Transcript Assessment Under Threat - Munk School of Global Affairs

Assessment Under Threat
Enid Slack
Institute on Municipal Finance and Governance
Presentation to the
Association of Municipalities of Ontario
Niagara Falls, Ontario
October 18, 2005
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Outline of Presentation
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Introduction: the characteristics of a good local tax: how does
the property tax stack up?
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Market value assessment under threat
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An alternative to market value assessment – area based
taxation
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Addressing volatility under a market value system – examples
from the U.S. and the U.K.
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Concluding remarks: Addressing volatility in the Ontario system
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Introduction: Characteristics of
a Good Local Tax
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Equity based on benefits received from
municipal services
Equity based on ability to pay
Efficiency – do not distort economic
behaviour
Autonomy and Accountability (visibility)
Revenue yield
Easy to administer
Stability and predictability
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The property tax
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Equity based on benefits received for some services
(should not pay for social services); does not tax
commuters and visitors
Is it a regressive tax?
Does distort decision to invest in property
Visible and accountable
Good revenue yield (2003 - $16 billion in Ontario) but
inelastic source of revenue
Easy to administer in theory
Volatility arising from market value assessment
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Market value assessment
under threat
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Concern over the use of market value
assessment and the volatility associated with
it
Alternatives to market value e.g. area-based
assessment
Ways to address volatility used in other
countries: time of resale assessment
(California); banding (UK)
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Alternative to market value
assessment: area-based taxation
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Under unit assessment, assessment is
calculated as the sum of an assessment
rate per square meter multiplied by the
size of the land parcel and an
assessment rate per square meter
multiplied by the size of the building.
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Alternative to market value
assessment: area-based taxation
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Under unit value assessment, the assessment
rate per square meter is adjusted to reflect
location (zone), quality of the structure (e.g.
age, construction materials), or other factors.
Market value has an indirect influence on the
assessment base through the application of
adjustment factors.
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Alternative to market value
assessment: area-based taxation
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Area-based assessments are commonly used
in Central and Eastern Europe where the
absence of developed property markets
makes it difficult to determine market value.
They are also used in parts of Germany (in
the former GDR), China, Chile, Israel, Kenya,
and Tunisia.
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Alternative to market value
assessment: area-based taxation
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Area-based taxes are less volatile than
value-based taxes but also less
equitable
Benefits from services are more closely
reflected in property values than in the
size of the property (e.g. properties
close to transit systems or parks)
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Alternative to market value
assessment: area-based taxation
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Area-based assessments (particularly unit
assessment) are unlikely to capture
neighbourhood amenities (amenities that
have often been created by government
expenditures and policies) because they do
not take into account differences in the
quality of buildings nor their location.
Two identical properties – one next to an
abbatoir and one next to a park – pay same
tax under area-based system
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Alternative to market value
assessment: area-based taxation
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Area-based assessment results in a
relatively greater burden on low-income
taxpayers than high-income taxpayers
when compared to value-based
assessment. The reason is that average
household incomes in high-value
neighbourhoods are higher than in lowvalue neighbourhoods.
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Alternative to market value
assessment: area-based taxation
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It has been argued that unit value
assessment is easier to understand and
cheaper to administer than value-based
assessments
Difficult to use for the multi-residential
rental, residential condominium,
commercial, and industrial properties
(e.g. how to allocate common areas)
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Alternative to market value
assessment: area-based taxation
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In market economies, there is a
tendency to a proliferation of multipliers
applied to area base to reflect relative
differences in values
The resulting complexity led to the
abandonment of area-based taxation in
the Netherlands, for example
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Alternative to market value
assessment: area-based taxation
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Conclusion on area-based taxation:
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Where it is possible to use market value, it
is generally regarded as a better tax base
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Addressing volatility:
Proposition 13 in California
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Time of sale reassessment: assessment
increased by inflation or 2% per year
(whichever is less) until property is sold
No reassessment if property transferred
to children of owner
Stability and predictability of taxes
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Addressing volatility:
Proposition 13 in California
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Inequitable: unequal treatment of properties
of comparable value
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Some owners pay 17 times as much in taxes
as neighbours in comparable properties
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Inequities can go on for generations: one
young family buys a new home and pays
market value taxes; another inherits a home
and pays taxes on parents’ acquisition value
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Addressing volatility:
Proposition 13 in California
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Young first-time homeowners face higher taxes
because starter homes are reassessed more
frequently
Proposition 13 favours older, more affluent generation
over younger first-time homebuyers
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Decreases household mobility
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Favours existing businesses over new businesses
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Addressing volatility:
Proposition 13 in California
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Does not always reduce volatility – when
property values fell (1990s) and then rose,
entire increase was allowed as long as it was
below acquisition value
Later introduced provision to allow for
reductions to be reflected in full
Still some properties whose values fell below
acquisition value faced assessment increases
greater than 2%
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Addressing volatility:
Proposition 13 in California
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Nordlinger v Hahn case went to U.S. Supreme
Court (1992)
In an 8-1 decision, court upheld acquisition
value system
New owner purchasing a property is different
than someone who is already saddled with
purchase and does not have the option not to
buy
Also upheld on grounds of neighbourhood
preservation, continuity, and stability
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Addressing volatility: Banding
in the U.K.
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Applies to the council tax (residential property tax)
introduced in 1993 after community charge (poll tax)
abolished
Individual valuations (market value) in 1991 used to
assign each property into one of eight bands
Change in value does not affect banding (increase in
value from expansion or improvement does not take
effect until time of sale)
No revaluation since introduction in 1993
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Addressing volatility: Banding
in the U.K.
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Stability and predictability of taxes
Inequitable: same impact as out of date
market value assessment
Revaluation would result in large tax shifts
Revaluation for 2007 (based on 2005 values)
has been postponed, pending further review
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Addressing volatility: assessment
and property tax freezes
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Breaks the link between taxes and
market values:
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Taxes less uniform and more arbitrary
Properties with similar values pay different
taxes
No incentive to review assessment
“Once a freeze is imposed, the process of
thawing may be too painful to bear” (Joan
Youngman, Lincoln Institute of Land Policy)
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Addressing volatility: property
tax freezes
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Stability and predictability at the
expense of equity
But, ignoring sound economics
principles can result in an even less
equitable tax in the long run and even
greater taxpayer resistance
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Addressing volatility in Ontario
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Accuracy in assessment is critical to a market
value assessment base
Assessment increases cannot be used as
excuse for property tax increases
Taxpayer (and media) education is needed to
understand the relationship between
assessment and taxes
Taxpayers should be offered more payment
options
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Addressing volatility in Ontario
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Existing tools can be used to mitigate impact
of tax increases:
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Property tax credits for low-income taxpayers
Tax deferrals for the elderly (to address cashflow problem)
Phase-ins of tax increases
Unduly burdensome provision under Section
365 of the Municipal Act (for those facing
undue hardship)
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Concluding Comments
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Market value may have its problems but
the alternatives are worse
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