A Tale of Two Taxes : Property Tax Reform in Ontario [1 ed.] 9781558442351, 9781558442252

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A TA LE OF

TWO TAXES

TWO TAXES

A TALE OF

Pro p er t y Ta x Ref o r m in On tar io

R i c h a r d M . B i r d , E n i d S l a c k , a n d A l m o s Ta s s o n y i

© 2012 by the Lincoln Institute of Land Policy All rights reserved. Library of Congress Cataloging-in-Publication Data Bird, Richard M. (Richard Miller), 1938– A tale of two taxes : property tax reform in Ontario / Richard M. Bird, Enid Slack, and Almos Tassonyi. p. cm. Includes bibliographical references and index. ISBN 978-1-55844-225-2 1. Property tax—Ontario. 2. Tax assessment—Ontario. HJ4122.O6B57 2012 336.2209713—dc23 2011029206 Designed by Westchester Book Services Composed in Adobe Garamond Pro by Westchester Book Ser vices in Danbury, Connecticut. Printed and bound by Puritan Press, Inc. in Hollis, New Hampshire. The paper is Rolland Enviro100, an acid-free, 100 percent PCW recycled sheet.

manufactured in the united states of america

CONTENTS

List of Illustrations Preface

vii xi

1

■

Getting Property Taxes Right: An Impossible Dream?

1

2

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Financing Local Governments and Schools in Ontario

11

3

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The Property Tax in Ontario: Is an Old Tax Always a Good Tax?

37

4

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The 1998 Property Tax Reform: A Never-Ending Story

57

5

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Assessment Reform in Ontario: Is Success Enough?

83

6

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Local Property Taxation and Education Finance

121

7

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The Property Tax Family

145

8

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Property Taxes in the Greater Toronto Area: Revenue Hills and Tax Competition

175

Rethinking the Property Tax in Ontario

223

References About the Authors Index About the Lincoln Institute of Land Policy

249 263 265 277

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ILLUSTRATIONS

FIGURES

2.1 2.2 5.1 9.1

Municipal Expenditures per Capita, Ontario, 1988–2007 Municipal Property and Related Taxes per Capita, Ontario, 1988–2007 New Housing Price Index, Toronto and Oshawa, 1985–2008 Impact of 5-percent Capping by Income Group

17 20 95 238

TABLES

1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 4.1 4.2 4.3

Property Taxes as Percentage of GDP Property Tax as Percentage of Subnational Expenditure Municipal Government Expenditures by Category, Ontario, 1988 and 2007 Municipal Government Revenue, Ontario, 1988 and 2007 Relative Changes in Assessed Values and Property Taxes, Ontario, 1988 and 2007 Property Taxes, Ontario, 2007 Local Ser vices Realignment: Changes between Provincial and Municipal Governments Provincial-Regional Cost Sharing for Social Programs: Region of Peel, 2009 Education Property Taxes, Ontario, 1990–2007 Education Property Tax Rates, Toronto, 1998–2007 Per Capita Real Property Assessment, Ontario, Selected Years, 1886–1941 Per Capita Real Property Taxes, Ontario, Selected Years, 1886–1941 Highlights of Property Tax Reform, 1998–2009 Provincial Ranges of Fairness, Ontario A Comparison of Regulated and Actual Tax Ratios, Selected Municipalities

4 4 18 19 22 23 26 28

34 35 46 47 62 65 67

viii

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List of Illustrations

4.4

Relative Changes in Assessed Valuations, by Class and Region, 2003–2004 4.5 Requests for Assessment Review 4.6 Greater Toronto Area House Prices, 1998–2008 5.1 Selected Fee-Based Ser vices Provided to Public by MPAC 5.2 Assessment Update Cycle 5.3 MPAC Evaluates Itself: Corporate Quality Standards 5.4 The Ombudsman and MPAC 5.5 Cost of Exemption Provisions for Education Tax Revenue, 2006 5.6 Municipal Tax Assistance Programs 5.7 Assessment Methods 5.8 Assessment Classes and Education Property Tax, 2006 6.1 Education Property Tax Revenues, Ontario, 1990–2006 6.2 Distribution of Business Education Tax Cuts by Municipality 6.3 Education Property Taxes, Greater Toronto Area, 1997 and 1999 6.4 Education Property Tax Rates, Toronto, 1998–2007 6.5 School Taxes as a Percentage of Total Local Tax Levy, Selected Years, 1932–1995 6.6 Private School Enrollment in Ontario Compared With Public and Separate Schools 7.1 Sources of Capital Financing, Ontario Municipalities, 2008 7.2 Eligible and Ineligible Ser vices under the Development Charges Act 7.3 Residential Development Charges, Selected Ontario Municipalities, 2007 7.4 Nonresidential Development Charges, Selected Ontario Municipalities, 2007 7.5 Development Charge Revenues, Greater Toronto Area, 2006 7.6 Business Improvement Area Levies, Greater Toronto Area, 2006 8.1 Greater Toronto Area Population, Assessment, and Effective Tax Rates, 2005 8.2 Exogenous Variables Used in First Stage of 2SLS Estimation 8.3 Tax Rate to Base Elasticity for the Sample Period, 1977–2005 8.4 Business-Residential Tax Ratios by Region and Property Type, 1998 and 2002 A8.1 CIB Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Municipal Average A8.2 CIB Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality

72 76 78 89 92 93 96 104 105 107 109 132 134 136 137 142 144 146 153 156 157 158 173 185 193 199 200 202 204

List of Illustrations

A8.3 CIB Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Municipal Average A8.4 CIB Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality A8.5 Residential Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Municipal Average A8.6 Residential Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality A8.7 Residential Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Municipal Average A8.8 Residential Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality

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ix

206 208 210 212 214 218

PREFACE

P

roperty tax reform in the Canadian province of Ontario is a topic that should be of interest far beyond provincial borders as scholars and policy makers around the world grapple with how to fi nance local governments. A common response in many cities, states, and countries has been to consider or implement property tax reforms similar to those in Ontario. Thus, there is much to learn from the Ontario experience. From the perspective of property tax reformers, one welcome lesson is that although major property tax reform is unlikely to be either easy or quick, it can be done. A second lesson may be less welcome. The Ontario experience suggests that even the best property tax reform is unlikely to resolve local government finance problems, especially in large metropolitan areas. Although this message does not seem to have been received yet by the governments of many countries, including Canada, the conclusion is unlikely to surprise anyone who has considered local finance in detail. More surprising to many experts, however, may be another conclusion drawn from the Ontario experience: namely, that the most commonly recommended solution to the property tax problem, the introduction of a good market value assessment system, may in some circumstances exacerbate rather than alleviate the basic fiscal problems faced by growing urban public sectors, and may even imperil sensible reform as a whole. This last point suggests another lesson from the Ontario case study. It is sometimes too easy for experts to rush to judgment, as it were, by focusing on a particular solution like market value assessment as the answer to a wide variety of problems. In reality, as the Ontario case shows, there is not and cannot be any one-size-fits-all solution to the question of how best to reform property taxes in any jurisdiction. No two reforms of an institution as complex as the property tax are ever really the same. One must pay very close attention to the specific historical and institutional context, as well as to the realities of the economic, political, and social environment. In particular, this book stresses the need to pay close attention to the important economic, administrative, and political differences between the two related but quite distinct taxes— on residences and on businesses—that

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Pr eface

are commonly lumped together under the label of the property tax. In the Ontario case, property tax reform is truly the “tale of two taxes” indicated by the title of this book—two taxes that differ not only in their political and economic impact, but also to some extent in how they are administered. The same is likely to be true in other jurisdictions as well. Or perhaps it may not be true, for at a deeper level, one of the main points of this book is simply that reforming a complex and deeply rooted institution such as the property tax system is likely to succeed only if carried out with full awareness of all the relevant local circumstances. Such knowledge cannot be acquired either through visits by outside experts or from statistical analysis alone, though these may prove useful inputs toward a workable solution. It is also necessary to undertake a detailed analysis of how the institution came to function as it does, and how that may affect the proposed reform. Our aim is to tell the Ontario story from such a perspective, while at the same time offering some ideas of broader relevance to local finance reform in other jurisdictions. In writing this book, we have incurred a variety of debts to a number of people. We are especially grateful to the Lincoln Institute of Land Policy, both for providing invaluable support for our endeavor and for waiting longer than expected for the results. This support made it possible for us to secure essential technical help in constructing a database and to carrying out the analysis in chapter 8, first from Andrey Tarasov and then from Cesar Furtado. We are equally grateful to Larry Hummel, Brian Guerin, and their colleagues at the Municipal Property Assessment Corporation (MPAC) for the time and effort they gave responding to our many queries about the assessment process, although none of them is in any way responsible for what is said here. At different times, we also received helpful comments on earlier drafts from David Sjoquist, Michael Smart, and Sally Wallace. Finally, we owe a special note of thanks to Wayne Thirsk, whose perceptive early work on this subject both inspired our title and to some extent shaped our thinking, as well as to Emily McKeigue and the editors at Westchester Book Services, whose careful guidance helped produce this volume. As always, the authors alone bear full responsibility for its contents.

A TA LE OF

TWO TAXES

CHAPTER

1

Getting Property Taxes Right An Impossible Dream?

M

ore than 40 years ago, a provincially appointed committee issued a clarion call for property tax reform in Ontario, a reform centered on a province-wide market value assessment (Ontario Committee on Taxation 1967). Since Ontario municipalities depend entirely on the property tax for tax revenues, as they have access to no other major tax bases, this proposal was central to the committee’s vision of the appropriate role of local government in the province. After three decades of inaction, attempted action, and reaction, the provincial government finally answered the committee’s call and undertook a market value assessment in 1998. The initial and subsequent assessment operations were major technical undertakings, and the province’s ability to launch and maintain the new system provided an equally major test of the political system. The technical task, the assessment, was successfully accomplished within a few years. However, the real challenge of property tax reform is not technical but political. Unfortunately, in the case of Ontario in the decade following 1998, the complex and confusing institutional and political changes and compromises that proved necessary to put the new system in place and keep it going make it difficult to understand and evaluate the many reforms undertaken. It is also still impossible to fully determine how successful the massive reform has been, although, as we shall see, there is room for doubt as to whether it has worked in terms of reforming either the property tax or local finance. To confuse matters further, at the same time that it was reforming both assessment and the property tax itself, the province undertook two other major initiatives that significantly affected local government. First, ser vice responsibilities between the provincial and municipal governments were substantially realigned

2

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Chapter 1

and, as part of that realignment, the structure of provincial-municipal transfers was significantly changed. Second, the province encouraged (to the point of forcing) amalgamations in many municipalities. Not only was there a major amalgamation in the largest city in Ontario, Toronto, but between 1996 and 2004 the number of municipalities in Ontario overall was reduced from more than 800 to 445.1 Some years ago, two of us wrote a paper titled “Can Property Taxes Be Reformed?” (Bird and Slack 1981). Our conclusion was that it would be very hard to reform the property tax in Ontario. Nonetheless, after considerable delay major reform did finally take place a decade ago, albeit in a convoluted way, as detailed in chapters 3 through 5. In a sense, the question we ask here is: Was Ontario’s property tax reform worth doing? Or, to put it another way, was the price paid to achieve market value assessment worthwhile? Although much of the dust stirred up by the 1998 reform has now settled, in some ways the answer to this question resembles what China’s Zhou Enlai reportedly once said when asked what he thought of the French Revolution of 1789: “It is too soon to say.” However, it is not too soon to say that still more changes are needed if the Ontario property tax is to be improved and become a key part of a sustainable local finance system. At least three tentative conclusions emerge from this account of the Ontario experience. First, one cannot get to a good property tax simply by instituting a good assessment system. Even the best market value assessment may not lead to a better or more productive property tax. Indeed, as we suggest in chapter 9, in the case of Ontario the new assessment system may, in the long run, have weakened the role of the local property tax, although the last chapters of this story still remain to be written. Second, good property tax design needs to recognize, more explicitly than most of the literature does, that there are important differences between taxing housing and taxing business property. If this is not acknowledged, both the rhetoric and the reality of the property tax may be distorted, and the outcomes of reform may depart widely from those originally intended. Although the evidence reported here is far from complete, some distortions seem apparent in the Ontario experience, as discussed in chapter 8. Third, as useful and indeed essential as a good property tax system is in financing local government, larger urban areas in particular are unlikely to be able to pay for the range and level of public ser vices for which they are responsible solely (or almost solely) with revenue from the property tax. Of course, none of these tentative 1. As the scope of these policy changes suggests, and as we discuss further in chapter 2, legally Canadian provincial governments may, subject to political constraints, do more or less whatever they want with respect to their local governments: they can change their boundaries, their electoral systems, their expenditure responsibilities, and their revenue and borrowing power more or less at will, and they have often done so (Tindal and Tindal 2009).

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3

conclusions implies that it is impossible to design and implement a good property tax, or that such a tax does not have an important role in financing local government. They do suggest, however, that these aims will not necessarily be achieved by reforming property tax along the assessment-driven path conventionally recommended in the literature and generally followed in Ontario for the past decade.

Why the Property Tax Matters One reason to get property taxes right is simply because such taxes are significant. As table 1.1 shows, on average around the world property taxes collect about 1 percent of gross domestic product (GDP), with the proportion being twice as high in the more developed countries in the Organization for Economic Co-operation and Development (OECD).2 Property taxes are particularly important in Canada, which appears to be at or near the top of the international league when it comes to property taxes as a share of GDP, a figure that usually falls in the range of 3– 4 percent.3 Property taxes are especially important in Ontario, where they amounted to 4.5 percent of provincial GDP in 2006, with local property taxes alone accounting for 4.0 percent.4 Asset-based taxes at such levels matter economically. In 2006, for example, property taxes in Canada were as productive a revenue source as corporate income taxes. Since property taxes imposed on the (estimated) value of real property are equivalent to taxing the income from such property, arguably their potential economic effects are likely to be comparable to those arising from the corporate income tax. Any tax that costs the average Canadian $1,578 a year (in 2006) and the average resident of Ontario even more ($1,872, or over 5 percent of personal income) is worth attention for that reason alone. Getting property taxes right is a matter of great fiscal importance for local governments, particularly in Canada, where the property tax is essentially the only local tax source, accounting for 98.5 percent of local taxes in 2006 (Treff and Perry 2008). As table 1.2 shows, on average around the world property taxes finance at most a little more than 10 percent of local government expenditure in developed countries. In Canada, however, the comparable share is 39 percent, or almost four times the world average. Ontario, where 44 percent of local expenditure is financed by local property taxes, seems to be at the leading— or perhaps 2. For further discussion of property taxation around the world, see Bahl, Martinez-Vazquez, and Youngman (2008) and Bird and Slack (2004). 3. Bahl (2001) reports a figure of 4.0 percent for Canada in 2001 (using IMF GFS data). Treff and Perry (2008) report a 2006 GDP share of only 2.9 percent for local taxes (98.5 percent of which are property taxes). However, if one takes into account that some property taxes are collected by provincial governments, this figure rises to 3.5 percent. 4. Calculated from data in Treff and Perry (2008) and Statistics Canada (2008).

4

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Chapter 1

TABLE 1.1

Property Taxes as Percentage of GDP 1970s

1980s

1990s

2000s

OECD countries

1.24 (16)

1.31 (18)

1.44 (16)

2.12 (18)

Developing countries

0.42 (20)

0.36 (27)

0.42 (23)

0.60 (29)

All countries

0.77 (37)

0.73 (49)

0.75 (58)

1.04 (65)

notes: Includes all taxes on property, whether levied by local or other governments. Number of countries in sample indicated in parentheses. Data for 2000s are simple averages of 2000 and 2001. “All countries” includes data on some transitional (formerly Soviet-dominated) countries mainly in Eastern and Central Eu rope. source: Bahl and Martinez-Vazquez (2008).

TABLE 1.2

Property Tax as Percentage of Subnational Expenditure 1970s

1980s

1990s

2000s

OECD countries

9.70 (16)

9.88 (17)

13.65 (16)

12.40 (19)

Developing countries

18.65 (21)

15.97 (27)

13.49 (24)

18.37 (20)

All countries

14.49 (38)

12.89 (48)

11.63 (58)

13.40 (59)

notes: Number of countries in sample indicated in parentheses. Data for 2000s are simple averages of 2000 and 2001. “All countries” includes data on some transitional (formerly Soviet-dominated) countries mainly in Eastern and Central Eu rope. source: Bahl and Martinez-Vazquez (2008).

bleeding— edge when it comes to the dependence of local expenditures on local property tax support. Given the increasingly critical role played by larger urban areas in driving regional and local growth and the need to adequately fund the urban infrastructure (both human and physical), once again the importance of getting property taxes right is evident.5 Property taxes also matter because people care about them. For decades, surveys in the United States have reported that the property tax is the least favored of all taxes. In a 2005 Gallup poll, for example, 42 percent chose the local property 5. Slack and Bird (2008) discuss the importance of cities as growth drivers in Canada. An especially critical factor in the growth equation relates to education. Although education fi nance in Ontario is a subject in itself, as we discuss in chapter 6, it is nonetheless closely related to property taxation.

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tax as the worst or least fair tax while only 20 percent nominated the federal income tax for this dubious honor (Bowman 2008). Canadians, too—not least the 40 percent or so of them who live in Ontario—appear to take a generally dim view of the property tax. Indeed, few taxes have been more vigorously debated in both the provincial and local political arenas in Ontario than the property tax. No one seems to like the tax much, yet it continues to be the mainstay of local government finance. While the problem arising from the apparent dichotomy between the need for local revenue and the dislike of the main source of such revenue, the property tax, is especially sharp in Canada, there have been no property tax “revolts” in Canada similar to those in the United States. Miller (2008) suggests that the main explanation lies in the very different political and economic context of the property tax in Canada, as discussed with respect to Ontario in the next chapter. Nonetheless, as Miller notes, the same pressures that led to the well-known Proposition 13 property tax revolt in California some years ago have been felt in Ontario and other Canadian provinces. To date, however, perhaps owing in part to the combination in Canada of strong legal and institutional constraints on independent local fiscal actions (as discussed further in chapter 2) and the absence of such “direct democracy” provisions as the referenda and initiatives that exist in some U.S. states, these pressures have mainly emerged at the provincial level and have been manifested less overtly through the complicated and drawn-out process of reforming the reform that has taken place over the past decade, as discussed in chapter 4. All these factors are clearly evident over the long history of property taxation in Ontario (see chapter 3). However, the immediate stimulus for this book was the deep and broad reform of the Ontario property tax in 1998. The objective of this reform, as discussed in chapter 4, was not only to solve most of the perceived problems with the tax, but also, more ambitiously, to establish a property tax system that would be broadly acceptable and thus would largely remove property tax reform from the provincial political agenda. Although the 1998 reform was widely lauded by experts at the time and was in many ways a major technical and political achievement, the objectives of the 1998 reform were clearly not achieved. Property tax reform remains on the agenda, and over the past decade, more and more suggestions have emerged for drastically altering the existing form of the tax or for finding an alternative (though usually poorly specified) method of financing education and local government. As discussed further in later chapters, most suggested alternatives proposed softening the blow of increased assessments, especially on homeowners. In the campaign leading up to the provincial election in 2007, for example, one opposition party (the New Democrats, on the political left) proposed a Californiastyle freeze on a property’s assessed values until a change in ownership. The other

6

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Chapter 1

opposition party (the Conservatives, on the political right) proposed an indefinite 5-percent cap on assessment increases until a change of ownership. Thus attacked from both the left and right, the centrist Liberal government’s response was essentially ameliorative, introducing yet more measures to dampen the effects of assessment changes, specifically by introducing a four-year assessment cycle combined with a four-year phasing in of any increased assessments. On the local level, in Toronto the mayor initially looked not to the provincial legislature but to the federal government in Ottawa for relief, by appealing for a share of federal revenues from the Goods and Ser vices Tax (GST), Canada’s federal sales tax.6 However, sustainable solutions to financing Toronto and other large cities will require deeper consideration of the appropriate role a redesigned property tax can and should play in financing local government.

Objective of the Book This book aims to explain why Ontario’s success in instituting an efficient and effective system for province-wide market value property assessment failed to enhance either the economic efficiency or the political acceptability of the property tax as the major local revenue source. In fact, the new assessment process arguably made things worse. Those in other jurisdictions interested in establishing better systems of property taxation and local government finance may learn some lessons from this cautionary tale. Ontario’s recent reform of its system of property assessment and taxation certainly has some positive lessons to offer. The post-1998 experience demonstrates that it is possible to administer a conventional market value assessment–based property tax more equitably and efficiently than had been done in Ontario in the past and is still the case in many other jurisdictions.7 The Ontario experience also shows that in a developed jurisdiction with about five million properties, it is possible to reform the assessment system completely and effectively in a relatively short time. However, the Ontario experience also suggests that placing too heavy a demand on property taxes may risk the political destruction of this important instrument of local finance. As sensible and generally desirable as market value assessment is as the basis for a good property tax, it can be a mistake to push it too far and too fast. In particular, doing so may lead to political reactions resulting in hasty and ill-thought-out temporary expedients, such as caps and freezes, that 6. Toronto mayor David Miller, from a report on CTV News, 6 February 2007 (http://toronto.ctv.ca /servlet /an /local /CTVNews/20070226/one _cent _gst _070226/NFL). 7. For discussion of this question in the very different context of the developing countries, see Bird and Slack (2007).

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can leave the property tax system even more illogical, inequitable, and in some ways even more politically unacceptable than it was before the reform process began. An old story tells of a group of blind men, each of whom touches a different part of an elephant, and their resulting disagreement about how best to describe the beast. Many analyses of property taxes are like this story. What one sees is some combination of what one is looking for and what is there, and how one interprets the relationship between theory and what seems to be reality offers yet more room for interpretation. What a property tax is, how it functions, what its effects are, and how it may best be reformed in any particular jurisdiction are all heavily dependent on the specific context. For example, without some understanding of both education finance in Ontario and the changing structure of its local governments, it is simply not possible fully to understand or follow the progress of property tax reform in the province over the past decade. The aim of chapter 2 is to help those unfamiliar with the local terrain wend their way through to the end of this tale. It sketches out in brief the general institutional framework within which the recent property tax reform has played out. History matters as well as context. Old institutions hardly ever really die, and they seldom even fade away. Instead, they evolve into or are subsumed by new institutions as circumstances and incentives alter over time. Chapter 3 therefore reviews two centuries of Ontario property tax developments leading up to the 1998 reform, with emphasis on the three decades immediately preceding the reform. The pace of the story picks up in chapter 4, which sets out the key elements of the 1998 reform and what happened after they were put in place. The twists, turns, and reversals of policy made in reaction to the reform are set out in some detail. Overall these changes, through the introduction of a series of assessment caps and “clawbacks” and a complex property-classification scheme, considerably dampened the impact of market value assessment. Given this combination of factors, the outcome of property tax reform seems in some instances to be quite different from what was originally intended. Reformers sometimes think their job is done once a change has been designed and accepted. Owing to the way in which the executive and legislative functions of government are combined in the Canadian parliamentary system (particularly when there is, as there usually is, a majority government), Canadian reformers may fall into this trap more easily than Americans. In Canada, if a provincial government decides to do something, it can do it without being subjected to a variety of amendments in the legislative process. Understandably, governments like this system. The downside, however, is that if the government gets it wrong, it can get it very wrong. As the experience outlined in chapter 4 shows, if a majority government does get something (politically) wrong, it can usually fi x its mistakes

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Chapter 1

quickly and without much fuss. Once again, however, there is a downside. The very ease with which governments can fi x perceived mistakes may lead them to make still more mistakes: haste may not always make waste, but the hasty correction of perceived problems can certainly lead to new problems. The never-ending story told in chapter 4 indeed seems unlikely to reach an end anytime soon, and the end to which it is apparently leading may not be all good. Chapter 5 turns to the key element of the 1998 reform and the foundation of any property tax system, the assessment process. The chapter describes in some detail the assessment methodology now in place for residential and nonresidential properties, including the computer-assisted mass appraisal (CAMA) model and multiple regression analysis (MRA), used mainly for residential properties (and an increasing number of commercial properties); the assessment of farmland based on current use; the cost approach, used for industrial properties; the income method, used for many larger commercial and multiresidential properties; and the special approaches used for particular property classes, such as railways and pipelines. Every assessing jurisdiction uses a similar array of methods. It is far from clear, however, that the implications, both economic and political, of these different techniques have always been adequately considered during reform discussions. Although market value assessment (called current value assessment, or CVA, in Ontario) has, with some hiccups, been implemented in Ontario more or less as originally envisaged and the reform has achieved almost everything originally intended in a technical sense, in some ways its very success may have sown the seeds for the partial destruction of the local property tax. To dampen or offset the changes in tax burden that were an intended economic and administrative outcome of CVA, so many changes have been made in property tax policy that the major political objective of the original reform—taking property tax off the provincial agenda and turning it into a minor matter for local politicians—has not been achieved. Indeed, the main effect of the past decade of continuous reform in Ontario’s property tax system has been to make it obvious that, when it comes to local finance, it is provincial politicians who are almost entirely responsible. An attempt to minimize the difficulties for provincial politicians arising from local financial problems has resulted in further “provincialization” of local governments, which has problematic implications for the prospects of improving urban governance. Some aspects of this theme are developed in chapter 6, which describes and assesses the important changes over the past decade in how primary and secondary education is financed in Ontario. Unlike the situation in many parts of the United States, education in Ontario has never been solely or even mainly a local concern. The province has long had a dominant role in, and control over, the education system. Ontario’s property tax had been levied by the lower (municipal)

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tier of local government on behalf of school boards and, in much of the province, the upper (regional) tier of government. However, the introduction of the new assessment system was accompanied by a provincial takeover of the education property tax, a move that both formalized provincial domination of education and further underlined the fact that local governments have at most a minor role in providing primary and secondary education in the province. The provincial component of the property tax, the education property tax, is now imposed at a uniform rate on all residential properties in the province. Interestingly, however, it is still imposed at a nonuniform rate on nonresidential properties, although it is hard to understand this feature of the present system in any rational way. The provincial takeover of education finance was coupled with a move to lower the education property tax, thus offering more “room” for municipal property taxes. These changes have had an effect on local finance in general and on both of the two taxes—the residential property tax and the nonresidential property tax—that are commonly discussed as a single tax: the property tax. Chapter 7 completes the story of property taxation in Ontario by looking at a variety of other taxes imposed on property. At the local level, the most important of these, again largely treating housing and business property differently, are the development fees that municipalities charge developers to cover the growthrelated costs associated with their projects. Development charges may be levied on a uniform basis throughout a municipality or on a project-by-project basis, and how such charges are imposed clearly has an impact on local land-use patterns. The degree of freedom municipalities have had in imposing such charges stands in sharp contrast to the many constraints hindering what they do with respect to the basic property taxes on either business or housing. It is thus not surprising that rapidly growing municipalities, like many in the Greater Toronto Area (GTA), have at times preferred to increase such charges rather than raise taxes on existing properties. Chapter 7 also discusses new financing devices, such as tax increment financing and tax increment grants, as well as transfer taxes and business improvement levies. Chapter 8 looks first at whether the property tax reform has succeeded in revenue terms. Did the reform enable local governments to climb farther up the revenue hill? The chapter examines empirical evidence on whether municipalities in the GTA have exhausted their capacity to raise the residential or the nonresidential property tax, or both. Once again, it proves critical to understand the differences, in economic and political terms, in the treatment of residential and nonresidential property. The same is true regarding a second empirical question: How did tax reform affect local property tax policy? Since 1998, Ontario municipalities have had the ability, within limits, to set different tax rates for different classes of property (residential, multiresidential, commercial, industrial, and so on). Initially, these tax rate differentials reflected the differentials that existed prior to

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Chapter 1

reform. Chapter 8 reviews how Ontario municipalities have determined the effective tax rates applicable to residential and nonresidential properties within their jurisdiction, and discusses the likely effects of the reform on tax competition within the GTA. Chapter 9 attempts to answer the logical question raised by this story of a mountainous reform effort that appears to have resulted in a molehill of change, and possibly created an even more distorted and limited system of local governance and finance. Where should Ontario go from here with respect to property tax reform? The chapter addresses three underlying problems that will affect the answer. First, the property tax has inherent limitations as a means of financing local government in a modern society: it simply cannot be pushed too far. In particular, there is nothing to be said in favor of the classified nature of the property tax, with its much heavier taxation of nonresidential property. Perhaps the best way to deal with this problem, as well as the more basic problem of connecting local taxes and local expenditures in a more meaningful fashion, would be simultaneously to change the property tax and the system of education finance, in addition to considering the possibility of introducing a new form of business tax. Second, the limitations of property taxation may reflect not so much the inherent nature of the tax as the problems associated with determining individual tax bills on the basis of current market value assessments. Nonetheless, the chapter concludes that a uniform property tax should continue to have an important role in financing local government, Finally, chapter 9 considers a vital but often neglected issue: the selling of the property tax, or, more properly, the selling of the two distinct but related taxes on housing and business property that are bundled under this label.8 With Ontario’s history, the suggested reforms— essentially, imposing a uniform property tax at the local level and instituting provincial financing of education— seem most likely to prove acceptable if a new form of business tax is introduced to make up for the sharp reduction in business property taxation.

8. Although this issue has not received nearly as much attention as it deserves in the literature, we are by no means the fi rst to raise it. In Canada, for example, important differences between the two property taxes were incisively discussed by Bossons (1981) and Th irsk (1982) and analyzed empirically by Ballantine and Th irsk (1982).

CHAPTER

2

Financing Local Governments and Schools in Ontario

C

anada, it has been said, may be thought of as a country of some 34 million people scattered over an immense geographic area and separated by differing opinions about which level of government is or should be responsible for what. In the federal-provincial arena, the intergovernmental struggle is at the heart of Canadian politics and policy. In the arena of provincial versus municipal governments, however, the sound and the fury over control are muted.1 Indeed, in the story of property tax reform in Ontario, the provincial government is and always has been the key player— and often the only player—in the reform process. To understand the property tax reform of 1998 and its aftermath, one must understand the role of provincial governments in municipal affairs. A reform inevitably reflects its history. Economists like to call this “path dependency”: what you do depends in part on where you start. Reform is also shaped by its institutional context—which is itself largely a product of history. This chapter discusses the institutional context at the time of the 1998 tax reform. The historical evolution of property tax institutions in Ontario is examined in chapter 3.

The Intergovernmental Setting Canada is a federation with three levels of government: the federal government; the ten provincial and three territorial governments; and about four thousand 1. On the importance of the sharp difference between federal-provincial and provincial-local relations for understanding Canadian policy, see Bird and Chen (1998) and Bird and Tassonyi (2003).

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Chapter 2

local governments. The Constitution Act, 1982, lists the jurisdictions over which federal and provincial governments have lawmaking authority. The federal government maintains “peace, order and good government” by being in charge of citizenship, unemployment insurance, trade and commerce, national defense, native affairs, and criminal law. The provincial governments control nearly everything else: education, health, social ser vices, property rights, administration of justice, local public works, and municipal institutions. A few responsibilities are explicitly shared between the federal and provincial governments, such as immigration, agriculture, and pensions. Municipalities, although they are mentioned in the Constitution only as one of the responsibilities allocated to provincial governments, are largely responsible for delivering such important local ser vices as police and fire protection, roads and transit, water and sewers, solid waste treatment, recreation and culture, and planning. Provinces definitely rule the municipal roost. As the Supreme Court of Canada recently reasserted, “Municipal governments and special purpose municipal institutions such as school boards are creatures of the provincial government. . . . [T]hese institutions have no constitutional status or independent autonomy and the province has absolute and unfettered legal power to do with them as it wills.”2 Provincial legislation sets out the powers of municipal governments in municipal or local government acts and other laws. Provincial legislation may create and abolish local governments, alter their geographic boundaries, mandate their expenditure responsibilities, set standards for local ser vice provision, determine the revenues they can raise, set the rules with respect to levying the property tax, influence municipal expenditures through grant programs, and determine the extent to which municipalities can borrow to meet capital requirements. Furthermore, provincial legislation prohibits municipalities from incurring deficits in their operating budgets. In short, local flexibility with respect to municipal finance is extremely limited in Ontario, and indeed everywhere in Canada. As noted above, all municipal authority flows from provincial laws. In particular, municipalities in Canada have no constitutional revenue-raising powers at all. Under the Municipal Act 2001, Ontario permits municipalities to impose property taxes and user fees; in addition, they are allowed to raise revenues from some licensing fees, for business-improvement areas (as discussed in chapter 7), and from fines for bylaw offenses. However, municipalities are explicitly prohibited from imposing income taxes, poll taxes, consumption (sales) taxes, fuel taxes, and resource extraction taxes. The revenue choices available to Ontario’s local governments are thus both limited and, for the most part, tightly controlled by the province. 2. Ontario English Catholic Teachers’ Assn v. Ontario (Attorney General), 2001 SCC 15 [2001] 1 S.C.R. 470, para. 58, http://csc.lexum.umontreal.ca /en /2001/2001scc15/2001scc15.html.

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An interesting exception is that the City of Toronto Act of 2006 gives Toronto somewhat greater authority and autonomy than other municipalities in the province.3 In particular, the act gives the city the power to impose “direct taxes.” The effect of this rather astonishing concession, however, is immediately cancelled by a long list of exclusions in the act: taxes cannot be imposed on income; capital income; sales of goods and ser vices; accommodation (including hotels and motels, apartments, clubs, and so on); wealth (including inheritance); machinery and equipment used in research and development or manufacturing or processing; the acquisition of any gas or liquid that may be used for generating power by means of internal combustion; the consumption or use of energy (including electricity); the generation, exploitation, extraction, harvesting, processing, renewal, or transportation of natural resources; the supply of natural gas or artificial gas; or the use of highways with respect to placing equipment under, on, or over the highway. Finally, the last nail in the coffin, the city is also prohibited from imposing a poll tax. So much for what the city cannot do. What can it do? The revenue news is not all bad because, now, unlike any other municipality in Ontario, the City of Toronto can choose to levy alcohol and tobacco taxes, entertainment taxes (such as amusement taxes on movies, live sporting events, and live entertainment), vehicle registration fees, land transfer taxes, parking taxes, billboard taxes, congestion taxes, and road tolls. The first time it exercised its new powers, in 2008, the Toronto City Council decided to impose a land transfer tax and a vehicle registration fee. Subsequently, in 2009, it passed a billboard tax that would come into effect in 2010. An initial appraisal of the land transfer tax was unfavorable (Dachis, Duranton, and Turner 2008). The empirical basis for this appraisal— a few months of sales data—was skimpy, but the conclusion seems correct. The principal effect of imposing this tax on real estate sales in one city within the integrated greater Toronto metropolitan area was probably to reduce household mobility and hence welfare. As the report’s authors properly conclude, the same amount of revenue could have been raised more efficiently with a very small increase in the property tax. However, the council chose the land transfer tax because it (correctly) viewed that tax as being more politically acceptable than even a small increase in the property tax.4 3. Like municipalities, metropolitan regions are closely supervised by the province in many respects. The provincial government determines major infrastructure investments such as roads and water systems and regulates regional land use. In many ways the spatial and development patterns in areas like the Toronto region reflect provincial fiscal and planning decisions more than local ones. However, there is still some room for municipal politicians to shape land use and development to some extent through property tax policy, as discussed in chapter 8. 4. In economic terms, there is more to be said in favor of the vehicle registration fee (Bird 2006a). Interestingly, however, the new mayor of Toronto elected late in 2010 decided to abolish the vehicle fee but not the land transfer tax.

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Chapter 2

Toronto, like all Ontario municipalities, operates under a “weak mayor” system in which the mayor, chosen in a citywide election, has little more power than any other member of the city council. In fact most Canadian mayors, unlike those in many American and European cities, have few executive powers. For example, in the case of Toronto, the city administrative staff report to the council not to the mayor. For action on an issue the mayor must form a coalition within the rather large council (44 members, plus the mayor) in order to have any influence. This is made more difficult by the fact that there are no parties in politics at the municipal level in Ontario. More than 380,000 people voted directly for the mayor of Toronto in October 2010, but his influence over what happens in the city is much less than that of the provincial premier (who was himself elected, by an Ottawa constituency, by only 24,000 voters). Th is is because Ontario’s premier controls the party that holds the majority of the seats in the provincial legislature (and in Canada, parties vote the way their leaders tell them to) and that legislature controls almost every facet of municipal finance and orga nization. The mayor has little direct control over either the city council or the city administration. There are currently 444 municipal bodies in Ontario: 22 counties, 6 regions, and 416 cities, towns, villages, and townships. Three types of incorporated municipal government structures exist: a two-tier county system, a two-tier regional system, and a single-tier system. All three forms of municipal government may be found in southern Ontario, but most of the sparsely populated municipalities in the north have single-tier governments. Counties and regions—upper-tier municipalities— exist only in southern Ontario. In the two-tier systems, the upper-tier municipality delivers certain services for the lower-tier municipalities within its geographic boundaries. Members of lower-tier municipal councils are elected directly (either by wards or at large), but election to upper-tier councils is usually indirect. Although there are exceptions, upper-tier councils generally comprise the heads of the lower-tier councils and certain other councilors elected at the lower-tier level. The head of the upper-tier council is usually indirectly elected by and from among the members of the upper-tier council, although in some cases the head may be directly elected. “Separated” cities and towns (of which there are currently 17 in Ontario) are geographically located within a county, but they are not part of that county’s two-tier system. They are independently responsible for providing all municipal ser vices to their residents and they do not contribute taxes to the county.5 Thus 5. Unlike counties in the United States, counties in Ontario do not include major cities and provide relatively few ser vices. Many ser vices provided by counties in the United States (hospitals, correction ser vices) are provided by the province in Ontario.

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these larger, more densely populated cities and towns are in effect separated from the more rural parts of the county. Outside of the separated cities and towns, the counties deliver countywide ser vices and lower-tier municipalities are responsible for local ser vices. In addition, 36 Consolidated Municipal Ser vice Managers (CMSMs) in the south and 11 District Social Service Administration Boards (DSSABs) in the north are responsible for delivering Ontario Works (workfare benefits); social ser vices including child care, public housing, preventative health programs; and land ambulance ser vice. These entities were created by the Social Ser vices Administration Act of 1998, which moved the provision of a number of social and community ser vices from the provincial to the local level. Frequently, CMSMs are aligned with the region or county in which they operate. However, unlike other ser vices provided at the upper-tier level, CMSMs also serve any separated towns or cities that may exist within the geographic boundaries of the county or region. The designated ser vice manager may be either the region or county, or the separated municipality.6 District Social Ser vices Administration Boards (DSSABs) were established across northern Ontario in much the same way, to create a governing body for the social and health ser vice responsibilities that were transferred from the provincial government to the local level.7 (No jurisdictions equivalent to the uppertier municipalities found in southern Ontario existed in the north prior to the creation of the Regional Municipality of Sudbury in 1973, which was subsequently restructured as Greater Sudbury in 2001.) The costs of DSSABs are in most cases apportioned among the organized and unorganized municipalities included in the district, based on weighted assessment.8 However, because unorganized municipalities have no formal local government and hence no property tax, in reality the province pays the costs apportioned to them. At the same time, the province levies the Provincial Land Tax (PLT) on residential, commercial, and industrial properties located in unorganized municipalities. For more than 60 years, the PLT rate on such properties was set at 1.5 percent of assessed value and assessments were unchanged. In 2009, however, properties in the unorganized

6. Special arrangements among municipalities at different levels may also exist in some regions. For example, the city of Peterborough provides municipal court ser vices for municipalities in the county of Peterborough, with any revenues from fines (net of administration costs) being shared on the basis of weighted property assessment (see note 8). Other agreements exist in other regions with respect to such matters as transit ser vice for the handicapped, animal control, and provision of electricity (Slack et al. 2007, 107). 7. In northern Ontario DSSABs replaced the former District Welfare Administration Boards and Homes for the Aged Boards. 8. Assessments are weighted by tax ratios (described in more detail in chapter 4) to reflect the fact that different tax rates are levied on different classes of property. In some DSSABs, however, costs are apportioned on the basis of some combination of population and assessment.

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Chapter 2

municipalities were reassessed in the same way as all other properties in Ontario and new (lower) tax rates were applied.9

Municipal Expenditures In 2007, municipal expenditures in Ontario were almost $31 billion, or $2,421 per capita. Municipal expenditures represented 5.3 percent of gross provincial product (GPP), 6.7 percent of personal income, and 22.6 percent of consolidated provincial/local government expenditures.10 From 1988 to 2007, municipal expenditures in Ontario increased steadily. Figure 2.1 shows total municipal spending per capita (including operating and capital expenditures) over this 20-year period in current dollars and in constant (1988) dollars.11 Average per capita expenditures for all municipal governments in Ontario increased from $1,187 to $2,421 over the period. Adjusting for inflation, however, per capita expenditures increased only to $1,512, or by 1.3 percent per year on average. Table 2.1 shows the relative importance of expenditures by function for 1988 and 2007. As mentioned, municipal governments in Ontario are responsible for transportation (roads and transit), protection (police and fire), environment (water, sewers, and solid waste), and social ser vices. They are also involved in public health, public housing, recreation and culture, and planning and development.12 The distribution of expenditures has not changed significantly over the past two decades, with the exception of social ser vices, which increased significantly following the local-services realignment in 1998. Expenditures on protection, environment, health, and housing increased as a proportion of total expenditures; expenditures on transportation, recreation and culture, general administration, regional planning, and debt charges fell. Debt charges decreased in part because of lower interest rates but also because municipalities reduced their borrowing.13 9. For a brief further discussion of the PLT, see box 5.1 in chapter 5. 10. Note that “provincial/local expenditure” includes school boards, but “municipal expenditure” does not. 11. Data for all figures are calculated from Statistics Canada, Financial Management Systems (FMS). FMS data combine operating and capital expenditures. A consistent data series is available only starting in 1988. 12. In terms of the allocation of expenditures between upper-tier and lower-tier governments, there is some variation across the province. However, upper-tier municipalities are generally responsible for regional or county roads; waste disposal; water production, treatment, and storage (except in counties); social ser vices; regional parks and recreation facilities; economic development; and policing. Lower-tier municipalities are responsible for local roads, fire protection, waste collection, parks, culture and recreation, and animals. 13. For a discussion of municipal borrowing in Canada, see Bird and Tassonyi (2001, 2003). Amborski and Nichols (2010) provide a useful recent overview of the regulatory framework for municipal borrowing in Ontario and other provinces.

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FIGURE 2 .1

Municipal Expenditures per Capita, Ontario, 1988–2007 3,000

2,500

2,000

1,500

1,000

500

2007

2005

2006

2004

2003

2002

2001

2000

1999

1997

1998

1996

1994

1995

1993

1992

1990

1991

1989

1988

0

Municipal expenditures per capita constant $ Municipal expenditures per capita source: Calculations based on Statistics Canada, CANSIM database, table 3850024 (for municipal expenditure data); table 510001 (for population); and table 3840036 (for the implicit price index, GDP at market prices, and net government current expenditures on goods and ser vices).

Municipal Revenues Table 2.2 compares the distribution of municipal revenues for 1988 and 2007. Property taxes were an even more important source of revenue for municipalities in 2007 than in 1988. On average across the province, property and related taxes accounted for almost half of municipal revenues in 2007. As a percentage of total revenues, property taxes increased in relative importance over the period, as did user fees. On the other hand, intergovernmental transfers (mainly from the provincial government) decreased significantly. This decrease reflects, in part, the local services realignment that took place in 1998. When the growth in municipal revenues is measured in constant dollars per capita, total revenues grew at an average annual rate of 1.2 percent. This growth rate is, unsurprisingly, close to the growth rate for expenditures, in part because, as mentioned earlier, local governments are required to balance their operating budgets. However, the data shown here also include municipal capital expenditures and sources of capital financing.

11,678

Total expenditures

100.0

8.7 15.0 21.6 2.9 14.6 2.4 14.2 11.2 2.3 1.9 4.1 1.2 30,973

2,509 4,850 5,217 1,412 5,832 572 5,233 2,770 1,664 309 583 22

In millions of dollars

100.0

8.1 15.7 16.8 4.6 18.8 1.8 16.9 8.9 5.4 1.0 1.9 0.1

As % of total expenditures

2007

1.3

0.9 1.5 0.0 3.7 2.7 − 0.1 2.2 0.1 6.0 −2.1 −2.8 −12.8

Annual average growth rate per capita (in constant dollars)

note: Expenditures do not include school board expenditures. Health refers to public health, which includes immunizations and restaurant inspections, etc. source: Statistics Canada, CANSIM database, table 3850024 (for municipal expenditure data); table 510001 (for population); and table 3840036 (for the implicit price index, GDP at market prices, and net government current expenditures on goods and ser vices).

1,011 1,753 2,520 338 1,702 281 1,658 1,307 266 222 478 142

General government ser vices Protection Transportation Health Social ser vices Resource conservation Environment Recreation and culture Housing Regional planning Debt charges Other expenditures

In millions of dollars

As % of total expenditures

1988

Municipal Government Expenditures by Category, Ontario, 1988 and 2007

TABLE 2 .1

864 2,806 3,670 11,771

General purpose transfers Specific purpose transfers Total transfers

Total revenue

100.0

7.3 23.8 31.1

41.7 1.3 20.0 5.1 0.7 68.8

Percent of total revenues

30,921

862 6,436 7,298

14,821 319 6,624 1,460 400 23,624

In millions of dollars

100.0

2.8 20.8 23.6

47.9 1.0 21.4 4.7 1.3 76.3

Percent of total revenues

2007

1.2

−3.8 0.5 − 0.5

2.0 − 0.2 1.6 0.8 4.6 1.8

Annual average growth rate in per capita constant dollars

source: Statistics Canada, CANSIM database, table 3850024 (for municipal expenditure data); table 510001 (for population); and table 3840036 (for the implicit price index, GDP at market prices, and net government current expenditures on goods and ser vices).

4,905 158 2,357 599 81 8,100

Property and related taxes Other taxes User fees Investment income Other Total own-source revenue

In millions of dollars

1988

Municipal Government Revenue, Ontario, 1988 and 2007

TABLE 2 .2

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Chapter 2

FIGURE 2 .2

Municipal Property and Related Taxes per Capita, Ontario, 1988–2007 1,400 1,200 1,000 800 600 400 200

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

0

Property and related taxes per capita in constant $ Property and related taxes per capita source: Calculations based on Statistics Canada, CANSIM database, table 3850024 (for municipal expenditure data); table 510001 (for population); and table 3840036 (for the implicit price index, GDP at market prices, and net government current expenditures on goods and ser vices).

