties with +10% increase	5,922	17,113	-	-

Table 3. Impacts of One Percent Shift in Levy, Class 6 Business

	Base Case	1% Shift	$ Change	% Change
Tax Rate	$14.752	$14.496	($0.26)	(1.7%)
Tax Levy	$197.5 m	$194.1 m	$3.4 m	(1.7%)
Average 1999/1998 change in taxes	2.2%	0.5%	-	(1.7%)
Average 1999/1998 change in taxes	$698	$308	($390)	-
# properties with +10% increase	590	423	-	-

NOTES FOR TABLES 2 & 3
1. Class 1 and Class 6 based upon three-year land averaged values, and a 3.4% tax increase is incorporated.

OTHER TAXATION ISSUES: BLENDED TAX RATES FOR CLASSES 5 & 6

In 1998, Council passed the following recommendation,

"THAT Council proceed with the implementation of BOD/TSS changes no later than 1999, and at that time, blend the Class 5 (light industrial) and Class 6 (business) tax rates to a single rate."

This taxation option originated from the Citizens' Advisory Group on Property Taxation in 1997. In this year, the Director of Finance suggested that the GVRD BOD/TSS effluent charge to permitted properties would be somewhat offset by the coincident implementation of blended tax rates for the business and light industrial classes. Beyond the fact that the effect of one counters that of the other, there is no inherent relationship between these two separate policy decisions.

It has been the intention of staff to coordinate the BOD/TSS charge with a sewer user fee. For this reason, there are no plans to implement the BOD/TSS charge in 1999. It is noted that the impacts of a blended Class 5 and Class 6 tax rate, and of a new BOD/TSS charge can be mitigated by phasing in either or both of these options over a number of years.

The BC Assessment Authority Area Assessor, has provided the following reasons in support of blending Class 5 and 6 tax rates:

· Small class - The light industrial class contains few properties. In 1998, there were 149 properties in Class 5. The assessed value of these properties totalled $100.5 million, and the levy for this class was $2.8 million. Appendix G contains a detailed listing of light industrial properties.

· Same valuation methodology - The valuation approach used for properties in each of these two classes is the same.

· Little distinction between properties - Since the creation of the major industrial class in 1988, there has been less of a distinction between light industrial and business properties. Often the physical attributes of properties in these two classes are identical, which results in an apparent inequity. For example, a strata warehouse used for storage of a certain product will be taxed as Class 6, whereas the identical building used for the production of that same product will be classified light industrial.

· More stable tax base - Due to the reasons listed above, light industrial taxpayers appeal their assessed taxable value. A single tax rate for the business and light industrial classes would eliminate these appeals.

It is noted that the taxable value in the light industrial class is highly concentrated: thirty properties account for 92% of the taxable value of this class, and one property alone (Molson Companies Ltd.) accounts for a quarter of the value in this class. Roughly half of the properties in this class are tax exempt, some of which provide significant payments-in-lieu of taxes (PILs) to the City, notably the Port of Vancouver.

Table 4. Class 5 Characteristics

	#	1998 Actual Value	1998 Taxable Value	1999 Proj Revenue
Number of taxable properties (taxes)	79	$100.8 m	$100.5 m	$3.2 m
Number of tax exempt properties (PILs)	70	$173.6 m	$0.0 m	<$2.8 m
Totals	149	$274.4 m	$100.5 m	<$6.0 m

Blending the light industrial and business tax rates has three main impacts:

· Taxes on all light industrial properties would be reduced, as the tax rate for this class drops by almost half as a result of blending the tax rates. If tax rates were blended in 1999, the light industrial levy would drop from $3.2 million $1.7 million. Approximately two thirds of this reduction would accrue to eight of the 80 taxable properties in the class.

· All business properties will experience a tax increase. Although the increase is not very significant, the tax rate for this class will increase by approximately 0.8% as a result of blending the tax rates. If tax rates were blended in 1999, the business class levy would increase from $197.5 million $199.0 million.

· The payments-in-lieu of taxes received by the City from light industrial property owners is decreased by in excess of $1.0 million. This is not a revenue-neutral effect and the loss of this revenue would force an additional property tax increase beyond that already approved by Council.

Because the BOD/TSS charges are not to be implemented in 1999, and because of the revenue loss associated with Class 5 grants and rents-in-lieu of taxes, the Director of Finance recommends that light industrial and business tax rates not be blended in 1999. The April 1999 recommendation of the Citizens' Advisory Group on Property Taxation is consistent with this:

"THAT inasmuch as when the Citizens' Advisory Group on Property Taxation made the recommendation to blend Class 5 and Class 6 tax rates combined with the implementation of the sewer utility no later than 1999, it was not aware of thepotential impact on payments-in-lieu of taxes, let it be resolved THAT Council table this policy pending additional input from the Citizens' Advisory Group on Property Taxation."

CONCLUSION

This report discusses two tax options for 1999: a $3.7 million shift of the tax levy to the residential class, and, blended tax rates for the business and light industrial classes. The Director of Finance submits the one percent shift to Council for consideration, and recommends against a blended tax rate for classes 5 and 6 in the 1999 tax year.

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

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(c) 1998 City of Vancouver