Figure 2.2 shows the trend in recent years, not just in per capita municipal property tax revenues but also in the whole “property tax family” (real property taxes, lot levies, special assessments, payments in lieu of property taxes, land transfer taxes, and business occupancy taxes) in both current and constant (1988) dollars.14 In real terms, property taxes per capita remained relatively flat over the period from 1988 to 1997 in Ontario. They then increased markedly in 1998 and 1999. After 2000, however, the trend was again relatively flat. The jump in 1998 reflects a major realignment of ser vice responsibilities between the provincial and local governments that resulted in both a reduction in education property taxes (taken over by the provincial government in that year and lowered) and an increase in municipal property taxes designed to take advantage of the “tax room” opened up by the reduced education taxes and to finance new responsibilities. Whether property taxes increased or not over this period depends on how one looks at the data. To illustrate, table 2.3 provides a rather different perspec-

14. The currently extant members of this tax “family” are discussed in chapter 7.

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tive on the relative growth of property taxes.15 From 1988 to 2007, assessed values (equalized to reflect market value) increased by more than 190 percent and more than doubled even in constant-dollar terms. However, in relation to GPP, assessed values increased by only 27 percent. In addition, after allowing for changes in both the price level and population, assessed values per capita increased in real terms by 58 percent. What all this means, as table 2.3 shows, is that despite the fact that the yield of the property tax in real terms over this period increased by 42 percent, the relative importance of property taxes actually decreased with respect to both GPP and assessed value.16 When price-level changes over the period are taken into account, the per capita yield of the property tax in real terms increased by only 9 percent over the period covered in the data.17 Table 2.4 provides a breakdown of property taxes in Ontario in 2007 both by property class and by whether they are municipal or education taxes.18 More taxes are raised from residential properties than from other property classes. In fact, taxes on residential and multiresidential properties accounted for more than 60 percent of total property taxes collected. Moreover, municipal taxes represent a higher share of total property taxes (municipal plus education) for residential property than for business (commercial and industrial) property. In other words, in Ontario more than 78 percent of the residential property tax goes to finance local governments, and only 22 percent to support education. In contrast, about half of taxes on business property go to support education. This rather peculiar allocation, detailed in the next two chapters, reflects the historical development of property taxation in Ontario and especially the 1998 reform. However, its rationale remains unclear. Municipalities in Ontario may borrow for capital expenditures, although lower-tier municipalities in a region do so through the agency of the regional government. The regional-agency model is followed in one county (Oxford); in other counties, lower-tier municipalities may elect to borrow through the county or they may issue their own debentures, as may separated towns and cities. Municipalities 15. Note that although the data in table 2.3 include municipal and education property taxes, the data depicted in figure 2.2 include only municipal property taxes. 16. The tax figures in table 2.3 are deflated by the implicit deflator for government current expenditures to give some indication of what local governments could buy with the revenues they received. The prices of the goods and ser vices purchased by government are mea sured by the implicit deflator for gross national expenditure and rose more quickly over this period than the price level in the economy as a whole. These different deflators behaved quite differently over this period, which is why real property taxes as a percentage of GPP and as a percentage of assessed value in constant dollars declined by more than the corresponding ratios in current dollars. For a discussion and justification of this approach, see Bird (1982). 17. Vander Ploeg (2008, 11) calculates that for Canada as a whole, local property taxes in real per capita terms rose by an annual average of only 1.7 percent from 1961 to 2007, compared with a 4.7 percent growth rate of provincial taxes and a 2.7 percent growth rate of federal taxes. 18. The total tax figure in table 2.4 is not the same as that in table 2.3 because the data come from different sources.

433,844 169 44,080 9,402 4 2 955 238

1,261,893 215 98,635 21,323 4 2 1,667 990

2007

191 27 124 127 −1 −22 74 316

Percentage change

612,864 169 62,269 15,050 4 2 1,529 381

1988

1,261,893 215 98,635 21,323 4 2 1,667 990

2007

Constant 2007 dollars

106 27 58 42 −12 −31 9 160

Percentage change

notes: Assessed value in 1988 is equalized assessed value and in 2007 is current value. Property taxes include special charges and business taxes but exclude payments in lieu of taxes. Gross provincial product (GPP) at market prices and assessed values are deflated by the national accounts implicit GNE deflator. Tax figures are deflated by the national accounts implicit GNE index for government current expenditure on goods and ser vices. GPP at marketprices is deflated by the national accounts implicit GNE deflator. sources: Assessed values are taken from Ontario Financial Information Returns. Property taxes, population, and deflators are taken from Statistics Canada, CANSIM database. See table 2.1 plus Statistics Canada tables 3840002 (for GPP) and 3800056 (for national accounts implicit GNE deflator).

Assessed value (in millions) As percent of GPP Per capita (dollars) Property taxes (in millions) As percent of GPP As percent of assessed value Per capita (dollars) Residential and farm taxes per capita (dollars)

1988

Current dollars

Relative Changes in Assessed Values and Property Taxes (Municipal and Education), Ontario, 1988 and 2007

TABLE 2 .3

1,907 29 545 409 2,890 478 293 771 69 1 33 239 13,934 144 23 14,101

Commercial Parking lot Office building Shopping center Subtotal

Industrial Large industrial Subtotal

Pipelines Other property classes Adjusted for shared PILs Supplementary taxes

Total levied by tax rate Amount added to tax bill Other taxation amounts

Total before adjustments

100.0

98.8 1.0 0.2

0.5 0.0 0.2 1.7

3.4 2.1 5.5

13.5 0.2 3.9 2.9 20.5

61.4 8.5 0.6 0.0 70.5

Percent

6,481

6,475 0 6

73 1 −32 138

493 249 742

1,862 26 525 409 2,822

2,563 147 22 0 2,732

Education taxes (millions)

source: Ontario Ministry of Municipal Aff airs and Housing, Financial Information Returns.

8,653 1,198 81 1 9,933

Municipal taxes (millions)

Residential Multiresidential Farmland Managed forests Subtotal

Property Taxes, Ontario, 2007

TABLE 2 .4

100.0

99.9 0.0 0.1

1.1 0.0 − 0.5 2.1

7.6 3.8 11.4

28.7 0.4 8.1 6.3 43.5

39.5 2.3 0.3 0.0 42.1

Percent

20,582

20,409 144 29

142 2 0 377

970 542 1,512

3,769 55 1,070 818 5,712

11,216 1,345 103 2 12,666

Total taxes (millions)

100.0

99.2 0.7 0.1

0.7 0.0 0.0 1.8

4.7 2.6 7.3

18.3 0.3 5.2 4.0 27.8

54.5 6.5 0.5 0.0 61.5

Percent

68.5

68.3 99.8 78.6

48.5 75.5 — 63.5

49.2 54.0 50.9

50.6 52.0 50.9 49.9 50.6

77.1 89.1 78.7 76.1 78.4

Municipal as percent of total taxes

24

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Chapter 2

may choose to borrow through a provincial “pooling” agency—formerly called the Ontario Strategic Infrastructure Financing Authority (OSIFA) and now merged into Infrastructure Ontario—that offers low-cost, long-term, fi xed-rate financing to municipalities (and such other public-sector institutions as universities). The Ontario Financing Authority borrows on behalf of Infrastructure Ontario.19

Local Ser vices Realignment In addition to the reform in property taxation and assessment, two other important changes to local government in Ontario, a local ser vices realignment and municipal amalgamations, occurred in 1998. Because all of these policies were introduced in the same year, it is difficult to isolate the impact of any one set of reforms on property taxes. Indeed, a Machiavellian analyst might infer that engendering such confusion may have been one aim of the provincial government at the time. Numerous earlier efforts at property tax reform had failed, essentially because of their perceived impact on taxpayers and more specifically on single-family homeowners. Perhaps one intent behind implementing a complex set of interconnected reforms simultaneously was to make it more difficult for taxpayers to isolate the impact of property tax reform. As it turns out, however, it is hard to hide taxes from homeowners (see chapter 4). Shortly after the 1998 reform wave, the provincial government was once again running for cover from irate taxpayers. The division of roles and responsibilities between the province and municipalities in Ontario has evolved with time. Over the decades, many commissions and committees considered how to realign ser vice responsibilities between the two levels of government to achieve a number of different objectives. In 1990, for example, the Provincial-Municipal Social Ser vices Review recommended that Ontario take complete responsibility for the cost of social assistance, as most other provinces had already done. Although the province agreed in principle with this recommendation, it was not prepared to absorb the cost involved (Tindal and Tindal 2009). Subsequently, the report of the Advisory Committee to the Minister of Municipal Affairs on the Provincial-Municipal Financial Relationship (1991; known as the Hopcroft Report) looked at the division of powers between the provincial and municipal governments and said that functions should 19. The Ontario Financing Authority is responsible for financial risk management activities and cash and debt management ser vices for the provincial government; it also provides advice to the government on financing proposals related to capital infrastructure.

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be clearly assigned to one level of government or the other and financial relationships should be simplified (Advisory Committee 1991). This report emphasized that conditional grants should be used only when there is a clear provincial interest in the aided function. The Hopcroft Report’s recommendations were not implemented, however. The next detailed review was conducted by the neatly named Who Does What (WDW) Panel in 1996 (Ontario Who Does What Panel on Local Governance 1996). This panel also considered which ser vices should be provided by the province and which ser vices by local governments, with the stated rationale of promoting more efficient and more accountable local government. The panel set out four principles for dividing responsibilities between the province and local governments: 1. Municipal government, in keeping with its historic function, should have a strong role in “hard ser vices,” such as ser vices to property and community infrastructure. Correspondingly, the province should have a strong role in the provision of “soft ser vices,” such as health, welfare, and education. 2. Government programs aimed at income redistribution should be funded by the province. 3. Where possible, only one level of government should be responsible for spending decisions, and the level of government making the spending decisions should have responsibility for the funding of that ser vice. 4. There should be an appropriate balance between the allocation of responsibility and the financial resources available to support those responsibilities. Following these principles as best it could, the WDW Panel recommended that municipal governments should be responsible for roads, transit, ferries, airports, water and sewer systems, and policing, and that provincial responsibility for social ser vices and education should be increased. Following the release of the panel’s recommendations, the provincial government launched what was called the local ser vices realignment (LSR). Although the LSR largely ignored the main WDW Panel recommendations on the funding of social ser vices, in the end the result was essentially a provincial takeover of the funding of elementary and secondary education. Table 2.5 shows the changes that resulted from the LSR. It lists how responsibilities were divided between the province and municipalities in 1997 and in 1998 and thereafter. In each municipality, some ser vices were uploaded to the provincial government and some were downloaded to local governments. Municipalities were given full responsibility for funding transit, police, water and

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TABLE 2 .5

Local Ser vices Realignment: Changes between Provincial and Municipal Governments Responsibility

1997

Since 1998

General welfare assistance: benefits administration Family benefits assistance: benefits administration Child care ser vices Long-term care Hostels Homes for special care Women’s shelters Public housing Child welfare Municipal transit GO Transit Ferries Airports Sewer and water Policing Farm tax rebate Property assessment Libraries Public health Ambulances Roads Gross receipts tax Provincial offenses Residential education taxes

80% provincial; 20% municipal 50% provincial; 50% municipal Provincial Provincial 80% provincial; 20% municipal Provincial 80% provincial; 20% municipal Provincial 95% provincial; 5% municipal Provincial-municipal 80% provincial; 20% municipal 33% provincial; 67% municipal Provincial Provincial 40% provincial; 60% municipal 10% provincial; 90% municipal 10% provincial; 90% municipal Provincial Provincial 5% provincial; 95% municipal 70% provincial; 30% municipal 90% provincial; 10% municipal Provincial-municipal Municipal Provincial School boards

80% provincial; 20% municipal 50% provincial; 50% municipal 80% provincial; 20% municipal 50% provincial; 50% municipal 80% provincial; 20% municipal Provincial 80% provincial; 20% municipal Provincial Provincial Municipal Provincial Municipal Municipal Municipal Municipal Municipal Municipal Municipal Municipal 5% provincial; 95% municipal 50% provincial; 50% municipal 50% provincial; 50% municipal More municipal Provincial Municipal 50% provincial for education; 50% municipal

notes: The uploading of general welfare assistance to the province began in 2010 and will be completed by 2018; administration costs will continue to be shared. The province downloaded funding for a suburban rail system (GO Transit) in 1998 but took back the responsibility in 2002; GO Transit is now part of Metrolinx (the Greater Toronto Transportation Authority). The downloading of public health and ambulances was reversed in 1999. Provincial roads grants to municipalities were cut back in 1996; maintenance of some formerly provincial highways was also transferred to municipalities.

sewers, public housing, and the farm tax rebate, as well as, in principle, property assessment. (Chapter 5 discusses the extent to which assessment in fact continues to be essentially provincial.) Some funding responsibility for family benefits, a major welfare program, was downloaded to municipalities along with the associated administrative costs. The cost of other social assistance remained shared between the province and municipalities, even though the WDW Panel recom-

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mended that those responsibilities be fully funded by the province.20 In 1999, the province took back some responsibility for funding ambulances and public health but not for other social ser vices. Since 2010 general welfare assistance has been gradually uploaded to the province; however, the full cost will not be borne by the province until 2018. In exchange for downloading ser vices to the local level, the province was to take over complete funding of elementary and secondary education. Previously, the province had funded about 40 percent of the costs of education from its general revenues, with the remaining 60 percent coming from property taxes levied by school boards and collected by lower-tier municipalities. To pay for its new educational outlay, the province first took over all education property taxes, both residential and nonresidential, and then cut provincial residential property taxes for education in half in 1998 to leave “tax room” for municipalities to increase municipal property taxes to finance the new ser vices for which they were responsible. Further cuts in provincial property taxes for education were made in 1999. Like property tax reform itself, the effort to realign or disentangle provincial and municipal ser vices in Ontario appears to be a never-ending project. Continued opposition on the part of municipalities to the 1998 downloading of social ser vices and public housing resulted in yet another review of provincial and local responsibilities. In 2006 the provincial government and the municipalities embarked on the Provincial-Municipal Fiscal and Ser vice Delivery Review, which focused on the provincial-municipal funding relationship, ser vice delivery, and ser vice governance. Before the review was finished, however, the province agreed in 2007 to fully fund the Ontario Disability Support Program (ODSP) and the Ontario Drug Benefit (ODB) program by 2011. After the release of the report in October 2008, the province also committed to uploading the municipal costs of Ontario Works benefits (income and employment assistance) over a nine-year period starting in 2010 and the costs of court security over a seven-year period starting in 2012. Table 2.6 gives a sense of the current situation by laying out the cost-shared social programs in place in 2009 in Peel Region, a large suburban region adjacent to the City of Toronto.

20. Some regional pooling of social ser vice, public housing, and transit costs in the Greater Toronto Area (GTA) was introduced to spread the impact of those changes throughout the region. As Boudreau (1999) discusses, this was a contentious issue in the 905 region— so-called for the telephone area code— surrounding Toronto. Although this pooling is currently being phased out by the provincial government, it remains a sore point with Toronto’s neighbors. In a flyer sent to taxpayers in 2009, the neighboring Peel Region tells its residents that each house in the region is, on average, paying $87 for what it calls the “Toronto Tax.”

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TABLE 2 .6

Provincial-Regional Cost Sharing for Social Programs: Region of Peel, 2009 Program

Ontario Works administration

Legislated share, provincial/ municipal (%)

50/50

Comments

Includes the programs listed in next two rows

Social assistance payments 80/20

To be fully uploaded by 2018

Employment, homelessness

80/20

Actual provincial share lower because funding is capped (and based on per diem for homelessness)

Ontario Disability Support Program

80/20

To be fully uploaded by 2011

Children’s Ser vices

84/16 (average for administration and three programs)

Actual provincial share lower (77/23) owing to caps

Public housing

0/100

Cost not shared but province funds 5%

GTA pooling

0/100

To be fully uploaded by 2013

Emergency medical (paramedics)

50/50

Capital expenditures fully municipal

Long-term care

58/39 (actual average for three programs, 2008)

Plus 3% client fees. Province pays fi xed per diem for operations that cover 56% of cost and cover all costs of “aging at home” program

Public health

75/25 (of net eligible expenditure)

Actual less for cost-shared programs owing to capping, but province covers 100% of cost of healthy babies and certain other provincially mandated programs

Transit for disabled

6/94 (actual, 2008)

Provincial funding comes from Dedicated Gas Tax program

source: Regional Councillor’s Report, Ward 2, Spring 2009.

Provincial Grants to Municipalities As part of the realignment of ser vice responsibilities in 1998, the province eliminated most of the specific matching grants to municipalities. It introduced a new, unconditional grant called the Community Reinvestment Fund (CRF) to ensure that the transfer of responsibilities was revenue neutral in each munici-

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pality. In essence, this grant was calculated as the difference between costs that were uploaded and those that were downloaded in each municipality. The grant formula assumed that municipalities would realize cost savings from the downloading, because the province believed that local governments could deliver these ser vices more efficiently than the province. The amount of the grant was reduced by different amounts according to the population of the municipality, with larger municipalities expected to find relatively more savings. In 2005 the CRF was replaced by the Ontario Municipal Partnership Fund (OMPF), which is now the main provincial transfer to municipalities.21 The total amount of funding available in 2005 was $656 million, compared with $618 million in CRF funding in the previous year. For 2007, OMPF funding was $843 million, or 2.8 percent of municipal revenues. Although the OMPF is unconditional in terms of how the funds are spent by municipalities, it nevertheless comprises four separate grants: the Social Programs Grant ($309 million in 2007), Equalization Grant ($199 million), Northern and Rural Communities Grant ($267 million), and Police Ser vices Grant ($68 million). Box 2.1 describes these components in more detail. By 2010, the total flowing to municipalities under the heading of the OMPF was shown as $1.2 billion. However, only $625 million was actually to be paid in cash; the balance represented the estimated savings to municipalities as a result of uploading some social ser vice costs to the province: the Ontario Drug Benefit Program ($168 million), the administration of the Ontario Disability Support Program ($86 million), and the partial uploading of benefits under ODSP (50 percent; $303 million) and Ontario Works (3 percent; $13 million).22 As is evident from the description of the various components of the OMPF in box 2.1, the amount received by a municipality depends on its fiscal capacity. Fiscal capacity is measured by the size of the assessment base and, in some cases, by composition (residential versus nonresidential). Getting the assessment base right is thus critical not only with respect to property taxes but also for the distribution of transfers among municipalities.

Municipal Amalgamation Municipal restructuring has been an ongoing process in Ontario for more than 30 years. During the late 1960s and early 1970s, two-tier regional governments 21. See http://www.fin.gov.on.ca /english /budget /ompf/2007/brochure.html. 22. In addition, another $125 million in court security costs will be uploaded over seven years, beginning in 2012. In 2010 an additional $25 million in payments went to small, rural, and northern municipalities to provide the same support as was provided by uploads plus OMPF in the previous year (see http://www.fin.gov .on.ca /en /budget /ompf/2010/techguide.html). Past experience makes one wonder if this one-time-only payment will indeed be one time only.

BOX 2 .1

Ontario Municipal Partnership Fund The Social Programs Grant provides funding to municipalities to help offset the municipal share of social program costs, through two components. Under the assessment-threshold component, funding is provided to municipalities with limited property assessment to support their share of social program costs. Specifically, funding is provided to municipalities whose costs for these programs exceed the revenue that could be raised by levying a 0.156-percent property tax on their assessment base. Full excess costs are funded. Under the income-threshold component, funding is provided to municipalities with high social program costs relative to their residents’ household incomes. Funding of up to $80 per household is provided to municipalities whose net social program costs exceed 0.60 percent of the total household income of their residents. The Equalization Grant also provides funding to municipalities with limited property assessment. It has two components. The assessment-equalization component provides funding to municipalities with limited property assessment owing to relatively low values (compared with a provincial standard) and limited nonresidential assessment (on the grounds that municipalities can set higher tax rates on nonresidential property, and so a municipality with limited nonresidential assessment is assumed to have lower fiscal capacity than a municipality with a larger nonresidential assessment base). Municipalities with an assessment per household less than $213,000 receive $47 for each $10,000 of total assessment differential (i.e., differential per household multiplied by the number of households). Under the farmland and managed forest assessment component, funding is provided to municipalities with limited property tax bases owing to a significant amount of farmland and managed forest. The grant provides funding equivalent to 300 percent of the municipal revenue generated from farmland and managed forest assessment where these properties comprise more than 20 percent of the municipality’s tax base. Municipalities in which 5 percent to 20 percent of their tax base is made up of these properties receive a portion of this funding on a sliding scale: every 2.5-percent increment in taxes generated from farmland and managed forest properties will result in additional funding equal to 50 percent of the taxes generated by these properties. The Northern and Rural Communities Grant provides funding to northern and rural communities through four components. First, under the rural communities component, support is given to municipalities based on the proportion of their population residing in rural areas or small communities. Municipalities with a Rural and Small Community Measure (RSCM) of 75 percent or more receive the full per-household amount of $156. Municipalities with an RSCM between 25 percent and 75 percent receive a portion of this funding on a sliding scale: every 5-percent increment in the RSCM results in an additional $15.60 per household. Second, under the northern communities component, assistance is provided to all municipalities in northern Ontario based on their number of households. The grant per household is $235. Third, under the northern and rural social programs component, funding is provided if the municipal share of eligible social program costs (net of the Social Programs Grant) exceeds 11.5 percent of municipal tax revenue. All northern municipalities are eligible for this grant if their social program costs exceed the threshold. Municipalities that are not in the north are eligible to receive the full amount of funding available through this grant compo-

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nent if they have an RSCM of 75 percent or greater and their social program costs are greater than the threshold. Municipalities with an RSCM between 25 percent and 75 percent receive a portion of this funding on a sliding scale. Fourth, under the stabilization component, ongoing assistance is provided to municipalities in the transition to the new funding model. This provides ongoing funding to municipalities that otherwise would see decreases in funding of more than $85 per household, relative to funding received from the 2007 Ontario Municipal Partnership Fund. This grant component has been calculated on the basis of 2010 funding levels, and the funding pa rameter will be maintained at the $85-per-household level in future years. Finally, the Police Services Grant provides funding to rural communities to support policing costs. For municipalities with an RSCM of 75 percent or more, this grant provides funding equal to 50 percent of eligible policing costs between $150 and $750 per household, and 75 percent of eligible policing costs above $750 per household. Municipalities with an RSCM between 25 percent and 75 percent receive a portion of this funding on a sliding scale. source: http://www.fi n.gov.on.ca /en /budget /ompf/2010/techguide.html.

were created to replace county governments in the more rapidly growing areas of the province. Responsibility for the delivery of a number of lower-tier ser vices, such as water, sewers, and regional planning, was shifted to the upper-tier level because these ser vices were heavily capital intensive and extended beyond lowertier municipal boundaries. In Ontario lower-tier municipalities have long collected property taxes on behalf of the upper tiers. On the other hand, upper-tier municipalities borrow on behalf of the lower tiers, so it was considered appropriate to make the upper tiers responsible for funding ser vices that were significantly financed by borrowing. Municipal amalgamation in the Toronto area began in 1954 with the creation of a two-tier metropolitan government (a metropolitan tier and 13 lower-tier municipalities). In 1967 the number of municipalities was reduced to six. From 1954 to 1988, metropolitan councilors were not directly elected. Instead, two members were elected from each ward and the member with the most votes sat on both the metropolitan and local councils while the other member sat only on the local council. From 1988 until the dissolution of the metropolitan council in 1998, however, metropolitan councilors were directly elected. The most recent amalgamation took place in the fateful year of 1998, when the metropolitan and lower tiers were merged to create a single-tier entity, the City of Toronto. This merger took place in the face of strong local opposition that culminated in a municipal referendum in which 70 percent to 81 percent of those voting in each municipality (in a 36-percent turnout) voted strongly against it. The provincial government was not legally bound by this vote, however, and it did what it wanted to do, thus displaying, in the words of one author,

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“contempt for the democratic process and the will of the people” (Boudreau 1999, 776).23 Local referenda and protest rallies may express local opposition but they seem to have little political effect in Ontario—at least when they occur in Toronto. As noted earlier, there are no formal political parties at the local level and the city operates under the weak-mayor system. Elections were held every two years up until 1982 and every three years from 1982 to 2007; they have been held every four years since 2007. All these changes in the electoral period were made by the provincial government. From the mid-1970s until 1996, municipal restructurings outside of Toronto generally took the form of annexations and locally initiated amalgamations. However, in 1996 a new law, the Savings and Restructuring Act, was introduced to encourage even more municipal restructuring in order to achieve cost savings and streamline local government. Unlike Toronto’s story, this legislation allowed municipalities to restructure if they reached local agreement, provided that the change had the support of the majority of municipalities containing a majority of the population and also, where applicable, the support of the majority of members on the upper-tier council. If local agreement could not be reached, one or more municipalities could request that the Minister of Municipal Affairs and Housing appoint a commission with full authority to determine the new structure for the municipal area. The Savings and Restructuring Act, coupled with provincial statements about reducing the number of municipalities in Ontario, put considerable pressure on municipalities in many areas to amalgamate (Tindal and Tindal 2009). The outcome was that the number of municipalities in Ontario was reduced by more than 40 percent between 1996 and 2004, from 815 to 445, through both voluntary and provincially imposed amalgamations. In some cases, as in Kingston, the change was voluntary. In others, as in Toronto, the province imposed the amalgamation directly. In still others (Kawartha Lakes, for example), the province appointed a commissioner whose recommendations were implemented directly, or, as in Ottawa, Hamilton, and Sudbury, a special advisor whose recommendations were, for the most part, implemented by the provincial government. In all likelihood, these municipal amalgamations had some impact on municipal spending and taxes, although not necessarily in the desired direction (Vojnovic 2000). Further analysis of the effects of amalgamation is beyond the scope of this study. Nonetheless, it is important to keep in mind that the many changes Ontario municipalities have been undergoing in recent years in addition to assessment and property tax reform are likely to have affected the level (and perhaps the structure) of municipal property taxes. 23. For more detailed discussion of the amalgamation of Toronto, see Slack (2000).

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Education Finance The delivery of elementary and secondary education in Ontario is the responsibility of both public and separate school boards. Prior to 1998, these school boards had taxing authority. In effect they set their own budgets and then simply requisitioned the necessary funds from the local municipalities that they served.24 The lower-tier (or single-tier) municipality was entirely responsible for tax billing and collection. On average, these education property taxes accounted for about half of total property taxes. Since 1998, however, as we discuss in more detail in chapter 6, the provincial government has both set the property tax rates for education and determined the total level of funding for education. As table 2.7 shows, one important result of this change was that in 1998 residential education property taxes accounted for less than 30 percent of total residential property taxes collected. Education property taxes were over $8.5 billion in 1997 but less than $6 billion in 1998. Although education property taxes have increased slightly since 1998, this increase reflects the increase in the assessment base and not any increase in tax rates. Indeed, the proportion of total residential taxes going to education has declined further because the province has continued to reduce these taxes, as table 2.7 indicates. Table 2.8 shows the education tax rates for Toronto from 1998 to 2007. As we explain later (see chapter 6), a uniform education tax rate is applied to residential property (including multiresidential properties) throughout the province, so that residential education property tax rates are the same for all municipalities, including Toronto. Business education property tax rates, however, vary by municipality and by class of property (commercial, industrial, pipelines); only the commercial tax rates for Toronto are shown in table 2.8. Differences in these rates across the province reflect the historical incidence of taxation on these property classes prior to 1998, as well as subsequent provincial policy changes intended to reduce relative differences among municipalities and offset the effects from resetting rates in reassessment years to a revenue-neutral level.25 On the whole, despite the rather dramatic changes in both the amounts (table 2.7) and rates (table 2.8) of education property taxes, the split between residential and nonresidential property tax funding of education has remained almost unchanged. In 1998 residential (including multiresidential) property provided 42 percent of the total property tax support of education; in 2007, this source provided 43 24. Chapter 6 discusses the rather complex structure of school boards in Ontario, where there is public funding of both public and “separate” (Roman Catholic) school systems, and there are linguistic (French) boards in both separate and public systems. These boards may in some instances be responsible for coterminous geographic areas and in other cases, different but overlapping areas. For a general overview of how education is financed in Ontario and in other provinces, see Auld and Kitchen (2006). 25. Prior to property tax reform in 1998, municipalities levied a business tax on business occupancy. In 1998 this tax was rolled into the commercial and industrial property tax (see chapter 4).

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TABLE 2 .7

Education Property Taxes, Ontario, 1990–2007 (in millions of dollars) Residential

Multiresidential

Commercial

Industrial

Total

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2,336 2,139 2,168 2,222 2,273 2,330 2,387 2,452 2,530

134 120 119 145 142 146 146 146 147

2,586 2,645 2,674 2,641 2,672 2,704 2,743 2,793 2,855

869 878 846 784 738 739 732 728 726

6,416 6,998 7,541 7,901 8,044 8,328 8,524 8,569 5,925 5,782 5,807 5,792 5,825 5,919 6,008 6,119 6,258

2007

2,585

147

2,896

741

6,369

notes: Residential includes farmland and managed forests. Commercial includes pipelines. Supplementary taxes and payments in lieu of taxes are excluded. source: Ontario Ministry of Municipal Aff airs and Housing, Financial Information Returns.

percent of the total (table 2.7). In 1998 the residential education property tax rate in Toronto was only 11 percent of the commercial rate; by 2007, this ratio had risen just two points, to 13 percent. As part of the provincial takeover of education funding in 1998, the Province of Ontario introduced a new model for the funding of elementary and secondary education.26 Unlike the earlier education grant system, this new funding model contains no equalization component based on assessment. Instead, the provincial government simply determines the overall level of funding for each school board and then sets the residential and nonresidential education tax rates. Municipalities collect the education property taxes determined by the province and transfer the funds to the school boards, as they did under the previous system when school boards set the tax rates. The provincial government closes the gap by transferring the difference between the funding level and the amount collected from property taxes to the school boards. 26. The system is described in detail at http://www.edu.gov.on.ca /eng /funding /0708/technical.pdf. For further discussion, see chapter 6.

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TABLE 2 .8

Education Property Tax Rates, Toronto, 1998–2007 (%) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Residential

Commercial

0.460 0.414 0.414 0.373 0.373 0.335 0.314 0.314 0.264 0.264

4.223 4.019 3.959 2.653 2.653 2.300 2.216 2.216 1.976 1.976

source: Ontario Regulation 400/98 under the Education Act, as amended.

What this means is that local education, one of the initial driving forces behind the establishment of local governments in Ontario (see chapter 3), is now funded in more or less exactly the same way as local governments were funded in the centrally planned economies of Central and Eastern Europe before the arrival of democracy.27 In a recent paper, Sokoloff and Zolt (2006) argue that the link between local education and local democracy was a critical factor distinguishing the evolution of political institutions in North America from contemporaneous developments in South America. In Ontario, however, this link has never been very strong. The provincial government has long controlled education, and the fact that it now explicitly sets the education property tax rate represents more a simplification of the preexisting system than a radical change. Perhaps the major question raised by the present system is whether it makes sense to have what is in effect an earmarked property tax for education in a province (and country) with a long tradition of general-fund financing of public ser vices.28 In addition, as we discuss in chapter 9, these recent developments may call into question the relevance for Ontario of the traditional North American rationale for linking local property taxes, local education, and local democracy.

Some Key Issues The foregoing brief review of the intergovernmental context in Ontario highlights several issues that are important for understanding the 1998 property tax reform. 27. On this socialist funding model, see, for example, Kornai (1992). 28. For an earlier discussion of Ontario’s limited experience with earmarking, see Th irsk and Bird (1994).

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First, the reform was only one part of a much larger overhaul of the provincialmunicipal financial system. In 1998 (and subsequently) the province of Ontario realigned responsibilities between the provincial and municipal governments in a way that downloaded many new responsibilities to the local level. This realignment was accompanied by a reform in education funding that amounted to a full formal provincial takeover of education funding, including its previous local property tax component. Many municipalities, such as Toronto, also faced restructuring in the form of municipal amalgamation. Because all of these changes occurred simultaneously, it is difficult to separate the impact that property tax reform had on municipal taxpayers from the impact of other contemporaneous policy changes. Second, property tax reform has implications not only for municipal and education property taxes but also for some provincial transfers to municipalities that are based on fiscal capacity (measured by property assessment). In addition, in northern Ontario the apportionment of social ser vice costs is determined, at least to some extent, on a measure of the assessment base. Third, to understand how the property tax reform came about, the nature of the reform, and the impact it has had, it is critical to understand that it is the province that has made all the major decisions on the structure of the property tax, not local governments. For example, although the assessment function was turned over to what is officially a municipal assessment corporation, the province appoints the chair and provincial representatives to the board. The province also decides what is to be included in the assessment base and sets the parameters for how the assessment base is to be determined (see chapter 5). Municipal governments now have limited flexibility in the setting of tax rates. However, the province took away taxing authority from local school boards and now sets education tax rates. In Ontario the provincial government largely rules when it comes to property tax reform, and indeed almost any other aspect of the local public sector.29

29. Of course, Ontario is by no means unique in this respect in Canada. Indeed, compared with most Canadian provinces, it is positively liberal in its treatment of municipalities. For example, only three other provinces join Ontario in having a law that requires the provincial government to consult with local governments on legislation that affects them: it does not have to listen to what they say, but it does have to talk to them (Slack et al. 2007). And Ontario goes further: its Municipal Act (unique in Canada) actually requires a formal memorandum of understanding with the Association of Municipalities of Ontario (AMO) on matters of mutual interest, and also provides a formal protocol for involving AMO in federal-provincial consultations on matters of interest to local governments. For example, both AMO and the City of Toronto (which often feels underrepresented by the small municipality-dominated AMO) have explicitly signed on to the federal Ontario agreement for allocating the funds for municipal infrastructure derived from the federal gas tax (see http://www.toronto.ca /legdocs/mmis/2009/ex /bgrd /backgroundfi le-17899.pdf).

CHAPTER

3

The Property Tax in Ontario Is an Old Tax Always a Good Tax?

I

t is said that age and virtue are connected. If this were true, then the property tax in Ontario would appear to be exceptionally virtuous. Soon after the colony of Upper Canada (subsequently, Ontario) was established in 1791, one of its first fiscal measures was a moderately graduated tax on total property (real and personal), established in the Assessment Act of 1793. Over the next two centuries the Ontario property tax evolved and changed in many ways. Nonetheless, the property tax continues to be the only significant local tax in Ontario.1 The property tax may not be virtuous, but it is definitely a survivor. Despite its longevity, however, the property tax has never been popular in Ontario. Indeed, perhaps no tax has been more vilified. It has been described as unfair because it is unrelated to taxpayers’ ability to pay or to benefits they receive, unsuitable because it supports ser vices unrelated to property and burdens housing and business too heavily, and inadequate because it generates insufficient municipal revenue. In recent years, its effects on housing, land use, and urban development have been castigated.2 Everyone, and certainly every politician, seems to be well aware of the political unpopularity of the property tax. Still, battered and twisted though it may be, it endures. 1. In 2007 the property tax accounted for 48 percent of municipal revenues, on average, province-wide. The remaining sources of municipal revenue are user fees (21 percent), intergovernmental transfers (24 percent), and other miscellaneous revenues (7 percent). With the exception of the City of Toronto, which, as noted in chapter 2, can levy a few additional minor taxes, municipalities in Ontario do not have any other tax sources. 2. For a review of potential effects of property taxes on urban development and land use, see Slack (2002a).

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In some ways, the story of the Ontario property tax and its persistence in the face of equally persistent unpopularity resembles that told by Wallis (2000) about state property taxes in the United States.3 As Wallis notes, the states turned to other revenue sources as soon as they could. He suggests, however, that local governments for the most part stayed with the property tax not simply because they had no choice, and certainly not because the administrative and efficiency costs of the tax were lower at the local than at the state level. Instead, they continued to rely heavily on property tax finance largely because it was easier to sell to taxpayers at the local level owing to the strong link between local taxes and the provision of local public ser vices that benefited residents. Over the years, however, the link stressed by Wallis has been considerably weakened in Ontario, and the main reason Ontario municipalities still depend solely on property taxes for local revenue is essentially because they have no choice. This chapter tells the tale of how the Ontario property tax survived and evolved over the two centuries prior to the “big bang” of the 1998 reform. A brief review of the historical evolution of the property tax and then a more detailed discussion of the three decades leading up to the 1998 reform will help put the events of the past decade into long-term perspective.

The Beginning A standard guide for storytelling is that it’s best to start at the beginning. This rule seems especially sound when it comes to the story of a complex fiscal institution like the property tax, in which the term fiscal inertia (Rose and Karran 1987) often seems a more appropriate description for the process than the term path dependency (David 2007), which is more commonly found in the economic literature. The First 100 Years The beginning, in the colony of Upper Canada, was the Assessment Act of 1793. According to Canada’s preeminent tax historian, J. Harvey Perry, four modifications between 1811 and 1838 gradually turned the tax established in 1793 into a moderately effective real property tax that also applied in a limited way to personal property (Perry 1955). In 1838, the Assessment Act was further amended to specify that real property should be assessed at 20 percent of its value. Originally, the property taxes in the 19 counties established in 1792 were 3. See Tassonyi (2011) for some discussion of the expenditure and debt components of the Ontario story.

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levied by justices of the peace, who were responsible to the provincial government. However, following a major popular uprising in Upper Canada in 1837, an 1839 report concluded that a lack of municipal government had been one of the “main causes of failure of representative government and of the bad administration of the country” (quoted in Perry 1955, 33). As a result, a formal municipal-government system was finally established in what is now Ontario between 1841 and 1849, and the already existing property tax was turned over to the new elected local councils. As chapter 2 describes, the structure of local government set up in the province at that time essentially prevails today, including the critical feature that local municipalities are the only authorities that collect property taxes, although upper-tier local governments—then counties and now both counties and regional governments—in effect imposed their own rates (to be collected by the lower tier).4 The relationship between local government and education has a longer and more convoluted history. The property tax was first used to pay for education in 1841. Prior to that, the main source of education revenue was a rate bill charged to parents, which was supplemented, in some cases, by charitable donations (Cameron 1972). Beginning in 1841, local councils were required to distribute among the common schools of the district an amount equal to the district’s share of the provincial school grant, and to raise the funds from the general property tax. In 1850 a major reform of school finance occurred when the Common Schools Act gave school trustees the right to require taxes to be levied on property. Municipal governments continued to be fully responsible for levying and collecting those taxes, although, until 1877, if for any reason the school trustees wanted to take on the job themselves they could. After 1877, however, there was no choice: the lowertier localities (cities, towns, villages) were assigned sole responsibility for financing both local schools and upper-tier local governments—the counties—from locally imposed property taxes. With the important exception of the direct provincial assumption of responsibility for education property taxes (discussed in more detail in chapter 6), this system is still in force today. For example, in the City of Mississauga (a large municipality adjacent to Toronto) only 28 percent of the “local” property tax imposed on property owners by the city in 2007 actually went to the city. Most of the tax revenues collected (46 percent) flowed directly to the Region of Peel, in which Mississauga is located, and to the relevant school boards (26 percent).5 4. Actually, it is only since 1998 that the upper-tier municipalities have been able to impose their own rates. Before then, the result was the same but the process was different, in that although upper-tier municipalities “requisitioned” funds from the lower-tier municipalities, they did not formally impose their own rates. 5. Of course, nothing is ever this simple in the world of Ontario property taxation. In 2007 66 percent of the school levy went to the District of Peel School Board— the “public” board— and the balance went to the Dufferin-Peel Catholic District School Board, which also covers the adjacent county of Dufferin. Similarly, of

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As Locke and Tassonyi (1993) argue, sharing tax bases in this way greatly blurs the accountability of local government. This aspect of Ontario’s intergovernmental system hardly stands out, however, since almost every other feature of provincial-municipal relations in the province seems just as cleverly—if not intentionally— designed to obfuscate the accountability of governments at the provincial and local levels. As an accompaniment to the new municipal structure introduced in the middle of the nineteenth century, a new Assessment Act was introduced in 1850, revising a draft bill (originally proposed in 1843) that had in turn largely been copied from a recent law in the adjacent state of New York in the United States.6 Although initially it had been proposed that a wide definition of personal property and income should be included in the tax base, in the end income was not included and the taxation of personal property was confined to a short list including horses, cattle, carriages for pleasure or hire, merchants’ stock, mechanics, manufacturers, and so on, as well as stock (shares) in watercraft for freight or passengers. In all probability, the main items actually taxed as personal property were business inventories. However, in an early instance of the “now you see it, now you don’t” nature of much property tax legislation, shortly after the 1850 reform, income over 50 pounds was brought back into the tax base as an item of personal property (unless exceeded by the value of other personal property). Towns and cities were permitted to petition to use annual rental value instead of capital value as the basis for assessment, although capital value was still to be used in counties and townships. By 1853, the formal responsibility for assessment had been transferred to the local level. Assessors were empowered to obtain information from property holders. In 1866 yet another important change was made when capital value once again became the mandatory assessment basis for real property. At the same time, income exceeding $300 was to be added to the personal-property tax base.7 At this point, the property tax system appears to have reached an equilibrium position, because matters remained more or less the same for the remainder of the nineteenth century: Ontario’s local governments imposed a “general” property tax that encompassed not only both real and personal property, but also income. Despite the longevity of this system, however, which was also the experience in the United States in the latter half of the nineteenth century (Seligman 1969), the 46 percent that went to the Region of Peel, 51 percent went to a so-called social pooling costs levy that is shared throughout the greater Toronto area (GTA); the 26 percent that went to education in fact now is really a provincial tax, although it still appears in the books of the school district(s) as “local taxes.” The 2007 Ontario Budget announced a seven-year phase-out of the GTA pooling arrangements, beginning in 2008. 6. According to Ontario Committee (1967), 42 of the 69 sections of the 1843 bill were copied directly from the New York statute. 7. The estimated earnings per worker for an industrial worker in Ontario in 1870 were about $245 (Drummond 1987). (Note that the currency unit in the province changed with the formation of Canada in 1867, from the English pound to the Canadian dollar.)

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not everyone in Ontario—indeed, almost no one— appears to have been very happy with the general property tax. In the 1860s and 1870s, for example, many local governments petitioned the provincial legislature to strengthen their fiscal position by repealing such provincially decreed exemptions as those for bank stocks and for personal property used in farming (Stokes 1993). Since municipal fiscal issues were serious political matters in early Ontario (Noel 1990), the solution seemed obvious. In a pattern that became so common in Canada that it might be considered standard operating procedure, a special committee was established to deal with the issue. During the hearings held by the resulting Select Committee on Exemptions from Taxation in 1878, other complaints came to the fore, particularly with respect to the personal property component of the tax. For example, the treasurer of the City of Toronto called the assessment of personal property “entirely fallacious,” and a local alderman suggested that the value on the rolls was less than one-tenth of the true amount—an estimate supported by other evidence submitted to the committee (Perry 1955, 87). Both the personal property tax and the municipal income tax were severely criticized. Inevitably, further commissions were soon established to study these additional issues. The 1904 System The most important of these later commissions, the Mclennan Commission, filed its report in 1902 (Ontario Committee on Taxation 1967). The commission recommended that all local income taxation of individuals should be abolished, and that the personal property tax should be replaced by a flat-rate occupancy tax on business.8 Although the provincial government accepted this report, the subsequent major reform of the Assessment Act in 1904 actually rejected some key recommendations of the commission. With respect to the business occupancy tax, for example, “rather than accept the value of business and urban residential premises as an appropriate measure for a basic amount of tax, the Select Committee [of the provincial legislature] endeavoured to relate the new tax to the old by setting differing percentages by class of business, with the intention of producing about the same revenues [by class of activity] as the personal property tax had done” (Ontario Committee on Taxation 1967, 38–39).9 As the next 8. As proposed by commissions in 1888 and 1889, an 1890 law had allowed municipalities to replace the personal property tax, essentially a tax on inventories, with a business property tax based on annual rental value at a rate of 7.5 percent (with rental value being set as 7 percent of assessed [capital] value). However, none appears to have accepted the invitation (Perry 1955). 9. As Merritt more cautiously said, “It is presumed that a study of the situation was made at that time, but it is highly unlikely that it would have withstood the more sophisticated examination it may well have received today. . . . We are not sure whether the classification is based on what was in fact taking place or what should have been if the old tax laws had been applied properly” (Merritt 1967, 18).

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chapter will show, even a century later life in the provincial legislature seems to have changed little in this respect. The 1904 reform repealed the personal property tax. In its place, it introduced a more effective system of withholding on wages as well as a new definition of income—a definition that was actually later adopted by the federal government when, pushed by the needs of war finance, it finally introduced Canada’s first national income tax in 1917 (Perry 1955). More closely related to the story in this book, the 1904 act not only exempted machinery from real property assessment, but also clearly distinguished the business property tax from the property tax on housing for the first time in Ontario, by creating a special “graded” business occupancy tax. This new tax was imposed (in addition to the property tax) at the general rate of property tax on a specified percentage of assessment for different types of business. In other words, a business property assessed at $1,000 would be subject not only to the general property tax, at a rate of, say, 10 mills (0.1 percent or a tax of $10), but also to a business occupancy tax imposed at the same rate on a specified percentage of the assessment (for example, 50 percent or, in this case $500, amounting to an additional tax of $5). As noted, the percentage rates applied to the different categories identified in the 1904 law were apparently set initially at levels intended to avoid major changes in the tax burden on different businesses. These rates ranged from a low of 25 percent for retail merchants in cities with more than 50,000 inhabitants to 75 percent on most financial institutions and a high of 150 percent for distilleries.10 Whatever the initial rationale for these differentials, it is a phenomenon familiar to students of tax policy everywhere that, once established by law, such numbers soon take on a life of their own. The world, and Ontario, changed greatly over the next 75 years. However, the additional business surcharges established in 1904 remained largely unchanged until the 1980s, when the number of rates was reduced and, in particular, the high rates for distillers were finally lowered.11 Until the major reform in 1998, however, five classes of additional “business assessment” surcharges continued to exist: 25 percent for car parks; 30 percent for racetracks, telephone and pipeline companies, and most small retail businesses; 50 percent for lawyers, doctors, dentists, engineers, and other professionals, agents, radio sta-

10. Merritt (1967, 18) notes that “one may . . . be somewhat suspicious of the 75 per cent rate which was applied to most financial institutions in view of the general distrust that people have had— and probably always will have— of such institutions. On the other hand one must remember that the business tax classification reflected an assessment which included not only personal property but income and the high rates for distillers and financial institutions may have been valid in view of this evidence.” Determining the intentions of Ontario policy makers in many ways remains more an arcane art than evidence-based science. 11. Perhaps this change may be interpreted as one small part of what Cook (2007) labels the “alcoholism movement” of the postwar period— the changed perception in North America of the nature of society’s alcohol problem. The result, as Cook documents, was a pervasive and substantial decline in recent decades in the real taxation levels imposed on alcohol and related products and activities.

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tions, newspapers and magazines, photographers, printers, stock or commodity exchange operators, department stores or retail chains with more than five outlets in the province; 60 percent for manufacturers, mines, smelters, and concentrators; and 75 percent for wholesalers, financial institutions, courier and delivery companies, brewers, and distillers (Ontario Fair Tax Commission 1993). One interpretation of the 1904 reform is that it represented a temporary resolution of the ongoing political struggle between the business interests that had long been dominant in Ontario and the growing middle class, particularly in urban Toronto (Levine 1987). Levine developed this theme further in a subsequent study examining the long, drawn-out discussion of the single tax in the province and particularly in Toronto during a period that saw several avowed “single-taxers” elected to the city council (Levine 1993). Generally, land and buildings were valued separately in Ontario at this time (and for many years thereafter), so it is perhaps not surprising that, as land values rose sharply, the single-tax movement launched by Henry George in the United States found many followers north of the border. In 1905, a referendum exempting part of the value of improvements from property tax was passed by a large majority in Toronto, although the measure was defeated in the city council. Other referenda and a good deal of political agitation continued for years but nothing more happened until, apparently with the idea of encouraging home ownership, the populist United Farmers government that came to power in Ontario at the end of World War I passed the Municipal Tax Exemption Act of 1920, which gave municipalities the option to introduce site-value taxation by exempting improvements. In fact, however, perhaps reflecting the postwar decline in land values and hence the danger of basing local finances on them exclusively, no municipality appears to have seized this chance before the option was removed in 1924 (Finnis 1972).12 Nonetheless, one small trace of the single-tax heritage remained on the books for years in the form of a partial graded exemption for dwellings, introduced in 1919 as a veteran’s benefit. Under this provision, up to 50 percent of the value of dwellings assessed at $4,400 or less could be exempted, up to a maximum of $2,200. Although only Toronto and one other municipality (now part of Toronto) took advantage of this legislation, as late as 1977 some 37,000 properties on Toronto’s assessment roll continued to benefit from the exemption (Ontario Commission 1977). Indeed, this 1919 exemption continued to be, as it were, 12. Georgism found its real home in Canada farther west in the prairie provinces and British Columbia, where the pre–World War I land boom was even more marked. Site-value taxation and the exemption of improvements made considerable headway in these provinces (Haig 1915). However, events soon overcame this enthusiasm when the end of the boom and then the Depression severely affected local tax bases. Indeed, the fall in land values in some western cities like Edmonton at the end of the boom was so steep that it took more than 40 years for the assessment base to return even to the level it had reached in 1913 (calculated from data in Canadian Tax Foundation 1958); for further discussion, see Bird (1959).

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“great-grandfathered” and to provide benefits to a lucky few until its final demise in the 1998 reform. In a similar fashion, most of the property tax system introduced in 1904 also endured for most of the next century, with the important exception that the municipal income tax, never an important source of local revenue and one that had always encountered many problems in collection and compliance, was replaced in 1937 by the first provincial income tax.13 Municipalities pioneered income taxation in Ontario, but their dominance in the field did not last. With World War I, the federal government moved into the income tax field with a “temporary” wartime income tax. Unsurprisingly, this tax is still with us today, in a considerably expanded form. In the Great Depression of the 1930s, the provincial government also entered the income tax field, and it took the further step of eliminating competition from below by prohibiting local governments from taxing income. To this day, municipalities in Ontario (and in Canada generally, with very minor exceptions) can tax neither income nor sales, with the result that their revenue base essentially consists of only a two-legged stool—transfers from the provincial government and the local property tax.14 Much of the local financial story for the past century reflects the shifting dependence of municipal governments on these two revenue sources, one of which (transfers) is largely outside their control. At the same time, the ability of local governments to determine the revenues raised from property taxation has also been restricted by the provincial government.

The Growth of Property Taxes Given the lack of options, taxes on real property have always constituted by far the most important source of municipal revenue in Ontario. As a major pre–World War II federal report noted, “The outstanding feature of the Ontario revenue system is the high yield, both proportionately and absolutely, of real property taxa13. The Rowell-Sirois Commission of the late 1930s, citing the need for centralized control over rates, exemptions, and the “appropriate curve of progressivity,” recommended that not just municipalities but even provinces should withdraw entirely from the personal income tax field (Royal Commission on DominionProvincial Relations 1940, 111–112). Th is is essentially what happened in World War II when the provinces “rented” their income tax room to the federal government in exchange for transfer payments; after the war, however, the provinces reentered the income tax field in 1947, and all now rely heavily on income tax revenues; for further discussion of the shifting federal-political roles in income taxation, see Bird and Vaillancourt (2006). 14. To be fair, there is a third leg to the municipal financial stool in the form of user charges. Although this source of revenue has increased in recent years and could definitely be used more, and better, by Ontario municipalities, the subject is not discussed further here; see Bird (1976) and Bird and Tsiopoulos (1997) for more detailed treatments of user charges in Canada.

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tion. This particular source has long been the backbone of Ontario public finance as might be expected from the highly urbanized character of the economy.”15 In 1878–1879, for instance, real property taxes provided 81 percent of Toronto’s “own revenue,” with the balance coming from taxes on personal property (15 percent) and income (4 percent). In 1892–1893 the comparable breakdown was 89 percent, 7 percent, and, again, 4 percent (Kitchen 2002). After the 1904 reform, with the abolition of the tax on personal property the balance became weighted even more heavily in favor of real property taxes, a tendency that was further accentuated by the abolition of the local income tax in the late 1930s. For Ontario as a whole, from 1886 to 1910, local taxes—increasingly, real property taxes— accounted for 85 percent of own local revenues, with the balance coming from fees and utility charges. Although provincial grants to local governments increased after World War I, rising from only 2.7 percent of total local revenues in 1913 to 7.6 percent in 1937, the local finance story throughout the first half of the twentieth century, as throughout the previous century, continued to be essentially the story of the real property tax. In most years this tax accounted for 90 percent or more of local taxes and about three-quarters of all local revenues. Fortunately for Ontario’s growing urban areas, however, not only their populations, but also their assessment bases grew rapidly over most of this period, as shown in table 3.1. One result was a marked increase in the importance of the assessment base in urban areas compared with rural areas. A related phenomenon was a corresponding increase in the importance of buildings relative to land in the tax base. However, although per capita assessment at first grew (in constant 1900 dollars) from $288 in 1886 to $416 in 1906, it then declined sharply to only $341 in 1921, rose again to $481 by 1931 and then fell to just $355 in 1941. Thus 50 years of assessment effort (from 1891 to 1941) left Ontario municipalities as a whole with approximately the same real per capita tax base as that with which they began. With municipal finance dependent on property tax revenues, the pattern of real per capita municipal expenditure in this period largely mimicked the pattern of growth and decline in real per capita assessments. Total local expenditure increased from $10 per capita in 1900 to $15 by 1910. By 1924 expenditures had reached nearly $20 per capita (in 1900 dollars). The peak, at nearly $30, was reached in 1932; by 1941, reflecting both deflation and reduced pressure on municipalities to spend on relief and debt charges, it was merely $14. Similarly, school expenditures, which at the time were financed entirely by property taxes, 15. Royal Commission on Dominion-Provincial Relations (1940, vol. 1, 230). Of course this was not only true in Ontario. As the same study put it, in words that still echo in the ears of local councils across the land: “Anything which had an adverse effect on real estate values would undermine Canadian municipal fi nances” (130).

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TABLE 3.1

Per Capita Real Property Assessment, Ontario, Selected Years, 1886–1941 (constant 1900 dollars) Year

Rural

Urban (towns and villages)

Cities

Provincial average

1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1941

308 351 403 n/a 482 454 n/a 312 313 394 364 342

196 253 282 n/a 298 268 n/a 218 255 327 285 182

312 437 484 n/a 393 455 n/a 423 478 607 544 434

288 351 398 n/a 416 412 n/a 341 374 481 433 355

source: Tassonyi (2011).

increased from more than $3 per capita in 1910 to just over $8 in real terms by 1933 and then declined to just over $4 by 1941. The pattern for revenue was roughly similar, as shown in table 3.2. Average local taxes per capita (in real terms) rose from about $4 in 1886 to more than $7 in 1906, around $10 in 1916, and more than $20 in 1931 before falling again in the mid-1930s. Combining the revenue and assessment data, the effective rate of total local property taxes (as a percentage of assessed values) rose from about 1.3 percent in 1886 to 1.9 percent in 1911. This rate then continued to rise more sharply, to a peak of 4 percent in the early 1930s, before declining slightly (see table 3.2). An interesting study of Boston and Baltimore in the nineteenth century concluded that much of the growth in local government expenditure in that period was driven more by the increasing revenues, yielded relatively painlessly by the growing property tax base, than by any increased demand for local public ser vices from residents (Holcombe and Lacombe 2004). That something similar may have occurred in Ontario in the first third of the twentieth century is suggested by the rising effective local tax rates, shown in table 3.2, although it is not possible to test this hypothesis rigorously. The effective tax rate shown in table 3.2 is the ratio of tax to assessed value (AV). An earlier study (Bird and Slack 1981) found that the same rate for the decade from 1969 to 1978 to be close to that of the early 1930s shown in table 3.2, 4 percent. A more meaningful economic concept of effective rate is to relate taxes to market value (MV). Assuming, as seems reasonable, that the AV/MV ratio in the 1970s was more or less the same as that reported for the early 1960s, 39

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TABLE 3.2

Per Capita Real Property Taxes, Ontario, Selected Years, 1886–1941 (constant 1900 dollars)

Year

Rural

Urban (towns and villages)

1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1941

3.18 3.54 3.90 n/a 5.29 5.85 6.59 9.03 11.27 15.32 12.17 9.83

4.17 5.32 6.53 n/a 7.66 7.63 7.66 10.31 12.79 18.14 15.85 12.29

Cities

Provincial average

Effective tax rate (%)

7.11 9.94 11.48 n/a 10.47 11.94 14.56 18.28 20.11 28.52 25.60 19.14

4.11 5.32 6.21 n/a 7.31 8.34 9.98 13.23 15.42 21.99 19.07 14.63

1.3 1.4 1.5 1.6 1.6 1.9 2.4 3.4 3.6 4.0 4.0 3.8

source: Tassonyi (2011).

percent to 35 percent (Ontario Committee on Taxation 1967), the effective rate on market value in the 1970s may be estimated at about 3 percent. If the same AV/ MV ratio prevailed in the earlier period, the effective rate related to market values in the early 1930s, when values had fallen sharply with the Depression, may have been around the same level. Although there is no reliable or consistent information on market values for the earlier period shown in table 3.2, if the ratio of assessed value to market value was as low as the 10 percent alleged for personal property by some observers in Toronto in the late nineteenth century (Perry 1955), the effective tax rate on market value may well have been much less than 1 percent throughout much of the period, though it would have increased sharply in the 1930s as values fell faster than taxes. On the whole, given the general sluggishness and spottiness of the assessment process over much of the earlier period (see chapter 5), the effective rate of property taxation in Ontario in the first half of the twentieth century was unlikely to have been much more than 1 percent, although it apparently increased significantly (to 3 percent) briefly in the Depression of the 1930s and then more lastingly in the years of rapid postwar growth. Given the paucity of data, the preceding estimates are at best very rough. What we know with more certainty is that throughout the Depression, the war, and the postwar boom the story was largely one of local governments struggling to stay fiscally afloat. The GDP-elasticity of local property taxes was estimated to be only 0.87 from 1933 to 1965 (Bird 1970). Indeed, for Canada as a

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whole, property taxes declined sharply over the period from 1926 to 1950. Tassonyi (2011) estimates that local property taxes as a percentage of income rose from 6.6 percent in 1926 (the first year with reliable income data) to a high of 10.0 percent in 1932–1933, before falling steadily to 4.4 percent in 1941. After World War II, however, they increased as a share of both GDP and personal disposable income until 1970, before falling again in the next two decades (Bird and Slack 1993). Although per capita taxes in real terms grew during the period, in 1998, on the eve of the Ontario reform, an official report estimated that residential property taxes accounted for, on average, only about 1.2 percent of the market value of homes in Ontario (Chawla and Wannell 2003). The same source estimated that such taxes amounted to only 3.2 percent of pretax income in 1998. Fragmentary as they are, such data suggest that there is little evidence that the property tax burden in Ontario was either crushingly heavy or sharply increasing in the post– World War II era.

The 30-Years’ War Despite the story the data appear to tell, the political struggles around property tax issues went on more or less continuously in the 30-year period between 1967 and 1998 with attempt after attempt to reform the property tax—a tax that essentially had been established in 1904. Was this tax— adopted when Ontario had a population of about two million people, more than half living in rural areas, and with its largest urban area (Toronto) having only about 200,000 people— still appropriate for a province that in 1970 had a population of 7.7 million, 82 percent of whom lived in urban areas, and whose metropolitan population had grown to 2.9 million? By 1996, just before the 1998 reforms, Ontario had almost 11 million people, of whom 83 percent lived in urban areas, with 4.6 million in the greater Toronto area (GTA). The Smith Committee The modern history of property tax reform in Ontario began with the report of the Smith Committee in 1967. This committee condemned the property tax for being regressive, in the sense that it was borne more heavily by low-income households than high-income households, and also for being inequitably administered, because properties of similar value were not assessed equally. Specifically, after finding that more than half of assessments deviated by more than 20 percent from citywide averages, the Smith Committee concluded that this “degree of inaccuracy . . . deserved public censure” (Ontario Committee on Taxation 1967, 255). The committee recommended a twofold solution: first, real property should

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be assessed at “actual” value; second, the provincial government should play an increased role in assessing real property. In addition, to help low-income residential taxpayers the Smith Committee recommended that a “basic shelter exemption” should be introduced. The provincial government in fact had preempted this recommendation before the committee’s report was published, by introducing a version of such an exemption in 1967. In 1972 Ontario replaced this exemption with a refundable property tax credit as part of the provincial income tax.16 Because the federal government actually administers the provincial personal income tax, the result was that a federally administered provincial tax credit was employed as a way to offset the presumably regressive incidence of a municipal tax: Canadian intergovernmental politics at its best. The stated reason for introducing the property tax credit was to enhance the progressivity of the tax system as a whole by reducing the regressivity of the property tax. In the words of the provincial treasurer at the time: The Ontario style of tax reform is built around the major distortion in Canada’s total tax package, the insensitive property levy. The municipal tax displays relatively little consideration for the ability of the individual citizen to pay the amount it requests of him. . . . To provide effective relief for this municipal revenue base, there must be a substantial shift of costs to the more progressive tax fields jointly occupied by the federal and provincial governments.17

As it turned out, what this meant was not a major shift to provincial finance of local ser vices, as the treasurer’s words appear to imply, but simply the introduction of the property tax credit. This credit still exists in a modified form. To make it clear why this alleged offset to property taxation is not discussed in more detail here, it may suffice to recount how it is calculated. In 2008, for instance, the size of this credit for homeowners was determined as 10 percent of property tax paid, plus $250. For homeowners 65 and older, the fixed amount was $625. Interestingly, a similar credit could also be claimed by renters whose annual rent paid was $1,250 or more, and a $25 credit could even be claimed by students living in university or private-school residences. These credits might appear rather generous but in practice they are less so, because (in combination with a provincial sales tax credit of $100) the total credit available is first reduced by 2 percent of net income (less $4,000)— or 4 percent of net income (less $22,000) for those 65 and older— and then limited to a maximum of $1,000 ($1,125 for those 65 and older). So, for example, a person who paid $4,000 in property taxes 16. For a detailed analysis of this tax credit and the asserted (but not easily demonstrable) regressivity of the property tax it was designed to off set, see Bird and Slack (1978). 17. Hon. Charles MacNaughton, trea surer of Ontario, speech at Empire Club, Toronto, 17 April 1969 (Empire Club 1969, 274).

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would be eligible for a property tax credit of $650 plus a sales tax credit of $100, or a total of $750. However, they would receive a credit only if their net income was less than $41,500—unless, of course, they were 65 or older. In that case, they would be eligible for a larger credit ($1,025) and their net income would have to exceed $50,125 for them to be entirely ineligible.18 When faced with a new and higher property tax bill from the local municipality, can any reasonable citizens possibly keep all this in mind and figure out what, if anything, the implications are for them? No wonder this property tax credit seems to have been completely forgotten long ago by all combatants in the property tax wars. No one seems to have even mentioned the credit in the past decade of seemingly endless discussions of the post-1998 development of Ontario’s property tax system. If anyone in Ontario thinks about the credit at all, it is undoubtedly as yet another incomprehensible component of the income tax system, rather than as an explicit offset to the property tax. As for the main property tax recommendations from the Smith Committee, the response of the long-standing Conservative provincial government was to go even further than the committee suggested and completely take over the assessment function from municipalities in 1970. At the same time, the government committed itself to adopting full market value assessment (MVA) as the base for property taxes throughout the province. Interestingly, again the main stated rationale was equity: The present property tax and its cousin, the business tax, pose two equity problems. In addition to the regressive nature of these taxes, their assessment base is riddled with inconsistencies and inequities. . . . Our plan to take over the assessment function from municipalities, to launch a comprehensive attack on provincewide assessment at current value, represents another key element in our tax reform plan.19

Others, stressing the extent to which municipal failures to assess property accurately were biasing the distribution of provincial-municipal transfers, agreed with the need for a provincial takeover of assessment, arguing, for instance, that “the Province was compelled to assume the assessment function in order to reform the current assessment inadequacies” (Bureau of Municipal Research 1970, 25). Of course, moving to MVA inevitably implied tax shifts; indeed, in many ways that is precisely the reason the Smith Committee, like most experts, 18. In 2008 the province introduced an additional property tax grant for seniors, the Ontario Senior Homeowners’ Property Tax Grant. The maximum grant in 2009 was $250; it rose to $500 in 2010. Like the property tax credit, the amount of the grant is reduced as income rises (by 3.33 percent for married couples with incomes over $45,000), and it is administered with the provincial personal income tax by the Canada Revenue Agency. For a recent assessment of property tax relief programs across Canada, see Murrell and Chu (2010). 19. MacNaughton speech, Empire Club (1969), 278.

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thought it was such a good idea. However, since those on the losing side are much more likely to be vocal about their unhappiness than the winners are to be appropriately grateful, any government proposing to carry out such a policy change is unlikely to find it easy to do and will almost certainly have to compromise and negotiate with the affected groups. Ontario’s experience over the past decade confirms this hypothesis, as is discussed in chapters 4 and 5. In the 1970s the process of compromise started almost immediately after the 1970 takeover announcement. Although a 1971 bill specified that all property in Ontario was to be assessed at market value and that taxation on the basis of 1974 values was to begin in 1975, there were several subsequent postponements of the scheduled date for the introduction of province-wide MVA. Finally— or so it seemed—the 1976 provincial budget firmly grasped the nettle and set out a series of tax reforms that the government considered necessary before the MVA system could be introduced. Over the previous decade, although assessments had been essentially frozen in anticipation of the ever-impending MVA reform, residential property values had generally been increasing more rapidly than nonresidential (commercial and industrial) property values. As a result, residential assessments were on average considerably further from market value than nonresidential assessments. At the time a “split mill rate” system was in effect in the province, under which the tax rate imposed in any locality on residential assessment for municipal purposes was fi xed at a level equal to 85 percent of the mill rate on commercial and industrial assessment; for purposes of the educational property tax, however, the level was a little higher, at 90 percent of the commercial and industrial rate. Even with this advantageous rate structure, however, it was painfully obvious that a move to MVA without prior ameliorative changes in property tax policy would result in a substantial— and politically dangerous— shift in taxation to residential properties. To alleviate the anticipated shift of property taxes toward residential properties, in 1976 the province proposed to tax residences on only 50 percent of market value while taxing other properties on 100 percent of their estimated market value. Other proposed reforms included limits to exemptions and the phasing in of higher taxes. In addition, the 1976 provincial budget at last took the advice of not only the 1967 Smith Committee, but also the 1904 Mclennan Commission by recommending that the business occupancy tax, applied at different rates for different types of businesses, be changed to a uniform business tax on 150 percent of MVA.20 A new day seemed almost ready to dawn.

20. It should be noted that when business property was unoccupied, it was not subject to the business occupancy tax, but the residential tax rate was applied. The economic incentives this created were hardly sensible. Something similar may be said about the still-existing favoritism toward vacant land built into the current classified property tax system (see chapter 4).

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More Commissions and Committees It was not to be so, however. Shortly after the release of the 1976 bud get, rather than implementing market value assessment and the new property tax system it had proposed, the provincial government appointed yet another commission (the Blair Commission) to consider its property tax proposals in more detail. When this commission came back with its report in 1977, it supported the main recommendations of the 1976 budget, with the interesting exception of proposing that the province should pay 90 percent of all taxes on farms (Ontario Commission 1977). However, rather than pushing ahead with its original proposal, the government’s response was to issue yet another set of proposals in 1978 known as the Alternative System (McKeough 1978). In addition to making some changes in the 1976 budget proposals, the main innovation in the Alternative System was, in a manner reminiscent of the events at the turn of the century, to back away once again from the idea of a uniform business tax in favor of maintaining the long-standing differentiated levy. The new date for adopting the MVA was now 1979, although this time the base was to be considerably lagged, with the tax applied only on 1975 values. As had become customary, the next step was to appoint yet another committee to consider the new proposals. The report this time, from the Provincial-Local Government Committee (1978), supported many aspects of the Alternative System but suggested two major changes. The first was that multiple residences (buildings with seven units or more) should be taxed on 75 percent of their market value rather than under the general 50-percent inclusion rate for residential property. Under the then existing system, although apartment buildings were taxed at the residential rate, they were significantly overassessed compared with single-family homes— and more so in Metro Toronto than in other parts of the province (Bird and Slack 1978). The impact of the change proposed by the committee would thus have been to favor single-family homes, in accordance with long-standing tradition, by reducing the potential shift of taxes to them that would have resulted if apartments continued to be treated like other residences. The second change proposed by the Provincial-Local Government Committee was to permit Metro Toronto to deviate for up to three years from the general 50- and 75-percent assessment ratios proposed for residential and multiresidential properties—for example, to impose ratios of 45 and 80 percent. This change was designed to cushion the impact on Metro Toronto, where apartments were even more overassessed in relative terms than in other municipalities.21 The 21. As late as 1991, the assessed-to market-value ratio was 6 percent for multiresidential units compared with 1 percent for single-family units in Toronto. In contrast, in neighboring Mississauga, the assessed- to market-value ratio was 22 percent for multiresidential units compared with 13 percent for single-family units

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effect of these recommendations was to reduce substantially the tax shift resulting from assessment reform, and in particular to lighten the burden on singlefamily residences. Presumably, the main reason for doing this was the simple (and accurate) political calculation that the owners of such residences are both much more aware of their property tax burden and much more likely to vote in local elections than are tenants. After all the years and effort spent in devising ways to lessen the impact of market value assessment on homeowners, the final outcome of the 1978 discussion was the provincial government’s announcement that no general property tax reform would be implemented in 1978. Moreover, to try to reduce the pressure on the province, the Minister of Revenue publicly emphasized the fact that, under section 86 of the Assessment Act, municipalities could, at their option, apply to the province for permission to reassess values within classes of property (single-family homes, apartments, commercial properties, and so on). Thus, they could attempt to reduce inequities within classes of property, but they could not do the same with respect to inequities between classes of property. Over the next few years, many municipalities across the province exercised this option. Conspicuously, while some neighboring cities (such as Mississauga) did so, Metro Toronto did not, even though the assessment inequities within property classes, like those between classes, were likely larger in Toronto than anywhere else in the province. Toronto was not the only municipality that did not implement this limited (within-class) form of more uniform market value assessment. As a result, despite the 1970 provincial takeover of assessment, assessment reform in Ontario continued to be piecemeal throughout the 1980s and 1990s. Many municipalities, particularly large ones like Toronto, chose not to implement any updating of the assessment base.22 Others chose to update their assessment bases by the “factored value” (section 86) system, that is, by correcting inequities within a class of property, but leaving the class tax distribution unchanged. Assessments for similar properties thus varied among municipalities, with relative tax burdens almost always being higher, and sometimes much higher, on commercial, industrial, and multiresidential properties compared with residential properties. Assessments for similar properties also differed within municipalities, generally with newer properties having higher assessments.

(Ontario Fair Tax Commission 1993, 614). In other words, apartments in Toronto were on average assessed three times more heavily relative to single-family units than apartments in the large city next door. 22. Toronto’s rationale for not doing so was twofold. First, it argued, much as had the provincial trea surer a decade earlier, that section 86 assessment would have such a serious impact on low-income homeowners and tenants that it would be inequitable unless the provincial tax credit were enriched. Second, it argued that the city would likely lose a lot of revenue from successful appeals from businesses unless the whole system was reformed (City of Toronto 1982).

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In the end, the long-standing Conservative provincial government effectively gave up its decade-long attempt to reform the basic property tax system. However, when a new Liberal government came to power in 1985, it took on the challenge of property tax reform by commissioning a report, which was appropriately titled “Taxing Matters: An Assessment of the Practice of Property Taxation in Ontario” (Goyette 1985). The result of this exercise turned out to be, once again, the property tax two-step: the report recommended market value assessment (with taxable assessments at 100 percent of market value), and the government backed away from implementing the recommendation (Slack 2002b). The Last Hurrah In 1991, unfazed by the failure of all earlier governments to make much headway in this area, yet another new government (the left-leaning New Democratic Party) commissioned yet another study to review property taxation (as well as other forms of taxation) in Ontario. In 1993, the Ontario Fair Tax Commission made several recommendations on property taxation and municipal and education funding. In language reminiscent of the Smith Committee’s report a quarter century earlier, this report noted that “the assessment system is in a shambles” (Ontario Fair Tax Commission 1993, 80). In sharp contrast to many earlier studies, however, the solution proposed was not market value assessment but what is called “unit value assessment.” Unit value assessment, a relatively new concept in Ontario, essentially determines the tax base by the size of the property rather than its value.23 Despite its novelty, however, this recommendation met the fate of all ideas with respect to property tax reform in Ontario in the postwar period: it was not implemented. Not giving up, toward the end of its period in office a few years later, the New Democratic government established the Greater Toronto Area Task Force. Problems with the property tax in Toronto had become urgent by this time, not least because assessment appeals were increasingly eroding Metro Toronto’s tax base. Successful appeals clearly benefit those who appeal— often, large commercial property owners with the most to gain. To the extent that appeals are successful, the assessment base is eroded and the result is that all taxpayers face relatively higher tax rates than they otherwise would have. In addition, there was a perception, or perhaps a reality, that businesses were leaving Metro Toronto because of high property taxes—a problem that is discussed in chapter 8. In particular, since taxes on businesses in Toronto were high relative to the rest of the GTA, it was easy for businesses literally to move across the street in order to lower their taxes, 23. For a critical discussion of this approach and a comparison with market value assessment, see Slack (2006).

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creating what the Board of Trade of Metropolitan Toronto (1994) called the “hole in the doughnut.”24 The GTA Task Force, which continued its work under the new Conservative government, recommended what it called “actual value” assessment as the way to go (Greater Toronto Area Task Force 1996). So far as anyone could tell, actual value assessment appeared to be market value assessment under a new name. In response to this task force report, a new provincial government did the usual: it established its own panel, the Who Does What Panel, to address issues in property taxation and the disentanglement of provincial-local responsibilities. The panel’s recommendations on the property tax were a bit clearer than those of the GTA Task Force, but they were not very different. It recommended market value assessment, although the name was changed to current value assessment, presumably in an effort to protect this now standard recommendation for a uniform, province-wide, value-based assessment system from the unhappy fate of the many previous recommendations. Additional, more meaningful protection was provided by the panel’s recommendation to accommodate political realities and municipal differences by allowing municipalities to set tax rates (not assessment percentages), varying by property class (Ontario Who Does What Panel on Local Governance 1996). This time it worked. Not only did the provincial government essentially accept these recommendations, but it actually went on to implement them. At last, expert advice and common sense seemed to have won out. Finally, after almost a hundred years of attempting to do something sensible with property tax reform, in 1998 Ontario adopted what was essentially the current value assessment system— market value assessment under another name—that had been recommended by the Who Does What Panel.

Conclusion Two quite different interpretations may be offered with respect to how the 1998 reform emerged from the history of the three preceding decades. One is that much of the trouble with property tax reform arose from the way in which “local interests, acting through local political officials . . . [could] effectively counteract provincial attempts to bring local policy into conformance with provincial and even national policy objectives.” In this view, “local political institutions and interests act as impediments to change in the distribution of advantages and 24. The reference is to the visibly lower “business density” on the Toronto side of the border. The overtaxation of nonresidential properties in Toronto— the other side of the undertaxation of residential property in the city—is documented in Kitchen and Slack (1993). We explore the question of tax competition in the GTA at more length in chapter 8.

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disadvantages among citizens and communities” (Frisken 1991, 377). This view might be characterized as the planner’s or reformer’s perspective of the role of local government: something should be done in the interests of all, as decided by those in a position to view the larger picture (the provincial or national government, as the case may be). The task of local government is then to implement the policies, not to get in their way.25 From this perspective, the 1998 reform signified the much-delayed triumph of right and reason over local self-interest. Unfortunately, as the next decade revealed, the natives (local governments and local residents) remained restless. An alternative perspective is that the provincial government has brought down on its own head much of the grief it has suffered over the years with respect to property taxes. The basic local-finance framework put in place by the province has, on the whole, saddled local governments in Ontario with an incompatible combination of broad responsibilities, exogenous constraints, and limited access to revenue sources, which together mean that general changes to any one component of this policy set, such as the property tax, results in highly specific and localized consequences. In addition, the provincial government’s response to the resulting problems has almost always been to modify the initial change in a way that both engenders still further differentiated consequences and reinforces the message to local citizens that they should look to Queen’s Park, the seat of the provincial government, rather than to their town or city hall for redress. The particularly visible and inflammatory nature of the property tax makes the resulting citizen–local government– provincial interactions even more difficult than they might otherwise be. These broader considerations are examined in the concluding chapter of this book.

25. Th is is similar to the view taken of local government in the system of “administrative federalism” that exists in most Scandinavian countries (Rattso 2002), although in those countries the assumption is that both levels of government agree on what is to be done and substantial consultations are undertaken to ensure that they do. For a comparison of this approach with the alternative of “fiscal federalism,” see Bird (2010a).

CHAPTER

4

The 1998 Property Tax Reform A Never- Ending Story

T

he property tax reform finally implemented in Ontario in 1998 had two critical components—market value assessment and variable property tax rates. The first and in principle the most fundamental component was uniform market value assessment introduced throughout the province. After almost a century of dithering, this long-anticipated reform came about when a uniform assessment system based on current value was implemented province-wide in January 1998. The term current value assessment, as used in Ontario, should not be confused with “value in current use.” Current value assessment is exactly the same as market value assessment. It is even defined with the conventional words: “the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer” (Assessment Act, sec. 1). The main reason for choosing the term current value was that it was not market value, a term that by 1998, after decades of controversy over property tax reform, was perceived very negatively by the public.1 Although this book sometimes refers to market value assessment (MVA), the correct term in Ontario since 1998 has been current value assessment, often referred to as CVA. Another feature of the 1998 reform was that the assessment function was moved from the provincial government to the Ontario Property Assessment Corporation (OPAC; 2000), a not-for-profit corporation established by statute (Ontario Property Assessment Corporation Act 1997). Every municipality in Ontario is a member of this corporation, which was renamed the Municipal Property

1. For an example, see Greater Toronto Area Task Force (1996). The task force itself recommended “actual value assessment,” yet another name for the same thing.

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Assessment Corporation (MPAC) in 2001 (with the name of the act being similarly changed). The corporation is governed by a board of directors made up of five taxpayer representatives, eight municipal representatives, and two provincial representatives. The municipal representatives—whose numbers formally ensure their control of the corporation— are chosen from a list of 24 candidates submitted to the province by the Association of Municipalities of Ontario (AMO; 2007). However, since all directors are appointed by the provincial government, it is clear that the principal responsibility for assessment still ultimately rests with the province. MPAC was charged with determining the assessed values of properties, classifying properties according to the regulations, determining which properties are entitled to be exempt from taxation, preparing and delivering an annual assessment roll to municipalities, and defending assessment appeals. During the years from 1998 to 2000, every property in the province was to be assessed as of the valuation date of 30 June 1996.2 Initially, the same valuation date was to be used for three years.3 Although this chapter touches on a few of the changes in the assessment process in the decade following the reform, its primary focus is on the second and equally critical component of the 1998 reform: the introduction of a classified property tax. Owing to one of the main lessons provincial policy makers had learned from their various earlier experiences with property tax reform (discussed in chapter 3), Ontario did not even attempt to implement a uniform tax rate on property in 1998. Instead, the provincial government established an explicitly classified property tax system. Municipalities, although free in principle to set their own tax rates, were allowed and almost encouraged to levy different rates on different classes of property. Specifically, municipalities in Ontario may levy different rates on seven different classes of property established by the province: residential, multiresidential, commercial, industrial, pipelines, farms, and managed forests. In addition, municipalities were allowed to adopt several additional optional classes—also as established by the province—such as new multiresidential, office buildings, shopping centers, parking lots, and large industrial properties. Later, professional sports facilities (in 2000) and resort condominiums (in 2005) were added to this list. But that was not the end of the complexity in the new property classification scheme. Rate reductions were specified in the Assessment Act for certain subclasses of property—vacant commercial (35 percent reduction), vacant industrial (30 percent reduction), farmland pending development, and, in the City of Toronto, certain theaters. The tax rate on farms and managed forests is set by 2. The only exception was for properties in unorga nized northern areas that were subject to the Provincial Land Tax. 3. Chapter 5 discusses further details of the assessment reform; see chapter 6 for important changes in education funding that took place in 1998.

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provincial legislation at just 25 percent of the residential tax rate.4 In addition, as discussed in chapter 5, farmland is uniquely assessed at its value in current use. Moreover, when farmland is to be used for nonagricultural purposes, increases in taxation may be phased in over stages. Specifically, tax increases are triggered (Phase 1) when land is used solely for farm purposes but has been registered for subdivision and development, and again (Phase 2) when land is still used solely for farm purposes but a building permit has been issued.5 Finally, both commercial and industrial classes may be divided into three bands according to value, with graduated tax rates applied to each band. Toronto adopted such banding in the residual commercial class in 2008, and two other small municipalities (Orillia and Smith’s Falls) have also introduced banding. In total, as box 4.1 shows, under current law up to 36 separate property classes and subclasses may have different rates, and this leaves out the banding just mentioned. There is no pretense in Ontario that all real property should be taxed at a uniform rate: this is truly a classified property tax.

Postreform Reforms Although the property tax is determined according to 36 different property classifications, it was initially argued by the Ontario Property Assessment Corporation (2000) that the move to current value assessment at least eliminated the assessment inequities that had characterized the preexisting system. Of course, not everyone agreed. An earlier study of Hamilton, a medium-size city near Toronto, had demonstrated that, under the pre-1998 system, assessed values did not reflect market values evenly with respect to some types of properties and some neighborhoods were overtaxed while others were undertaxed (Thrall 1979). In an interesting exercise intended to test the equity of the new system, Harris and Lehman (2001) undertook a similar study in the same city using the new CVA assessments. Unfortunately, their basic finding was that the patterns found for 1976 (Thrall 1979) were basically unchanged in the initial assessments for 1998 (based on 1996 values) 4. In 2002 municipalities were given the option of reducing the property tax on farmland to less than 25 percent of the residential tax rate. Any such decision to lower the rate has to be renewed annually. At least one municipality (Chatham-Kent) has exercised this option. 5. As box 4.1 shows, farmland undergoing development is taxed differently, depending on the nature of the development—residential, multiresidential, commercial, or industrial. Moreover, in addition to the vacant-land reduction discussed above excess land is subject to a similar reduced rate. (Vacant industrial land, e.g., is land zoned for industrial use but without any structures on it, while excess industrial land is land that may be included in an assessed parcel but is undeveloped and not going to be developed, such as the land in a buffer zone around a refinery.)

BOX 4.1

The Classified Ontario Property Tax Property Classes and Subclasses 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

Residential Residential farmland awaiting development, Phase 1 Residential farmland awaiting development, Phase 2 Resort condominiums Multiresidential, occupied Multiresidential farmland awaiting development, Phase 1 New multiresidential Commercial, occupied Commercial, excess land Commercial, vacant land Commercial farmland awaiting development, Phase 1 Commercial farmland awaiting development, Phase 2 Office buildings Office buildings, excess land Office buildings, vacant land Shopping centers Shopping centers, excess land Shopping centers, vacant land Parking lots and vacant land Parking lots and vacant excess land Professional sports facilities Professional sports facilities, excess land Professional sports facilities, vacant land Industrial, occupied Industrial, excess land Industrial, vacant land Industrial farmland awaiting development, Phase 1 Industrial farmland awaiting development, Phase 2 Large industrial Large industrial, excess land Large industrial, vacant land Pipelines Farmlands Managed forests Railway rights of way Hydro rights of way

source: Ontario Regulation 282/98 under the Assessment Act.

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under the new system. If there had been inequity before, they concluded that it still existed and might even have increased in some respects. Indeed, Harris and Lehman (2001) went so far as to argue that the regressivity of the property tax—which they treated as if it were entirely a tax on housing6 —had been accentuated by the tendency of the new assessment system, to an even greater degree than the old, to overassess lower-valued properties. An expert from the newly established Municipal Property Assessment Corporation (MPAC) quickly refuted these conclusions on the grounds that the market value data employed in the Harris-Lehman study were incomplete and biased, an argument that was likely correct to some extent (Moore 2002).7 Unfortunately, although he referred to an “internal ratio study for the City of Hamilton [that] produced results that are in direct opposition to those produced in the study by Professors [sic] Harris and Lehman,” Moore neither provided any details on the results of this internal study nor any information on how the study was conducted (Moore 2002, 365). Th is early indication that the new assessment system was perhaps being run in a rather opaque way soon became a matter of some public concern. In fact, if the uniform province-wide assessment had been done correctly and left alone, potentially large shifts in tax burden both within and between classes of property were to be expected. It was precisely to ensure that this did not happen that major changes in property tax policy were introduced at the time of the assessment reform, as already mentioned. The process of backing away from the results of CVA did not stop in 1998, however. Indeed, in the following three years the provincial government introduced seven pieces of legislation affecting local property taxes, and it kept on doing this throughout the next decade, as summarized in table 4.1. Many of the changes listed in table 4.1 represent attempts by politicians to deal with public concerns by softening the impact of the 1998 system. For the most part these changes reflect the fact that the property tax is not one tax but two, a residential property tax and a business property tax. For example, while an increasing fraction of business property is now assessed similarly to residential property, much is still assessed using completely different techniques (see chapter 5). Moreover, in economic terms, as discussed in chapter 8, the residential and nonresidential tax bases appear to respond differently to rate changes. Finally, from a political perspective, property taxes on housing—the residential 6. For reasons discussed at length in Bird and Slack (1978) and elegantly set out in Zodrow (2001) and Fischel (2001), we should emphasize that we do not accept this view of property tax incidence. Nonetheless, the idea that the property tax is a tax on housing ser vices appears to be the view that largely frames public policy in this area; for another example, see Chawla and Wannell (2003). 7. See the exchange in Moore (2002) and Harris and Lehman (2002).

Property class

All

All

All

Multiresidential, commercial, and industrial

Multiresidential, commercial, and industrial

Multiresidential, commercial, and industrial

Multiresidential, commercial, and industrial

Multiresidential, commercial, and industrial

Date

1998

1998

1998

1998

1998

1998

1999

2000

Mandatory limits on reassessment-related property tax increases for 2001 and future years; restriction on municipal levy increases where tax ratios are above defined thresholds; comparable tax levels for new construction and other eligible properties

Newly constructed properties to be taxed at a level of assessment no higher than that of comparable properties in the vicinity

Mandatory capping on property tax increases for 1998, 1999, and 2000; use of “frozen assessment listing”

Mandatory provision of tax rebates to charities

Optional capping (at 2.5%) of property tax increases for businesses for 1998, 1999, and 2000

Creation of Ontario Property Assessment Corporation (OPAC) to conduct assessments on behalf of municipalities

Transfer of responsibility for rate setting to provincial government for education

Current value assessment; property classification system; municipalities given authority to levy variable mill rates; phase-ins; tax mitigation mea sures for seniors and disabled

Measure

Highlights of Property Tax Reform, 1998–2009

TABLE 4.1

Legislation

Continued Protection for Property Taxpayers Act, 2000 (Bill 140), amending the Assessment Act and the Municipal Act

Tax Credits to Create Jobs Act, 1999 (Bill 14), amending the Assessment Act and the Municipal Act

Fairness for Property Taxpayers Act, 1998 (Bill 79), amending the Assessment Act and the Municipal Act

Small Business and Charities Protection Act, 1998 (Bill 16), amending the Assessment Act and the Municipal Act

Small Business and Charities Protection Act, 1998 (Bill 16), amending the Assessment Act and the Municipal Act

Ontario Property Assessment Corporation Act, 1997 (Bill 164, Schedule G)

Education Quality Improvement Act, 1997, amending the Education Act

Fair Municipal Finance Act, 1997 (Bill 106), and Fair Municipal Finance Act, 1997 (No. 2) (Bill 149), amending the Assessment Act and the Municipal Act

All

All

Multiresidential, commercial, and industrial

All

All

Residential, farm, managed forests

Residential

Commercial, and industrial

All

Commercial and industrial in northern Ontario

Commercial and industrial

All

2004

2005

2005

2006

2007

2007

2007

2007

2008

2008

2009

2009

New phasing rules with change in property during assessment phase-in period

Municipalities given option to remove property classes from capping and clawing when CVA-level tax reached

Accelerated BET reductions

Mandatory four-year phase-in of assessment increases

Reduce provincial Business Education Tax (BET) to 1.6% by 2014

Enhance property and sales tax credits for seniors

Mandatory four-year phase-in of assessment increases

Move to four-year assessment cycle

Assessments for 2006 and 2007 frozen at 2005 level

Option to increase annual cap up to 10% of previous year’s taxes or minimum annual increase of up to 5% of CVA taxes; could phase out new construction treatment; option of graduated rates for optional classes

Beginning in 2006 tax year, assessment value date moved up from 30 June to 1 January; reassessment for 2005 cancelled

Defer implementation of assessment averaging

Change name of OPAC to Municipal Property Assessment Corporation

note: Th is summary does not include all changes in the relevant legislation and regulations.

All

2001

Amendments to regulations under the Education Act

Amendments to the Assessment Act

Annual regulations under the Education Act

Amendments to the Income Tax Act

Amendments to the Assessment Act

Amendments to the Assessment Act

Amendments to the Assessment Act

Amendments to the Municipal Act, 2001

Amendments to the Assessment Act

Amendments to the Assessment Act, Municipal Act, 2001

Amendments to the Municipal Property Assessment Corporation Act, 1997

Assessment Act regulations under section 48.1

Amendments to regulations under Municipal Act 2001 and City of Toronto Act

.

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class— and property taxes on business—the nonresidential classes (commercial and industrial)— are usually considered as being quite different taxes. Much of the public discussion, understandably, focused on housing; however, the business community, which had clearly been relatively overtaxed under the old assessment base, ensured that its concerns and interests were also heard in provincial political circles.8 Indeed, if one considers that many of the provincial measures were explicitly intended to reduce the ability of municipalities to tax business more heavily than housing, it could be argued that business concerns had more influence at the provincial level than at the local level. In a more benevolent view, at least some of the restrictions imposed by the provincial government on local policy may be understood as simply recognizing the differential elasticity of the residential and business tax bases. From this perspective, many of the restrictions on local taxation may be interpreted as reflecting either a paternalistic concern to discourage local officials from foolishly driving away their nonresidential tax base or simply a desire to encourage investment in the province as a whole by lightening the burden of capital taxation. Transitional Fairness Whatever its underlying rationale, the provincial government began its march toward what it perceived to be a fair property tax system in 1998 by identifying the existing (prereform) municipal tax burdens in each municipality. Based on the new assessments issued in 1998 (for values in 1996) and the taxes actually levied in 1997, the relative municipal tax burdens on different property classes prior to the reform were estimated. These relative burdens were then expressed in terms of so-called transition ratios—ratios that compared the notional effective tax rate (taxes as a percent of assessed value) of a particular property class (e.g., commercial property) with the effective tax rate of the residential property class. Since the residential class was properly considered by politicians to be the focal point of public attention, and because not all municipalities have any commercial/industrial assessment, the residential class was taken as the norm and assigned a transition ratio of 1.0. To prevent the prereform gap in effective tax rates between classes of property from increasing, as local governments attempted to calm “homevoters” (to use Fischel’s [2001] clever label) by shifting more taxes to business, the provincial government prescribed what it called ranges of fairness for each property class. In effect, the ranges established target levels for municipal taxation of each 8. As Kitchen and Slack (1993) show, the business sector was even more overtaxed if one compares taxes paid with benefits received.

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TABLE 4.2

Provincial Ranges of Fairness, Ontario Property class

Multiresidential New multiresidential Commercial Office buildings Shopping centers Parking lots and vacant land Professional sports facilities Industrial Large industrial Pipelines

Allowable range of fairness

1.0–1.1 1.0–1.1 0.6–1.1 0.6–1.1 0.6–1.1 0.6–1.1 0.001–1.1 0.6–1.1 0.6–1.1 0.6–0.7

source: Ontario Regulation 386/98 under the Municipal Act, as amended.

class of property, expressed in terms of tax ratios—that is, the ratio of the effective tax rate for the property class relative to the effective tax rate for the residential class. Table 4.2 depicts the prescribed ranges of fairness. As Fischel (2001) notes, it is a well-established fact in local politics that homeowners are far more likely to vote than tenants. It is thus not surprising that, before 1998, multiresidential properties in Ontario had usually been assessed more heavily than single-family residential properties, and that a certain degree of overtaxation for this class of properties was even built into the range of fairness (see table 4.2). Historically, even after the provincial takeover of the assessment function in 1970, while condominiums and cooperative housing continued to expand as shares of the housing market in Ontario, these units continued to be taxed on the same basis as rental apartment buildings (Goyette 1985). The result was that condominium units were frequently taxed at higher rates than single-family homes. However, following a series of appeals and legislative changes beginning in 1975, the system was changed, and by 1986 condominium and cooperative units were treated like owner-occupied single-family homes. Individual units in a condominium building are now assessed separately, with some adjustment for common space and amenities. If a multiresidential building is converted to condominium use, the building’s classification changes to residential and its tax burden generally falls. Thus the current assessment system has added another impetus to the movement already afoot to convert rental buildings into condos. Under the range of fairness approach, municipalities could establish for each property class a tax ratio that either maintained the transition ratio or moved toward the range of fairness—but not one that moved away from it. In addition,

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municipalities could also vary class tax ratios within the range of fairness. For example, suppose the initially calculated transition ratio for multiresidential properties in a particular municipality was 4.1—that is, taxes on such a property as a percentage of assessed values were 4.1 times higher than the residential tax ratio (deemed to be 1.0) in that municipality.9 The municipality now had to choose between reducing the ratio to 4.0 (or less) or maintaining it at 4.1. But it could not under any circumstances increase the ratio and thus make the preexisting interclass inequity even worse. However, once the tax ratio of any property class reached the target range, the municipality was allowed to adjust it up or down within the range. For example, as table 4.2 shows, any property class except pipelines could be taxed at rates 10 percent greater than those on singlefamily homes. In principle, one might perhaps want to tax some classes at rates considerably lower than residential rates, for instance on benefit grounds (Kitchen and Slack 1993) or perhaps as an incentive, as evidenced by the considerable leeway afforded the apparently ever-popular class of professional sports facilities (table 4.2).10 In practice, however, since in the majority of municipalities most property classes were initially subject to ratios higher than the upper end of the range of fairness, the binding constraint imposed by this complex system was the prohibition against increasing the relative tax burden on business properties. Generally municipalities adopted the prescribed transition ratios in 1998, since that was essentially where they already were. However, some chose to move ratios toward the target ranges. Table 4.3 compares the actual tax ratios adopted by selected municipalities in Ontario in 2002 with the regulated transition ratios initially prescribed in 1998. Most municipalities were at or below the prescribed tax ratios. In particular, Toronto was considerably below the regulated level compared with other municipalities, in part because residential property values there had increased more, relative to nonresidential values, than in other parts of the province.11 Another factor came into play in some municipalities, such as Durham Region ( just east of Toronto), when local councils deliberately attempted to shift some of the tax burden away from certain nonresidential property classes. Close examination of table 4.3 reveals wide variation in municipal behavior. For example, Peel Region ( just west of Toronto) simply adopted the regulated 9. As mentioned earlier, the calculated ratio on multiresidential properties could be this high (or even higher) in some localities, as a result of their previous overassessment compared with single-family homes. 10. The lowest level of the commercial rate was designed to capture all preexisting relative tax burdens. In some small northern municipalities and in some rural counties that had been assessed at full market value under the pre-1998 system, the effective tax rates before the reform were actually lower on commercial properties. 11. Between October 1981 and July 2009, for instance, the average price of a single-family residence in Oakville, a high-income suburban community, rose by a factor of 4 (from $88,000 to $350,000) in current dollars. Over the same period, a similar home in North Toronto, a well-off city area, increased by almost twice as much (from $81,000 to $575,000). Data from Royal LePage Historical Data Bank, available at http://www .royalllepage.ca .

City of Toronto Durham Region Halton Region Peel Region York Region Niagara Region Waterloo Region Oxford County City of Ottawa City of Greater Sudbury City of Windsor City of Kingston City of London City of Hamilton City of Thunder Bay

Municipality

5.2355 2.7103 2.4439 1.7336 2.0875 2.5568 3.2146 2.8392 2.3359 1.9570 2.5202 2.6526 2.3852 3.0614 2.9039

Multiresidential

4.2759 1.4819 1.4565 1.2971 1.1190 1.6464 2.0148 1.9018 1.9577 1.6614 1.9740 1.6822 1.9136 2.2764 2.4450

Commercial

2.5823

2.2810 1.8967 1.4939

1.0397

2.0071

1.6340 2.2426 2.2136

2.0269

1.6285

1.2829

2.3659

Shopping centers

1.2078

Parking lots

2.2960

Office buildings

1998 Regulated tax ratios

A Comparison of Regulated and Actual Tax Ratios, Selected Municipalities

TABLE 4.3

5.9685 2.0907 2.3599 1.5986 1.3427 3.6362 3.2175 2.9098 2.2439 2.4500 2.8923 2.5702 2.7633 3.9654 3.2301

Industrial

(continued )

3.1961 4.717 3.4718

3.4636 1.9269 2.7560 4.1218

4.1880

3.8036

Large industrial

4.1700 2.4000 2.2619 1.7336 1.3000 2.0000 2.7400 2.7400 2.1780 1.9570 2.5202 2.6526 2.1077 2.8326 2.5400

Multiresidential

3.8000 1.4819 1.4565 1.2971 1.1000 1.6147 1.9800 1.9018 1.9288 1.6614 1.9740 1.6616 1.8808 2.2420 2.3500

Commercial

2.1300

2.0269

2.0071

2.4800

1.6044

2.3309

Shopping centers

1.3300

2.2420

Parking lots

1.4819

Office buildings

2002 Adopted tax ratios

note: Not all municipalities chose to distinguish all optional classes (see box 4.1). source: Ontario Ministry of Finance and OPTA database.

City of Toronto Durham Region Halton Region Peel Region York Region Niagara Region Waterloo Region Oxford County City of Ottawa City of Greater Sudbury City of Windsor City of Kingston City of London City of Hamilton City of Thunder Bay

Municipality

TABLE 4.3 (continued)

5.3000 2.2598 2.3599 1.5986 1.3000 3.3648 2.6300 2.8219 2.2439 2.4500 2.7228 2.6299 2.6300 3.5621 3.1000

Industrial

4.1770 3.3300

3.3667 1.9269 2.7560 3.8803

3.7052

2.9000

Large industrial

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ratios, as did Sudbury, but Durham Region kept ratios for shopping centers and industrial properties above the regulated level, as did the City of Hamilton ( just west of Peel) for parking lots. In addition to the policy framework for interclass rate differentials, the province established phase-in provisions for assessment-related tax increases, as well as tax deferrals. These measures were intended to mute the shifts that would otherwise have occurred within property classes, particularly those in the residential property class. Municipalities, at their option, could apply a phase-in period of up to eight years for assessment-related tax changes. However, since no interclass subsidization was permitted, any reduction in tax revenues resulting from phasing in had to be offset by reducing tax decreases that would have otherwise benefited properties in the same class. On one hand, for example, municipalities could not disallow tax decreases in the commercial class in order to offset tax increases in the residential class. On the other hand, municipalities could use different schemes for different classes, and different phase-in periods could be used for decreases and increases. Like the system of restricting rate differentials between property classes through transition ratios and ranges of fairness, the way in which the province attempted to soften within-class shifts was not simple in either concept or practice. Notwithstanding all the policies intended to reduce the tax-burden shifts between (and to a lesser extent within) property classes, some large shifts still resulted from the new assessment system. In particular the tax burden on small retail commercial properties in Toronto increased relative to large office towers, in part because of market conditions prevailing in June 1996 (the original valuation date for the property tax under the new system). Largely in an effort to reduce this shift to small commercial properties, the provincial government introduced new optional classes for office buildings, shopping centers, parking lots, and large industrial properties. The introduction of the large industrial class had the additional political benefit of reducing the extent of tax shifting to small industrial properties that would otherwise have occurred in Ontario’s many small, one-industry towns. However, since this did not prove to be enough to satisfy small business, further policy changes soon ensued.12 Capping and Clawing In 1998 the government introduced a system of optional capping under which municipalities could limit tax increases on commercial, industrial, and 12. Small business, like farming, is a sector that seems dear to the hearts of politicians everywhere. However, it is never quite clear what is meant by “small”— the nature of the business, gross revenues, profits, assessed valuation, square footage?— or, more important, why small business deserves to be subsidized.

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multiresidential properties to a maximum of 2.5 percent each year for the first three years (1998, 1999, and 2000). In other words, no municipality was permitted to increase taxes on properties in any of these classes by more than 2.5 percent over what the tax had been prior to reform. As in the case of the phaseins, the revenue forgone as a result of capping tax increases was supposed to be recovered through clawbacks—reductions in the size of property tax decreases that other properties in the same class would otherwise have received. In this instance, however, municipalities could choose whether they recovered all of the revenue forgone or only some of it. Initially only Toronto chose to apply the 2.5 percent capping option. But as soon as it became clear that there were large tax increases on small commercial properties in other municipalities, the provincial government decided that it was not enough to leave local business to the local politicians, not even small local business. Once again it stepped in, establishing a mandatory restriction (a cap) on property tax increases on commercial and industrial properties of 10 percent in 1998, an additional 5 percent in 1999, and an additional 5 percent in 2000. These limits were not optional, although municipalities were allowed to decide how they would achieve the 10-5-5 target—through phase-ins, capping, or some other method.13 As before, all or part of the tax revenue forgone by a municipality as a result of these limits could be recovered by limiting, or clawing back, the tax decreases of other properties in the same class. A different capping rule, again mandatory, was imposed beginning in the 2000 taxation year with respect to commercial, industrial, and multiresidential properties subject to either a physical change (new construction) or a change in classification. In the first year in which such a change is made, the new rule was that tax was to be based on the lower of two figures: either the property’s assessment or the average tax of up to six similar properties in the vicinity, as chosen by MPAC (but subject to appeal either by the owner of the property or the local municipality). In subsequent years, the ordinary rules were to apply. The effective result of all this capping and clawing was to freeze the assessment roll at 1997 values for many properties. Indeed, many municipalities did not even use the 1998 assessments for the multiresidential, commercial, and industrial properties affected by all these rules. Instead, they continued to employ the so-called frozen assessment listing (which contained property-specific information for the 1997 tax year) as the basis for calculating and billing taxes under 13. The limits on tax increases were additive, not compounded. In other words, taxes on a property in 1998 could not exceed 110 percent of the taxes levied in 1997. For 1999 the taxes on a property could not exceed 115 percent of its 1997 taxes, and for 2000 the taxes could not exceed 120 percent of the property’s 1997 taxes. However, taxes could exceed the limits if there had been a physical change to the property or if the municipality increased tax rates.

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the caps in 1998, 1999, and 2000. In the end, therefore, the main outcome of the capping exercise in much of the province was that no efforts were made to remove or even reduce any preexisting inequities in property tax burdens within the business (commercial, industrial) and multiresidential sectors. The continued use of the frozen assessment listing led to increasing dissatisfaction with the 10-5-5 limits, with the strongest views being expressed by previously “overtaxed” property owners (mainly business) who had been expecting some tax relief. The outcome was yet another significant change in the capping system in 2001. The use of the frozen assessment listing was discontinued. Thenceforth, the increase in annual taxes imposed on a property in the capped (business and multiresidential) classes— a property that would otherwise experience a reassessment-related tax increase—was limited to 5 percent of the annualized taxes of the previous year.14 In addition, taxes could be adjusted in the case of a rate increase for municipal purposes. This last qualification may appear to give a fairly free hand to municipal councils. However, their freedom was again restricted because no tax rate increases were permitted on any property class if that municipality’s tax ratio for the class in question exceeded a provincially prescribed threshold ratio. The threshold ratio was simply the average ratio for each class in the province as a whole, defined (as usual) in relation to the residential norm of 1.0. The prescribed threshold ratios were as follows: commercial, 1.98; industrial, 2.63; and multiresidential, 2.74. Municipalities were able to increase taxes on a property class only when their ratio moved below this threshold—that is, when their tax ratio on the property class was lower than the provincial average. For municipalities with tax ratios above the threshold levels for these three property classes, any increase in property taxes had to be borne largely by residential property taxpayers. As table 4.3 shows, in 2002 many cities, including Toronto, were well above these levels, so this restriction had sharp teeth. Hamilton, like Toronto, was above the threshold for all three classes; others were above the prescribed ratio for commercial properties (Thunder Bay) or industrial properties (Niagara, Oxford County, Kingston, and, again, Thunder Bay). One region, Waterloo, simply set its ratios (in 2002) at the provincially prescribed limits, as did Oxford County for multiresidential property and the City of London for industrial property (see table 4.3). This important limitation on municipal property tax policy remains in effect today (although with some changes in the rules).15

14. Annualized means that the taxes on a property are adjusted to take into account property-level changes made in that year. 15. The capping provisions are set out in the regulations to the Municipal Act, 2001, and in the City of Toronto Act, 2006.

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TABLE 4.4

Relative Changes in Assessed Valuations, by Class and Region, 2003–2004 (percent) Property class

Province

Toronto

14.10 14.70 12.90 20.70 1.09

15.40 18.10 8.90 7.00 1.73

Residential Multiresidential Commercial Industrial Ratio of residential to commercial

Peel

York

18.80 19.50 20.00 25.30 8.10 6.90 9.50 12.10 2.32 2.83

Durham

Halton

Ottawa

16.60 8.70 9.60 15.00 1.73

19.90 21.00 11.50 13.00 1.73

26.30 13.10 12.20 9.40 2.16

source: Calculated from Ontario Municipal Financial Information Returns.

Still More “Fix Ups” Even after all the cutting and trimming, the reformed (and re-reformed) property tax system continued to create controversy. In particular, political problems arose because residential property values increased more quickly than those of commercial properties in the large municipalities in the southern part of the province, including all of the GTA and Ottawa, as shown in table 4.4. On average across the GTA, the increase in the residential base relative to the commercial base was almost twice as great as that for the province as a whole (including the GTA). When combined with the provincial restrictions on tax ratios, the result of reassessment was a significant shift in taxes to the residential property tax base. In reaction, in 2004, the new Liberal provincial government made two important policy changes that suggested it continued to hear more clearly the voices of homevoters than those of business (or tenants). To prevent a reassessment-related tax shift onto the residential property class, municipalities were for the first time explicitly permitted to increase the tax ratio of one or more business property classes away from the direction of the target ranges, to the extent necessary to maintain the existing municipal tax shares borne by the residential and business classes.16 The extent of such changes was limited by the provision that ratios could be increased only to maintain revenue neutrality among classes and not to increase the relative tax burden on any class. In effect, existing historical inequities were once again grandfathered. In addition, even municipalities (such as Toronto and the others mentioned) that had property classes taxed at levels above provincially prescribed thresholds, so that they were subject to limits on their levy increases, were now permitted to increase municipal taxes on those classes although such increases were 16. In 2004 14 of 31 cities in Ontario exercised this option, as did 9 of the 22 counties and 3 of the 6 regions. In 2006 15 cities, 4 counties, and 1 region did so.

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limited to not more than half of any tax-rate increase applied to the residential class. As the ratios in table 4.3 suggest, this provision provided some breathing room for many of the province’s larger municipalities. Other problems kept coming up with respect to capping and clawbacks, the inability of municipalities to target tax relief to small business, and, as is discussed further in the next chapter, the future implementation of assessment averaging and the timeline of the assessment cycle. As a result, following consultations with representatives from the municipal and business communities, still more property tax changes were announced in the 2004 budget.

Nobody’s Satisfied The 2004 taxation year was especially fraught for property taxes because it was the first year in which reassessment was based on a valuation date of 30 June of the previous year. Those involved in the assessment process felt that an annual reassessment based on a 30 June valuation date did not give MPAC sufficient time to assess all properties (now approximately 4.7 million). Moreover, a valuation date of 30 June did not give municipalities sufficient time to analyze the reassessment data— an increasingly complex task, given all the policy changes outlined, most of which required them to compare tax-roll values before and after capping and shifts. Nor did it give taxpayers enough time to voice their complaints prior to the appeal deadline. In response to these concerns, the province moved the valuation date up six months, to 1 January of the preceding year, beginning with the 2006 taxation year. Supposedly to ease the transition to the new date, the reassessment scheduled for 2005 was cancelled, with the result that the valuation date for 2005 remained 30 June 2003, the same date that was used for the 2004 taxation year. Chapter 5 discusses these changes in the assessment cycle. Capping was criticized not only because it preserved historical tax inequities, but also because it slowed the rate at which property taxes were based on more current valuations.17 In addition, as the preceding discussion demonstrates, capping made the system much more complicated and imposed additional administrative costs on municipalities. To reduce these problems to some extent, and to increase the number of properties that were not subject to capping or clawbacks— and were hence paying tax on a market value assessment basis— even more optional features were introduced into the system in 2005. For the 2006 tax year, municipalities were given the choice of either increasing the annual cap up to 10 17. As mentioned earlier, the first taxation year in which the property tax base was supposed to be based on valuations as of 30 June the previous year was 2004.

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percent of the previous year’s taxes—that is, they could choose a rate of increase anywhere between the mandated 5-percent level and the new optional 10 percent— or implementing a minimum annual increase of up to 5 percent of the taxes that would have been imposed if the base were the full market value base (that is, not subject to capping or clawbacks). Municipalities were also allowed to move capped or clawed-back properties directly to this so-called full tax base, provided that the taxes that would be imposed by capping were within $250 of the taxes due on those properties under the full tax base.18 By 2008 many municipalities, including the regions of Durham, Halton, Niagara, Peel, York, and Waterloo, as well as cities such as Ottawa were using this option. Some municipalities, such as the cities of Hamilton, London, Windsor, and Orillia have chosen to apply this threshold to capped properties while applying a lower threshold (or no threshold) to those being clawed back. To add to the municipal-choice basket, these options could be adopted on a mix-and-match, class-by-class basis. For example, a municipality could cap the growth in taxes in the commercial class at 5 percent of last year’s taxes, while simultaneously capping taxes in its multiresidential class at 10 percent of last year’s taxes and capping taxes in its industrial class at 5 percent of taxes due under the full tax-base system. The threshold of $250 (or lower) could also be changed for different property classes. Capping decisions were to be made annually, and in principle were to take into account both the impact of the current reassessment and the extent of past progress toward taxing on the full tax base. In 2008, for example, the GTA regions of Durham, Peel, and York, as well as other regions such as Niagara and the cities of Ottawa, Orillia, and Windsor applied the 10 percent/5 percent combination rule. Others, such as the regions of Halton and Waterloo and the City of Hamilton chose to apply only the 10 percent, based on the previous year’s taxes. An additional change in 2005 was to permit municipalities to phase out the special capping rules introduced for new nonresidential construction that had been introduced in 2000. They could do so by creating “floors,” which would in effect phase out the caps by moving toward taxing the full assessment base over time. For example, eligible properties could be taxed at up to 70 percent of the full tax base in 2005, up to 80 percent in 2006, up to 90 percent in 2007, and up to 100 percent in 2008 and future years. Most of the municipalities in the province have implemented this phasing-out rule. Finally, the concern expressed by many about the need to target relief to small business resonated in political circles. To address this, municipalities were allowed to apply graduated tax rates to the optional property classes that had been intro18. If a municipality wished to do so, it could use a lower threshold than $250.

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duced earlier in the reform process. Municipalities were already able to apply graduated tax rates to the commercial or industrial classes as a whole through banding, but they had not been allowed to do so for such optional property classes as office buildings, shopping centers, or large industrial properties. However, only Toronto took advantage of this new freedom, and it did so only for one optional class, the not very clearly labeled commercial residual class.

The Ombudsman Speaks The provincial government was not the only public body that heard and reacted to the continuing complaints about property tax reform. Following the receipt of explicit complaints from 75 taxpayers about their assessments, the Ombudsman of Ontario undertook an investigation of MPAC in 2005. In the months following the announcement of the investigation, the Ombudsman’s office received 3,720 additional complaints (Ombudsman of Ontario 2006), and another 1,277 came in after that (Ombudsman of Ontario 2007). From one perspective these numbers are not very large, given that Ontario has about 4.7 million properties. Nonetheless, they are striking when one considers the general passivity of Ontario taxpayers over the years. Indeed, the only provincial public agencies that registered more complaints in 2006–2007 were two perennials— the disability support program and the family support office (Ombudsman of Ontario 2007). As table 4.5 shows, many more taxpayers— although still a relatively small number—requested assessment reviews by MPAC and the Assessment Review Board (ARB; see box 4.2). Such complaints increased sharply in years in which new assessments were issued, such as 2004 and 2006. The Ombudsman’s report addressed the transparency of the property assessment process and the integrity and efficiency of decision making at MPAC. The report addressed three major areas of concern: ■

Taxpayers had difficulty accessing the information they needed to understand their assessments or to appeal them to the ARB, a tribunal that provides property owners with the opportunity for an independent review of their property classification or assessment. (See box 4.2.)19

19. In 2006 owners of 116,089 properties made requests for reconsideration, for a total reduction in assessment of $3.18 billion; owners of 44,226 properties fi led complaints with the ARB, for a total reduction in assessment of $3.56 billion. In total 3.57 percent of properties made a request or fi led an appeal for a reduction in assessment of 0.50 percent (MPAC Annual Report, 2006).

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TABLE 4.5

Requests for Assessment Review

Tax year

1998* 1999 2000 2001* 2002 2003* 2004* 2005 2006* 2007 2008

Requests for reconsideration

134,257 41,000 29,063 130,560 40,992 113,346 164,221 87,961 116,039 46,721 61,388

ARB appeals

Percentage of properties

Percentage of total assessment

175,000 13,089 10,000 65,242 46,886 42,334 45,885 46,587 44,226 51,630 6,086

7.80 1.36 0.96 4.77 2.10 3.66 4.86 3.06 3.57 2.15 1.46

0.81 0.18 0.09 0.46 0.59 0.61 0.47 0.46 0.50 0.54 0.35

* indicates general reassessment year. source: MPAC (various years), Annual Report.

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In assessing a property, MPAC was alleged by some to ignore the actual sale price of a property without providing any reason why the sale price did not adequately reflect the market value. MPAC was also said to unduly downplay the importance of recent sales of comparable properties. Moreover, some argued that MPAC did not give adequate respect to the decisions rendered by the ARB, believing that its own mass appraisal techniques were superior to a value based on sales of comparable properties. Although MPAC was legally bound to accept ARB decisions for the tax year appealed, reportedly it often ignored those decisions in the next tax year, requiring taxpayers to launch another appeal. At ARB hearings, the onus of proof was placed on the taxpayer to show that MPAC’s assessment was wrong, and not on MPAC to explain its assessment and show why it was right.20

Immediately following the Ombudsman’s report, the government’s first reaction was to freeze assessments for 2006 and 2007 at the 2005 level, ostensibly to give MPAC time to implement the Ombudsman’s recommendations and improve the assessment process. Subsequently, continued concern about the volatility in property prices, illustrated in table 4.6 (and the related, if lagged, volatility in assessed values), led the province to move to a four-year assessment cycle 20. The recommendations made by the Ombudsman to address most of these points, as well as what MPAC has done in response, are discussed in the next chapter.

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BOX 4.2

Assessment Review Board Like almost everything else in Ontario’s property tax system, the assessment appeals process was changed in 1998. After the provincial assumption of the assessment function in 1970, the previous Courts of Revision that had handled appeals were replaced by an Assessment Review Court, which was renamed the Assessment Review Board in 1983. Until 1998 decisions of the ARB could be appealed to another administrative tribunal, the Ontario Municipal Board. After 1998, however, appeals could be made only to the regular judicial system (the divisional court) on questions of law. Another change made in 1998 was that the period for launching assessment appeals was extended from 21 days after the return of the assessed roll to 90 days. In addition, a Request for Reconsideration process was introduced in 1998 in conjunction with the provincewide reassessment. The deadline for an application for reconsideration was 31 December of the calendar year, although the appeal deadline for an ARB hearing continued to be 31 March. Dissatisfaction with the appeal process resulted in several changes in 2009 in conjunction with the most recent reassessment. The Request for Reconsideration stage is now a mandatory first step in the process of appeal for residential properties (Assessment Act, sec. 39.1). A request may be made within 90 days after the return of the roll or by 31 March, whichever is later. The request must contain a statement of facts. A reply must be forthcoming from MPAC by 30 September (or by 30 November, by agreement). The property owner as well as the municipality (or, if the property is in unorga nized territory, the Minister of Finance) may appeal the settlement to the ARB within 90 days of receiving the notice of settlement. ARB members are appointed by the provincial government. In 2009 there were eight fulltime members and forty-three part-time members. Although fees, which vary according to property type, are required for fi ling, all revenues go to the Ministry of Finance, and expenditures of the board are covered by the normal provincial budget. In 2008–2009, ARB revenues amounted to $2.2 million and expenditures were $8.2 million. The caseload of the ARB varies substantially from year to year, depending in part on whether a new valuation has been issued. Such complex cases as the Bank Tower case (discussed in chapter 5) can take several years to resolve. In 2008–2009, however, 99 percent of all residential complaints were resolved within one year (Assessment Review Board 2009).

(instead of annual assessments, as the law had initially required) beginning in the 2009 taxation year.21 Perhaps by chance, but more likely deliberately, since in 2004 the government had specified that thenceforth provincial elections were to be held at least every four years, it happened that the new reassessments were scheduled to fall in the middle of that period.22 21. Data similar to those in table 4.6 are not available for business property, but similar volatility is evident in this sector in terms of vacancy ratios. For Midtown Toronto, for example, the ratio fell from 17 percent in early 2004 to only 8 percent at the end of 2008: see http://www.avisonyoung.com/Research/Market _Reports _Archive/. 22. Before 2004, as is traditional under Canada’s parliamentary system, elections were generally called at the discretion of the governing party (although conventionally they have been held at no more than five-year intervals), so that it was often possible to avoid having an election too soon after doing something taxpayers don’t like—like reassessment. The new timing of assessments preserves this tradition.

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Greater Toronto Area House Prices, 1998–2008 Year

Index

Change in index

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

69.11 71.04 74.99 79.21 86.17 90.87 95.93 102.19 103.93 112.37 111.67

— 2.79 5.56 5.62 8.79 5.45 5.57 6.53 1.70 8.12 − 0.06

source: Teranet– National Bank House Price Index, December index for GTA.

The provincial government made additional important amendments to the Assessment Act in 2007, including a mandatory four-year phase-in of eligible increases in the assessment of residential, farm, and managed forest properties (or other classes prescribed by the province). “Eligible” increases were those defined by regulations under the Assessment Act to deal with the treatment of renovations, new construction, and other similar changes to properties. Subsequently, the 2008 provincial budget extended this assessment phase-in to all property classes, including commercial, industrial, and multiresidential. Beginning in 2009, if the current value assessment of any property increased as a result of a general reassessment, the CVA for tax purposes was to be reduced by 75 percent of the eligible increase in the first year, 50 percent in the second year, and 25 percent in the third year. In contrast, assessment decreases were to be applied immediately. The race away from the implementation of a uniform property tax applied on a uniform and current market value basis continues. Finally, another important change that took place in 1998 was the uploading of elementary and secondary education to the province (discussed in more detail in chapter 6). Prior to 1998, education funding was based on property taxes collected by municipalities (but at rates set by school boards), together with provincial grants. In 1998 the province took over responsibility for education finance. Although education property taxes continue to be collected by single- and lowertier municipalities, the province now sets both the property tax rates for education and the level of funding for education. A uniform education tax rate on residential property (including multiresidential properties) was established for

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the entire province in 1998. However, business education property tax rates (formally, the Business Education Tax, or BET) on commercial and industrial properties continue to vary both by class of property (commercial, industrial, pipelines) and by upper-tier (or single-tier) municipality. As with the municipal business property taxes (discussed in chapter 3), the differential BET rates that were initially imposed reflect differences that existed across the province prior to the provincial takeover of education funding in 1998. The provincial government was hesitant to move to a uniform rate for business education taxes because the winners in such a shift would generally have been big business—most of which is located in big cities (e.g., Toronto)— and the losers, mostly small business and nonmetropolitan centers. However, to dampen differences in the BET among municipalities, where the rates were above the provincial average the province put in place a rate reduction program financed out of general provincial revenues. By 2007 the provincial government was ready to go further. With that year’s budget, a plan was announced to cut the provincial BET over seven years to a target maximum rate of 1.60 percent (a reduction of almost 14 percent in the then-current average BET rate of 1.85 percent). This important component of the property tax is discussed further in chapter 6; for the moment, it suffices to note again the sharp distinction between residential and business education property taxes and the complete absence of any local role in determining the level or structure of property taxes levied to finance education.

The Story Continues Two additional aspects of the 2007 version of the province’s once-more-intothe-breach actions to reform the property tax system also deserve mention. First, the provincial (property and sales tax) credits for seniors, discussed in chapter 3, were enhanced by increasing senior couples’ income threshold for those credits. Second, in a delayed response to the Ombudsman’s report, the province implemented a two-stage assessment appeal process, with standardized information disclosure protocols to take effect in 2009. The legislative dance around property tax reform continued, with the message continuing to be, in the slightly paraphrased words of Canada’s longest-serving Prime Minister, “Reform if necessary, but not necessarily reform.”23 In the run-up to the 2007 provincial election, for example, both opposition parties strongly favored more assessment freezes. The Conservatives promised a 23. Th is paraphrasing plays on a war time utterance of Canada’s long-time Prime Minister Mackenzie King, who was speaking about a highly controversial political issue of the day: “Conscription if necessary, but not necessarily conscription.”

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5-percent cap on annual assessment increases for as long as an individual owned their home, including if it was transferred to a spouse. The New Democrats went one step further and promised a complete freeze on the value of homes at their purchase price until they were resold.24 Much of the press coverage was on their side. One national magazine, for example, reported “a rapidly spreading consensus, not only in Canada but across North America, that property taxes, which are tied to market forces rather than a person’s income or ability to pay, are fundamentally regressive and unfair” (Campbell 2007, 30). The main focus of such comments was clearly on Toronto—where one taxpayer was quoted as saying, “It’s a stupid, unfair system” (ibid.)— and more generally on Ontario, where the property tax reform movement was said to be the most organized, with more than a million members. Some municipal politicians seized the occasion to hop on their own bandwagons. The mayor of Toronto, for example, was quoted as saying that, in his city, “the property tax carries a burden like no other city in America or for that matter the world” (Rook 2007, A19).25 Despite all the fuss, however, the Liberal government was returned to power with a comfortable majority in the 2007 election. As one might expect from studies of the many variations of assessment limits that have been considered and implemented in recent decades in the United States (see, for example, Haveman and Sexton 2008), the upshot of the many limits placed on the full adoption of MVA assessments in Ontario seems to have been somewhat different from what the advocates of such measures expect. A careful analysis of what the potential impact of alternative caps (5 percent, 10 percent, and one based on the consumer price index) until the time of sale would have been, if adopted for residential properties in 1980, found that capping favors both high- and low-income owners, and hence is least favorable to the great middle class that advocates of such measures generally wish to benefit. Assessment limits also favor the old relative to the young and in particular those who own properties with rapidly rising values (on the waterfront, for example). Moreover, for the reassessment to be revenue neutral the tax rate has to be in-

24. These statements are based on election leaflets circulated by the parties at the time. Actually, the New Democratic Party’s Task Force on Assessment and Property Tax (NDP 2006) was a bit more precise, recommending that assessments be frozen at their 2005 value until the property was sold or renovations exceeding in total more than $40,000 had occurred. The task force also urged that apartment buildings (the multiresidential class) should be aligned with the residential class. 25. Th is statement is, to say the least, hyperbole with respect to residential property taxes. The “burden” in Toronto in 2007 was clearly not even the highest in the GTA, let alone in Ontario, let alone Canada (Omelchuk and Brasek 2008). Even with respect to commercial and industrial property, while the estimated tax rate was relatively high in Toronto compared with the rest of the GTA, it was still not the highest in Canada, or even in Ontario, according to McLeod (2007), although its ratio of commercial to residential rates (per $100 of assessed value) was the highest in 2006, according to an industry study (http://www.newswire.ca /en /relaeases/archive/February2007/07/c4340.html). The relation between residential and business property taxes in the GTA is discussed in detail in chapter 8.

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creased, so some property owners would actually have their taxes increased, not reduced, as a result of capping (Slack 2010). However, this gloomy news about how assessment limits work appears to have been no more clearly heard in Ontario political circles than in similar circles in the United States. Two key events related to property taxes occurred after the 2007 election. First, there was a drastic collapse in the real estate market in 2008 (see table 4.6). Second, shortly before the collapse, a full reassessment was completed. As experts know, having an overly large assessed valuation base does not necessarily mean that everyone’s taxes will go up accordingly. However, few people understand the subtleties of the property assessment and tax system, and protests against the unfairness of CVA again began to be heard from many quarters. Nonetheless the new provincial government, presumably strengthened by its election victory, refused to consider any kind of freeze, despite the fact that the revaluation meant that many taxpayers would receive notice early in 2009 that their property’s assessed value was considerably larger than its current market value. In addition to implementing both the phase-in and the BET reduction plans, the government made three further tweaks to the system. For the first time in recent years a clear regional element in property tax policy was introduced when the government accelerated the scheduled BET reductions for the (sparsely populated) northern part of the province. In addition, the municipal option to remove specific business property classes from the capping and clawing process when CVA-level taxes were reached was expanded slightly. Finally, in a move that added yet more complexity to the system, the government introduced a set of rules related to how assessment changes are to be phased in when a change is made in the property—for example, by building on a vacant lot— during the phase-in period. Simply put, a property-specific discount factor must now be calculated when there is a physical change, and a municipal discount factor (MDF, calculated by MPAC) must be applied when there is a change in classification. The MDFs, based on the average increase in CVA within each class in the municipality, vary by both property class and municipality. For example, in the City of Mississauga the lowest MDF is .666019405 (for managed forests) and the highest (for multiresidential) is 32.9 percent higher, while the factor for a new commercial building in Gravenhurst, a small town to the north, is about 10 percent higher than the similar factor in Mississauga. The higher these discount factors, the more rapidly will alterations in assessed value from changes in classification (or additions to a building) be phased in. Although not insignificant, on the whole the changes that have occurred since the 2007 budget and subsequent election are less important than many of the changes discussed earlier. While there is more complexity to be unveiled in the next few chapters, it is appropriate at this point to draw at least one conclusion: namely, that anyone who claims that moving to full market value assessment is simple is either an

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all-powerful dictator or has never lived through the process in a democracy. It is not simple; it is complex. It is also difficult. And it is highly unlikely to be popular. As a rule, democratic governments that want to stay in power are loath to take on difficult, complex, and unpopular tasks unless they have no choice at all or the benefits expected are so great that they can buy their way out of unpopularity. Neither condition held in Ontario during this period, so it is not surprising that the decade following the reform saw the unfolding of the complex tale of retreat and further complications told in this chapter. One perhaps unexpected result was that, although in many ways they have less influence on property taxes than they did before 1998, Ontario municipalities must now spend a lot more time and effort figuring out both what to do with regard to property taxes and how to do it. More important, as one knowledgeable witness said, “The frequency and complexity of the changes have not only placed a financial and administrative burden on municipal resources, but have seriously eroded the level of accountability, which was such an important objective in the tax reform process” (Birt 2002, 85). This critical point is covered in chapter 9, after the rest of the story has been told.

CHAPTER

5

Assessment Reform in Ontario Is Success Enough?

T

wo answers to the question posed in this chapter title seem to be equally correct. The first answer is yes, the assessment reform that constituted a major component of the 1998 Ontario property tax reform (from some perspectives, the very rationale for that reform) was a great success and might be considered one of the largest assessment reforms ever implemented. The second answer to the question, however, is no. Anyone who thought, as many apparently did, including the provincial government, that introducing a uniform market value assessment system would resolve the problems that had long troubled Ontario’s property tax system was soon disabused of that notion by the twists and turns of the subsequent decade. As suggested in the concluding chapter, it may even be argued that the very success of the assessment reform has placed the role of the property tax as the mainstay of local-government finance in an even more perilous position than before. This chapter provides more background about the 1998 assessment reform at the time it was enacted and in the subsequent decade. It examines several aspects of the assessment process, particularly the way in which residential and small commercial properties are assessed compared to large commercial and industrial properties. The fact that much of the business property tax base cannot be estimated in the same way further, we suggest, accentuates the inherent artificiality of bundling these two very different tax sources under the generic label of “the property tax.” A one-size-fits-all solution, like market value assessment, is not possible.

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Assessment before 1998 While the duties, powers, and responsibilities of assessors were set in provincial law from the inception of property taxes in Ontario in 1793, for most of the past two centuries municipalities have been responsible for appointing their own assessors. Only in 1954 was a formal correspondence course for training assessors established by the Institute of Municipal Assessors, with the cooperation of Queen’s University (Finnis 1962).1 Over time, each municipality developed its own assessment system and method for valuing property. The first manual issued by the province to assist local assessors and provide information on values did not appear until 1954. However, in 1947 the province established a director of assessment and located provincial assessors in regional offices throughout Ontario with the responsibility to advise and assist local assessors and to equalize useful assessments for provincial grant purposes.2 Although the province, for its own purposes, prepared equalization factors for all municipalities, the counties (the upper-tier municipalities of the day) were responsible for preparing equalized assessments for county use. As early as 1940, most had appointed county assessors for this purpose. In 1961 in an attempt to upgrade assessment methods, counties were authorized to replace local assessment units with county assessments, although cities remained separate assessment units. Assessors were required to complete the annual assessment roll by a specified date. Since 1904, only real property had been subject to tax in Ontario. A number of exemptions were specified in provincial law, although some were granted at municipal discretion. In particular, until 1955 municipalities were allowed to exempt dwellings with an assessed value of $4,000 or less. Even after the general abolition of this exemption, Toronto, which had been permitted in 1949 to raise the exemption value to $4,400, was allowed to continue the exemption. Until 1961, municipalities were also allowed to grant concessions to industry under certain conditions. The provincial assessment law set out specific factors, such as location, use, cost of reproduction, rental value, and sales value, that were to be considered by municipal assessors when determining the actual value specified as the basis for assessment; these had applied since 1866 for land and since 1904 for buildings. Special assessment provisions were statutorily provided for mines, telephone companies, and railways, as they still are today. Finnis (1962) noted at the beginning of the 1960s that most Ontario municipalities continued to interpret actual value to be the value prevailing in 1940, 1. A brief history of assessment in Ontario since the inception of the property tax in 1793 may be found in Ministry of Revenue (1974). 2. For the history of provincial-municipal grants, see Dupré (1967). The current system of provincial municipal grants in Ontario is outlined in Slack et al. (2007).

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the year set out in the 1954 provincial assessment manual. At most, only a dozen municipalities assessed at higher levels, and many deliberately assessed on only a percentage of the 1940 estimated value. Although the province (through its Department of Municipal Affairs) had the right to order new assessments if the existing assessment roll appeared to be inequitable, it does not appear to have done so. In these circumstances, in 1967 a provincial tax review committee (the Smith Committee) condemned the existing property tax as poorly and inequitably administered (Ontario Committee on Taxation 1967). In only 2 percent of municipalities did assessed values exceed 50 percent of current value; they were at less than 30 percent of current value in 80 percent of the municipalities. Almost two-thirds of municipalities had made no adjustment in their assessment base since 1956, nearly 20 percent had no appraisal records of any kind, and many did not follow the procedures set out in the provincial Assessment Act. The Smith Committee concluded that the provincial government should play an increased role in assessing real property. However, it did not favor provincial assessment, preferring that it be the responsibility of the new regional governments that it proposed (Ontario Committee on Taxation 1967). Although the provincial government did soon begin to create a new upper tier of regional governments, as recommended, it did not follow the committee’s advice with respect to assessment. Instead, when the government decided to adopt full market value assessment throughout the province it took over the assessment function itself, arguing that “province-wide reassessment can be achieved much sooner under provincial management than under local administration” (Assessment Education Branch 1971, 22). Following the introduction of a new Assessment Act in 1969, the province took control of administering assessment throughout Ontario as of 1 January 1970. One comment at the time was that the provincial takeover was “the inevitable result of the failure of municipalities to assist the province in rationalizing the distribution of provincial funds” (Bureau of Municipal Research, 1970, 25).3 All assessment personnel became provincial civil servants under the Assessment Division of the Department of Municipal Affairs, and 32 assessment regions were created. In 1978 the Assessment Division, by then located within the Ministry of Revenue, was given further responsibility to administer provincial land tax assessments in unorganized territories that had previously been under the Ministry of Natural Resources (Finnis 1979). The Provincial Land Tax is discussed in box 5.1. As a result of these changes, for the first time assessment throughout the province was formally required to be at market value (instead of actual value), with no 3. At the time, a significant share of provincial-municipal transfers were allocated on the basis of equalized assessment.

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BOX 5.1

The Provincial Land Tax The provincial land tax (PLT) was introduced in 1924 for properties in unincorporated territory outside of municipal boundaries in northern Ontario. The tax rate was established at 1.5 percent in 1954 and remained unchanged for many years. For a long time, the assessed values were held at the 1940 values, with no property classifications. More than half the small amount of revenue raised from this tax came from pipelines. Other taxes applying in unincorporated territory included taxes imposed on behalf of school boards, local roads boards, and ser vices boards established on a voluntary basis in some areas. It was not until 2004 that the Ministry of Finance considered reforming the PLT; this was fi nally done in 2008, taking effect in 2009. The Municipal Property Assessment Corporation (MPAC) was charged with valuing properties in these territories, and the tax rates applied to the new valuations were established under regulations in the Provincial Land Tax Act. The minimum tax remains $6 per year, with the tax rates varying by property class (commercial, industrial, pipeline, and so on) and ranging from a low of 0.5 mills for commercial property to a high of 1.9 mills for pipelines. Residential or multiresidential property inside a school board district has a rate of 1.7 mills, compared with a rate of only 0.2 mills for similar property outside a school district. In addition, some properties lie within districts covered by local roads boards or local ser vices boards and are subject to levies by such boards that may or may not, at the discretion of the board, be included in their PLT bill. Presumably these rates, which are stated in the regulations to eight decimal places, were set to yield the receiving bodies approximately the same revenue as the preceding system. The initial regulation set constant rates for a three-year period. The Minister of Finance stated that the expected result of the new system was that about half of affected properties would see a tax decrease, and that among those with an increase, the additional amount would be less than $150 for about 90 percent of them (Duncan 2008).

distinction being made between land and buildings.4 The initial plan was for the province to complete reassessment at market value by 1975, to apply assessment methods and standards uniformly and equitably, and to maintain assessments for municipal and school tax purposes at market value thereafter (Finnis 1970). Only the first of these objectives was fully achieved. The principal reason for the provincial takeover was presumably to eliminate the interjurisdictional and other inequities and anomalies caused by the previous unsatisfactory practices. However, this outcome was not achieved, essentially because the new system was voluntary and some important municipalities— 4. Previously, the assessed value of land and buildings were stated separately, although the assessment for tax purposes was simply the sum of the two values. Although the term actual value was not clearly defined in the law, following a court decision in 1950 (Montreal v. Sun Life Assurance Co. of Canada [1952] 2 D.L.R. 81 [P.C., Nov./51])—interestingly, a decision that dealt not with Ontario but with Quebec law—it was generally understood to mean “the exchangeable value or what the building will command in terms of money in the open market, tested by what a prudent purchaser would be willing to give for it” (Ministry of Revenue 1974, 14). Th is definition is obviously similar to that normally used for market value in other jurisdictions.

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notably Toronto— did not participate.5 Even though the province met its target of preparing new market value assessments at 1975 values for all municipalities, in many areas, including Toronto, the assessment base still reflected 1940 values (Finnis 1979). In a 1970 statement, the Minister of Municipal Affairs emphasized that reassessment was not intended either to increase or to decrease the total tax levy (Assessment Education Branch 1971). However, even revenue-neutral base changes inevitably generate tax shifts. When, as in Ontario in the 1970s, such changes are large and occur in some jurisdictions but not in others, the result is likely to be highly distortionary.6 The longer reassessment was delayed, as it was in central Toronto, the harder it became to update assessments, given the magnitude of the tax shifts implied. Soon the question became “Can the property tax in Ontario be reformed?” (Bird and Slack 1981). For the next two decades, the answer to this question was no. All this finally changed, however, with the major reform of 1998. Or did it?

The 1998 Reform Provincial reorganization and takeover of the assessment process in 1970 did not solve the problems arising from the increasingly inequitable property tax. Consequently, in the manner of Ontario governments since the province was created, several more decades of discussion followed before, toward the end of the century the best solution was found to be—yet another reorganization. In January 1998 a new uniform assessment system based on current value was implemented province-wide (in effect, current value was just a new name for the market value concept of 1970, which had in turn replaced the actual value concept of 1904). All properties were to be assessed on the basis of their market value: CVA was now law. This time, however, unlike with the 1970 reform, the province ensured that municipalities had to comply; they were required to adopt the new valuations whether they wanted to or not. Perhaps partly to make this stronger provincial approach a bit more palatable and partly to distance the provincial government from the unpleasant news of higher assessments, the assessment system was completely reorganized. The government legally deprovincialized assessment by moving it from the direct control of the provincial government to a new notfor-profit corporation, originally established as the Ontario Property Assessment Corporation (OPAC) but soon changed to the Municipal Property Assessment 5. Although the issue was discussed in Metropolitan Toronto, which at the time had a two-tier governmental structure encompassing six borough governments, it was reportedly strongly opposed by the City of Toronto, where shifts between property classes would have been particularly great (Anstett 2001). 6. For analysis of the situation in Ontario at the end of the 1970s, see Bird and Slack (1978).

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Corporation (MPAC). Every municipality in Ontario automatically became a member of this corporation, which although nominally independent, remained essentially under provincial control. Since all of MPAC’s functions had been performed by the Assessment Division of the Department of Municipal Aff airs, from one perspective it seemed that nothing critical had changed, with the very important exception that now all municipalities were required by law to implement the new assessments. An additional difference was how assessment was financed. Since 1999 Ontario has constituted the largest single assessment jurisdiction in North America. MPAC is now responsible for assessing more than 4.7 million properties in the province, with a total assessed value of over $1.7 trillion. MPAC’s budget ($163 million in 2007) is funded almost entirely (96 percent) by municipal governments according to a formula set out in the Municipal Property Assessment Corporation Act of 1997 (sec. 12[2]). This formula allocates MPAC’s cost to particular municipalities based on a simple average of the municipality’s share of total provincial assessment (A) and its share of the total number of properties possessed in the province (B): (A + B) / 2C, where C is the allocable MPAC cost. The effect of this rather arbitrary cost apportionment, as Isenburg (2007) notes, is that larger municipalities subsidize assessment in smaller municipalities. The same source reports that the assessment cost ranged between $33 and $34 per property from 2000 to 2006, a period during which the number of properties assessed per staff member rose from less than 2,000 to more than 3,000. In addition to general reassessments, MPAC is responsible for supplementary assessments as a result of changes in property classification or new construction. In 2007, for example, the assessment base was increased by $18.8 billion as a result of new construction and an additional $1.6 billion as a result of property class changes, for a total of $20.4 billion, or about 1.5 percent of the 2007 assessment roll (MPAC Annual Report 2007). Apart from its basic task of providing the assessment roll to municipalities— a ser vice they cannot refuse and for which they must pay whatever they are charged—MPAC is also mandated to find alternative sources of revenue to reduce the costs charged to its municipal clients. In pursuit of this objective, MPAC has developed a variety of other products and ser vices that in total yielded $7 million in revenue, or 4 percent of its budget, in 2006. Some of the services available commercially are listed in table 5.1. In addition, MPAC provides special Web-based data services to municipalities (Municipal Connect) and school boards (School Board Connect). In June 2008, 258 municipalities were reportedly accessing MPAC data directly.7 Finally, MPAC plays an important role in preparing 7. As reported at http:www.amtco.on.ca /taxmat /ntaxmat.html.

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TABLE 5.1

Selected Fee-Based Ser vices Provided to Public by MPAC Type of ser vice

Description

Fee

AVM Report

“Real-time” estimate of market value of home

$25; enhanced report (with confidence limits) $30

AVM Comparables

AVM Report, plus information on three “comparables”

$40

Assessment Roll Reporta

Basic assessment information

$14

ACS Online

Replacement cost, less depreciation

$10,000 (per location) for province; $3,500 for each of four zones

Property Profi le Report

Assessment roll, sales, and structural information

$30 (plus $20/property for comparables)

Market Model Report

Details on multiple regression models in a particu lar area

$250

Custom requests

Data and mapping

$150–$250/hour, depending on nature of work

notes: The MPAC Web site provides the following description for ACS: ACS-online™ is an automated costing system that determines the replacement cost new less depreciation (RCNLD) for commercial, industrial, special use, and exempt properties. Th is new, Web-enabled ser vice provides users with a fast and simple way to estimate site improvement costs for most buildings or structures. AVM are Enhanced and Basic Market Value Reports. a. There are a number of variants of this report, both less and more complete; prices range from $1 to $16.

preliminary lists of electors for municipal and school board elections every four years as well as in reporting population by municipality.

The Assessment Cycle The same valuation date—30 June 1996—was used for the first three years of the new system (1998, 1999, 2000). For 2001 and 2002, as the province began to phase in annual assessments in accordance with the 1998 Assessment Act values were assessed as of 30 June 1999. Implementing this new system was clearly a major organizational task, requiring major investments in staffing and training. In 2003, properties were assessed according to their 30 June 2001 values, and in 2004, current values were set at those assessed as of 30 June 2003. The 2004 taxation year was thus the first year that a reassessment was based on data from the previous year. Current value assessment at last appeared to have arrived in Ontario. As mentioned in chapter 4, those involved in the assessment process felt that an annual reassessment based on a 30 June valuation date did not provide sufficient

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time to assess the millions of properties for which MPAC was responsible. Taxpayers and municipalities also felt pressed for time. To address this problem, in 2004 the province simply moved the valuation date back to 1 January of the preceding year, beginning with 2006, and cancelled the reassessment originally scheduled for 2005. The result was that the valuation date for 2005 and 2006 remained the same (30 June 2003) as for 2004. Initially the idea had been that, beginning with the 2005 taxation year— when annual revaluation was expected to be the norm— assessments would be based not on the assessment for the prior year but on average values from successive tax years (referred to as rolling averages).8 For 2005, for example, a two-year average was to be employed: the average of the current value for the tax year (that is, the assessed value of the previous year) plus the current value for the previous tax year (that is, the assessed value for two years earlier). For 2006 and subsequent years, the averaging was to be extended by a year, with future property assessments being based on three-year averages (the average of the current value for the tax year plus the current value for each of the two preceding tax years). In reality, however, none of this happened. Instead, as mentioned earlier, the 2003 assessed value was used for 2005. In 2006 valuations were based on 1 January 2005. This same base was then also used for 2007 and 2008. Why did the provincial government decide to defer the implementation of averaging to some unspecified future date? Officially, three reasons were given: averaging would increase the complexity of the property tax system; averaging would not enhance fairness to taxpayers; and averaging was redundant, given the various property tax mitigation tools that already existed (Ontario Budget 2004). The first and third reasons seem unpersuasive. It is hard to believe that the Ontario system could be much more complex than it already is, and the mitigation tools, as discussed in the previous chapter, seem strangely targeted in many respects. Perhaps the real reason for pulling back from averaging thus lies in the second reason: by 2004, the property price boom had already gone on so long that some were beginning to foresee the decline that would begin in 2008, and having a rolling average system that would require people to pay, say, based on three rising years just when prices began to

8. The idea of using a three-year rolling average to help smooth market fluctuations was recommended by the Who Does What (WDW) Advisory Sub-Panel on Assessment and Property Tax Reform, in a letter dated 20 August 1996, written by the Hon. David Crombie to the Minister of Municipal Aff airs as part of the recommendations of the WDW Advisory Committee appointed to review the provincial-municipal fiscal relationship. The committee had been appointed in 1995 to review options for property tax reform and other local finance arrangements (Anstett 2001). A similar proposal was also a feature of the “actual value” scheme in the Greater Toronto Area Task Force (1996).

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fall did not seem politically palatable. Perhaps the volatility of property prices is one reason why few jurisdictions have adopted any type of rolling average assessment scheme.9 In 2007 the whole idea was laid to rest when the law was amended to specify that assessments in the four years from 2009 to 2012 would be based on values as of 1 January 2008 (Assessment Act, sec. 19.2). Henceforth— at least as the law currently reads— assessed value is to be adjusted only once every four years, to the value as of 1 January of the year preceding the four-year period. However, any increases in value as a result of reassessment are to be phased in over the four years. Under this provision, for example, the value applied in the taxation year 2013 would thus be changed from the 2008 value, which had been phased in over the preceding four years, to the value as of 1 January 2012. The 2012 value would in turn be phased in through the taxation year 2016. In the words of the Minister of Finance in 2007: “These improvements are designed to provide property tax stability and predictability for all homeowners.”10 Under this system, values will certainly be more stable and hence more predictable than with any kind of rolling average system. However, it remains to be seen how happy homeowners will be with the new system. (Interestingly, homeowners are always the only group mentioned in these political discussions, despite the substantial importance of the business property tax base.) At first they did not appear to be particularly pleased with the prospect of having their property taxes for the next four years established on the basis of values estimated for January 2008, a time when most property values were considerably higher than they were in the spring of 2009, when most taxpayers received their new assessment notices. Table 5.2 summarizes the assessment update cycle since the inception of the new system and as currently established in the law. Whether the current system will stay in place, given the volatility of market values in recent years is not clear. In any case, Ontario has moved far away from its apparent initial ambition— an ambition that, unlike many associated with the property tax reform, had actually been realized in 2004— of maintaining only a one-year lag in assessed values. The proposed compromise of using a rolling average of several past years has also been abandoned, and probably correctly. 9. See, for example, the discussions of assessment cycles in Almy (2000), Malme (1991), and Mikesell (1980). Almy (2000) reports that three provinces followed a two-year cycle, and two a four-year cycle. Kitchen (2009) reports three (including Ontario) on a four-year cycle, one on a three-year cycle, one on a fiveyear cycle, and one on a six-year cycle. In British Columbia, which has an annual cycle, Vancouver has employed a three-year rolling-average system (for land only) to cushion the impact of changes in market value, although a recent study concludes that this approach does not deal adequately with the problems arising from sudden unanticipated value changes in par ticu lar “hot spots” (City of Vancouver 2007). 10. Ontario Ministry of Finance news release, 10 May 2007.

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TABLE 5.2

Assessment Update Cycle Taxation year(s)

Valuation date

1998, 1999, 2000 2001, 2002 2003 2004, 2005 2006, 2007, 2008 2009, 2010, 2011, 2012 2013, 2014, 2015, 2016

30 June 1996 30 June 1999 30 June 2001 30 June 2003 1 January 2005 1 January 2008 1 January 2012

source: Assessment Act, R. S. O. (1990).

The current situation, with its four-year assessment cycle—which is not uncommon in other jurisdictions (Malme 1991; Mikesell 1980)—is likely to result in persisting inequities among property owners, depending on such factors as trends in property prices and whether particular properties are sold (or substantially altered) within the four-year assessment period and hence reassessed. Such distortions are likely to be particularly important in more volatile markets like that in Toronto. As Mikesell (1980) shows, although there are some substantial advantages in having a fi xed assessment cycle, there are also costs. Unfortunately, neither the costs nor the benefits of the different alternative cycles considered (and employed) in Ontario over the past decade appear to have been carefully evaluated. Instead, what was done (or not done) seems to have been determined primarily by political considerations and in particular by repeated attempts to reduce complaints that arose, in essence, from the very success of the new assessment system in redressing previous inequities. An old tax may not always be a good tax. But the political reality seems to be that people are less likely to be upset with politicians when their sense of well-being is not perturbed by abrupt changes in their tax bills.

The Effects and Aftermath of the Reform As discussed in chapter 4, the perceived lack of transparency in MPAC’s operations was severely criticized in a 2006 report by the provincial Ombudsman. More basically, however, the obvious political problems arising from the current assessment system— as evidenced by the many twists and turns in provincial property tax policy over the past decade—rest on two fundamental characteristics of the system as it has operated so far in Ontario. The first is its arbitrariness: determining the base of the real property tax is inherently and unavoidably arbitrary to some degree. Regardless of how well the

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TABLE 5.3

MPAC Evaluates Itself: Corporate Quality Standards Residential properties

Urban homogeneous Urban heterogeneous Rural, except northern Rural, northern Condo, except northern Condo, northern Recreational waterfront Vacant land, except northern Vacant land, northern Recreational waterfront vacant land

Median assessment

Coefficient of dispersion

.98–1.02 .98–1.02 .95–1.05 .95–1.05 .98–1.02 .95–1.05 .95–1.05 .95–1.05 .90–1.10 .90–1.10

10.0 15.0 15.0 20.0 10.0 15.0 20.0 20.0 25.0 25.0

source: MPAC. http://www.mpac.ca /pages _english /property_owners/aggregate _sales _data _asp.

assessed values produced by the system conform to the profession’s normal quality standards— such as the coefficient of dispersion (COD) by which MPAC evaluates its own performance, as shown in table 5.3—assessments are always essentially estimations, which means the property tax is a fundamentally presumptive tax based on administrative determination, and is therefore always arguable.11 The main taxes (on income and sales) on which other levels of government rely are based on flows. In contrast, local property taxes are based on asset values. Of course income or sales taxes also give rise to arguments between the taxpayer and the tax authority. Nonetheless, there exists a measurable economic activity on the basis of which the tax is levied. Property taxes, on the other hand, are usually based on estimated asset values. Unless the asset subject to tax is actually sold (in an arm’s-length transaction by a willing buyer to a willing seller), someone must determine the value that serves as the basis for the tax. Indeed, matters are worse than this: not only must the values of all unsold properties be estimated, but even the values of properties actually sold must also be estimated in most cases, because sales seldom take place on the precise valuation date, and they are not always free of nonmarket considerations. Market value assessment systems like Ontario’s CVA system, no matter how well run, are thus arguable, and hence often subject to legitimate appeal. Many 11. The COD is a mea sure of the uniformity of the data. Assessment quality review includes an analysis of how tightly assessment-to-sales ratios (ASRs) cluster about the median ASR. A COD is calculated using the average deviation from the median ASR, expressed as a percentage of the median ASR. The lower the COD, the more uniform is the estimated ASR across all properties being compared. As market activity decreases, or as the complexity of properties increases, the COD will usually increase.

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owners, being human, are likely to feel that their property is overvalued for tax purposes, at least relative to their neighbor’s property.12 And they could be right. An estimate is an estimate, not a fact. Absent a sale to a total stranger on the exact day of valuation, some other person or agency has to determine the property’s base value for the property tax, in a way that is not true for any other significant tax. As mentioned earlier, one criticism of the MPAC approach was that even when a property was actually sold on the date of the valuation, that sale value would not necessarily be acceptable for property tax purposes (Ombudsman of Ontario 2006). MPAC’s initial response to this criticism was simply to reassure property owners that “greater weight is [now] being given to the actual selling price of homes when an assessment is challenged” (MPAC 2006, 9). Is this likely to be a satisfactory answer for irate taxpayers? The second fundamental characteristic of the market value assessment approach is that it is highly vulnerable to volatility in the underlying real estate base. Figure 5.1 shows the new housing price index for Toronto and Oshawa (a suburban municipality in the Greater Toronto Area [GTA]) from 1985 to 2008. Residential property values rose steadily up until 2008, with the exception of the economic downturn of the early 1990s. Toronto has always been a sticking point when it comes to property tax issues in Ontario, and the immediate fallout from changing economic conditions in the Toronto market made the introduction of the new assessment system particularly contentious. Even the best market value assessment system has difficulty in times of rapidly changing property prices, whether the change is up, as it was in the decade up to 2008, or down, as it was to some extent for a year or so thereafter. Moreover, market values are almost inevitably most out of line with assessed values in those areas in which (1) prices rise most quickly; and (2) where the initial assessed values are most distorted relative to prevailing market values.13 Toronto is the prime example of this situation in Ontario. People are unhappy. Politicians are ner vous. The results have included both the frequent changes in scheduled reassessments discussed in this chapter and the intricate system of caps and clawbacks outlined in chapter 4. Given the circumstances, it is no wonder that few taxpayers in Ontario over the past decade have appeared to agree that MPAC assessments of their property

12. Equally, owners often feel that those who offer to buy their property undervalue it. Some have attempted to capitalize on the existence of both lower and upper bounds to owners’ perceptions of value and attempted to devise “self-assessment” systems, in which the threat of a forced sale at the owner’s stated price would force that price closer to a “true” market value. So far, however, such schemes have not been very successful; for discussion and references, see Bird (1984). 13. As McMillen and Weber (2008) have recently shown for Chicago, these problems are exacerbated in “thin” property markets with infrequent sales; horizontal inequities are likely to be greatest in such areas.

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FIGURE 5.1

New Housing Price Index, Toronto and Oshawa, 1985–2008 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0.00

source: Calculated from Statistics Canada, New Housing Price Index, table 327- 0005.

reflect the sort of expert, objective, unbiased process to which MPAC aspires and for which it has been lauded by its peers.14

The Ombudsman Revisited As noted, the Ombudsman for Ontario undertook an investigation of MPAC in 2005. Table 5.4 sets out the 22 recommendations made in the Ombudsman’s 2006 report and summarizes MPAC’s official responses. Quite apart from these specific observations, and perhaps more devastating, the Ombudsman publicly berated the agency for its “superiority complex,” noting that “some within MPAC are rigidly committed to its mass appraisal models. They apparently do not like it when its results are challenged” (Ombudsman of Ontario 2006, 28). Some of the reasoning behind this criticism is worth quoting: MPAC believes that its mass appraisal system is accurate and has been proved to be so through performance indicators. It also treats “equality” as a crucial if not the crucial animating principle in a fair assessment system. It uses its mass appraisal system as the measure of that quality. (28) The fact is that MPAC’s mass appraisal system is an imperfect predictive model that eschews, save in exceptional cases, the particularized examination of the subject property being assessed. It is far healthier in my view to consider an ARB appeal as a contextually based check or balance on MPAC’s success rather than a challenge to it. (33) 14. In 2004, for example, MPAC received the Distinguished Assessment Jurisdiction Award from the International Association of Assessing Officers, the leading professional body in the field.

TABLE 5.4

The Ombudsman and MPAC Ombudsman’s recommendation

Action (year)

Enhance and improve brochure Include information on average % change in neighborhood on assessment notice Include more information in brochure Include information on past reviews on assessment notice Include property profi le report with assessment notice Provide more information on comparables used in assessment Release more multiple-regression analysis data Review whether full assessment methodology should be revealed to taxpayers Set out all administrative procedures clearly online Improve customer contact procedures Review staffing and expand inspections Standardize audit reports Give more weight to actual sale prices Apply ARB findings for all years based on same valuation date Apply ARB reductions for future years’ valuations Record clear reasons for settlements on review Apply such settlements for future valuations Document reasons for ARB decisions Do not introduce new comparables at ARB Do not make last-minute pre-ARB settlements Give MPAC onus of proof in ARB hearings Report to Ombudsman within six months

Completed (2006) In progress Completed (2006) Completed (2008) In progress In progress Completed (2007)a Not doneb Completion expected in 2008 Completed (2008) In progress Completed (2006) In progressc Completed (2007) In progress In progress In progress Completed (2007) Completed (2007) Completed (2008) Completed (2009)d Completed (2006)

a. MPAC (2008) indicates this has been done by including more information about multiple regression analysis on MPAC Web site. However, there is no search function on the site, and what has been put online by MPAC still falls short of what is desirable and perhaps necessary. b. As the Minister of Finance noted in his initial response to the ombudsman’s report (Duncan 2006), this is a decision for the province to make, not MPAC. It is not clear that anything has been or will be done about this central question. c. MPAC rates this as “completed,” but it is still doing pilot projects and it is not clear when any systemwide change will be made or what the nature of that change will be. d. Th is change required provincial initiative: it was adopted in the 2008 budget to take effect in 2009. source: MPAC (2007, 2008).

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Although the Ombudsman seems prone to extreme language—in a later report he refers to MPAC as “a global leader in puffery” and disparagingly mentions its “slick but hollow self marketing” (Ombudsman of Ontario 2007, 5)—he nonetheless makes an important point here that is often neglected in the literature on property tax assessments. Frequently the appropriateness and per formance of the assessment system is evaluated solely in terms of such measures as the COD (see table 5.3). As the Ontario experience demonstrates, it is simply not enough for an assessment agency to meet or exceed the International Association of Assessing Officers (IAAO) “equality” standards to make the grade.15 The Ombudsman’s report made a series of recommendations to address access to information (see table 5.4). It recommended, for example, that MPAC should provide information to taxpayers on the average increase in assessed value in their particular neighborhood rather than on just the average for their municipality. The notice of assessment should also include information about “comparable” property assessments—why they are suitable for comparison with the property in question, how those comparable assessments can be accessed, and that MPAC would rely on the six comparables it selects in the event of a formal appeal to the Assessment Review Board (ARB; see box 4.2). In addition, the Ombudsman recommended that MPAC should implement mea sures to increase access to information about its computerized appraisal processes, and that it should publish its administrative procedures regarding assessments and inspections, disclosure of information, requests for reconsideration, and ARB appeals. Although some of this has been done, the property assessment notice taxpayers received in 2008, although it was much clearer, contained essentially the same minimal information as the original 2006 notice that led to the public uproar and the Ombudsman’s report. It basically announced the property assessment, without any specific explanation of why or how the number had been reached. Indeed, much the same was true even with the 2009 notices, which, in view of the great rise in property values from 2005 to 2008, indicated a huge increase in assessed value for most taxpayers. To address the second concern, about the use of sale prices in determining assessed values, the Ombudsman recommended that, when a property assessment is challenged based on an actual sale price proximate to the valuation date MPAC should generally accept that sale price as the best evidence of the property’s 15. Mehta and Giertz (1996) approach the question of mea suring the per formance of the assessment process in a more meaningful way by estimating statistical production functions, but there has been surprisingly little follow-up discussion on this in the literature. Unfortunately, we do not have access to the data needed to carry out such estimates for Ontario.

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assessed value. The actual sale price was also to be an important factor in assessing the value of the property in future years. While MPAC reports that it has done this (see table 5.4), taxpayers have been given little or no evidence to demonstrate that this is actually the case. The Ombudsman also recommended that MPAC should apply ARB decisions on the value at specific valuation dates when carrying out assessments for future years that use the same date. He further recommended, reasonably, that MPAC apply assessment reductions imposed by the ARB in arriving at future assessed values, unless the ARB decision is quashed or circumstances have changed. Finally, the Ombudsman recommended that the onus should be placed on MPAC to substantiate its assessments when they are challenged before the ARB. Following the Ombudsman’s report, in 2008 the province introduced a fundamental change in the entire assessment system by placing the onus of proof on MPAC to substantiate its assessments—though only when challenged before the ARB— effective in 2009. In response to the Ombudsman’s report, MPAC has issued a series of update reports on its progress with respect to the recommendations. In 2007 it reported that some action had already been taken on all 20 (out of a total of 22) recommendations within its jurisdiction (MPAC 2007). In a subsequent report (MPAC 2008), MPAC again gave itself high marks, reporting that 13 recommendations had been fully implemented and that progress was being made with respect to the rest. It has, for example, prepared a new brochure, put on its Web site more detailed explanations of internal procedures, improved customer contact and access, and done a number of other useful things. More important, in order “to improve the quality of information” it increased the number of inspections of residential properties from 355,000 in 2006 to 570,000 in 2007 (MPAC 2007).16 Regarding assessment challenges brought before the ARB, determinations are now supposed to be applied to all years based on the same valuation date and not only to the particular year appealed. The remaining two recommendations from the Ombudsman required legislative action by the province and not just administrative action by MPAC. As noted, the province has now acted to ensure that the onus of proof at ARB hearings has been shifted from the taxpayer to MPAC. It appears, however, that no action has yet been taken by the government of Ontario with respect to the important recommendation that the government should review whether “the public interest is better served by . . . requiring full disclosure of property assessment methodology to interested taxpayers” (Ombudsman of Ontario 2006, 56). 16. An additional 27,000 properties in northern Ontario were assessed for the purposes of the provincial land tax (see box 5.1).

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Thus, little has been done to unveil to the public, even the expert public, what exactly goes on within MPAC. The agency’s Web page and its revised brochures certainly represent a vast improvement on the “hermetic secrecy” that was once said to have characterized the assessment process in Ontario (Bird and Slack 1978, 15). Perhaps reflecting the “privatized” nature of the agency, however, it is still far from entirely open to taxpayers about how the value of their property has been assessed. A detailed look at the process of assessment in Ontario will shed more light on this subject.

What Is Assessed By law, all real properties are assessed, but as always there are a number of exemptions and special treatments. Churches and cemeteries, for example, are exempt from taxation, as are certain property improvements for seniors, while properties owned by municipal, provincial, and federal governments are not subject to property tax— although the two upper levels of government do make equivalent “payments in lieu of taxes” (PILT) to the local jurisdictions in which their facilities are located (see box 5.2). Box 5.3 lists the major exemptions and reliefs. The extent and variety of the exemptions listed in Ontario’s property tax law— amounting to a bit more than 5 percent of the total assessed value in the province—is not uncommon, but a few points deserve emphasis. ■

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First, a number of these exemptions (for example, those with respect to machinery and equipment) are clearly intended to limit the property tax base primarily to land and structural improvements. Second, a number of these exemptions are intended to deal with specific cases— a point that becomes clearer if one looks at the detailed legal formulations in the law and regulations. For example, the limited exemption for land used for international tunnels or bridges appears to be designed for the specific circumstances of Windsor, Ontario, where the bridge is actually owned by a U.S. company.17 Similarly, the provision on toll highways is clearly designed to fit the special circumstances of Highway 407, the privately owned (and the only) toll highway in the province. The exemption for large nonprofit theaters was designed for several large theaters

17. Most of the other bridges in the province are operated by bridge authorities. There are 13 international bridges in Ontario and before 1997 most of them were treated differently, from a property tax perspective. The current tax provisions are found in the Municipal Act, 2001.

BOX 5.2

Payments in Lieu of Property Taxes Section 125 of the British North America Act (now the Constitution Act) states that “no lands or property belonging to Canada or any Province shall be liable to taxation.” This clause was enacted to ensure that the legislative powers of taxation of one level of government would not interfere with the control of property owned by another level of government. This clause means that local governments do not have legislative power to collect property taxes on properties owned by federal and provincial governments or their enterprises.1 In place of property taxes, federal and provincial governments have generally adopted the practice of paying municipal governments what are called payments in lieu of taxes (PILTs) on provincial and federal properties. In some provinces, PILTs are paid on local government enterprises (generally, utility companies including gas, electricity, telephone, steam, and central heat) and on nongovernment organizations (examples include nonprofit organizations and a few private corporations). The size of the payment depends on two factors: the number of federal and provincial government properties or Crown corporations located within the municipality and the extent to which these payments reflect the value of property taxes that would have been paid otherwise. In 2007 PILTs accounted for 1.7 percent of municipal revenues in Ontario. A number of concerns have been expressed around the current system of PILTs on federal properties. Primarily, the exceptional nature of these properties often makes it difficult to arrive at an appropriate value for property tax purposes. These properties include national parks, historic sites, penitentiaries, military bases, and wilderness areas. Municipalities contend that these properties should be assessed in the same way as privately owned properties. The federal government argues that the use of these properties is restricted and the assessed value should be based on the current (restricted) use. The federal government makes assessment and tax rate– based payments under the authority of the Payment in Lieu of Taxes Act (PILT Act).2 The act also provides for the establishment of a PILT Dispute Advisory Panel with a mandate to provide advice to the Minister of Public Works and Government Ser vices Canada with respect to the resolution of disputes concerning PILT payments between the federal government and taxing authorities. The chairperson of the panel may appoint panels of up to three members to hear disputes.3 Somewhat curiously, municipalities in Ontario are permitted to keep the education portion of a PILT for their own purposes, but must remit the education portion of actual taxes levied to the local school board. Diplomatic and Consular Property The federal government has established a program of payments in lieu of local taxes and local improvement charges on diplomatic property in Canada. Th is program is intended to provide compensation with respect to properties that are exempt from property taxes by virtue of international law, as reflected in the Vienna Convention on Consular Relations. The federal Department of Foreign Affairs and International Trade is responsible for the payment, calculated as if the property were federal property and subject to PILTs in accordance with the PILT Act.4

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Provincial Payments in Lieu of Taxes The provincial government makes PILTs on the properties of the province and provincial agencies under the authority of the Municipal Tax Assistance Act. A per student and per bed– based payment is made on behalf of colleges, universities, public hospitals, and detention centers under the authority of the Municipal Act, 2001. In Ontario, federal and provincial PILTs, where assessment based, have an education component and a municipal component. Municipalities are required to share only the residential property tax portion with the local school boards; they are allowed to retain the full payment on properties taxed by nonresidential rates, except the taxes of commercial tenants of the Crown. 1. Federal government enterprises generally consist of Crown corporations. Provincial government enterprises include a number of diverse entities, such as electrical utilities, housing corporations, liquor control boards, and so on. 2. A recent Supreme Court decision (Montreal [City] v. Montreal Port Authority, 22010 SCC 14), that the federal government must pay PILTs at the same rate with respect to federal corporations as comparable property owners. Th is may require some changes in this system. 3. Public Works Canada has posted the rules of practice to be followed by the parties in an appeal. See PILT Dispute Advisory Panel on the PILT Web page of Public Works and Government Ser vices Canada, http://www.tpsgc -pwgsc.gc.ca /biens-property/peri-pilt /index-eng.html. 4. See http://www.tpsgc-pwgsc.gc.ca /biens-property/peri-pilt /index-eng.html.

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in Toronto.18 The Stratford Festival (like the Shaw Festival and various other cultural centers) is exempted by separate special legislation. Third, a comparison of the list in box 5.3 with a more condensed listing of major exemptions in Kitchen (1993) suggests that, despite the major property tax reform in 1998, the political process has continued to nibble away at the tax base.

No doubt, interesting stories might be told about the many detailed revisions made over the years to provisions such as those dealing with forestry lands and cemeteries, for example, as well as the rather erratic way in which the law names specific institutions such as the Boy Scouts and the Navy League. Although Ontario is hardly unique in the extent to which the particular circumstances are dealt with by altering general legislation, over the years this approach has produced a rather complex and convoluted legislative framework within which MPAC must operate. The revenue costs for the provincial education property tax of some of the more important relief features in Ontario property tax law are indicated in table 5.5. Because this tax is essentially imposed on the same base as the municipal property 18. The GTA Task Force noted that “live-theatre owners argued that assessment of live theatres is inconsistent across Metro and places Toronto’s theatres at a competitive disadvantage relative to theatres in the United States and other jurisdictions. The Province should address this inequity by, for example, establishing a separate class for live theatres so that municipalities have the power to adjust tax rates to a more competitive level” (1996, 99–100). Th is call seems to have been heard, at least in part.

BOX 5.3

Property Tax Exemptions and Reliefs Public Sector Activities1 Crown (federal and provincial) land.2 Municipal (including upper-tier municipalities, public commissions, and local boards as defined in the Municipal Affairs Act). Public educational institutions (universities, colleges, schools) as defined in the Education Act. Public hospitals receiving provincial aid under the Public Hospitals Act. Children’s treatment centers receiving provincial aid under the Ministry of Community and Social Ser vices Act. Property of Children’s Aid societies under the Child and Family Ser vices Act. Highways, lanes, and other public communications and public squares. Land owned or leased by a designated airport authority under the Airport Transfer (Miscellaneous Matters) Act of Canada, provided (1) the authority is designated by the minister and (2) it makes payments in lieu of taxes to the municipality (see box 5.4). Conservation land.3 Land used for purposes of bridge or tunnel to United States is exempt from taxation for school purposes. Nonprofit Activities Church or religious orga nization;4 municipalities may exempt religious organizations from taxes other than school taxes and local improvement rates. Buildings and land (up to 50 acres) of nonprofit philanthropic, religious, or educational seminary of learning. Property of Boy Scouts and Girl Guides Associations. Nonprofit organizations for purpose of house of refuge, reformation of offenders, care of children (excluding day care centers). Red Cross, St. John Ambulance, charitable nonprofit organizations for relief of poor (if supported in part by public funds). Public library, other public literary or scientific institution, and agricultural and horticultural societies. Battle sites preserved and open to the public “in order to promote the spirit of patriotism.” Nonprofit theaters with at least 1,000 seats and used for at least 183 days in the year for live performances.5 Navy League of Canada. Memorial home, clubhouse, or athletic grounds used by veterans.6 Other Cemeteries, burial sites, and crematoriums.7 Land of toll highways (under Highway Traffic Act) leased from the Crown and used for that purpose (excluding buildings, land used in connection with buildings, and parking lots). Land of companies formed for the erection of exhibition buildings, to the extent that the municipal council consents it shall be exempt. Machinery and equipment (including foundations) used for manufacturing, farming, or ore and metal concentration and smelting, excluding that for lighting, heating, or other building purposes or for any form of transportation or transmission. Machinery for producing electric power.

Hydroelectric generating stations (as defined in Electricity Act) and land and buildings used in connection with the generating station. Machinery and plant used by any telephone or telegraph company for the operations of its telephone or telegraph business. Buildings, plant, and machinery under mineral land, and machinery on the land used for obtaining minerals, other than for building materials. Poles, towers, and lines owned by utilities designated by the minister (under Municipal Act or City of Toronto Act) or owned by a municipal electricity utility, located on easements on land not owned by the utility. One out of every 10 acres of land used for forestry purposes, up to a total exemption of 20 acres. Nonregistered land in nonmunicipal territory (not registered under Land Titles Act or Registry Act); not liable to assessment or taxation.8 Amusement rides. Small theaters used predominantly for live performances.9 Improvements and additions to existing residential units to provide for seniors and persons with disabilities. Tax Relief Programs Municipalities must have in place a program to provide tax relief from increases owing to reassessments for low-income seniors and low-income persons with disabilities; form and extent of the relief are at their discretion. Municipalities may also, at their discretion, provide tax relief to owners of residential, farm, or managed forest property if the taxes are “unduly burdensome.”10 Vacant commercial and industrial buildings receive mandatory rebates, as do charities with buildings in these classes. Municipalities have the option of providing rebates in any property class to nonprofit organizations, heritage properties, or brownfield sites.11 Farms and managed forests are taxed at 25 percent of residential rate. 1. Note that some of the activities listed are not technically public sector activities (hospitals, for example, are owned by nonprofits and children’s aid societies are not public sector agencies). They are included, however, because they are fi nanced largely or entirely by the public sector and carry out a public purpose. 2. Most exempting provisions mention only “land,” including land leased and used for a designated purpose, but land is defi ned in the Assessment Act to include buildings and improvements. 3. Conservation land is land identified by the Ministry of Natural Resources as significant wetland, an area of natural and scientific interest, or a habitat and an endangered species. Th is class also includes certain land that is within or abuts provincial and national parks, is designated as an escarpment protection area or is an area designated by a conservation authority (Conservation Authorities Act), the Oak Ridges Moraine Conservation Act, or the Planning Act. 4. Fifty percent of assessment of residence and land on site and used by officiating member of clergy is also exempt. 5. The Stratford, Shaw, Massey, and Roy Thomson theaters, along with some other cultural centers and institutions like the YMCA, are exempted by separate special legislation. 6. In 2007 legislation governing the property tax exemption for veterans’ facilities (such as the Royal Canadian Legion) was transferred to the Assessment Act. Municipalities must pass bylaws granting such exemptions. 7. Recently the provincial government made it clear that those parts of a cemetery used for burying pets do not qualify for exemption (Brockville Recorder and Times, 30 April 2010, A1). 8. Such land is subject to the Provincial Land Tax (see box 5.1). 9. Excluding dinner theaters, nightclubs, taverns, cocktail lounges, bars, striptease clubs, and similar establishments. A similar exclusion applies to the exemption for large nonprofit theaters. 10. There is also a tax credit administered through the provincial income tax system to provide relief to lowincome taxpayers. Th is credit is combined with a sales tax credit (maximum of $1,125 for individuals) and declines with income; the 2007 threshold for seniors was set at $23,820. 11. Under the brownfields program, the province will match (in reduced education property tax) municipal tax reductions offered on land being rehabilitated under certain conditions (Ministry of Finance 2004).

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TABLE 5.5

Cost of Exemption Provisions for Education Tax Revenue, 2006 Provision for property tax exemption

Rebate for charity Conservation land Farm land Live theatres and sports facilities Managed forest Exemptions under private statutes Vacant commercial/industrial units Vacant land

Estimated revenue cost (millions of dollars)

7 2 65 2 2 30 50

source: Ontario Budget (2007, 85).

tax, the relative size of the different property tax expenditures shown in table 5.5 may be assumed to hold true for the municipal property tax as well. Municipal governments in Ontario have very limited flexibility when it comes to how much of the property tax base they can give away. Apart from having discretionary and veto power over the rather curious exemption for exhibition buildings and legion halls, they have no say over the exemptions listed in box 5.3. However, although both upper- and single-tier municipalities are required to establish mitigation plans for low-income seniors and the disabled, the details of these programs are left to them (see table 5.6). For instance, municipalities may implement a rebate program when they deem tax increases from reassessment of residential properties to be “unduly burdensome,” or they decide to provide a tax subsidy for brownfields development. Table 5.6 also contains information on other municipal property tax relief programs in a number of municipalities. Perhaps the most striking thing about these programs is the very limited number of people who take advantage of them. As Bird and Slack (1978) noted decades ago, deferrals, by far the most common municipally chosen relief, appear to be particularly unpopular although they are logically the correct way to go in many respects. Another rather odd characteristic of most municipal relief programs is the apparently deliberate decision not to charge for the “time value” of money by not charging and accruing interest on deferred taxes, a change implemented for taxes deferred after 2001. Municipalities also seek to use the limited powers they have under the Planning Act to circumvent the “antibonusing” provisions of the Municipal Act, 2001, that are intended to restrict their ability to provide business subsidies through property tax incentives. Under the Planning Act, municipalities can designate an area or the entire municipality as a community improvement area. They can then implement a community-improvement plan (CIP) with grants or loans that can

100% of tax increase

Toronto Durham Hamilton London Muskoka Niagara Ottawa Peel Peterborough

b

Credit

100% of tax increase Reassessment-related increase above 5% or $100d Yes Yese Yesf Reassessment-related increase over $200g Increase greater than both $100 and 5% of taxes dueh Annual increases Yes Tax increase limited to 25; maximum credit $530i Reassessment-related increase Tax increases over $100 or 10% Reassessment-related increase over 3% or $50 Reassessment-related increase above $100 Reassessment-related increase over $300

Deferrala

246 ($188,662)

None None

Cancellation, 2,367; deferral, 70c 10 95 ($80,000) 40 ($27,241) None None 9 64 ($19,964) ($237,829)

No. of applicants (cost in 2006)

Unless otherwise noted, owners or spouses over 65 or disabled and in receipt of federal or provincial low-income support payments are eligible for municipal tax assistance programs. a. Deferral is a lien on property, and unless otherwise noted it must usually be repaid when eligibility, ownership, or principal residence changes. Except where noted, interest is not charged. b. For persons over 65 or disabled with (1) household income of $25,000 or less; (2) assessed value less than $398,400; and (3) occupancy of home for at least one year. c. In 2005, when 2,353 taxpayers applied for cancellation and 461 for deferral, the cost was $357,311 and $311,835, respectively. d. Interest is charged at prime minus 2 percent for deferred taxes prior to 2001. Total cost of this program since 1998 is $20,000. e. Eligibility requires assessed value less than $300,000 in 1998 and cumulative reassessment-related increases since then greater than $100 or 5 percent of 1997 taxes. f. Interest charged at prime plus 2 percent. g. Repayable on sale of property. h. Eligibility requires assessed value less than $500,000 in 2001. Interest charged at prime plus 0.5 percent, for 2001 and earlier only. i. Credit provided under “unduly burdensome” provision also to those age 55– 65 with income less than $25,000. Cost in 2006 for seniors, $212,922; for the disabled, $18,783; for 55– 65 group, $6,124. Peterborough also has a deferral program for low-income seniors that costs $1,241 in 2006.

Sudbury Thunder Bay Waterloo Windsor York

Cancellation

Municipality

Municipal Tax Assistance Programs

TABLE 5.6

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be calculated on a tax-increment basis. In other words, the municipality can offer developers a financial incentive based on the higher property tax generated from development (the tax increment)— an incentive known as a tax increment equivalent grant (TIEG). We discuss these policies further in chapter 7. The 1998 Assessment Act established a classified property tax system in the traditional sense that different rates may be applied to different classes of property. As table 5.5 suggests, the tax exemptions specified for certain subclasses, in particular, farmland and vacant business land, are by far the largest concessions in the existing property tax structure in Ontario.

How Property Is Assessed MPAC uses mass appraisals to produce estimates of current value for almost five million properties province-wide. Mass appraisal values a group of properties using common data, standardized methods, mathematical models, and statistical testing. Like all assessment agencies, however, MPAC also employs single property appraisals for certain types of property. All methods of appraisal use techniques rooted in standard approaches to value, but they differ in terms of scope and the tools used to arrive at value estimates. MPAC uses the three basic approaches listed in table 5.7 for determining current value assessments: the sales comparison approach, the cost approach, and the income approach.19 In addition, as discussed in box 5.4, special methods are used to assess various regulated properties as well as farm properties and golf courses. Sales Comparison Single-family residential, recreational, and small commercial properties are usually valued by the sales comparison approach.20 Based on the discussion above and the data in table 5.8, this group may be roughly estimated to represent more than 90 percent of properties, accounting for perhaps three-quarters of total assessed value— although given both the small size of most such properties and their generally lower rates, only perhaps 40 percent of property taxes are collected from these properties.21 By definition, the sales comparison approach 19. The three methods of value have been upheld by Canadian courts as being valid ways of obtaining current value assessment. See Ontario Ministry of Revenue (1992). Kitchen (2005) suggests that the comparative sales and depreciated cost approaches appear to be superior in determining market value. Data problems may affect the income approach in par ticu lar. 20. MPAC staff have published several excellent articles setting out their approach in some detail: see Campbell, Guerin, and Gloudemans (2003); Gloudemans, Guerin, and Graham (2007); and Guerin (2000). 21. Since the data in table 5.8 are for the education property tax, and the relative rates for this tax on residential and nonresidential properties are, as discussed in chapter 6, different from those for the municipal property tax, it is only possible to make the rough estimates reported above from available data.

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TABLE 5.7

Assessment Methods Determination of current value

Examples of property types

Sales comparison method

Compares sales prices of similar properties with the property being assessed

Single-family residence, condominium, vacant land, small commercial shop

Cost approach

Current value of land plus cost of improvements minus depreciation equals value of property

Manufacturing plant

Income approach

Analyzes future benefits (i.e., income-producing potential)

Hotel, apartment building, office building, casino

Approach

is best suited for properties that sell often on the open market so that adequate comparable sales data are available. Essentially, this approach estimates the current value of a particular property by adjusting the sales prices of comparable properties for differences, using statistical methods. To defi ne the pa rameters for the statistical analysis, the fi rst step is to select a set of recently sold comparable properties based on their similarity to the subject property, including such pa rameters as the date of sale, physical attributes, economic conditions, and competitiveness in the same market. According to MPAC’s description of the process on its Web site, the most important component in defining similarity is competitiveness in the same market, because unless the properties compared and the property being assessed compete in the same market, the supply and demand factors that each property faces will be different. It follows that the most important decision MPAC makes in its statistical analysis is delineating the 147 different market areas in the province within which comparisons are made. The idea is that a market area is a geographic area subject to similar economic influences, so that properties in the area tend to move up or down together in value and are in competition with one another in the marketplace. Market areas are usually, but need not be, geographically contiguous. Typically, a market area has at least several thousand residential properties and several hundred recent sales (within the past three to five years). Each market area is analyzed separately. In addition, within each market area a number of neighborhoods and subneighborhoods are usually distinguished for analytical comparison, essentially on the basis of presumed locational desirability. Obviously, the selection of these comparable areas is critical to the process and requires very localized knowledge that is not easily obtainable from data alone, particularly in thinly traded markets. In one GTA case known to the authors, for example, failing to distinguish

BOX 5.4

Regulated Rates Generating stations are assessed at a value of $86.11 for each square meter of inside groundfloor area. In addition, the current value assessment of the buildings and structures is estimated, and the difference in school and municipal tax is paid to the Ontario Electricity Financial Corporation to fund stranded debt. Since 2005 wind turbine towers have fallen under this section and are assessed at a value determined by multiplying $40,000 by the installed capacity of the attached generator. Pipelines are assessed at a rate per linear foot established in the regulations, with different rates for pipelines of different diameters in three different categories: offshore pipelines, plastic field-gathering pipelines and gas distribution pipelines, and other pipelines. For 2008, for example, the rate for “other pipelines” varied with diameter, ranging from $8.20 per foot for pipes less than 1 inch in diameter to $444.59 per foot for 48-inch-diameter pipes. These rates are reduced for depreciation at about 2 percent a year (on average). In addition, $250 is added to the assessed value for each connection to an end user. A 25-percent reduction is applied to the basic rate if the pipeline is not the primary pipeline in the right-of-way or easement. Airport authorities are required to make a payment in lieu of taxes (PILT) in the municipality in which the airport is located.1 However, the PILT is based not on assessed value but on the total number of enplaned and deplaned passengers of the preceding year (as officially reported by Statistics Canada), with the per passenger rate varying from $0.55403 (Thunder Bay) to $1.66998 (London). The rate established in regulations for Toronto is $0.94029 per passenger, with 99.43 percent of this amount going to Mississauga, where Toronto’s Pearson International Airport is located, and 0.57 percent to the City of Toronto. Rail and hydroelectric corridors have since 1997 been assessed on a per acre basis at rates established by regulation.2 By 2005 the new system was fully phased in and different rates were established for nine different areas in the province. The rates were initially set to approximate the taxes paid before the 1998 reform, and since 2005 the geographic rates have been held constant. For the Greater Toronto Area, in 2008 the rate for rail rights-of-way was $611.33 and for hydro corridors $834.02. In contrast, in the far west of the province (Kenora, Rainy River, and Thunder Bay) the equivalent rates are only $35.26 for rail—this is the lowest rate in the province— and $122.15 for hydro. The lowest hydro rate, in Sudbury and adjacent districts, is $12.54. These fi xed per acre rates are supposed to be indexed to changes in the commercial tax rate. Rates for the provincial education property tax are established in the same way. Golf courses are generally assessed in accordance with the income approach but may at municipal option also benefit from fi xed assessments. Once the assessment is fi xed, it is to be adjusted each year by the increase in taxes over the previous year for the residential property class. In addition, taxes for each year are calculated as they would have been if there were no fi xed assessment, and the difference plus interest is carried as a debit until the agreement is terminated, for example, when the use of the land is changed. 1. These provisions apparently apply only to specific large airports. 2. In earlier years, assessment was based on the assessed values of abutting lands in the commercial property class. Th is meant that railway lands were assessed at much higher rates in cities than in rural areas— a result that many might consider quite appropriate. The area rates set in 1998 were established so that the taxes would approximate those paid in the preceding year.

100.0

0.9

39, 696

4,567,463

89.4 0.3 3.0 1.6 0.0 4.6 0.2

4,083,425 15,771 134,947 72,529 1,486 210,212 9,397

Percent of total

1,364,615

69,972

958,055 54,964 159,032 63,034 6,310 51,911 1,337

100.0

5.1

70.2 4.0 11.6 4.6 0.5 3.8 0.1

Percent of total assessment

6,113.5

2,441.6 146.2 2,716.8 705.5 80.3 22.4 0.7

Education property tax (thousands of dollars)

sources: Calculated from MPAC, Annual Report 2006, and 2005 data from Ministry of Finance for education property tax.

Totals

Residential Multiresidential Commercial Industrial Pipeline Farm Managed forest/ conservation Special/exempt

Type of property

No. of properties

Assessed value (millions of dollars)

Assessment Classes and Education Property Tax, 2006

TABLE 5.8

100.0

39.9 2.3 44.4 11.5 1.3 0.4 0.0

Percent of total education property tax

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properly the “waterfront” and “nonwaterfront” segments of a suburban neighborhood led to a sizable overstatement of the values of homes in the nonwaterfront segment in the 2008 reassessment. The apparent reason was that the model used in effect assumed that all residences in the neighborhood had benefited equally from the inflated sales reported for a few waterfront properties. Although MPAC’s initial reaction to complaints was simply to assert that its model produced the right results, after a live assessor actually visited the area and the case was considered in detail, a substantial reduction was eventually granted for all the affected properties. Multiple regression analysis is a useful tool, but like must be grouped with like to get the right results, and reliance on sales data cannot ensure an acceptably equitable result in thin markets (McMillen and Weber 2008). Assuming the market to be compared has been correctly demarcated, the recorded sales prices of comparable properties are adjusted for differences in property characteristics. More than 300 factors are reportedly taken into account (not all necessarily in one study, of course), including physical characteristics of the property, such as living area, age of the structure, parcel size, garage, and so on; time of last sale; location (access to public ser vices, proximity to transit, schools, waterfront, or disamenities); and financing. The quality of these assessments is judged in terms of the quality standards set out in table 5.3, which in turn depend on the quality of the sales data and on the appropriate delineation of the market areas compared. Cost Approach The cost approach to valuation is based on the theory that an informed purchaser would not pay more for a property than it would cost to produce a substitute of equal utility, assuming no costly delay in construction. This method includes several steps: ■

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A current value for unimproved land is determined, using the sales comparison approach. The replacement cost of fully functional modern improvements comparable to existing buildings is then calculated on the basis of an up-to-date construction cost database and such physical property information as building size. All accrued depreciation to the existing property is determined from physical, functional, and economic conditions both within and external to the property. The land value is added to the building cost and depreciation is deducted, resulting in a current value assessment for the property as a whole. To the extent possible, calculations are compared with actual sales to improve the accuracy and quality of the appraised value.

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To develop an estimate for each property, MPAC employs an automated costing program with respect to building construction costs, combined with an estimate of economic depreciation and then a land table based on an analysis of land sales in the area. As table 5.7 indicates, the cost approach is applied to properties that are structurally diverse (such as industrial buildings) for which rental data are typically not available. Although this method is also sometimes employed as a supplement to other valuation approaches, it is probably not used for more than about 5 percent of assessed value. However, owing to the greater average value of these properties and the higher rates generally applied, it seems likely that this category may account for more than 10 percent of property tax revenues. Income Approach The income approach presumes that the value of certain properties can be determined by estimating the present value of all future benefits. Future benefits typically include net income generated by the property and the proceeds from the sale at the end of the investment. The technique of income valuation consists generally of the following fundamental steps: ■

■

■

Market rents are determined to establish the potential revenue generation of the property. Those rents are then adjusted to take into account vacancy rates as well as legitimate expenses incurred to maintain the property.22 The result is an estimate of the net operating income of the property. Net operating income is converted into an estimate of value using a market capitalization rate.23 The capitalization rate is an “average” rate as determined from an analysis of market transactions and a variety of other market and financial information.

As noted in table 5.7, the income approach is generally used to determine assessed values for larger investment properties such as office buildings, hotels, and apartment buildings. Vendors, purchasers, and other financial advisors usually use the same approach for similar properties. Conservatively, about 10 percent 22. Special regulations limit the expenses that may be deducted with respect to hotels. 23. Kitchen (2005) provides the following example: if net annual rental income from a property is $10,000 and if the current interest rate is 5 percent, the capitalized value of the property would be $200,000 (net rent divided by interest rate, or $10,000/.05). Th is is also the market value, because an individual would be willing to pay $200,000 for a property that generates an annual net rent of $10,000— that is, a 5 percent return identical to the return on bonds.

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of assessed value— and probably well over twice that proportion of taxes—is likely to be estimated on the basis of such valuations. Although the politics of property taxes is always about residences and small businesses, how the income approach is developed and applied to large commercial activities is nevertheless, from a revenue perspective, sometimes the single most critical aspect of the assessment process, especially in large urban areas. This was recently underlined by the “bank towers” case in Toronto (discussed later in the chapter), in which the large banks, most of which have headquarters buildings in downtown Toronto, appealed their assessments and thus put at risk a significant proportion of the city budget. Fortunately for the city, in the end the banks lost.

Regulated Rates Some properties are difficult to assess using any of the three methods described. This is usually owing to unique characteristics, such as the property is seldom traded in the marketplace, or because sale prices may reflect the impact of substantial nonassessable items.24 Therefore, as shown in box 5.4, what are in effect regulated rates are applied to power-generating stations and linear properties such as railway rights-of-way, gas and oil pipelines, and electricity transmission and distribution rights-of-way. Somewhat curiously, these rates also apply to golf courses. As table 5.8 shows, pipelines are by far the most important of these special categories in revenue terms. Current Use and Farm Valuation The three basic appraisal methods described above attempt to estimate current value assessment. In contrast, a current use method is applied to farms and managed forests. Although properties that are used for the sole purpose of farming by the owner or tenant, or both, are in principle valued using bona fide farmer-tofarmer sales, in reality farmland is usually assessed according to its productivity value, that is, the ability of the land to produce crops or maintain livestock. These productivity rates are established by estimating the productivity for the best soils and then reducing the rates for less-than-optimum soil conditions.25 24. In commenting on rights-of-way, the Ontario Committee on Taxation (1967, vol. 2) considered it to be relevant that they made almost no demands on the community for ser vices and also crossed municipal boundaries, thus making the assignment of value arbitrary for any par ticu lar municipality. 25. A similar approach is used with respect to managed forests, with the rates being prescribed annually by the Minister of Finance based on an analysis of the assessed values of woodlots in the same economic area, that is, the area in which farms with similar soil characteristics sell for prices similar to those of woodlots. If this approach results in a value higher than the current use value assessment, the assessment is capped at the current use value.

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In contrast, farm residences are assessed like any other residences. If a farm residence is occupied by someone other than the person farming the property, it is considered a nonfarm residence and the surrounding acre of land is valued at the rural residential rate. Farm outbuildings (barns, silos, and other structures used for farming purposes) are assessed based on their design and classified by use. Buildings not used for farming purposes are classified by use. Building valuations—apparently often including residences—seem to be assessed on a depreciated cost basis. The Ontario Ministry of Agriculture, Food and Rural Affairs sets the criteria for farm eligibility for tax purposes, including production and income thresholds to distinguish farm use from nonfarm use. With the current income threshold, farm use is declared if the annual gross income of the farming business equals or exceeds $7,000.26 Although farm properties account for almost 5 percent of total properties assessed in Ontario, their average assessed values are relatively low: they provide less than 4 percent of the total assessed value base, as shown in table 5.8. Of course, given their extremely favorable rate treatment, farms (and managed forests) account for a very small fraction of total property taxes.

An Appraisal of Assessment Summing up, most properties in Ontario are assessed by computer-assisted mass appraisal (CAMA) techniques. Almost four million properties— about 90 percent of the total— are assessed in this way, including residences (both freehold and condominiums), vacant land, small commercial warehouse and industrial properties, and waterfront recreational properties. Although this common approach is based heavily on sales prices of comparable properties, for any particular property— even if it has been sold recently—the reported sale price is not necessarily the same as its assessed current value; rather, it is considered to be at most an indication of its real market value. As noted, the political evidence suggests that people have considerable difficulty understanding this approach, particularly if there are cases in which sales value is less than assessed value, as may have been true in some areas in 2009 after the sharp break in housing prices subsequent to the January 2008 assessment date. Nonetheless, although homeowners in particular seem to have trouble with MPAC’s heavily computerized approach to assessment, it is on the whole perfectly sensible, given the way the property tax works in Ontario (as it does in 26. The annual gross income is determined in the same manner as the gross income from farming of the farming business is determined under the Income Tax Act (Canada) for the most recent taxation year for which a tax return was fi led in relation to the farming business during the 18-month period preceding the date on which the annual registration form is required.

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most if not all of North America). Unlike any other tax, the rate of the property tax in a particular municipality is not set by law but is calculated annually through a process that, in effect, balances the municipality’s need to finance a certain proportion of its expenditures with local sources and the size of the assessed property tax base. An increase in the level of government expenditures that must be financed from property taxes—that is, local expenditures net of transfers, borrowing, and user charges—implies, other things being equal, an increase in the local property tax rate.27 However, if the local assessed property tax base increases, other things being equal, the property tax rate will fall. While the political dynamics of the linkage between assessments, tax rates, and expenditures are more complicated than this, it is basically correct to say that, in and of itself, an increase in the assessed value of property within any particular jurisdiction does not imply a necessary increase in either expenditures or tax rates. Assessment thus plays a complex dual role in the property tax system. On one hand, from a municipal-government perspective, an increased assessment base allows local governments to choose between increasing expenditures, while keeping tax rates constant, and lowering tax rates. On the other hand, from the point of view of any particular taxpayer, regardless of how the municipality chooses to react, an increase in the assessed value of the taxpayer’s property that is greater than the average increase throughout the municipality means an increase in property taxes. Few people find it easy to grasp that it is the interaction between the relative change in the value of their property (relative to the average rate of change in the municipality) and the many municipal and provincial decisions that establish what has to be financed from local property taxes that determines the impact a change in assessment will have on their final property tax bill. Confusion about such matters seems particularly likely in Ontario, where much of the local property tax in fact goes to finance education (as well as regional governments, something most people really do not understand), and where municipal expenditure decisions are heavily influenced by provincial policies. In the shifting and complex morass of subprovincial public policies in Ontario, most people tend to focus what limited attention they give to local fiscal matters on the annual assessment notice, and they react strongly to increases in the assessed value of their property, assuming that the increased value will translate into an increase in the taxes they have to pay. While experts have admired the effort and achievements of Ontario’s bold leap forward into the new CAMA system since the 1998 tax reform, the increased 27. It is important to remember, in the case of Ontario, that the expenditures that must be financed through the property tax are not just those of the local municipality; they also include the local share of upper-tier government costs, a share that is established essentially by the proportion of assessed value in the local municipality as a share of all the assessed value in the relevant area, as well as the provincial education tax discussed in chapter 6.

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reliance on what to many remain rather mystical statistical techniques for estimating the value of individual properties has made it difficult to understand how the assessment for a particular property is reached. It appears, for example, that perhaps the single most important factor determining the assessed value of a particular property is its “locational neighborhood.” (One must say “perhaps” because the MPAC models are not freely available.28) Within each market area, MPAC’s assessment system identifies several neighborhoods, each containing usually several hundred properties. The neighborhoods are presumably identified largely on the basis of sales information. Isenburg (2007) notes that 85 percent of a property’s value is, as a rule, attributable to five factors: building age, building area, construction grade, lot dimensions, and—listed first— “location, location, location.” Clearly location is often a critical factor. However, the only indication MPAC gives with respect to how neighborhoods are defined is that there may be more desirable and less desirable areas in the local market and that “properties are combined into the same neighbourhood whenever lots of a given size and site amenities would command similar value.” Experience suggests that at least in some cases, the most important factor in determining particular assessments turns out to be precisely this neighborhood effect. But taxpayers are given no information on what constitutes the relevant neighborhood for any particular property. Moreover, they are similarly ignorant about what specific sales information has been used for that neighborhood to determine increases over the period being assessed. In short, it is nearly impossible for the average property owner to understand the rationale for any particular assessment, and even the expert owner has little reason to accept on faith that it is the best possible estimate for the owner’s property, or, more important, that it is at least as good as the estimates used for the other properties in the tax base of the relevant jurisdiction. The information provided publicly by MPAC in presentations such as Isenburg (2007), as well as privately to taxpayers who request that the limited information be made available to them, does little to clear up the mystery of property assessment because it provides no rationale at all for the critical “base value” to which all subsequent calculations relate.29 The fact that those who appeal to the ARB can now obtain much of this information is also no help to most citizens, since the relatively expensive and intimidating appeal process is primarily the recourse of those with larger fish to fry than the owner of a single-family home. Of course, supplying even the best and most complete information would not 28. As noted in table 5.1, one may buy a par ticu lar model from MPAC for $250, but one would need to have all 147 models (which would cost $36,750) in order to work out the “average” weighting. Moreover, what often is most critical in the end may be the locational neighborhood model, and that is not for sale. 29. See, for example, “Sample Reassessment Base Year Residential Valuation Overview,” available on the MPAC Web site.

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satisfy some people— and would perhaps only baffle most. While MPAC does a very good job of assessing most properties, can even the best job of assessing market values ever be good enough? The answer depends largely on factors well beyond any technical solution, such as the size of the property tax demand, the (perceived) size of any increases, and the strength of the link to valued local benefits. Presumably the base values used in the determination of individual assessments are largely derived from the many sales ratio studies that MPAC reportedly carries out with respect to each valuation model, using standards that exceed IAAO requirements. Specifically, for heterogeneous residential areas the MPAC standard is for mean and median sales ratios between 0.98 and 1.02 with a COD less than 15 percent, while the comparable IAAO standard is between 0.90 and 1.10 with the same COD. All models employed are stated to meet or exceed these objectives (however, none of the underlying studies appears to have been made public). In addition, the values estimated from these models are finetuned by regional valuation staff, although there appears to be no publicly available information on the frequency, scale, or direction of such fine-tuning in different areas. Introducing the human element through such (relatively) local input certainly may be valuable, but at the same time, it introduces yet another discretionary element into the valuation process and hence makes it even more difficult to determine the basis for any particular assessment. Despite these observations, there is nothing fundamentally wrong with any of the procedures used by MPAC in estimating assessed values. In many respects the organization seems to be at the cutting edge of good assessment practice. The problems are more fundamental. A first problem is that the inherent arbitrariness of the property valuation process, when applied to any particular property, means that the tax base always remains arguable in the end, no matter how scientific and objective the process followed may be. A COD of 15 means the values of two identical neighboring residences may be 30 percent apart. A second problem, more related to the current assessment process itself, is that the technical nature of the process makes it extremely difficult for taxpayers who appeal their assessment and must essentially bear the burden of proof to make their case. The recent provincial decision to shift the onus of proof to MPAC in cases brought before the ARB— cases that are brought largely by commercial entities that employ professional valuers in any case—provides no practical help for ordinary taxpayers who want to question the valuation they receive from MPAC. A third and more fundamental problem is that property taxes are as important in Ontario as in any jurisdiction in the world, and property prices, especially in major urban areas, have until recently experienced a rapid rise. Neither of the

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first two problems mentioned would matter much if the property tax were small and unimportant, and if property values were stable. Fourth, and perhaps most important, market value assessment was introduced in Ontario in a context of significant inequities and anomalies, which had existed for a century or more among jurisdictions, among property classes, and among taxpayers. Not only are many of these problems still unresolved, but to some extent they have even been reinforced as a result of the changes introduced in the years since the reform process began. In addition, it is important to remember that a large fraction of the assessed property base (and a considerably higher proportion of property taxes imposed) continues to be estimated not with multiple regression techniques, but rather with a variety of alternative approaches. Farmland, for example, which is assessed according to actual use, is valued based on factors such as topography and drainage that are considered to affect agricultural productivity. Some special-use properties (pipelines, for example) are assessed by provincially specified methods, as discussed earlier. Industrial property assessments are generally based on a value for unimproved land, determined by examining sales of such land in the area, plus a replacement-cost-less-depreciation approach to building valuation. Finally, a considerable array of valuable properties (hotels, offices, and multiresidential buildings) are assessed on the basis of the income approach, which essentially estimates net operating income and capitalizes it at an appropriate capitalization rate into a capital value estimate. Unfortunately, despite the revenue importance of the capitalization rate, very little is known publicly about either the rationale behind choosing the rate or its impact on the assessment base. To raise just one topical question: What, if anything, are the implications of the recent sharp decline in both expected rental-income streams and bank rates for the important chunk of the tax base assessed using the income approach? Unless both change proportionately, major changes would seem to lie ahead for some big properties, and more appeals may be coming down the pike. Given the high value of many of the properties assessed using the income approach, it is not surprising that a large number of the appeals from assessment decisions reviewed by MPAC, and especially those going forward to the ARB, deal with properties assessed on the income basis. A current example is the “bank towers” case, in which an ARB decision called into question MPAC’s assessment of six high-value downtown Toronto office complexes occupied by banks. The central issue in the case was not the capitalization rate but the definition of current value in the Assessment Act: specifically, whether the interests of tenants and leasehold improvements should be included in the valuation base. The ARB ruled that leasehold improvements were not to be included in the determination of assessed value. Both MPAC and the City of Toronto appealed this decision to the courts, not least because the implication of the decision

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would seriously affect the assessment of all tenanted commercial properties in the province.30 In the end the banks lost, but the discussion certainly highlighted the possible vulnerability of the urban tax base with regard to how large commercial properties are assessed. Suppose the banks had won their case. What would have been the implications for residential property assessments? In the absence of other policy changes, and unless the city budget were cut drastically, homeowners throughout the city would have ended up paying higher taxes because banks paid less. Since any politician can foresee the resulting uproar, this is not likely to be allowed to happen: some special capping, phasing, clawing, or limiting would probably be the response. To return to one of the principal themes in this book, locking residential and nonresidential properties too tightly together in the same tax system may end up doing a disser vice to both.

Conclusion In many ways, the biggest problem with the 1998 reform of property assessment taxation in Ontario was that nobody sold it properly to the public. Despite the countless committee meetings and discussions that took place throughout the 1990s, no comprehensive consultation or public information program was undertaken. Moreover, the reforms were buried in the complex restructuring of fiscal and program relationships between the province and the local governments. Perhaps the provincial government thought the complexity of the package would protect it to some extent. If so, they were mistaken. As Anstett (2001, 7) notes, “Most taxpayers had no idea of how the reforms might affect them until they received their new 1999 assessment notices and property tax bills.” When they did receive the assessment notices, the universal reaction was shock, because the proverbial man in the street naturally assumed that the tremendous increase in his assessed tax base—information that arrived several months before he was informed of the actual increase in taxes—would result in an equally large increase in his taxes. Nowhere was this shock greater than in Toronto, where some taxpayers were sitting in properties with 60-year-old assessed valuations. If those taxpayers also owned waterfront property in the form of a family cottage, as some did, they felt not just shock but outrage, owing to the tremen30. A case dealing with a somewhat similar issue but with respect to the less glamorous (or revenue important) area of mobile homes in trailer parks had earlier led to a similar appeal to the courts and a victory for MPAC (Carson’s Camp Limited v. Municipal Property Assessment Corporation and the Town of South Bruce Peninsula, Ontario Court of Appeal 2008). There are important differences between the two cases, so the favorable outcome (from the public sector perspective) of the bank case was not predictable.

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dous increase in the value of waterfront recreational land that had already taken place in the previous decade. The provincial government had provided a considerable number of mitigation measures in the original legislation. However, most of these measures had to be adopted by the municipalities, and they were not happy about their lack of consultation about the reform. Many adopted only some of the mitigation measures available to them, or none at all. They were happy to let the provincial government bear all the blame. And the province did bear the blame, and was forced to react quickly. Initially, as discussed in chapter 4, it provided more optional mitigation measures, which were in the end adopted only by Toronto. It then went further and effectively eliminated all large tax shifts by freezing the assessment rolls for several years. Just as with the initial reform, none of these politically necessary reactions seems to have been widely discussed or understood before they were made law, and many municipalities— as well as most taxpayers—had a hard time understanding what was going on and could not keep up with the changing system. Matters did not really get much better over the succeeding decade, as suggested by the Ombudsman’s report (Ombudsman of Ontario 2006) and the continuing changes in both property tax policy and property tax administration. It should be understood that very little of what has gone on indicates the failure of the up-to-date technical market value assessment adopted by MPAC. Indeed, as a Toronto journalist who was extremely critical of MPAC and the whole process concluded, one might argue that “The reason MPAC failed was that it did its appointed job so effectively” (Barber 2007, A11). In his view, the problem was not that the agency did a bad job in implementing market value assessment. On the contrary, he said, “MPAC did exactly what it was supposed to do, refining its automated assessment processes until it was able to produce largely accurate annual updates for every property in the province—a Herculean task.” The problem was that the whole experience revealed that market value assessment was not what the people of Ontario either wanted or needed. Those most likely to be affected—for example, those owning waterfront properties that had previously been relatively underassessed—made their unhappiness clear (Topp, Hatch, and Rees 2008), but similar, if more muted, sentiments were expressed beyond this group. As Sheffrin (2008) has argued more generally, the Ontario experience shows that even the most technically sound market value assessment system does not inevitably result in a property tax that is perceived as “fair.” But what are the alternatives, and in what respects are they better or worse, and for whom? We consider these questions further in the last chapter.

CHAPTER

6

Local Property Taxation and Education Finance

E

ducation in Canada is primarily the responsibility of the provinces. In Ontario, education for elementary and secondary students is governed entirely by provincial legislation, principally the Education Act, and overseen by public and separate (denominational) school boards. Educational finance, however, has always depended on both transfers from the provincial government and local property taxes. Prior to 1998, school boards in Ontario had substantial autonomy in determining their own spending levels. Moreover, they had the authority to requisition taxes from local municipalities to finance the difference between their spending decisions and provincial transfers. All that has now changed. Even before the virtual elimination of the local role in financing education as part of the 1998 local ser vices realignment that took place simultaneously with the property tax reforms, provincial transfers for education had already changed a great deal in response to political pressures. Although education continues to rely on property taxation as a main source of revenue, the extent to which it does so is shrinking. School board spending is now determined by the Ministry of Education’s funding formula (see box 6.1), with grants being paid to boards based on the difference between local property tax revenues per student and the total entitlement, as determined by the formula, of each school board. Primary and secondary education in Ontario is now essentially controlled by the provincial government, with local school boards playing a minor role and municipal governments involved only as tax collectors. Although in many ways the picture today is not that different from that which has long prevailed in the province, since 1998 the dominance of the provincial

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BOX 6.1

Education Funding Model The Student-Focused Funding Model (now the Education Funding Model) was introduced by the Ministry of Education to deal with a number of issues related to the previous model for education funding. In particu lar, there was the wide variation in per pupil spending among boards that resulted from differences in the assessment bases. The province was also concerned with the rapid increases in education property taxes: such taxes had increased, on average, 4.8 percent per year between 1990 and 1997 (see table 2.7 that shows the actual annual change in current dollars, from $6.4 billion to $8.6 billion). Finally, the province wished to address the school boards’ lack of accountability for taxing and spending decisions.1 To deal with these issues, the new model was to be based not on assessment, but rather solely on the needs of students— as determined, of course, by the provincial government. The current provincial education funding model consists of four basic grants: 1.

2. 3.

4.

The Pupil Foundation Grant ($9.5 billion in 2010–2011, province-wide) provides $5,328 per primary student, $4,396 per junior and intermediate student, and $5,590 per secondary student. Th is grant provides the basic funding for classroom teachers, educational assistants, learning materials, and supplies. The School Foundation Grant ($1.36 billion) supports the cost of in-school administration and includes salaries of principals, vice principals, and secretaries. Special purpose grants ($8.77 billion) include 13 separate categories of transfers to reflect differences in the cost of education for specialized programs. One of these categories is for school facility operations and renewal ($2.22 billion). Debt ser vice grants ($537 million) provide debt support for capital expenditures.

1. These concerns had been recognized by previous provincial governments. In 1992, for instance, an Education Finance Reform Project was launched to establish a new funding model designed to achieve equity in availability of programs and outcomes, adequacy, accountability, flexibility, and cost-effectiveness (Ontario Ministry of Education 1992). Concerns over the differences in the quality of education as a result of differences in the fiscal resources available to school boards were also raised by the Ontario Fair Tax Commission (1993, 679). The commission recommended that school board funding be entirely removed from the property tax base. Municipal accountability was also affected by taxing decisions made by school boards because these had an impact on the taxing and spending decisions of municipalities that shared the same local property tax base (Locke and Tassonyi 1993).

government has become even stronger and clearer. The fundamental shift in education financing that took effect in 1998 was accompanied by major changes in the governance of education when the Education Quality Improvement Act of 1997 established a new governance and finance model for both public and separate school boards.1 Presumably as a response to the effect that the provincial takeover of the education property tax had on the disparities in revenue among school boards (both among urban and rural boards and among separate and public boards) the funding formula was changed from one based on a measure of tax capacity, based on equalized property assessment, to the per student allocation described in box 6.1. Not only were taxing powers now centralized in the 1. The full text of all recent Ontario statutes and regulations is available at http://www.e-laws.gov.on.ca.

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BOX 6.2

Separate Schools in a Public System The right of separate Roman Catholic schools to public funding was established in Ontario at the time of Confederation in 1867 (section 93 of the Constitution Act). Essentially, taxpayers who support separate schools may choose to have their children attend such schools. The doors of some separate schools are mandatorily open to certain students, however, regardless of whether their parents support separate schools with their taxes. Section 23 of the Canadian Charter of Rights and Freedoms gives Canadian citizens of the Englishspeaking or French-speaking minority of a province the right to educate their children in that minority language, wherever numbers warrant. In Ontario those in the following categories have the right to have their children educated in French at the elementary and secondary school levels: Canadian citizens residing in Ontario whose first language learned and still understood is French; Canadian citizens residing in Ontario who received their elementary-level education in French, in Ontario or elsewhere in Canada; and Canadian citizens who have a child who received or is receiving an education in French at the elementary or secondary level, either in Ontario or elsewhere in Canada. Children whose parents do not meet these criteria may also be admitted to a Frenchlanguage school. In such cases, however, they must apply for permission from the school’s admissions committee, which may take into account such factors as the parents’ commitment to the school (how their property taxes are directed) and their commitment to education in the French language.1 Although matters are not quite so clear with respect to admission of non- Catholics to denominational separate schools, on the whole it appears that much the same set of factors (replacing language by religion) is taken into account. About 40 percent of Ontario children are in the separate-school system. An interesting recent study of the parallel publicly funded school systems in Ontario found that the expansion of choice and competition in the school market— even though not all families are free to choose among different options—had a modest but statistically significant effect in increasing the growth rate of student achievement, as measured by a mandatory provincial testing system applied in both systems (Card, Dooley, and Payne 2008). Added to this “demand-side” effect, which was measurable in both the public and separate systems, an earlier study by Bagnoli and McKee (1992) had suggested that there may also be a beneficial “supplyside” effect from the increased competition among schools, in terms of restraining the ability of school administrators to divert resources to what the authors called “bureaucratic perquisites.” 1. See http://www.edu.gov.on.ca /eng /document /policy/linguistique/guide/index.html.

hands of the Minister of Finance, but the power of school boards to control their budgets and expenditures was limited, with the important exception that local control was guaranteed over denominational expenditures—that is, those in the separate (Roman Catholic) boards (see box 6.2).2 In line with long-standing provisions in Ontario for dealing with local fiscal crises, in extreme cases the 2. Interestingly, although the earmarking control by local residents, emphasized by Bilodeau (1994) and discussed later in this chapter, has now been substantially weakened, this provision is very much in line with the rationale for the separate-school financing system that Bilodeau suggests.

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Ministry of Education and Training was given the authority to take temporary control of a school board if financial problems arose.3 The complete provincialization of school funding in 1998 certainly raises issues of local accountability. It also may reduce public acceptance of the role of the property tax, as well as bring into question the current design and impact of the tax, as discussed further in chapter 9. The interaction between provincial control over the assessment base and rate setting and municipal policy is not well understood; nor are the consequences, if any, for educational outcomes. As Hoxby (1996, 52) notes, “The meaningful diff erence between local finance and centralized finance is a difference of control, not a difference of accounting” (italics in original). The control of the entire school system has clearly shifted in Ontario to the provincial level, calling into question the continued role of local property tax support for the system, and perhaps even the strength of continued local support for the property tax.

The Evolution of Education Governance in Ontario The development of public education at the local level in Ontario, as in most of North America, was in the past inextricably linked with the development of the property tax system that underpins local government in general. However, there has always been a strong provincial role in the education system. As Dupré (1967, 111) noted, public education in the province has been “an eminently intergovernmental operation” since the nineteenth century. In some respects, despite the recent centralization of decision making, this statement remains true. Dupré (1967) went on to note that, historically, the division of financing responsibilities for education closely resembled a functional split.4 Also, he reported, education claimed first priority in the allocation of local funds: Educational expenditure is autonomously determined by a special board elected for the purpose and hence is insulated from incursions by competing local functions. School boards have the capacity to requisition annually from municipal councils a sum equal to the difference between the total current expenditure set by the boards and the operating grants received from the Province. (111) 3. The supervisory sections of the Education Act parallel those of the Municipal Affairs Act, which provides authority for the Minister of Municipal Aff airs and Housing to supervise municipalities in difficulty. See Bird and Tassonyi (2003) for a discussion of the issues involved in the imposition of hard budget constraints on municipalities in Canada. 4. “A partial list of those facets of education that are primarily the responsibility of the Province would include curricula, textbooks, length of school year and school day, period of compulsory attendance and approval of construction. The school board, for its part, has a primary role in hiring teachers, determining the size of classes, constructing and maintaining buildings and, within the limits imposed by provincial control, setting individual standards for teachers’ salaries, special classes and diversity of course offerings” (Dupré 1967, 111).

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Despite the many changes over the years in the powers available to school boards and in their access to the property tax base, the principle of protecting education finance against competing local demands for funds has remained a constant in the financing of education in Ontario. Some viewed the results of this system with approbation. For example, a Commission on the Financing of Elementary and Secondary Education in Ontario (1985, 21) noted that “there is between the central and local agencies and various interest groups a dynamic tension providing for interaction and adjustment in the organization, administration, and financing of the educational system.” Judging by subsequent developments, however, others seem to have viewed the system as too untidy to be allowed to continue. Three phases may be identified in the development of the finance and governance arrangements for public schooling in Ontario prior to 1998. In the first, from the late eighteenth century to the mid-nineteenth, parental and religious concerns predominated. In the second, during the latter part of the nineteenth century, the locally based institutional structure of local authorities and provincial oversight was established. In the third, during the course of the twentieth century, the ideal of equal opportunity began to influence policy, until finally, in the late 1980s, full funding was extended to separate secondary schooling. The pressure to equalize schooling opportunities continued, however, and this movement reached full fruition when, in 1998, the province took complete control of education finance.

School Boards and the Entitlement to Public Education Public and separate boards have coexisted in Ontario since the beginning (see box 6.2). In 1969, however, partly in connection with the movement toward school consolidation, particularly at the secondary level, 1,300 school boards were consolidated into 125 larger administrative units, including 77 boards of education, 49 county and district Roman Catholic separate school boards, and 60 other school boards serving isolated areas in the north of the province, treatment centers, and military bases.5 In 1997, as part of the radical change in education finance, the number and composition of school boards was again altered. There are currently only 72 district school boards in Ontario, consisting of 31 English public boards, 4 French public boards, 29 English Catholic boards, and 8 French Catholic boards.6 In addition, there are 11 other special school authorities in the 5. See Commission on the Financing of Elementary and Secondary Education in Ontario (1985, 21). The report notes that one of the consequences of the consolidation was to reduce the variation in equalized property assessment per student, citing Lawton (1979, 9): “The ratio of the lowest to highest valuation decreased from 1:1,100 to 1:21 after reorga nization.” 6. As an interesting example of the religious and linguistic fragmentation that persists in Ontario’s current unified system, there is even a Protestant separate board in one municipality (Penetanguishene) that provides English elementary instruction in a single school.

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province, consisting of geographically isolated boards and hospital school authorities that govern school facilities in centers for disabled children. In 2008– 2009 the system as a whole had 2.1 million students enrolled in 4,034 elementary schools and 901 secondary schools, and about 115,000 teachers. Total government funding was approximately $19.1 billion in that fiscal year.7 Schooling is compulsory in Ontario for persons under the age of 18. It is also free. Moreover, pupils have the right to attend a school in the school section (defined as the geographic area over which the various boards have jurisdiction), separate school zone, or secondary school district in which they reside. Typically, parents choose which school they want their children to attend, depending on the category of schools they support, public or separate. Taxpayers may choose to direct their taxes to the separate systems, if they wish, rather than the public system, and residential property taxpayers are allowed to alter their school support category at will. This information is included in the enumeration and preparation of the assessment roll by the Municipal Property Assessment Corporation (MPAC). The extent to which local property tax funds from residential taxpayers flows to the various separate boards is thus entirely and directly in the hands of local taxpayers (see box 6.2).8 While there may be educational and perhaps even broader societal benefits from the existence of a separate system funded in part by voluntary contributions from residential property taxpayers, it is somewhat more difficult to understand why many businesses have the right to designate the direction of school support from nonresidential property taxes.9 Not all can do so, however, because the taxes of certain “designated ratepayers” are allocated to boards based on enrollment, in addition to those subject to payments in lieu of taxes (see box 5.2), as well as a variety of public sector agencies and entities and also, importantly, corporations with publicly traded securities. Before the 1998 reforms, all education property taxes paid by nonresidential taxpayers went automatically to the public school boards unless otherwise designated. The result of this system was that the public boards could generally collect more taxes with relatively lower tax rates than separate boards. The separate school boards were thus under pressure to keep their tax rates at a level competitive with public boards to avoid

7. Education Facts, Ontario Ministry of Education, http://www.edu.gov.on.ca /eng /educationFacts.html. 8. As Bilodeau (1994) shows in the Ontario separate school case, such “tax earmarking,” by allowing the preferences of a minority to affect public sector resource allocation, may be a useful way to avert potentially serious unrest in an ethnically and religiously divided jurisdiction (given a degree of majority tolerance). For an extension of this line of argument to a much broader canvas, see the interesting proposal by Frey and Eichenberger (1999). On the other hand, one might argue that segmenting children into different school streams may exacerbate rather than alleviate social tensions. 9. The simplified summary in the text omits many complexities, for example, with regard to “splitting” partnership and share interests, and the like.

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losing pupils. To do this, they tended to keep per pupil expenditures lower.10 The system in place since 1998 has removed this fiscal disadvantage: all boards are now on the same footing with respect to nonresidential property taxation. At the same time, this change reduced competitive pressure to keep tax rates down; thus the province has in effect removed almost all elements of local discretion in determining education property tax rates.

Property Taxation, Local Institutions, and Schooling In a recent comparative study of social spending and economic growth, Lindert (2004, 105) emphasizes the importance of local initiative in the early development of publicly funded mass schooling: “Decentralization of government allows that region [where a slight mandate for public schooling has emerged] to vote for its own taxes and schools. If it were forced to put the same issue to a national government, the taxes and schools would not happen because the balance of power is still against them at the national level. . . . The early leaders were those countries where local governments were free to choose their own levels of commitment to taxbased schools.” Others have made similar arguments about the critical importance of local property tax support for public schools and education. For example: ■

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Sokoloff and Zolt argue that there is a strong link between the growth of local institutions, including universal public schooling, and the provision of local infrastructure and access to a “progressive” tax. They characterize the property tax as a progressive tax during the nineteenth century in both the northern United States and Canada, and see local property tax financing for schools as providing a “broad distribution of social returns.” (Sokoloff and Zolt 2006, 27–28) Go and Lindert argue that the relatively high prosperity of American wage earners (which made the purchase of schooling more affordable), their greater political voice relative to local elites, and local autonomy below the state level together resulted in the decentralized provision of local elementary education, or “common” schooling. They link the extension of the franchise and political voice to support for public school funding, and conclude that “the movement for the establishment of public schools

10. Th is problem came before the Supreme Court of Canada, which noted the necessity of grants for separate boards “because of the practical limitations separate boards faced in raising funds through local taxation,” citing the Ontario Court of Appeal: “[The separate school system’s] poorer assessment base and the risk of taxpayer migration away from the system have always placed very significant practical constraints on the power of separate school boards to tax their supporters. The right to tax has never provided separate school boards with more than limited financial autonomy”(2001 SCC 15 paragraph 52), http://scc.lexum.umontreal .ca /cgi-bin /print.pl?referer =http://csc.lexum.umontreal.ca /en /2001/2001scc15/2001scc15.html.

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supported by local property taxes closely and successfully followed the expansion of the suffrage, which strongly suggests that the latter did indeed make a difference for policy.” (Go and Lindert 2007, 26) Goldin and Katz (2002; 2003) stress the critical importance of local property taxation: “Under local control with a property tax, the benefits of a better school system get capitalized into the price of housing. With a constant tax rate the increased value of housing gets translated into greater revenue for the district. Thus the decentralization of fiscal control, the large number of fiscally independent districts, and the use of the property tax were all efficiency enhancing innovations.” (Goldin and Katz 2003, 13)

On the whole, as these quotations suggest, the dominant view among American scholars seems to be, as Mikesell (2008, 37) recently put it, “The case for property tax finance of schools is strong.” But how does the Ontario experience relate to that of the United States? Once more, we have to delve back into history. The Early Days In Ontario the provincial government has always led the way in promoting education. In fact, provincial assistance to education began a half century before local public financing, when lands were set aside in 1796 to endow secondary schooling.11 Later, in 1816, provincial funds were allocated to fund common or elementary schools, with the proviso that three local trustees had to be elected in order for the school to receive the funds. It was not until 1841 that the property tax made its debut as a school tax in Ontario. In that year, the newly created local councils (see chapter 3) were required not only to match elementary school grants through a levy on real and personal property, but also to supplement that amount with a direct charge on the parents of each pupil. Where there was no school, the inhabitants of a school section could be assessed an additional amount not exceeding 50 pounds for construction costs. Separate schools were also explicitly recognized for the first time in 1841. A few years later the Common Schools Act of 1850 finally established a taxsupported education system giving school trustees the right to impose property taxes for school support, with the taxes in urban areas to be collected by the municipal authorities. In townships, public school trustees had the choice of providing their own tax collectors or charging municipal authorities with the authority to perform this function. Trustees were given wide powers to manage 11. Lindert (2004, 322) notes that “while Canadian schooling before mid-century is assumed to have lagged behind the United States, we lack specific early dates for the emergence of Canada’s schools.” Th is is not true for Ontario; see Dupré (1967) and the Supreme Court of Canada, 2001 SCC 15, 30–32.

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income for school purposes, build and repair schools, employ teachers and set their salaries, supply authorized textbooks, and report both to constituents and to the applicable superintendent or to the municipality. They were subject to regulation by the chief superintendent of education for Upper Canada (as Ontario was then known) and the Council of Public Instruction for Upper Canada. The chief superintendent was also responsible for allocating the provincial education grant and ensuring that provincial funds were properly spent, while the council was given broad regulatory power over schools and teachers. The contentious political issues caused by religious conflicts over schooling were resolved in 1863 by the confirmation of the denominational rights of Roman Catholic school supporters. Separate school trustees were given essentially the same powers as public school trustees, including taxing powers, as well as a share of all provincial funding for elementary schools. As box 6.2 notes, these rights were enshrined in Canada’s Constitution a few years later. All the colonial arrangements for education were basically continued into the post-Confederation period. However, in 1871 the system changed when school boards were required to be constituted by municipal council bylaw.12 A few years later, in 1877, when the same level of tax support was extended to high schools (Gidney and Millar 1990), the township’s choice of handling its own tax collection versus municipal collection was removed. Thenceforth, all school taxes were to be collected by the local municipal governments, although the latter had no legal say on either how much was to be collected for school purposes or how those funds were spent. While minor changes were made from time to time, the system established by the end of the nineteenth century essentially remained in place for the next 50 years.13 In 1900 less than 15 percent of total education expenditures were provincially financed. By 1920, however, that share had risen to 23 percent, and it remained close to that level until 1930 (Ontario Ministry of Education 1938). The principle of equalization was formally recognized for the first time in 1931, when urban and rural schools were placed on essentially the same funding basis. Even during the Depression of the 1930s, when municipal governments were under severe financial pressure, the system remained unchanged: the school boards determined the amount of tax to be imposed. Municipalities then had to levy the tax and collect it. It is important to note that whether they were actually able to collect any property tax or not, the municipalities still had to pay over the full amount of the education levy to the public school boards. Since the 12. Royal Commission on Education in Ontario (1950). 13. In 1896, for example, townships were required to raise up to $600 per teacher in taxes, and in 1921 tuition in secondary schools was finally eliminated. Similarly, in the United States, until the introduction of “free tuition” laws in the early twentieth century, many parents of secondary school students had to pay tuition to attend schools in neighboring districts (Goldin and Katz 2002).

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province provided little additional funding to school boards during the 1930s, the fact that the amount spent on public education as a share of income actually rose in the Depression years suggests that municipal finances were successfully squeezed to maintain education spending. Subsequently, however, especially after World War II, the provincial funding formula was frequently amended, ending in 1958 with a grant system that used assessment equalization factors calculated by the provincial government to take into account differences in access to the property tax base.14 Before the 1998 Reform Provincial involvement in setting parameters for the use of property taxes to finance education is long-standing in Ontario. During the 1980s, significant steps were taken at the provincial level to expand public funding of separate secondary schooling to levels equivalent to that provided in the “public” system.15 All education funding continued to be closely related to the property tax base, however. The 1986 funding formula, the Mill Rate Equalization Plan, which prevailed until 1998, was based on the principle of equal yield for equal effort.16 This goal was achieved by provincial determination of the equalized mill rate so that all boards imposed the same equalized mill rate to attain the same level of recognized ordinary expenditure (ROE) per pupil, with provincial grants making up the difference between the yield of the equalized mill rate and that level of expenditure. In effect, this was a system of centralized financial control under which ROE was the standard base level of funding per pupil, established by the province, that school boards were estimated to require to meet their legal obligations in providing schooling.17 The amount thus established also, not so incidentally, acted as a ceiling on grants. The result was that, as the provincial government gradually increased the level of ROE in response to cost pressures without simultaneously increasing its education grants, school boards had to keep increasing property taxes in order to meet the mandated levels of expenditure. School boards could also choose to increase their property taxes to cover even higher expenditure levels, if they wished. Some did so. Expenditures in 14. Dupré (1967) provides the full details of the various shifts and changes in the funding formula. It may be appropriate, in light of subsequent history, to note that at one point in his study Dupré writes: “Th e reader who has been bewildered by the above is invited to take a brief pause which he may use to give vent to any appropriate emotional reaction” (121). We know what he meant. 15. Although this extension was challenged in the courts, it was ultimately upheld by the Supreme Court of Canada in 1987. 16. See Ontario Ministry of Education (1986; 1992). 17. Different levels of ROE were established for students with special needs and various other categories, but all such refinements are left aside here.

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excess of ROE were particularly important in areas like Toronto, where the school board took a broad approach to meeting the needs of students and in some instances used its funds to provide ser vices similar to those offered by social ser vice agencies. One reason why municipalities like Toronto expressed increasing concern about what they saw as the growing “education overburden” on the property tax base was, in the eyes of some, because of such discretionary board expenditures. In fact, immediately before the 1998 reform, the Metropolitan Toronto School Board was actually in a so-called negative grant situation, in the sense that its taxable capacity was so great that it would have raised more money than the ROE simply using the equalized mill rate established in the formula.18 In 1994–1995, for example, such additional taxes accounted for 18 percent of total expenditures of $14.7 billion for elementary and secondary education.19 Because its equalized assessment base was so high, the Toronto board did not qualify for any provincial grant support for education.20 The board was not penalized for its “surplus” position by being made to pay into the pool; instead it was simply considered to be ineligible for general legislative grants. Although this situation largely reflected the relatively high per capita assessed wealth of Toronto, it added to the widespread local perception that the city was being dealt with unfairly by the provincial government. This (and other) taxpayer and local-government complaints about the apparently inexorable growth of education property taxes were cited as key reasons for the 1998 reform and provincial takeover. Unsurprisingly, one of the most marked effects of the takeover was the immediate sharp reduction in the level of the (now provincial) education property tax (table 6.1). Outside of the largest cities, however, since the provincial government set both the minimum local effort and the parameters governing spending, school boards had little control over how much they had to spend and what they had to spend it on. Throughout most of Ontario even before 1998 the provincial government was essentially determining the supply of, and the effective local demand for, primary and secondary schooling. Moreover, what was happening with education spilled over into local public goods in general through the mutual dependence of schools and localities on the same tax base. The Wicksellian connection (Breton 1996) between taxing and spending at the local level in Ontario was essentially broken with respect to education finance and, to a considerable extent, local finance more generally (Bird and Tassonyi 2003; Locke and Tassonyi 1993). 18. The only other board in a negative grant position in Ontario was the Ottawa Public School Board. 19. Ontario Ministry of Education (1997). 20. However, the Toronto board did receive various other specific provincial transfers for education.

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TABLE 6.1

Education Property Tax Revenues, Ontario, 1990–2006 (millions of dollars) Residential

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2,336 2,139 2,168 2,222 2,273 2,330 2,387 2,452 2,499

Multiresidential

134 120 119 145 142 146 146 146 147

Commercial

2,586 2,645 2,674 2,641 2,672 2,704 2,743 2,793 2,837

Industrial

Total

869 878 846 784 738 739 732 728 708

6,416 6,998 7,541 7,901 8,044 8,328 8,524 8,569 5,925 5,782 5,807 5,792 5,825 5,919 6,009 6,119 6,190

note: Breakdown of revenue categories (unavailable from 1990–1997). source: Ministry of Municipal Aff airs and Housing, MARS database (1991–2007).

The 1998 Reform The world of education finance in Ontario turned upside down in 1998. Instead of restoring any local role in school finance, the provincial government simply took over and ran the whole show. Like everything else in the complex Ontario intergovernmental world, however, the takeover was not done simply. In particular, to preserve at least the appearance of the right of separate school boards to tax their own supporters, the financing provisions established in the Education Act were divided in two: Division B, which applies to public school education, and Division C, which provides authority to the separate boards. However, only one of these systems, Division B, is currently functioning; Division C includes a provision that in effect renders it inoperable.21 In the end, opposition to removing independent taxing authority from the separate school boards appears to have been largely bought off by the provincial government with the shift in the 21. An amendment to the Education Act with the consent of the legislature is required to provide authority to the separate boards to set their own tax rates. No such amendment has been passed. Although the scheme was challenged in the courts by one of the teachers’ unions, it was ultimately upheld by the Supreme Court of Canada in 2001. See Ontario English Catholic Teachers’ Assn. v. Ontario (Attorney General), [2001] 1 S.C.R. 470, SCC 15.

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distribution of nonresidential taxes toward separate boards and a substantial increase in grants to separate boards.22 Under the current system for education finance there is a province-wide uniform tax rate for all residential and multiresidential property.23 In addition, since 2001 the provincial government has established separate commercial, industrial, and pipeline tax rates for education—the Business Education Tax (BET)—for each municipality at the upper- and single-tier level. The BET rates reflect the historical incidence of taxation on these property classes prior to 1998 and the various complex policies, described in earlier chapters, intended to reduce relative differences among municipalities and to maintain effective rates in reassessment years at a revenue-neutral level. Among the desired outcomes of the 1998 changes was a reduction in the level of taxation for education purposes on most businesses. After a gradual eight-year phase-in, such taxes were expected to be reduced across regions by widely varying rates, with industrial properties in Toronto receiving the largest cuts (table 6.2).24 Even after the proposed reductions, however, the property taxes for school purposes would still be uniform for residential ratepayers but would continue to vary substantially across jurisdictions for nonresidential property owners. Moreover, the latter would still pay more. As table 6.1 shows, in 2006 well over half of education property taxes were paid by businesses. This imbalance was even more marked immediately after the reform. In 1997, before education reform and before local ser vices realignment (see chapter 2), total education property taxes were $8.6 billion; in 1999, after the “big bang,” they had decreased to only $5.8 billion. As table 6.3—which, it should be noted, covers only the Greater Toronto Area (GTA)—illustrates, however, not every taxpaying sector gained equally. In fact, all the gains were reaped by homeowners (and tenants). The business sector actually ended up paying more. Ontario, it seemed, had ended up with a system that gets things backward. Residential property owners have less and less connection with school funding, while more and more of the load has been shifted, for reasons that are not easy to articulate, to business property owners. This fundamental component of the local property tax system is broken. As discussed in chapter 9, this is not a trivial matter for the future of property taxes in Ontario. The uniform tax rate on residential property was fixed at 0.264 percent for 2006, 2007, and 2008. As table 6.2 shows, BET rates above the provincial average 22. Note that the current system largely nullifies the benefits attributed to the separate system by Bilodeau (1994). However, it does not affect the “demand-side” gains from competition discussed by Card, Dooley, and Payne (2008), as discussed in box 6.2. 23. An important difference from the municipal property tax is that the latter treats multiresidential properties not as residential property but as business property, which means that the rate is capped, as discussed earlier. As usual, the tax rate on farms and managed forests is 25 percent of the residential rate. 24. The programmed cut was not carried out in 2003 for budgetary reasons, and only 50 percent of the planned 2004 reduction took place.

Algoma D Brant Co Cochrane D Durham R Elgin Co Essex Co Frontenac Co Grey Co Haldimand-Norfolk R Halton R Hamilton-Wentworth R Hastings Co Kenora D Kent Co Lambton Co Lanark Co Leeds and Grenville Co Lennox and Addington Co Middlesex Co Niagara R Nipissing D Northumberland Co Ottawa- Carleton R

Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial Industrial

Property class

25,180 254,950 122,410 987,210 152,500 1,117,230 158,050 114,860 222,780 159,210 2,538,290 159,180 159,650 98,980 394,560 94,130 409,110 103,710 581,440 1,551,030 93,330 210,560 323,150

Tax cut (dollars)

1998

Distribution of Business Education Tax Cuts by Municipality

TABLE 6.2

201,400 2,039,600 979,300 7,897,700 1,220,000 8,937,800 1,264,400 918,900 1,782,200 1,273,700 20,306,300 1,273,400 1,277,200 791,800 3,156,500 753,000 3,272,900 829,700 4,651,500 12,408,200 746,600 1,684,500 2,585,200

1.2 21.6 8.5 21.8 19.2 22.4 24.4 26.4 21.2 3.3 44.0 17.6 20.0 11.2 21.3 26.9 39.0 21.0 26.0 37.3 24.9 27.1 12.7

Cut in education taxes (%)

Fully implemented Tax cut (dollars)

Industrial Industrial Industrial Industrial Industrial Commercial Industrial Industrial Industrial Industrial Commercial Industrial Commercial Industrial Commercial Industrial Commercial Industrial Industrial

source: Ontario Ministry of Finance, 1998 Ontario Budget.

notes: Co = County; D = District; R = Region.

Total

Waterloo R Wellington Co

Toronto

Timiskaming D

Thunder Bay D

Renfrew Co Simcoe Co Stormont, Dundas, and Glengarry Co Sudbury D

Oxford Co Perth Co Peterborough Co Prescott and Russell Co Rainy River D

63,755,700

220,880 74,280 143,540 31,080 60,960 6,180 210,000 367,240 328,090 139,490 12,600 498,300 10,740 13,530 4,880 14,000,100 36,307,060 927,800 367,450 510,045,100

1,767,000 594,200 1,148,300 248,600 487,700 49,400 1,680,000 2,937,900 2,624,700 1,115,900 100,800 3,986,400 85,900 108,200 39,000 112,000,800 290,456,500 7,422,400 2,939,600

13.8 9.1 21.4 10.6 20.9 2.5 35.4 18.3 33.4 32.8 5.5 18.6 0.3 7.5 0.9 50.6 25.3 18.0 18.1

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TABLE 6.3

Education Property Taxes, Greater Toronto Area, 1997 and 1999 1997

1999

Dollars (millions)

Percent

Dollars (millions)

Percent

Residential and farm Commercial, industrial, business Supplementary Other

2,697 1,897 112 0

57.3 40.3 2.4 0.0

1,127 2,102 56 19

34.1 63.6 1.7 0.6

Total

4,706

100.0

3,304

100.0

source: Ministry of Municipal Aff airs and Housing, MARS database (1997, 1999).

were to be reduced during the period from 1998 to 2003, with the costs being offset by increased provincial transfers to education. In the GTA, for instance, commercial and industrial properties in Toronto and industrial properties in Durham and Halton benefited from the BET reductions because education tax rates in those regions were above the provincial average. In addition, when municipalities took the initiative to reduce the relative tax burden on nonresidential properties on an ad hoc annual basis, the province implemented dollar-fordollar rate-matching reductions. Despite this and other subsequent measures to address the differential in BET rates and residential rates, however, the difference between residential and nonresidential rates for education property taxes continues to be wide, as table 6.4 shows for the case of Toronto. Understandably, the business sector was not happy.25 For the province as a whole in 2007, education taxes typically accounted for about 50 percent of total property taxes levied on business properties. Moreover, historical inequities persisted across municipalities, with the highest BET rates in the province being four times the provincial average BET rate of 1.85 percent. In its 2007 budget, therefore, the provincial government promised—much as it had a decade earlier—that a new lower average BET rate of 1.60 percent— a 14 percent reduction from the average 2007 rate—would be phased in over the following seven years. To achieve this goal, a new ceiling rate of 2.50 percent for commercial properties and 3.00 percent for industrial properties was introduced in 2008, with the proposal that both ceiling rates would be reduced annually until they reached the promised target.26 New construction was to be subject to 25. For typical complaints about this situation from business interests, see Web sites for the Canadian Federation of Independent Business (CFIB), Canadian Institute of Public Real Estate Companies (CIPREC), and the Toronto Board of Trade. 26. Rates below the annual ceiling rate were to be reduced by 2 percent of the amount by which they exceeded the final target of 1.60 percent.

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TABLE 6.4

Education Property Tax Rates, Toronto, 1998–2007 (%) Residential (uniform provincial rate)

Commercial

1998 1999 2000 2001 2002 2003 2004 2005 2006

0.460 0.414 0.414 0.373 0.373 0.335 0.314 0.314 0.264

4.223 4.019 3.959 2.653 2.653 2.300 2.216 2.216 1.976

2007

0.264

1.976

notes: Residential includes farmland and managed forests. Commercial includes pipelines. Supplementary taxes and payments in lieu of taxes are excluded. source: Financial Information Returns for 1998–2007, Ontario Ministry of Municipal Aff airs and Housing.

the target 1.6 percent rate from the beginning. Once again, as in 1998, tax cuts of between 10 and 55 percent were projected for different regions, but this time the government was careful to emphasize that more than half the benefits would be received outside of Toronto and to show that the percentage cut in Toronto was in the middle of the projected range. Further reflecting the continuing political importance of the relative under-representation of GTA members in the provincial legislature, the nonmetropolitan pie was further sweetened in the 2008 budget when more BET cuts for the sparsely populated northern part of the province were announced, in part as a response to the adverse effects of the financial crisis in the forest-based industrial sector of the region.

Sharing the Property Tax Base The property tax system, education funding, and local government have always been closely related in Ontario. Although this connection was considerably attenuated by the set of changes introduced since 1997, it still exists. The education property tax is now entirely a provincial tax. However, it continues to be entirely administered by lower-tier (and single-tier) municipalities. So far as local taxpayers are concerned, this provincial tax shows up in the form of larger property tax bills from their municipal government. Municipalities must remit the taxes collected for education purposes to local school boards. The province then transfers directly to each school board an amount calculated to be the difference between the board’s

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allocation under the provincial funding model (see box 6.1) and the revenues the board receives from the municipal collection of education property taxes. In addition to the basic confusion this system sows in the minds of local taxpayers about which level of government is responsible for collecting and raising taxes for schools, municipal tax policy itself in some instances may have an impact on the education tax rate. For example, when municipalities introduce optional property classes or graduated tax rates (see chapter 4), education property tax rates need to be recalculated to parallel municipal tax policy. Similarly, if a municipality reduces rates for vacant land in the commercial and industrial class beyond the statutory minimums, as it has the option to do, such reductions also apply for education tax purposes. However, following the long-standing provincial policy that school board revenue must be protected, meaning that school boards are entitled to receive the full education property tax as assessed according to current market value, any reductions in education taxes that arise from municipal decisions to impose business capping or residential phase-ins (discussed in chapter 4) must be fully made up from municipal revenue. In practice, what this usually implies is that the full cost of such reductions for some local property taxpayers must be offset by increases for others. In other instances, however, mandatory municipal tax mitigation provisions, such as those for assistance to seniors and the disabled to offset the impact of property reassessments, as well as rebates for vacant portions of commercial and industrial property, also apply to education taxes. In these cases, the province picks up the cost for school boards.27 Still other mitigation programs are municipal options for which the costs are shared, but in a more convoluted way. First, the municipality must formally deem the taxes to be “uncollectible.” Having done this, it may deduct such taxes from the education property tax it has to remit to the school board. To complete the process, the provincial government then makes up the resulting financial deficit by adjusting grants, thus rendering school funding whole. In still other instances, such as the optional heritage properties rebate, there is no provincial sharing; the full cost has to be reimbursed from municipal property taxes.

Education Overburden? The sharing of the property tax between school boards and local governments raises some more basic and challenging issues than these relatively minor points about who must make up the cost of various mitigation programs. These same 27. In the 2003 budget, the Conservative provincial government promised that seniors would be reimbursed for the full amount of their residential education property tax, beginning in 2004. However, this provision was not enacted by the incoming Liberal government.

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issues have over the years received considerable attention in the United States, where “the property tax has long been the mainstay of revenue sources for public education” (Bahl, Sjoquist, and Williams 1990, 171). In the 1980s, for example, some economists posited what is known as the “municipal overburden hypothesis” about the extent to which local property taxation constrains the equitable financing of education.28 During this same period, however, as more and more of local property tax revenues were used to finance education in Ontario, the issue was essentially reversed. The question became instead, Does school financing “overburden” the local property tax, the major source of municipal governments’ own revenue? Slack (1977, 12), for example, suggested that “a high school rate . . . may cause municipal officials to reduce the municipal rate.”29 Auld, Hobson, and Kitchen (1990) noted that taxpayers and the lower-tier municipalities that had to collect the property tax often perceived the demands on the tax from school boards and upper-tier municipalities as constraining their ability to tax for their own purposes. In part to provide local governments with additional “tax room,” Kitchen and McMillan (1985) suggested that education would be more appropriately financed either from provincial revenues or by a local income tax. Similarly, both Hobson (1991) and Graham (1991) called for the removal of school financing from the local property tax base. However, Kitchen (1993) took a different view, suggesting not only that good-quality schools have a positive impact on property values, but also that there was room in the property tax to finance them. Writing after the 1998 Ontario reform, Kitchen (2002) suggested that it may be appropriate to capture some of the value created for residential owners by good local schooling and fund some local school expenditures from residential taxes. At the same time, he supported using a province-wide nonresidential property tax for education finance, both to further equalization and to minimize tax exporting (Kitchen 2002).30 Most discussion of these issues in the United States focused on the extent to which local property taxes prevented school boards from raising sufficient revenue to fund education adequately. In many American jurisdictions, school districts with weak tax bases sought redress in the courts, seeking more equitable funding formulas. In some critical decisions, the courts proved to be sympathetic to the municipal overburden hypothesis. Brazer and McCarty (1987), for example, observed that courts in Maryland, New Jersey, and New York appeared to have accepted the argument that the competition between schools and 28. Brazer and McCarty (1987) provide a full explanation of the municipal overburden hypothesis. See also Bahl and Vogt (1975) on the relevance of this hypothesis for education expenditures. 29. The possibility that school finance might impinge on municipal finance was also noted by Bird and Slack (1983). 30. For an estimate of property tax exporting in Canada, see Ballentine and Th irsk (1982).

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municipalities for property tax revenue was a constraint on education finance that reinforced inequitable patterns of expenditure. Whatever the merits of that argument, when combined with the well-known property tax revolts occurring in some states during the same period, the result was a striking decline in the extent to which American schools were financed from local property taxes rather than by transfers from state governments (Hoxby 1996).31 Some have argued that this increased centralization of education financing reduced the quality of public education (Fischel 2001). It is clear that the debate on the role of the property tax in funding local schools is not yet resolved in the United States (Kenyon 2007). In contrast, the “inverse” debate in Ontario about the share of the property tax being used for education and the amount of tax room left for municipal purposes has never gone to the courts and has hardly begun in either political or scholarly terms. Periodically the issue has come to the fore, mostly in times of fiscal stringency for local governments. In the 1930s, for example, many observers expressed concern about the level of education demand on property taxes, in the context of the pressures created for local governments by uncollectible taxes and the servicing of debts incurred during the booming 1920s. In response, the provincial Minister of Education was adamant that municipalities should not be given control over school board finances: The school boards being elected by the ratepayers who elect the councils also, have controlled their own expenditures for generations. It is now suggested in some quarters that they be placed under municipal control. This could be done only by enactment of the Legislature. The change would be a complete reversal of the policy of the Province in relation to the schools. In accordance with accepted practice, the people generally should be consulted before infringing upon the right of local boards to control the cost of education. There is no present indication that the Legislature would approve such a measure and it is difficult to see how any Government could proceed along the line proposed without the plainest warrant from public opinion. (Ontario Ministry of Education 1931, vi)32

Subsequently, a Provincial Committee of Enquiry into the Cost of Education dealt with the issue in much the same way, noting, These conflicts have arisen over the desire of councils to avoid the fi xing of a high mill rate of taxation for all municipal purposes, and have involved the re31. As Fischel (2001) notes, later empirical work in the United States did not really support the municipal overburden hypothesis. 32. Note that, in good parliamentary fashion, it is assumed in this statement that the wishes of “the people” and “public opinion” are to be heeded only to the extent they are explicitly expressed by their representatives in the provincial legislature. The attitude revealed in this quotation is deeply embedded in Canadian political tradition; for further discussion of this theme, see, for example, Bird (2004).

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quest that expenditures for education be reduced to a greater extent than boards of education deemed wise. It was suggested that councils should be given the right, which they do not now possess, of compelling boards of education to reduce their estimates. The Committee cannot recommend that boards of education should be relieved of the responsibility now entrusted to them by law of providing and maintaining schools within the municipality. Members of boards of education are elected by the ratepayers of the municipality and are responsible to the ratepayers to the same extent as are members of municipal councils. (Ontario Ministry of Education 1938, 25)

In short, municipalities were told in the 1930s to grin— or grimace— and bear whatever tax load the school boards decided they should bear.33 Thirty years later the same issue was still very much alive. Dupré (1967, 134) noted, “The extent to which local contributions to education in an era of explosive expenditure have created an undue burden on the real property tax base has become a common topic of provincial, indeed national controversy.” As table 6.5 shows, much the same could also be said for the 30 years prior to the 1998 reform.34 Particularly in the 1980s and later, the schools’ share of total property taxes continued to rise inexorably. In reaction, an advisory report to the Minister of Municipal Affairs in 1991 suggested that “the share of the property tax base used to support provincially mandated education programs should be decreased by increasing provincial funding, thereby lifting some of the load off property taxes (Advisory Committee 1991, 46). Shortly thereafter, the Ontario Fair Tax Commission (1993) recommended that the taxation of nonresidential properties for school purposes should become a provincial responsibility and that access to the residential tax base should be limited to a discretionary local levy. Finally, noting that from 1985 to 1995 school board spending grew by 82 percent although enrollment grew by only 16 percent, and that “education mill rates rose by 80 per cent and school property tax revenues by more than 120 per cent” (Ontario Budget 1997, 21), the province heeded the advice and took over complete responsibility for education finance, including setting local tax rates. However, the Ontario version of the overburdening question still remains: Does the claim exerted by education on property tax revenues unduly constrain the ability of local governments to tax? In the sole empirical exploration of this question, Locke and Tassonyi (1993) found that in 1986 the taxing and spending decisions of school boards were indeed taken explicitly into account at the

33. For a detailed discussion of municipal finance in this period, see Tassonyi (1994). 34. The post-1998 situation is quite different. In contrast to the picture sketched in table 6.5, in 2010, for example, school taxes accounted for only 31.0 percent of total residential property taxes in the City of Toronto and 40.3 percent of nonresidential (a category that includes multiresidential) property taxes, for a total “schooling” share of only 36.8 percent (Omelchuk and Brasok 2008).

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TABLE 6.5

School Taxes as a Percentage of Total Local Tax Levy, Selected Years, 1932–1995 Year

School tax as % of levy

Year

School tax as % of total levy

1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982

30.5 33.2 37.9 33.4 38.5 43.1 45.1 48.2 48.2 48.2 50.4

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

51.2 51.9 52.5 52.7 53.0 53.9 54.8 55.0 55.1 55.7 56.0

1983

51.1

1995

55.3

source: Tassonyi (2011, 266)

municipal level and that there was evidence of “crowding” in the tax base. Although the database used in this study preceded both the introduction of provincewide market value assessment and the provincial takeover of the education property tax, no additional work has been done on this issue in Ontario (or elsewhere in Canada).35 Nonetheless, there is little reason to think that the many changes in the institutional structure since 1986 have changed matters much in this respect. Municipalities in Ontario continue to press the province to reduce the extent to which it relies on the nonresidential property tax base to fund education, in order to allow them more room to tax for other local purposes.36 The trade-off of functions and finances between the provincial and municipal levels in the local ser vices realignment (see chapter 2) had explicitly assumed that municipalities would increase their relative share of the residential property tax base. However, presumably in the interest of encouraging investment and growth, provincial policy sought to have municipalities reduce the relative municipal burden on nonresidential classes of property.37 As described earlier, the province reduced the relative education burden on nonresidential property—the 35. For evidence of the lack of such studies elsewhere, see Dahlby and Dyck (2002). 36. See, for example, AMO (2007). 37. Reducing such taxes was, for example, one of the elements of the tax strategy proposed in a report to the provincial government by Bird and Wilson (2004). Another element of that strategy was to reduce the tax on investment imposed by the provincial retail sales tax, which Ontario actually did in 2010, perhaps encouraged in part by an empirical study that demonstrated the beneficial effects of such a change in other provinces (Smart and Bird 2009b).

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BET—following the 1998 takeover, albeit slowly. Although municipalities have reduced the relative tax burden on nonresidential property, in part in response to provincial pressures, both municipal and business spokespersons have been critical of the pace of provincial progress in this regard. The annual exercise in municipal tax-rate setting invariably has to await the provincial rate-setting decision. Both upper- and single-tier municipalities are very aware of the overall tax burden, as is the business sector. In fact, it seems clear that the pressure on municipalities to lower commercial and industrial rates has been led by major industrial employers, for example, in the numerous communities in Ontario that are heavily dependent on such industries as automobile and paper manufacturing. However, whether the level of municipal expenditures, or the decision by municipalities to adjust the relative burden of property taxes by classes, is affected by the provincial education tax-rate decision has not been tested empirically with recent data. This remains a matter for further research.

Unresolved Issues Many other questions remain to be answered with respect to the relation between education funding and the property tax in Ontario. For example, has the provincial takeover of school funding reduced public support for property tax– supported schooling? Hoxby (1996, 71) suggests that “in a centralized system, more parents will be unable to satisfy their demands for education through a location decision, and instead will seek out private schools. In this scenario, it is more likely that private school parents could tip the balance and cause underprovision of public schooling.” As table 6.6 shows, private school enrollment has indeed grown sharply in Ontario in recent years. Again, however, no systematic exploration of the factors underlying this growth has yet been carried out. In addition, no consideration has been given to the more fundamental question raised by Hoxby: Has the provincial takeover of school funding reduced public support for the property tax in general? In line with the hypothesis about the link between local taxes and local expenditures, it seems likely that the combination of an increased (nominal) property tax burden and a weakened local connection to the schools may be one factor underlying the increasingly vocal presence of local groups against the property tax.38

38. The composition of the most vocal residential ratepayer group is suggestive in this respect. The current steering committee of the Coalition After Property Tax Reform includes representation from the following organizations: Retired Teachers of Ontario, Confederation of Resident and Ratepayer Associations, Federation of North Toronto Residents Associations, Waterfront Ratepayers after Fair Taxation, Federation of Urban Neighbourhoods, the Federation of Ontario Cottagers’ Associations, and the United Senior Citizens of Ontario. See http//www.captr.org /.

1,326,838 1,427,358 1,434,745 1,448,270 1,451,141 1,442,979 1,425,744 1,411,011

708,411 704,268 708,854 714,838 713,799 686,763 698,160 707,533

Secondary

2,035,249 2,131,626 2,143,599 2,163,108 2,164,940 2,129,742 2,123,904 2,118,544

Total

37,686 48,494 51,163 51,918 53,413 51,806 51,287 50,865

Elementary

8,068 11,050 12,377 12,837 15,889 20,311 18,624 20,678

29,096 43,426 46,364 47,898 52,145 46,114 48,025 48,041

Combined

Private Secondary

74,850 102,970 109,904 112,653 121,447 118,231 117,936 119,584

Total

0.037 0.048 0.051 0.052 0.056 0.055 0.055 0.056

Ratio private/public

note: Private includes schools for aboriginals and overseas schools. source: Ontario Ministry of Education, Quick Facts Ontario Schools 2003–2004, 2005–2006. Available online for 2005–2006 at http://www.edu.gov.on.ca /eng /general /elemsec /quick facts/2005 -06/quickFacts05_06.pdf.

1993–1994 1999–2000 2000–2001 2001–2002 2002–2003 2003–2004 2004–2005 2005–2006

Elementary

Public + Separate

Private School Enrollment in Ontario Compared with Public and Separate Schools (average daily enrollments)

TABLE 6.6

CHAPTER

7

The Property Tax Family

M

unicipalities can levy a variety of other taxes on property in addition to the property tax: special assessments and local improvement charges, development charges, land transfer taxes, tax increment financing, and business improvement levies. This chapter discusses this family of property taxes.1 Since tax increment financing and business improvement levies are based on taxable assessed values, the magnitude and distribution of these charges are directly related to the assessment issues discussed earlier. In contrast, special assessments are usually based on physical characteristics, such as frontage and location. Development charges are calculated as an amount per lot, in the case of residential properties, and an amount per unit of floor space in the case of nonresidential properties. Nonetheless, like the other revenue sources mentioned, development charges may affect property taxes to the extent that they are used to pay for the growth-related capital costs associated with new development. The larger the revenue from development charges, the less municipalities must lean on property taxes or provincial transfers for revenue to finance capital improvements. Finally, the provincial government also imposes land transfer taxes on the purchase price of property (in addition to a sales tax on new housing). The City of Toronto is unique in being the only municipality in Ontario that can levy a land transfer tax, in the form of a tax that is piggybacked on the provincial tax.

1. For earlier, more general reviews covering some of this ground, see Altshuler and Gómez-Ibañez (1993) and Smolka and Amborski (2000); the latter includes some discussion of the Ontario case.

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TABLE 7.1

Sources of Capital Financing, Ontario Municipalities, 2008 Millions of dollars

Long-term liabilities Grants and loan forgiveness Grants and fees from other municipalities Other financing Transfers from revenue fund Contributions from reserves, reserve funds, and deferred revenue Total sources of capital financing

Percent

961 1,669 106 585 1,359 4,139

10.9 18.9 1.2 6.6 15.4 46.9

8,819

100.0

Capital Financing for Municipalities Since several of the sources of local revenue are explicitly intended to finance capital expenditures, it is useful to take a brief look at how Ontario municipalities finance their investment.2 As table 7.1 shows, in accounting terms the largest financial source for municipal capital spending in Ontario (47 percent) consists of contributions from reserves, reserve funds, and deferred revenues. This item includes development charges in addition to other reserves explicitly earmarked for capital purposes. Grants (almost entirely from the provincial government) and borrowing together account for about 30 percent. Most of the balance comes from current saving in the form of transfers from the revenue (current) fund, which essentially means the property tax. In addition to financing municipal operating expenditures, property taxes have to cover debt costs arising from previous capital expenditures and, to the extent that some property tax is channeled to reserves for capital expenditures, finance future capital projects. Property tax finance for investment is used mainly in smaller towns and cities and in rural municipalities. One reason for this is that borrowing can be costly for these municipalities: the fi xed costs are high for small loans, and capital markets often view small municipalities as being a high risk. In addition, however, many Ontario municipalities appear to prefer pay-asyou-go financing to borrowing, at least in part because they are worried that debt charges would soon crowd out other local expenditures. The property tax is an appropriate way to finance capital expenditures to the extent that the benefits of those expenditures accrue to those who pay the taxes (that is, current users). Property tax finance is thus generally more suitable for 2. For a useful recent review of how infrastructure is— and might be— financed in the Toronto region, see OECD (2010).

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investments with short expected lives, such as police cars or computers, or for current maintenance “investments,” like maintaining and upgrading roads and sidewalks. It is less appropriate for financing infrastructure with a long expected life, such as waterworks and sewers that will be enjoyed largely by future generations. When property taxes are used to finance infrastructure, investment competes directly with such operating expenditures as police salaries. From a broader budgetary perspective, it may be argued that such competition makes sense; however, that is not how most local councils in Ontario run their affairs. To pay for all or part of the cost of major public works, municipalities may borrow, that is, use debt financing: servicing and eventually repaying such debt from operating revenues such as property taxes and user fees (Tassonyi 1997). Ideally, borrowing permits municipalities to synchronize the costs and benefits of infrastructure over time. A project built today may yield benefits over, say, the next 25 years. If the funds are borrowed, then the project may in effect also be paid for over the next 25 years. Those who use the facility and hence benefit from it over time will thus cover the costs, rather than present or past taxpayers. In this important sense, properly structured borrowing may be both a more efficient and a more equitable way to finance local infrastructure investment. Capital expenditures are usually made in lump sums rather than spread out over time; they can seldom be funded from revenues in any one year without large tax increases, which are seldom either feasible or desirable. Local governments that wish to fund investments from current revenues must set aside those revenues in a reserve fund over the years in order to accumulate sufficiently large sums. In contrast, borrowing allows municipalities both to avoid large year-to-year fluctuations in property tax rates and to enjoy benefits from capital improvements sooner than they could if they were to finance them on a pay-as-you-go basis. However, loans (unless forgiven) must be repaid from current revenues, which cannot therefore be used for other purposes. As borrowing increases, local budgets end up servicing debt, with the result that local fiscal flexibility may be severely constrained. Municipalities in Ontario have to worry about this problem more than in the rest of Canada because, uniquely, they are required to pay a specified share of “social ser vice costs” (including 20 percent of general welfare assistance benefits and 50 percent of those administration costs; 20 percent of family benefits assistance and 50 percent of those administration costs; and 20 percent of child care ser vices).3 Any downturn in the economy results in an increase in demand on the municipal budget arising from increased social ser vice 3. Beginning in 2010, these costs are being gradually uploaded to the province (see chapter 2). Before 2007 the costs of the Ontario Drug Benefits and Ontario Disability Support Program were also shared by municipalities.

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costs. With fi xed debt obligations, municipalities are then forced to raise property taxes or cut services—in either case exacerbating the very factors to which they are reacting. Local governments that are in debt also have less flexibility in general to react to unexpected events because the more debt they have, the lower their bond rating is likely to be and hence the higher their borrowing costs. Many Ontario municipalities have therefore begun to explore avenues for securing capital finance such as tax increment financing that are not included in their debt limit.4 Although there may be a rationale for upper-level government funding for some types of local infrastructure, based on externalities, there are also clear disadvantages to relying on transfers for financing such investments (Kitchen and Slack 2003). The record in Ontario suggests that grant funding is not always a stable or predictable revenue source for municipalities. When— as is not uncommon—the province decides to cut transfers to municipalities, municipalities must generally try to make up the lost revenue by increasing property taxes or by reducing expenditures. In addition, transfers may distort local decision making. Conditional transfers require municipalities to spend the transfers according to provincial (or sometimes federal) guidelines, and often require matching funds on the part of the municipality.5 Transfers may lead to inefficient local expenditure decisions and to inefficient local revenue decisions. Municipalities have no incentive to use proper pricing when grants cover a large proportion of operating and capital costs. In the past, for example, large grants for water treatment plants in some Ontario municipalities reduced the incentive for them to use volumetric pricing to reduce the demand for water or to manage the asset properly from an economic perspective. Optimizing both charges and prices is important if local governments are to deliver ser vices efficiently.6 As Canadians know from experience with federal-provincial transfers, intergovernmental transfers often result in accountability problems simply because more than one level of government is involved (Smart and Bird 2009a). When users (or taxpayers) have a complaint, they are often unsure which level of government is responsible for the problem. Even if it is clear who does what, since the

4. In addition to permitting municipalities to undertake long-term borrowing to meet capital expenditure requirements, Ontario has established a borrowing limit: municipal debt charges (principal repayment plus interest) cannot exceed 25 percent of own-source revenues, except in the City of Toronto. The Region of York recently asked and was granted an increase in the limit. For more general discussion of debt limits in Canada, see Amborski and Nichols (2010). 5. In 2007, 86 percent of the federal and provincial transfers received by Ontario municipalities were conditional transfers and only 14 percent were unconditional transfers. A large proportion of conditional transfers (68 percent) are for social ser vices and require local matching funds. 6. For discussion of the generally inadequate level and design of user charges in Ontario, see Bird (1976) and Bird and Tsiopoulos (1997).

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level of government making the expenditures is, by definition, not the one that raises the revenues, its incentive to respond to complaints is weak. Ideally, as noted in a recent survey of the fiscal federalism literature, those who decide what a government unit does, those who benefit from the decision, and those who pay for it should all be the same people (Bird et al. 2003). When they are not, as is the case for municipalities in Ontario, neither efficiency nor accountability is likely to be achieved.

Special Assessments and Local Improvement Charges To pay for additions or improvements to existing capital facilities, special assessments and local improvement charges may be levied on adjacent residential, commercial, and industrial properties. This method of financing is used largely to provide new ser vices in existing developments. Special assessments have been used by Ontario municipalities to finance such capital expenditures as paving (or repaving) streets, installing (or replacing) water mains and sewers, construction of sidewalks, and installing street lighting (Bird 1976). Although the size of the charge is based on a particular capital expenditure in a particular year, the cost is usually spread over a period of years. Generally, charges are based on such factors as frontage, size of lot, or (in some instances) the assessment base; they may differ for different geographic zones. In Ontario, the most commonly used base for a special assessment is frontage. This basis is quite appropriate when the cost of the improvement increases with frontage. For example, the cost per connection of water distribution lines increases with the number of feet of pipe between connections. Similarly, if costs are related to the size of the lot, lot size is an appropriate measure. When benefits may be reasonably considered as spread over an entire neighborhood as with a park the zone method may be appropriate. However, it can be difficult to determine the geographic boundaries of the benefits. For example, how far do the benefits of a park extend and to what extent do benefits decline for properties that are located farther away? As a rule, special assessments work best to finance a narrow range of infrastructure investments when the immediately neighboring properties are the major beneficiaries. As it is employed in Ontario, this approach cannot reasonably be used to fund such major infrastructure as transit systems and arterial roads.7

7. More far-reaching methods of land value recapture have been employed elsewhere (Smolka and Amborski 2000) and may in principle be of some use in Ontario (OECD 2010). However, this chapter focuses on methods of capital financing that have either been used in Ontario or are being actively considered by Ontario municipalities.

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Many public works increase the value of nearby land, creating a potential financial benefit for the owners. With a special assessment, the municipality constructs the works and then recoups the cost through a special assessment or local improvement charge on those properties that are presumed to benefit directly from the government expenditure. In theory, the apportionment of capital costs to benefiting property owners should reflect the value of the additional benefits received by each property, where the value is measured by the increase in property value. For example, a water main on a residential street presumably makes properties on the street relatively more desirable, which should be reflected in property values. In reality, however, it is usually difficult to isolate the impact of one capital expenditure from other influences on property values. For this reason, measures such as frontage and lot size are often used instead of property values. Development Charges A more important source of capital financing used extensively in Ontario in recent years has been development charges. Development charges in Ontario (often called lot levies or impact fees in the United States) date back to the 1950s when they were first levied under the authority of the Planning Act.8 It was not until 1989, however, that the first Development Charges Act was passed.9 Until then, for the most part “hard” ser vices, such as water, sewers, and roads for new developments, were installed and paid for by the municipality, which financed them by issuing debentures (bonds), raising property taxes, or levying local improvement charges on benefiting properties. As rapid population growth led to greatly increased housing construction, however, more and more infrastructure finance was shifted to the private sector. Under the Planning Act, for example, the provincial Ministry of Municipal Affairs, which approved all plans of subdivision at that time, could impose conditions such as ser vice provision before giving its approval to a development.10 8. There are other exactions (formal or informal) on developers that are part of the subdivision approval process in Ontario but that are not explicit development charges. Under section 42 of the Planning Act, for example, municipalities can require developers to set aside a portion of their land for parks or public recreational purposes, or to make a cash payment in lieu of parkland equal to the value of the land that would have been conveyed, and parkland dedication can be required of all types of developments. The percentage of land that is required to be set aside is 5 percent for residential properties and 2 percent for commercial and industrial properties. Under the Planning Act, there is an alternative provision in the case of land proposed for development or redevelopment for residential purposes: the land required for parks or public recreation is one hectare for each 300 dwelling units proposed, or a lesser amount specified in the bylaw. Under section 37 of the Planning Act, in what is known as density bonusing, municipalities can grant increased height and density beyond the permitted as-of-right limit in exchange for public amenities. 9. Ontario is the only province in the country that has separate development charges legislation. In all other provinces that allow municipalities to levy development charges, the governing legislation is that province’s version of the Municipal Act or the Planning Act. 10. Ontario Committee on Taxation (1967), see vol. 2, 313–314.

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After 1961 municipalities were allowed to require cash contributions from developers, although only for water, sewers, and roads. For those ser vices, developers were required to provide on-site municipal ser vices (within the development) in return for municipal permission to undertake the development. In addition, some developers were also required to make cash contributions to municipalities toward the growth-related costs for such off-site ser vices as sewers and water trunk lines and plants. With still other projects, on a case-by-case negotiated basis, developers were themselves required to provide off-site ser vices. As the housing construction boom continued in the 1970s, municipalities became interested in what were then called “lot levies”—the charges imposed on developers for off-site ser vices. Both the size of such levies and the scope of services for which they were collected expanded over time. Not only water, sewers, and roads, but also recreational facilities and other so-called soft services began to be included. By the 1980s most Ontario municipalities that were experiencing rapid growth were imposing such lot levies to finance associated ser vices. However, there were many ambiguities in how lot levies were applied. Although it was clear that the Planning Act permitted lot levies to be made a condition of subdivision approval, there was no other governing legislation. A host of critical issues—the calculation of the levy, the timing of payments, adjustments to the levy, the appeal process, and the services that could be financed by the levy—were in effect being determined by the decisions of the Ontario Municipal Board (OMB).11 One such issue was whether the charge imposed on a developer should reflect the capital costs necessitated by the particular development or be based on the average cost of all developments in the municipality. To put this question another way: Should there be (roughly) marginal cost pricing or average cost pricing?12 The Ontario government was under heavy pressure from the development industry to provide a legal framework that would bring consistency and certainty to the application of lot levies. In response, a new act regulating development charges was passed in 1989. This act set out rules that linked development charges to the assumed benefits from services. To limit the “gold plating” of services in new developments, it also specified that charges had to be based on standards of service no higher than those that had existed in the municipality at some time in the previous 10 years. However, since the act did not specify the services for which development charges could be levied, municipalities could and did impose charges for a wide range of both 11. The OMB, an independent, provincially appointed tribunal, hears applications and appeals on landuse planning under the Planning Act and other legislation, including financial issues related to development charges, land expropriation, municipal finance, and other legislated financial areas. 12. As discussed briefly below, the marginal cost is the additional capital cost per property necessitated by the new development. It is likely to vary with density and location. Average cost pricing results in a uniform charge across all developments in a municipality and thus does not reflect different costs for different types of development in different locations.

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hard services (water, sewers, roads) and soft services (city halls, recreational facilities, park development, museums, police and fire services). Developers continued to complain about how the charges were being calculated and what they claimed was abuse by municipalities. For example, the provision set up to prevent gold plating was problematic because for many services the highest past standards were in a year in which there was a major capital expansion. If those facilities had been built to accommodate future growth, as was often the case, then the level of service established in that year represented a significant amount of excess capacity. In response to such complaints, in 1997 the standard was altered to reflect the average level of ser vice over the past 10 years. At the same time, municipalities were constrained from imposing charges for any and all ser vices, and a mandatory 10-percent reduction in the development charge for some ser vices was imposed. With this revision, the pendulum swung: now the complaints came from the municipalities, which argued that they could no longer cover the growthrelated capital costs associated with new development because too many ser vices were excluded or discounted. More than a decade later, neither side seems satisfied. Municipalities continue to argue that they are unable to fund all the capital investment that they consider as associated with new development through such charges, while developers complain that the existing charges are already far too high.13 The Mechanics of Development Charges Development charges are usually payable when a building permit is issued for the development. The money goes into a separate reserve fund for each ser vice to which the development charge relates and may be spent only to cover capital costs for which the development charge was collected. The law allows municipalities to impose development charges “to pay for increased capital costs required because of increased needs for ser vices arising from development of the area to which the by-law applies” (Development Charges Act, 1997, c. 27, s. 2 [1]). Capital costs include the costs of acquiring and improving land, buildings and structures, and other facilities such as furniture and equipment (other than computer equipment), as well as undertaking associated studies and paying interest on money borrowed to pay for such costs. Table 7.2 sets out the ser vices for which development charges may—and may not—be levied. The explicit rationale for the rather curious middle category of services— essentially, ser vices not required at the time of occupancy—was cost containment. Municipalities must pass a development charge bylaw that sets out the determination of the charge that may be imposed. Special areas and projects may 13. For a recent example, see BILD (2008).

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TABLE 7.2

Eligible and Ineligible Ser vices under the Development Charges Act Ser vices for which development charges can be levied without reduction

Ser vices for which a 10 percent mandatory reduction is required

Water supply ser vices, including distribution and treatment ser vices

General government (e.g., master plans)

Waste water ser vices, including sewers and treatment ser vices

Recreation

Storm water drainage and control ser vices

Library ser vices

Public works (e.g., fleets, works yards) Transit

Ineligible ser vices

Cultural or entertainment facilities, including museums, theaters, and art galleries, but not including public libraries Tourism facilities, including convention centres Acquisition of land for parks Hospitals

Ser vices related to highways

Waste management ser vicesa

Police ser vices

Headquarters for the general administration of municipalities and local boards

Fire protection ser vices

a. Although waste management ser vices were included in background studies leading up to the passage of the new legislation, they were listed as ineligible ser vices in the legislation. The only justification provided was that user fees would cover the cost of waste management ser vices; it seems more likely, that this omission had more to do with cost containment.

be defined in the context of the bylaw. To impose a charge, municipalities must first estimate the anticipated amount, type, and location of development to be charged, as well as the increase in need for each ser vice attributable to the anticipated development (excluding benefits to preexisting development). As mentioned earlier, the estimated increase in need must not result in a higher level of ser vice than that provided on average by the municipality over the 10year period preceding the bylaw (see box 7.1). The estimated increase in need has to be reduced by any excess capacity existing in the municipality. Similarly, the estimated capital costs to provide the increased ser vices must be reduced by any contributions made to the municipality in respect of such costs. Development charge bylaws are in effect for no more than five years and are subject to public consultation. The bylaws may be appealed to the OMB, although even when a charge is being appealed, developers must pay the levy before they can proceed with their development. If the OMB ultimately determines that the levy should be reduced, then the municipality has to refund any reduction (plus interest).14 14. Interest is determined as the Bank of Canada rate on the day the bylaw comes into force and is updated as that rate changes.

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BOX 7.1

Setting Ser vice Standards for Development Charges Ser vice standards are determined by some quantitative mea sure, such as the number of facilities per capita (e.g., one fire station for every 10,000 residents) or the number of square feet per capita for facilities for public works buildings. These quantity standards are then converted into dollar figures per capita based on current costs. The dollar value of the average standard may be calculated using two different methods. Assume, for example, that the 10-year period is 1998 to 2008 and the charge is to be calculated for fire halls, and that one fire hall was built in 2000 and another was built in 2005. Under the first method, the standard might be calculated as average number of square meters of fire hall per 10,000 people, over the past 10 years. The cost base of building a square meter could be calculated as the cost to build a square meter of fire hall in 2008 (the last year of the 10-year period). This cost would be multiplied by the ser vice standard per 10,000 to get a dollar value for each 10,000 residents. Under the second method, the cost may be calculated using the actual construction cost of the fire hall built in 2000 and applying a construction cost index, or engineering cost index, to obtain the 2008 cost base for the fire hall. A similar index would be applied to the actual cost of the fire hall built in 2005 to get its construction cost value in 2008 dollars. Once both values have been converted into 2008 dollars, the total could be divided by the square meters of these two fire halls combined, to get a cost per square meter. The dollars per capita amount thus obtained is then multiplied by the growth in the population to determine the eligible costs for the charge.

Prior to the 1989 Development Charges Act, subdivision agreements usually had a “best efforts” clause that required the municipality to make its best efforts to recoup costs from subsequent benefiting owners in order to reimburse developers who undertook front-end financing. For example, if developers oversized facilities (such as a sewer system) beyond the capacity required for their own development, efforts were made to recoup those costs in the future from subsequent developments. Even the best efforts along these lines were often unsuccessful, however. The Development Charges Act therefore provided that a municipality could agree with owners who wished to accelerate development that they would either install water, sewers, and roads or make a front-end payment to the municipality. In exchange, the municipality would be legally obligated to require each benefiting owner—for example, those who later develop land within the benefiting areas—to make their portion of the front-end payment either to the municipality or the providing owner, as appropriate. A municipality may levy (or exempt) development charges on all or any residential, commercial, industrial, and institutional developments. It may also, if it wishes, exempt specific areas of the municipality. For example, some municipalities exempt downtown developments from paying the charge in order to attract businesses to the downtown core. In addition, municipalities are free either

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to levy a uniform charge on each type of development across the municipality (reflecting the average cost of growth in the municipality) or to impose different charges on different developments to reflect the marginal cost imposed by each development. They can, if they wish, do both things at once: levy a uniform charge across the municipality and impose additional specific charges for particular ser vices in specified areas. Unlike the property tax, which is heavily constrained by provincial policy, when it comes to development charges, municipalities can for the most part do whatever they wish. To illustrate the point, different municipalities in the Greater Toronto Area (GTA) have made very different choices.15 As tables 7.3 and 7.4 show, both uppertier and lower-tier municipalities impose development charges.16 In Georgina Township in York Region, for example, the residential development charge on single and semidetached housing is under $20,000 (including the regional and local charges); in King Township in the same region, however, the same charge is almost $26,000. In general, development charges are generally lower per unit on multiple residential units than on single and semidetached housing. In Peel Region (and its constituent municipalities), however, the same charges are imposed on both types of housing. As a rule, apartment units are charged less than multiple-unit dwellings, although apartments with two or more bedrooms pay more per unit than apartments with less than two bedrooms. On the nonresidential side, retail is generally charged more than industrial on the basis of gross floor area, although in some cases (for example, Oakville in Halton Region) the charge is the same. However, the most marked difference is that between the City of Toronto and the rest of the area’s municipalities. Toronto imposes no charges on industrial development. Even though the City of Toronto combines both the regional and municipal tiers of local government, mostly because it is largely already developed, its development charges are markedly lower across the board than those imposed in any other municipality in the GTA. Chapter 8 discusses other aspects of the differential treatment of residential and nonresidential property between Toronto and other GTA municipalities. Development Charges and Property Taxes How important are development charges relative to property taxes? In 2006 development charges collected in the GTA amounted to $664 million compared with $6.3 billion in property taxes, so they are little more than one-tenth 15. For another example, see the earlier comparison of different development charges—on-site, off-site, hard ser vices, soft services—for two specific projects in the GTA (one in Vaughan in York Region and the other in Brampton in Peel Region) in CMHC (2005). 16. School boards may also impose development charges, although now only for land costs.

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TABLE 7.3

Residential Development Charges, Selected Ontario Municipalities, 2007 (in dollars) Apartments Single and semidetached

Multiple-unit dwellings

Two or more bedrooms

Fewer than Two bedrooms

Toronto

10,415

8,288

6,755

4,198

York Region* Aurora East Gwillimbury* Georgina King* Markham* Newmarket Richmond Hill* Vaughan Whitchurch-Stouff ville*

16,249 10,173 5,462 3,590 9,598 8,586 7,516 8,859 9,568 7,488

13,846 8,081 4,528 3,472 8,310 6,745 6,043 7,341 8,202 5,154

10,157 5,985 3,414 2,471 5,813 5,748 4,765 4,809 5,332 4,255

6,460 4,490 2,350 1,704 4,002 3,653 3,032 4,809 5,332 3,806

Durham Region Ajax Brock Clarington Oshawa Pickering Scugog* Uxbridge Whitby

13,332 9,189 9,389 9,383 7,094 9,207 10,388 9,413 9,110

11,198 7,704 7,446 8,229 6,300 7,476 8,239 8,560 7,592

7,758 4,784 5,504 6,353 4,244 5,230 6,089 5,704 5,497

4,921 3,399 5,504 4,043 3,358 3,428 6,089 5,704 3,534

Peel Region Brampton Caledon Mississauga

8,302 16,214 13,624 8,488

8,302 16,214 12,393 8,488

5,930 11,922 9,071 6,063

3,084 6,199 5,243 3,153

Halton Region, non-HUSP Halton Region, HUSP Burlington* Halton Hills Milton Oakville*

12,078

8,128

6,929

4,653

20,092 7,682 7,851 9,158 10,911

13,982 4,191 6,253 6,944 8,587

11,687 4,090 4,400 5,221 6,940

7,862 2,791 3,011 3,450 4,000

* indicates area-specific charges may apply. HUSP = Halton Urban Structure Plan for Water and Sewer Servicing to Halton Hills. source: York Region 2007 DC By-Law Review Background Study.

as important (table 7.5). However, if the City of Toronto is set aside, the ratio of development charges to property taxes for the rest of the GTA rises to almost one-fifth. Moreover, as table 7.5 shows, the ratio of development charges to property taxes varies widely across the GTA. It is very high in Whitchurch-

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TABLE 7.4

Nonresidential Development Charges, Selected Ontario Municipalities, 2007 Dollars per square foot of gross floor area Industrial

Toronto

Retail

—

7.77

York Region* Aurora East Gwillimbury* Georgina King* Markham* Newmarket Richmond Hill* Vaughan Whitchurch-Stouff ville*

3.97 2.32 1.48 1.28 4.05 1.04 0.97 0.97 1.54 4.36

7.88 2.32 1.48 1.28 4.05 1.04 0.97 2.35 1.54 4.36

Durham Region Ajax Brock Clarington Oshawa Pickering Scugog* Uxbridge Whitby

— 1.89 3.76 2.00 3.14 2.50 5.10 — 1.56

5.02 2.86 3.76 3.64 3.14 2.50 5.10 3.61 3.12

Peel Region Brampton Caledon Mississauga

3.10 3.40 1.71 2.84

4.29 5.23 2.61 3.49

Halton Region non-HUSP Halton Region HUSP Burlington* Halton Hills Milton Oakville*

5.93 9.83 2.69 2.62 3.01 5.08

9.15 9.83 2.69 2.62 3.01 5.08

* indicates area-specific charges may apply. HUSP = Halton Urban Structure Plan for Water and Sewer Servicing to Halton Hills. source: York Region 2007 DC By-Law Review Background Study.

Stouff ville and Milton—municipalities in which property taxes yield relatively little, both because the tax base is small and because the tax rate is relatively low. The ratio is also high in Vaughan, a municipality that not only has the highest population growth rate in the GTA but also imposes a relatively low average

York Region Aurora East Gwillimbury Georgina King Markham Newmarket Richmond Hill Vaughan WhitchurchStouff ville

Toronto

23.1 15.2 4.0 13.0 1.7 20.3 15.2 29.8 37.3 11.0

4.0

Population growth rate, 1996–2001 (%)

111.1 7.3 1.1 0.6 0.2 24.2 3.2 10.4 47.1 8.3

35.2

Development charge revenues (millions of dollars)

621 22 9 24 11 93 30 59 101 10

3,101

Property taxes (millions of dollars)

Development Charge Revenues, Greater Toronto Area, 2006

TABLE 7.5

123,928 6,103 2,675 4,051 3,495 34,743 8,172 22,708 38,178 3,806

314,421

Taxable assessed value (millions of dollars)

0.50 0.86 0.84 1.09 0.82 0.77 0.87 0.76 0.76 0.76

0.99

Effective property tax rate (%)

17.9 33.6 12.1 2.3 1.4 26.2 10.8 17.5 46.9 82.8

1.1

Development charges relative to property taxes (%)

3.5 10.3 7.4 9.4 18.5

16.0 21.3 26.9 12.6

10.4 10.1 13.7 −2.0 12.7

Oshawa Pickering Scugog Uxbridge Whitby

Peel Region Brampton Caledon Mississauga

Halton Region Burlington Halton Hills Milton Oakville 66.6 8.3 3.2 16.7 15.7

79.4 74.3 2.3 38.1

8.4 2.1 0.6 2.3 9.6

65.9 14.7 0.3 6.9

274 84 21 18 92

650 189 23 246

88 32 8 7 46

400 35 6 32

58,446 20,096 6,214 6,746 25,396

128,749 40,261 8,149 80,339

11,111 9,320 2,429 2,463 10,769

52,204 3,383 1,157 6,808

0.47 0.89 0.81 0.74 0.83

0.50 0.97 0.78 0.81

1.56 1.11 1.10 1.05 1.20

0.77 1.80 1.29 1.24

24.3 9.8 15.0 92.0 17.1

12.2 39.2 9.7 15.5

9.5 6.6 7.7 34.7 20.9

16.5 42.0 5.3 21.7

source: Ministry of Municipal Aff airs and Housing, Financial Information Returns, 2006.

note: Development charge revenues include subdivider contributions because these terms have been used interchangeably by municipalities in the fi nancial information returns. Effective property tax rates (calculated as the ratio of property taxes to tax assessed value) for municipalities other than Toronto include the respective regional rates (in bold) to make them comparable to Toronto. For example, the effective tax rate for Aurora (0.86) is the lower-tier rate (0.36) plus the regional rate (.50).

10.5 14.5 3.5 15.2

Durham Region Ajax Brock Clarington

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effective property tax rate. In contrast, the ratio is low in Toronto where, although property tax rates are not as high as elsewhere in the GTA, property tax revenues are very large, while development charges are relatively low because most infrastructure is already in place. Discussions of development charges often appear to assume that they substitute for the property tax.17 The simple correlation between the population growth rate and development charges of 0.32 does suggest a positive relationship between the two variables, although not a very strong one.18 On the other hand, the simple correlation of 0.55 between assessed value and development charges suggests that those municipalities with larger assessment bases are making greater use of development charges. When Toronto, which is largely built up and makes little use of development charges, is removed from the data set, this correlation increases to almost 0.90. Although some earlier U.S. literature suggested that impact fees (which are more or less the same as development charges) might reduce property tax rates (Skidmore and Peddle 1998), this conclusion is not supported by GTA data. In fact, the low but positive correlation of 0.2 observed between development charges and property tax rates (calculated as taxes relative to taxable assessed value) suggests that there is actually a weak association between higher revenues from development charges and property tax rates.19 A recent analysis of the relationship between development-related charges and property taxes in the United States similarly concludes that although such charges may provide some tax relief, they are not a strong substitute for property taxes (Jung, Roh, and Kang 2009).20 Development Charges Evaluated Since residential development charges are imposed only on new construction, their incidence depends on the demand and supply for dwellings in the local market. If the demand for housing is fairly inelastic, the developers are likely to pass the charges on to new home buyers. This is especially likely to happen in buoyant housing markets like that in the GTA over most of the past decade. When housing markets are less buoyant, as has been true since the slump of late 2008, developers and builders are likely to postpone or defer development and construction activity, while buyer price resistance makes it more difficult to 17. For instance, see Steele and Tomlinson (2009). 18. When Toronto is taken out of the data set, the correlation increases only slightly, to 0.34. 19. The effective tax rate used to estimate the correlation between development charges and effective tax rates includes only the lower-tier tax rate. 20. Jung, Roh, and Kang (2009), using a panel of 695 cities from 1980 to 2000, analyze the effect of impact fees and special assessments on the level of capital spending, total local taxes (mainly sales and property taxes), property taxes, and long-term debt. They find that a dollar of development charges increased capital spending by 29 cents, that a very small amount of charge revenue was used to provide tax relief, and that on balance the charges resulted in increased long-term debt.

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pass on charges even to those who are still in the market. On the whole and over the long run, most studies that have examined the burden of the development charge suggest that it is generally buyers of new housing who ultimately pay the tax (Slack and Bird 1991). Moreover, although development charges are levied only on new construction, buyers of existing properties may also face higher prices. If newer and older homes are substitutes in the housing market, increased prices for new homes will shift demand to older homes and hence raise their selling price, so that in the end all houses sold, new and old, will to some extent feel the impact of development charges. Development charges are arguably fair in terms of the benefit principle when the beneficiaries of services from publicly provided facilities are easy to identify, when the capital cost of facilities servicing specific properties can be determined for each property, and when essentially all benefits from the service are confined to that property. Water, sewers, and local streets are examples. In some circumstances, other new capital expenditures accompanying growth, such as those for fire and police stations, parks, museums, libraries, and recreational facilities, might also fit into this category, although with more difficulty and further assumptions. However, even when development charges adhere strictly to the benefit principle, there may be inequities in allocating costs between current and future taxpayers. Suppose that a municipality uses property taxes or user fees on new properties to finance the repayment of capital expenditures for existing properties, or to finance future capital expenditures (by adding what is in effect an annual capital levy to the general property tax). Owners of new properties would then be paying not only for their own facilities (through development charges) but also for the replacement of capital facilities for owners of existing properties (through the property tax). Alternatively, municipalities might set aside funds for the benefit of future owners. In either case, new property owners would not be treated fairly compared with owners of existing properties. And to the extent that existing properties benefit from facilities financed by previous property owners through property taxes, moving to a system of financing infrastructure through development charges on new properties bestows a windfall gain (in the form of increased property values) on existing property owners. On the other hand, if existing property owners paid for ser vices that benefited only new development, they might be paying for others to enjoy a higher level of ser vice than they themselves received in the past. In a crude effort to reduce such “doublecharging,” some municipalities have deliberately discounted development fees by charging less than the attributable costs. Accountability in municipal finance is arguably best achieved when taxes (or charges) imposed on a property pay for specific ser vices used by that property. Development charges are clearly more accountable in this sense than property taxes, owing to the closer link between ser vices and charges. Provided

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that the right charges are imposed, costs that clearly benefit only new properties should be paid for by those properties. Transparency is further enhanced if charges are deposited in separate accounts, with the (legislated) provision that funds can be spent only on the ser vices for which the charges are collected. However, the clarity of this system in principle is considerably obscured in practice because charges are often levied long before a building is sold, with the result that even when charges are fully shifted forward to buyers, in many cases— and especially in large metropolitan areas with high intrametropolitan mobility—those who bear the burden cannot hold the local government accountable in any real sense because they were not local voters at the time the charges were imposed. Development Charges and Land Use Nonetheless, development charges may help close the accountability gap at the local level between “deciders,” “payers,” and “beneficiaries” to some extent. Development charges can also be a useful tool in encouraging efficient land use. To be efficient, a development charge must include the full costs required to service new growth. For infrastructure, such a charge might include a capacity component (to cover the capital cost of constructing the facility) plus a location or distance/density charge (to reflect the capital cost of extending the ser vice to particular properties or neighborhoods).21 The total development charge levied on an individual property (or on a neighborhood) should ideally be designed to recapture the extra (marginal) cost of the capital facility incurred as a result of adding that property or neighborhood to the system.22 Area-specific charges that allow municipalities to vary the charge by area according to differences in infrastructure costs are more likely than uniform citywide charges to reflect the true cost of providing public ser vices and to be more economically efficient. The costs of ser vices may vary by area for several reasons (Tomalty and Skaburskis, 1997). ■

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The distance to the facility may be different. A development far away from a water treatment plant, for example, may require an additional pumping station and should therefore pay a higher development charge than a development near the treatment plant. The infrastructure is already there. With nodal or infill development, for example, there may be some cost savings because the infrastructure exists.

21. To ensure efficient use of infrastructure investment, appropriate user charges should also be applied, as discussed, for example, in Bird and Tsiopoulos (1997). 22. As mentioned earlier, the possibility of more ambitious “value capture” systems has not been an issue in Ontario.

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Such developments should pay lower charges than new developments that require new infrastructure to be built. Finally, ser vice standards may be different in different developments. For example, standards may be established in an area to reflect different levels of efficiency in terms of per household water use, waste generation, automobile use, and so on.

Whatever the reason for differential costs, efficient land use requires that developments that impose higher infrastructure costs on the city should pay higher development charges than developments that impose lower costs. If charges reflect the full costs and benefits (private and public) of the development, developers will make more appropriate and more efficient choices about where to locate new construction. Some municipalities impose an identical charge on all properties of a particular type, regardless of location (see tables 7.3 and 7.4). Presumably, this practice has been adopted for administrative simplicity and to reduce conflicts with developers (OECD 2010). It is clearly inefficient. A house in a low-density neighborhood pays exactly the same as one in a high-density neighborhood, despite the fact that the marginal cost per property of infrastructure projects in low-density areas is almost invariably higher because longer pipes, more asphalt, more cement, and so on are needed to service a house in a low-density neighborhood. A uniform, “postage stamp” charge policy thus subsidizes inefficient uses of land. Under such a system, developments that impose higher costs are subsidized by developments that incur lower costs. One result is likely to be overdevelopment of low-density housing and underdevelopment of high-density housing relative to what is economically efficient (Slack 2002a). Education Development Charges An important feature of the 1989 Development Charges Act was that it empowered school boards to levy development charges to meet the growth-related education capital costs (net of capital grants and subsidies) associated with development in their school board area. Such charges could be applied to residential and nonresidential developments. Since the funds collected could be used only for school construction costs approved by the Ministry of Education and approved for capital grant purposes, school boards were required to determine the costs of site acquisition and construction on the basis of what would be approved by the Minister of Education. At the time this act was passed, the Ministry’s Capital Grant Plan called for school boards to justify new schools by examining enrollment projections and existing capacity. The Ministry then used this information to determine capital

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allocations, and based its grant to a school board on the approved portion of the costs, to which a grant rate related to the assessment base was applied. The (provincially approved) cost minus the (provincially approved) grant established the maximum amount that could be financed from a development charge. Any costs in excess of the approved amount had to be financed out of property taxes. Since boards for separate schools generally had a smaller assessment base than public boards, their grants were higher, on average, for a given capital expenditure than grants for public boards. Separate boards were thus generally less dependent on development charges than public boards. Under this system, the magnitude of the development charge for education was based not only on the benefits received by those in new developments (the charge itself) but also on the ability to pay of the entire jurisdiction (through the grant). Moreover, any expenditures above the approved amount were paid for out of the property taxes of the entire jurisdiction, not just the property taxes in the new development. After the passage of the Development Charges Act, the grant formula was changed so that the grant was smaller for growth-related capital projects than for non–growth-related projects, whether or not a development charge was levied. Whether a board imposed a development charge to fund the growth-related capital costs of schools or not, it got the same provincial capital grant. In effect, the capital grant was now intended to compensate only for differences in the property tax base and not for the amount of revenue actually raised from the assessment base. The Ontario Fair Tax Commission (1993) suggested that development charges should not be used to pay for any of the growth-related capital costs of education, and that education should be funded entirely from general provincial revenues. Th is advice was heard, at least to some extent. When the provincial government took over the funding of elementary and secondary education in 1998, education development charges were also changed. Although school boards can still levy education development charges to purchase land for schools, they are no longer allowed to charge for other capital expenditures; instead, the new provincial school funding model provides grants to cover the costs of constructing and furnishing new schools (see box 6.1). However, because school boards are responsible for the provision of sites for new schools, they are still allowed to impose education development charges on both residential and nonresidential development to cover land acquisition costs. As usual, lower-tier municipalities are stuck with the unpleasant task of collecting these charges on behalf of school boards and are required to transfer the revenue to them.

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Land Transfer Taxes Land transfer taxes in Ontario are levied at the time of sale of a property.23 The tax base is the value of the property, including any buildings and fi xtures, net of sales taxes.24 The tax, which must be paid before the transfer will be registered, is calculated as a percentage of the purchase price and is thus similar to a sales tax payable by the purchaser. The tax rate is 0.5 percent of the first $55,000 of the purchase price, 1 percent on the amount from $55,000 to $250,000, 1.5 percent on the amount from $250,000 to $400,000, and 2 percent on the amount over $400,000. Since 1996 a refund of up to $2,000 (the tax payable on a house bought for $227,500) has been provided for first-time home buyers of newly built homes; in 2008, a similar refund was made available for first-time buyers of resale homes. Also in 2008, as permitted for the first time under the 2006 City of Toronto Act (see chapter 2), Toronto imposed a municipal land transfer tax in addition to the provincial land transfer tax.25 For properties containing at least one and not more than two single-family residences, the municipal rate replicates the provincial rates, omitting one bracket: 0.5 percent for the first $55,000, 1 percent on the amount from $55,000 to $400,000, and 2 percent on the amount over $400,000. As with the provincial tax, first-time purchasers of a newly constructed or resale property with one or two single-family residences are eligible for a rebate, in this case ranging up to $3,725 (the amount paid on a $400,000 house). For other properties, Toronto’s rates reflect the considerable value of some of its real estate and encompass much higher brackets than the provincial rate: 0.5 percent for the first $55,000, 1 percent on the amount from $55,000 to $400,000, 1.5 percent on the amount from $400,000 to $40,000,000, and, interestingly, only 1 percent on the amount over $40,000,000. In the mid-1970s, the province had levied another type of land transfer tax, known as the Land Speculation Tax. This tax was imposed on gains realized on the disposition of real property, including buildings and fi xtures. The stated purpose of the tax was to restrain the rate of increase of land and housing prices 23. Six provinces in Canada impose land transfer taxes. Municipalities in Nova Scotia have the authority to impose the tax, as does the City of Toronto. In both these cases— and also, interestingly, in the province of Quebec— the revenues are retained locally. 24. New houses in Ontario are subject to both the federal Goods and Ser vices Tax (GST), which is 5 percent, and, since July 2010, the provincial component of the Harmonized Sales Tax (HST; 8 percent): in other words, to a combined rate of 13 percent. However, rebates are provided by both governments for lower-value houses. In Ontario’s case, 75 percent of the tax is rebated, up to a maximum of $2,400. The same rebate is available for rental housing. 25. Interestingly, both the provincial and the city tax are collected by a private company, Teranet. Teranet was formed in 1991 as a partnership between the Ontario government and the private sector to create an electronic land-registration management system. The Ontario government divested its interest in Teranet in 2003; see http://www.teranet.ca /.

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by curbing speculation, and also to recover for the public a major share of the windfall gains from land speculation. A tax rate of 20 percent was applied to realized capital gains, with some important exceptions.26 A study of the Land Speculation Tax found that although the tax caused a temporary reduction in the price of houses, it left the upward trend in house prices unaffected (Smith 1976). Furthermore, the tax appeared to increase concentration in the construction industry and in the ownership of residential investment properties, thus reducing competition. The tax was also criticized for encouraging the deterioration of residential investment properties and reducing the availability of funds for investment in real property. Finally, the tax was found to be so costly to administer that it was not clear if it generated sufficient revenue to cover even its administrative costs. Revenues were indeed small, since taxable transactions were severely discouraged; at the extreme, if the tax succeeded in eliminating speculation, there would presumably be no revenues at all. As a result of such criticisms, the tax was eventually eliminated. Somewhat similar criticisms have already been raised about the new Toronto land transfer tax. An empirical study of the effects of this tax in the first eight months of its operation concluded that its effects were on the whole detrimental. A 16-percent decline in the sales of single-family houses and an average drop of $6,400 in selling prices were attributed to the tax. More interestingly, the authors also estimated that the land transfer tax resulted in reduced household mobility, with about 3,500 families that would have moved not doing so because of the existence of the tax, and that the economic costs of reduced mobility were significant (Dachis, Duranton, and Turner 2008). As David Ricardo pointed out two centuries ago, taxes on the transfer of property are in a sense the ultimate antimarket and antidevelopment tax.27 Such taxes may “lock-in” properties (Sexton 2008) and hence discourage change and development. Their popularity around the world (Bird and Slack 2004) is presumably attributable to administrative convenience.28 As Dachis, Duranton and Turner (2008) emphasize, a more efficient way to raise revenue would be to increase the property tax by a small amount. Nonetheless, despite the economic advantages of encouraging efficient property transfers rather than discouraging them through

26. Exceptions included principal residences; developed industrial and commercial property sold to the government; residential investment property owned by the transferor for at least 10 years and containing a structure worth at least 40 percent of the total value; farm property owned by the transferor for at least 10 years, included in a registered plan of subdivision, and wholly or partially ser viced by the transferor. 27. For an early analysis of such “market-discouraging” transfer taxes and references to the older literature, see Bird (1967). 28. It is important to distinguish land transfer taxes such as those discussed here from value-added taxes applied to new housing sales, like the GST/HST in Ontario. The latter, by taxing housing consumption (effectively in advance but, as in Canada, usually at a lower rate) improves rather than distorts resource allocation and may indeed even be argued to be “optimal” (Smart 2010).

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lock-in effects, voters who adamantly resist increases in property taxes seem much more willing to accept taxes that are imposed on those who actually buy or sell properties. To that end, some more ingenious ways of tapping into property markets without actually imposing property taxes have been developed and, to a limited extent thus far, applied in Ontario.

New Ways to Tax Property without Property Taxes Tax Increment Equivalent Grants Under the Planning Act, Ontario municipalities can designate an area or the entire municipality as a community-improvement area and then implement a community-improvement plan (CIP) with grants, loans, or both. If the municipality chooses, these financial incentives may be calculated on a tax increment basis—that is, based on the higher property tax that the development is estimated to generate (the tax increment). Such incentives are known as tax increment equivalent grants (TIEGs).29 As an example of how a TIEG works, suppose that the municipal property tax before redevelopment in a particular project area is $10,000, but that it would increase to $110,000 after redevelopment. The tax increment for the project is thus $100,000. If the TIEG grant is paid over a 10-year period following redevelopment, the payment in the first year would be equal to 100 percent of the tax increment ($100,000). Each year, the payments would then be reduced by 10 percentage points until they stopped altogether in year 11. The subsidy decreases from $100,000 in year 1 to $90,000 in year 2, $80,000 in year 3, and so on, down to $10,000 in year 10 and zero in year 11. Under this formula, the total value of the subsidy in nominal dollars over the 10-year period would be $550,000. Over the same period, however, the municipality presumably would collect twice that amount ($1.1 million, or 10 times $110,000) in tax revenues, or $1 million more than it would otherwise have received. Perhaps in part because it appears that everyone wins in this scenario— though more likely because of the difficulty of raising property taxes and the general reluctance of Ontario municipalities to borrow (Bird and Tassonyi 2001)—tax equivalent increment financing is used in a number of communities across Ontario. The City of Cambridge, for example, offers TIEGs to stimulate property improvements and investment in the downtown core areas of the city. The city has a three-year phased program that provides grants equivalent to a 29. One of the main differences between TIEGs and tax increment financing is that TIEGs include a subsidy component. Another difference is that TIEGs apply only to the municipal portion of the property tax and not the education component.

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percentage of the city’s portion of the increase in property taxes as a result of property improvements. Eligible developments are those that result in an increase in municipal property taxes and may include, for example, the restoration and redevelopment of contaminated sites. Similarly, the City of St. Catharines provides grants to applicants who undertake rehabilitation activities that increase the property assessment and municipal property taxes. Grants are available for up to 10 years. As in the example above, in the first year the grant is equal to 90 percent of the tax increment, and it falls by 10 percent per year after that. Other Ontario cities using TIEGs include Hamilton, Guelph, Kitchener, Brantford, and Cornwall. Recently the City of Toronto introduced a TIEG that is available citywide for a period of 10 years and is linked to the development of key economic sectors. Even municipal subsidies to business through the use of TIEGs are permissible, provided they are approved by the province. Despite their growing popularity, these programs are fairly new in Ontario and no empirical analysis has been done of their impact on economic activity or land use. However, a number of U.S. cities have similar programs, and their impact on economic activity has been studied a number of times. One recent study concluded that, on the whole, such property tax abatement programs have probably had no significant impact in terms of, for example, attracting development to the downtown cores of cities where it would not otherwise have occurred (Wassmer 2007). Other studies over the years have suggested that property tax differentials are more likely to influence business location decisions within metropolitan areas than between metropolitan areas. In other words, if a firm is choosing between Toronto and Buffalo for a location, or even between Toronto and the nearby city of Waterloo, property taxes are unlikely to play a significant role. However, if a firm decides to locate in the Toronto area, just where in the GTA it chooses to locate may be affected by property tax differentials (as discussed in chapter 8). In addition, the larger the property tax differential, the more likely it is to have an impact on the decision. Ser vice levels also affect location decisions. Lower taxes combined with lower ser vice levels are unlikely to attract new firms. Of course, ser vice levels and tax levels both matter more to some businesses than others. Manufacturing firms, for example, may be more influenced than ser vice firms by property tax differentials, although when there are significant advantages from being in a particular location, property taxes will have less of an impact. And any property tax incentive is more likely to have such effect when it is available only in one jurisdiction within a particular metropolitan area; if everyone offers incentives, they are not likely to work for anyone. Finally, property tax reductions for some properties are likely to result in property tax increases for others; there is no free lunch. Whether such redistribution of the tax burden is progressive or regressive will depend on who ultimately bears the burden of the

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higher taxes. For example, taxes on business property might be borne by the owners of the business, by owners of capital in general, by the consumers of products produced by the firms, by workers in the firm or by labor in general, or by some mixture of these groups. If lower taxes on new firms mean higher taxes on the people working in existing firms, tax incentives would likely be regressive. In a somewhat different context, the “no free lunch” argument is at the heart of the traditional view of property tax incentives, which focuses on the zero-sum aspects of tax competition: development at one location will be at the expense of development at another location (Kitchen 1985). The underlying assumption in this argument is that the overall supply of capital is fi xed and that it flows to different jurisdictions in response to price (tax) changes. In these circumstances, tax competition does not increase the national capital stock but simply moves it around. Even tax incentives that seem to work in the sense of attracting activities to a particular jurisdiction may be wasted on firms that would have located there anyway. The true degree of additionality of any investment attracted by tax incentives is at least as questionable when it comes to competition between localities as between nations.30 Interjurisdictional competition through tax incentives may not only result in unfair competition between existing and new businesses, but may also lead to an environment in which no major investments are likely to occur without the tax incentive pot being sweetened. As the general literature on tax competition discusses at length, inefficiently low tax and public service levels may also result.31 Bartik (1991), for example, stresses the adverse effects of tax reductions on state and local public services, noting that tax cuts have to be financed in some way, and that if they are financed by cutting public services that businesses want, their net effect on economic development could even be negative. Some studies argue it is preferable to provide services, such as better municipal infrastructure, that will benefit both new firms and existing residents and firms (Fisher 1997). Improved infrastructure would influence firms to locate in the municipality and provide a tangible resource to the community. Others think that the general incentive of lowering property taxes on all business properties, because it leaves investment decisions to the market, is probably preferable to tax concessions to any specific business. Some arguments are more favorable to tax incentives. For example, GarciaMila and McGuire (2002) note that new investment can create external benefits from agglomeration economies—that is, the benefits that firms gain from locating near each other. If types of activities, like jurisdictions, differ in relevant ways, selective tax breaks may be justified in at least some cases (Glaeser 2002), 30. For a recent review of the international competition literature, see Klemm and van Parys (2009). Chapter 8 discusses intrametropolitan competition in more detail. 31. See, for example, Oates (1972), Wildasin (1989), Wilson and Wildasin (2004), and Zodrow and Mieszkowski (1986).

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although it seems rather improbable that any particular municipality would be likely to be in a good position to determine which particular firms should receive such a tax incentive, let alone just how large that incentive should be to induce the desired response. Tax incentives have also been justified on the basis that they signal that a municipality is “open for business,” although relatively low taxes on business would provide the same signal without opening the door to somewhat discretionary negotiations. In addition, some argue that the political benefits of being able to claim credit for creating new jobs and new investment probably outweighs all other considerations (Brunori 2003). Although this last argument certainly fits with observations in Ontario, from another perspective it simply underlines the general conclusion emerging from the literature that special local property tax incentives such as those embodied in TIEGs are on the whole unlikely to produce the desired results. Tax Increment Financing Unlike TIEGs, tax increment financing (TIF) does not provide an explicit subsidy to businesses to locate in a particular area of a municipality. Instead, it “relies on the incremental future tax revenues from a specific site or area as security for the financing” (Ontario Ministry of Finance, 2005, 4). Although TIF has been around in the United States for many years, the Tax Increment Financing Act was passed in Ontario only recently, in 2006. While no regulations have yet been issued, the City of Toronto has been given permission to develop TIF for a downtown development and also, in conjunction with York Region, for the financing of a subway extension. The TIF approach first appeared in 1952 in California and is now used in almost all states.32 TIFs have been used to revitalize blighted urban areas, to stimulate downtown revitalization, to encourage brownfield remediation, and to finance major infrastructure. Most states allow TIFs to be used for commercial and industrial projects; 30 states also allow TIFs for residential uses (Sands, Reese, and Tredeau 2005). TIF districts have in many cases become the focal points for tax incentives as well as the recipients of grants from the federal and state governments. As a rule, a TIF district is established with particular geographic boundaries, based on planning criteria and what is permitted in the enabling legislation. Once the area has been given official status, the annual property tax revenue accruing to all taxing authorities within the district (the municipality, school boards, and so on) is frozen at prerevitalization levels, or base-level property 32. For discussion of some of the extensive literature on the American experience with TIF, see Anderson (1990), Slack (2005), TD Economics (2004), and Wassmer (1994).

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taxes. For a period of time, generally between 15 and 35 years, all or some portion of the incremental tax generated by redevelopment (above the base level) then accrues to the redevelopment agency (which may be the municipality itself) to be used for the redevelopment project. Redevelopment is usually implemented by the private sector, although always under the auspices of a city board or a community redevelopment agency. Investment in infrastructure, land assembly, land write-downs, and other improvements are undertaken and often financed by borrowing or bonds issued against expected incremental tax increases. After the TIF period expires, tax revenues from the expanded assessment base again accrue to the taxing authorities. Unlike with a specific tax reduction or forgiveness of taxes (sometimes called tax bonusing), with TIF developers are not taxed at a different rate than other property owners, although they may benefit from being able to access a more appropriate or a more affordable site. If TIF works as it is supposed to, there is neither a direct transfer of funds from the government nor a transfer of tax dollars from one business to another. Because TIF funds are dedicated to redevelopment, however, taxpayers have more assurance that their taxes (and their own investments) will contribute to (and benefit from) a revitalized district, thus strengthening the Wicksellian connection between taxes and benefits and reducing political risk and uncertainty. In short, TIF seems like a better deal all around than TIEG, from the perspective of the municipality— and not a bad one from a private perspective. Of course, not many institutions work perfectly, and TIFs are no exception. It may not, for instance, be able to generate the predicted tax revenues, and the resulting lack of funds could threaten efforts to revitalize the designated area.33 Other taxing authorities (such as school boards) are unlikely to be happy that property taxes are frozen at a time when they are experiencing growing demand as a result of the revitalization.34 Moreover, although it is not a tax incentive, TIFs may have some of the same negative effects: merely accelerating development that would have occurred anyway, for example, and targeting funds to a designated area at the expense of “border” areas on the periphery of the TIF district and possibly at the expense of overall municipal growth. TIF may also turn out to be quite costly. Experience in the United States indicates that revenue bonds for TIF projects carry a risk premium in excess of 300 basis points over comparable general-obligation bonds, because debt repay33. A recent study suggests that the increase in property values will be greatest for districts with higher initial property values, larger TIF budgets, and larger bonds (Sands, Reese, and Tredeau 2005). Moreover, commercial and residential uses are associated with greater increases in property values than industrial uses; see also Weber, Bhatta, and Merriman (2003). 34. In the case of Ontario, however, since the provincial government would forgo education property tax revenues, under the funding formula it would probably have to increase its grant funding to the relevant school boards.

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ment depends on future increments in property tax revenues, and the municipality has no obligation to pay bond holders if sufficient tax increments are not generated (TD Economics 2004). One reason U.S. local governments nonetheless appear to favor TIF bonds is because they do not require voter approval. In addition, although they are often backed secondarily by the “full faith and credit” of the municipality, they are not subject to the constitutional and statutory debt limitations that exist in many states (Johnson 1999). Neither factor seems that important in Ontario, where bond issues do not need explicit voter approval and municipalities are much less subject to such restraints in generalobligation borrowing, although for reasons explored elsewhere (Bird and Tassonyi 2001), they have in general used their borrowing power much less than their counterparts south of the border. Unless an Ontario municipality is close to its borrowing limits, and few are, TIF seems unlikely to create much of an incentive for them to borrow.

Business Improvement Area Levies A business improvement area (BIA) is a geographic area in a municipality.35 A BIA board of management is orga nized to oversee the improvement, beautification, and maintenance of municipally owned land, buildings, and structures in the area, over and above what the municipality provides. BIAs also promote the area as a business and shopping district. Common activities include marketing, business recruitment, streetscape improvement and other amenities, seasonal decorations, and special events. The local municipality approves the budget for the BIA. There are currently more than 230 BIAs in Ontario, varying in size from less than 60 businesses to more than 2,000 businesses and property owners. In the City of Toronto there are 65 BIAs representing more than 20,000 businesses and generating more than $10 million in funding.36 BIAs are funded by a special levy imposed on commercial and industrial properties in the area that is collected by the municipality and then transferred to the BIA. The levy for each property is based on its proportionate share of the agreed budget as measured by its assessed value. Once a BIA is established, firms do not have any discretion about paying this levy: if they do not pay, they are subject to the same fines and penalties as if they did not pay their property taxes. BIAs may also raise funds for BIA-related events through corporate sponsorships and user fees. However, unlike their counterpart business improvement districts (BIDs) in many U.S. states, BIAs in Ontario cannot borrow money or 35. BIAs are similar to business improvement districts in the United States. 36. For information about BIAs in Toronto, see www.toronto.ca /bia /about.htm.

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TABLE 7.6

Business Improvement Area Levies, Greater Toronto Area, 2006 BIA levies (dollars)

Property taxes (dollars)

BIA levies as % of property taxes

9,433,768

3,101,070,042

0.30

York Region Aurora East Gwillimbury Georgina King Markham Newmarket Richmond Hill Vaughan Whitchurch-Stouff ville

0 0 0 0 335,945 0 0 0 39,999

21,864,908 9,078,387 24,111,964 11,419,436 92,626,634 29,751,379 59,172,124 100,537,963 10,065,756

0.00 0.00 0.00 0.00 0.36 0.00 0.00 0.00 0.40

Durham Region Ajax Brock Clarington Oshawa Pickering Scugog Uxbridge Whitby

44,350 0 155,950 145,433 0 103,040 80,625 0

35,041,192 5,644,166 31,749,617 87,631,816 31,795,787 7,986,410 6,486,540 45,876,534

0.13 0.00 0.49 0.17 0.00 1.29 1.24 0.00

Peel Region Brampton Caledon Mississauga

311,135 49,061 528,077

189,352,599 23,325,188 246,066,877

0.16 0.21 0.21

Halton Region Burlington Halton Hills Milton Oakville

483,676 167,267 115,715 839,763

83,926,445 21,235,154 18,144,257 91,655,648

0.58 0.79 0.64 0.92

Toronto

incur debts extending beyond the current year without approval by the municipal council. Table 7.6 shows that 15 municipalities in the GTA use BIA levies. Invariably, however, BIA levies account for a relatively small proportion of property taxes, ranging from 0.13 percent in Ajax to a little more than 1 percent in Scugog and Uxbridge. Although there has been little analysis of the impact of BIAs on property values— or even of the impact of BIDs in the United States— a few studies suggest that they may improve neighborhoods by reducing crime (Brooks 2008)

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and increasing property values (Ellen, Schwartz, and Voicu 2007). If property values do increase, then presumably this implies that BIDs have improved the local business environment in the sense of providing more in benefits than they cost. However, this conclusion holds only for large, office-oriented BIDs and cannot necessarily be extended to small, retail-oriented BIDs like most of the BIAs existing in Ontario (Ellen, Schwartz, and Voicu, 2007). Another recent U.S. study concludes that, on the whole, BIDs probably provide a small but useful way to complement municipal ser vices in specific commercial areas (Billings and Lelund 2009). Much the same can be said about BIAs in Ontario.

CHAPTER

8

Property Taxes in the Greater Toronto Area Revenue Hills and Tax Competition

P

roperty taxes are the main source of revenue for Canadian cities, accounting for 43 percent of total revenues and 71 percent of own-source revenue, on average, across the country (Treff and Perry 2007). Most cities in Canada are hard-pressed for additional funds. Invariably, however, they are reluctant to raise property taxes, partly because of popular resistance and partly because they are afraid that higher taxes will mean that people and businesses will move to cities with lower tax rates. This chapter focuses on the Greater Toronto Area (GTA) and asks two questions. First, how high can the different municipalities that constitute the GTA raise their property tax rates without losing so much of their tax base that they actually lose tax revenue?1 Second, how important is tax competition between municipalities in the GTA? The answers to these questions differ in predictable ways in different municipalities with respect to the two major classes of property: residential and nonresidential.

Revenue Hills As tax rates rise, economic agents (individuals and companies) seek to lower their tax liability through legal means (tax avoidance) and illegal means (tax evasion). To the extent they succeed in doing so, the effect is to reduce the taxable base. In 1. Popu larized in U.S. discussion some years ago under the name of the Laffer curve (Laffer 1979), the nonlinear relationship between tax rates and tax revenues has long been understood in the economics literature, going back at least to Dupuit in the early nineteenth century (Bird and Wallace 2005).

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theory, there is thus a tax rate that maximizes government revenue, the revenuemaximizing tax rate (RMTR). In effect, each tax rate climbs a “revenue hill”: at rates lower than the RMTR, an increase in the tax rate will raise revenue; at rates higher than the RMTR, however, a reduction in the rate will actually raise revenue. At the very top of the hill is the RMTR, the rate that will maximize revenues. Although the RMTR is usually higher than the tax rate that would minimize excess burden and maximize social welfare, those policy objectives, while central to public economic theory, are seldom explicitly considered by local governments when it comes to determining property tax policy. However, it is hard to imagine that any local government would consciously raise tax rates if the result were to reduce tax revenues. In this sense, as establishing an upper limit to feasible local tax rates, the RMTR is a useful concept in understanding local property tax policy. Two recent studies have explored the revenue prospects of property taxes for local governments in Canada’s largest metropolitan area, the Greater Toronto Area (GTA), which consists of the City of Toronto (home to 45 percent of the total GTA population of 5.6 million in 2006), four neighboring regional governments (Peel, Halton, York, and Durham), and 24 lower-tier cities, towns, and townships. These studies reached quite different conclusions with respect to the revenue potential of the property tax in the GTA. The first study, commissioned by the City of Toronto, argued that the city faces a substantial funding shortfall in the near future, a period in which it will have to deal with substantial infrastructural renewal needs (Conference Board of Canada 2005). This outlook was seen as especially dire with respect to property taxes, which accounted for almost half of city revenues in 2005. Owing to such factors as reduced household formation and an aging population, the study forecast a decelerating rate of growth in residential property taxes. At the same time, the report expressed considerable pessimism about the ability of the city to increase nonresidential property taxes, which account for more than 60 percent of all property taxes. The city’s share of the growth of this important component of the tax base in the GTA region was also decreasing, largely, it argued, because of the higher average tax applied to such properties in the city. The authors of this study concluded that unless the city’s responsibilities were reduced, it would need an infusion of federal or provincial funds to be fiscally sustainable in the future. Three comments may be made about this report. First, other regions in the GTA are even more dependent on property taxes than the City of Toronto. In 2000, for example, when Toronto’s property taxes (including equivalent payments in lieu of taxes or PILTs, from other levels of government) provided 45 percent of its operating revenues, the equivalent percentages in the other regions ranged from 46 percent in York to a high of 59 percent in Halton (Slack and Bird

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2004). However, the two factors singled out in the report as adversely affecting the City would seem to work the other way for at least some of these governments since the rate of household formation has been increasing and, as the report notes, they tend to impose lower tax rates on nonresidential property. If so, fiscal sustainability may perhaps be a problem only in the central city of the GTA. This point is considered more carefully in the next study discussed. A second comment is that the city itself seems to have accepted the emphasis on tax competition for the nonresidential base. As was noted in earlier chapters, once the path was set by provincial policy, the City of Toronto began reducing the ratio between the tax rates on nonresidential and residential properties. Achieving this goal does not seem to have been considered particularly urgent, however, since the target was to alter the ratio from the 4:1 ratio prevailing in 2004 to 2.5:1— close to the average in the rest of the GTA—by 2013 for small businesses and 2017 for all nonresidential properties. Third, the conclusions reached in Conference Board of Canada (2005) reflect an important (but implicit) assumption: namely, that the existing tax rates on both residential and nonresidential property in the City of Toronto are already at their revenue-maximizing level in the sense that they simply cannot be increased. This line of argument is popular with local commentators. Some have gone so far as to argue not only that the property tax cannot sustain any increases in Toronto, but also that the whole system is so broken that the current market value–based tax is “a disaster” and should be replaced by something like a “unit value” system or even an assessment freeze until a property is sold (Barber 2007).2 An earlier study of the fiscal sustainability of local governments in the GTA had reached quite different conclusions. Although Slack and Bird (2004) also noted that the region would face strong fiscal demands in the future and that all levels of government, in principle, should play an appropriate role in dealing with the problem, their study concluded that if property tax rates were raised by only about 1 percent a year, the GTA could manage quite well under a businessas-usual scenario for the next few decades.3 The (implicit) assumption in Slack and Bird (2004) is that the GTA, including the City of Toronto, is still on the upward-rising slope of the revenue hill. However, they did not test this hypothesis. One objective of this chapter is to do so by examining empirically whether any municipalities in the GTA have reached the peak of the property tax revenue 2. For a recent review of the alternatives mentioned, see Slack (2006). 3. The notion of local fiscal sustainability is explored in more detail in Slack and Bird (2004) and Bird (2006b). It may be worth mentioning that both reports discussed in the text argued that needed new infrastructure could and should be financed largely through borrowing. Canadian cities in general, including those in the GTA, have considerable unrealized borrowing capacity, as Bird and Tassonyi (2001; 2003) discuss in more detail.

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hill. In fact, we examine two hills, since the elasticity of the municipal property tax base is examined with respect to changes in property tax rates for both residential and nonresidential property. Because our analysis shows that some but not all municipalities in the GTA region are near the top of the hill and one city (not Toronto) may be over the hill, we also look briefly at the extent to which tax competition may have influenced these results. Haughwout and colleagues (2004) provide econometric estimates of the effects of local taxation on local economic activity in four major U.S. cities, Houston, Minneapolis, New York City, and Philadelphia, in effect estimating where each city is on its respective revenue hill. The peak of the hill, the RMTR, is where the rate-to-base elasticity is −1.0. If the rate-base elasticity is greater than this figure—for example, − 0.5—then a small increase in the rate will increase revenues and, as Slack and Bird (2004) implicitly assume, the locality is on the upward-sloping part of the curve. If it is less—for example, −1.3—it is on the downward-sloping part of the curve and a rate increase will actually reduce revenues. Similarly, if it is already at the peak (elasticity is −1.0), as the Conference Board of Canada (2005) assumed with respect to the City of Toronto, an increase in rate will not yield any additional revenues. Interestingly, Haughwout and colleagues (2004) concluded that, although Minneapolis is the only one of the four cities studied that (like all GTA municipalities) imposes only a property tax, it is also the only one positioned comfortably down the left side of the hill, with substantial unused revenue capacity. In principle, a general equilibrium model of local fiscal competition is estimated with capital, labor, and households all being mobile both within regions and between regions (Haughwout et al. 2004). This model is useful in the present context because it specifically includes firms as market participants. Arguably, although tax competition is not the only factor determining rate and base shifts, it may be expected to be more important in major metropolitan areas, like the GTA and those studied by Haughwout and colleagues (2004), than in largely rural areas, such as those in earlier Canadian studies in British Columbia (Brett and Pinske 2000) and New Brunswick (Brett and Tardif 2005). In addition, it should be easier to estimate pure behavioral responses in a simpler, more transparent system like that in Minneapolis or in the GTA than in the more complex U.S. cases where it can be difficult to control adequately for the impact of other taxes. This study, unlike Haughwout et al. (2004), explicitly considers possible competitive neighborhood effects on property taxes.4 Moreover, since Ontario has a 4. However, Haughwout et al. (2004) did find that property values in New York City received a substantial one-time boost when the neighboring states adopted income taxes (New Jersey in 1977 and Connecticut in 1992).

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classified tax, with different rates imposed on different classes of property, the residential and nonresidential components of the property tax are treated separately.5 Haughwout and colleagues (2004) estimated a model in first differences on time series data (for periods ranging from 27 to 41 years) for all four cities, since each series proved to be a first-order integrated process (augmented Dickey-Fuller test). They did not pool their city data but estimated equations separately for each city. Their core regression analysis, employing ordinary least squares (OLS), found that changes in the local property tax rate had an immediate, quantitatively important, and statistically significant negative effect on the tax base, which, they argued, reflected an immediate capitalization effect (reducing property values) rather than a longer-term investment effect. Although we do not explore this issue in detail here, we find basically similar results, so it seems equally likely that most of the estimated base-rate elasticities similarly reflect capitalization effects, certainly in the case of residential property. However, in land- and structureintensive businesses in which local property tax differentials may constitute a significant excise tax on employing capital in particular localities, some longer-term investment effects seem likely.6 The rate-base elasticity of the property tax was found to be close to or less than −1 in Houston (ranging from − 0.89 to −1.13), New York (− 0.77 to − 0.90), and Philadelphia (− 0.41 to − 0.80). In contrast, this elasticity (for the most recent tax base and rate) was only − 0.16 to − 0.36 in Minneapolis. To check their results, Haughwout and colleagues (2004) carried out alternative estimates, employing such instrumental variables as changes in national health care spending (for Philadelphia) and real farm income (for Minneapolis) and the adoption of new income taxes at the state level (for New York and Philadelphia).7 Since their results suggested that the instruments they employed worked well for property tax rates in all four cities, they preferred these results to the OLS results, although the basic rate-base elasticity patterns already noted were not significantly altered. Since this chapter focuses on these elasticity patterns and, as noted below, also finds somewhat similar (though weaker) results when employing more complex techniques, the OLS results are emphasized here. The first objective of this chapter is to determine whether local governments in the GTA maximize (both currently and historically) their property tax revenues 5. Since the base values used in Haughwout et al. (2004) are weighted values of different property classes created by adjusting assessed to market value, the tax rate they employ is, similarly, a constructed “effective average rate,” calculated by applying the nominal rate to this adjusted and aggregated base. 6. For example, a recent study of the effects of reducing the excise tax imposed on investment by provincial retail sales taxes (by replacing them with a VAT) found significant evidence of investment shifts; see Smart and Bird (2009b). 7. Changes in national crime rates were found to be significant in Houston and Minneapolis but not in the other two cities studied. As is noted later, this variable was found to be insignificant in the GTA analysis.

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when setting their residential and commercial/industrial property taxes for local residents and businesses, respectively. This objective is modest: no attempt is made to estimate any optimizing model, let alone a complete general equilibrium model. Since the implied tax elasticity of property tax bases may be used to determine the position of any given municipality relative to the revenue maximization point, the main aim is simply to identify the location of current or historical property tax rates on the revenue hill curves for different GTA municipalities.

Tax Competition This analysis also tests for the presence of tax-competition effects among the municipalities as well as, more unusually, for the presence of cross-category taxbase effects between the residential and commercial/industrial property classes. Although there have been many theoretical studies of tax competition in recent years (Wilson and Wildasin 2004), and a number of empirical studies, including some at the provincial level in Canada (Crisin 2007; Mintz and Smart 2004), until very recently there have been no Canadian empirical studies of local government competition for tax base along the lines of the many such studies done in the more data-rich U.S. environment (for example, Brueckner and Saavedra, 2001).8 The first such study in Canada, by Brett and Pinske (2000), focused on business property taxes in British Columbia. It analyzed these taxes for the years 1987 and 1991 for 147 municipalities and found some evidence of interjurisdictional tax competition: tax rates in one jurisdiction appeared to be affected by tax rates in neighboring jurisdictions; the reaction function was positively sloped. However, when both tax base and tax-rate determinants were investigated, Brett and Pinske (2000) concluded that the hypothesis that the reaction functions were driven by base competition was not supported. Similarly in the GTA case, some evidence supporting rate competition is found but none that supports base competition. The model used in Brett and Pinske (2000) assumes that municipal governments simultaneously determine tax rates and tax bases in such a way as to maximize the combined utility local residents receive from public ser vices and rents accruing to private activities, with the rents being assumed to depend on the total (not just the municipal) property tax rate. The capital tax base is assumed to be partly mobile, so that the business capital stock in any municipality depends in part on the tax rates and characteristics of other municipalities. The influence of neighboring jurisdictions depends in part on distance, which Brett and Pinske 8. See Gaboury and Vaillancourt (2003) for a more extensive survey of the tax competition literature from a Canadian perspective.

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(2000), who are studying a wide variety of municipalities in a large and unevenly populated area, model in a variety of interesting ways. They choose to study only business tax rates in part because they assert that business and residential rates are closely related (simple correlation of 0.70) and so the same factors may be assumed to determine both rates. Moreover, they study only the municipal (as distinct from the educational and regional) business rates because it is assumed to be the basic choice variable facing municipalities. The assumption is that municipalities view regional and school taxes as fixed when they make their own tax decisions. The independent factors Brett and Pinske (2000) use to explain the tax base include median family income (to measure the attractiveness of the area for commercial activity as well as willingness to pay), the percentage of the workforce in primary industries (to take into account location-specific factors, important in the commodity-based rural sector of the province), and two measures of local infrastructure, meters of road per capita and hectares of parks per capita, with the former being interpreted as a measure of infrastructure and the latter as a measure of both land availability and amenity value as well as a possible “shifter” of the willingness to pay for public ser vices (Brett and Pinske 2000). In addition, they include the percentage of seniors as a proxy for the demand for public services, and possibly also for wealth. Both structural and reduced-form equations are estimated, with both fi xed and random effects using instrumental variable techniques: for example, the senior variable serves as an instrument to control ser vice demand (in the structural base equation), while the fraction of the total property tax rate determined outside the municipality is an instrument for the tax rate in the base equation. Demographic and geographic characteristics are used as instruments for neighboring total tax rates. A subsequent study by Brett and Tardif (2005) estimated a model of joint determination of local property tax rates and bases for a panel of about a hundred New Brunswick municipalities, at five-year intervals from 1983 to 2003. Some (though not much) evidence of spatial competition was found. More interestingly, Brett and Tardif (2005) found that the elasticity of tax base to owntax rates was increasing over time, as tax rates increased. In other words, local governments in New Brunswick appeared to be coming closer to the top of their revenue hill with respect to property taxes as time went on. Subsequently, however, in a later analysis of the same data by Brett and Tardif (2008), this conclusion is downplayed owing to the variability of the elasticity estimates. Instead, the later study concludes that because the base-rate elasticity remains small (less than −1), property tax rate increases remain economically—if not politically— feasible in New Brunswick. Brett and Tardif (2005), unlike Brett and Pinske (2000), explicitly model “yardstick competition,” in which voters may punish politicians if they get too

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far out of line with tax rates in neighboring jurisdictions (Besley and Case 1995). While the approach they follow is broadly the same as in the earlier study, there are a number of interesting variations. Tax rates are modeled as a function of the local tax base, local characteristics, and the tax rates of nearby municipalities. Tax bases are modeled as a function of the local tax rate, local characteristics, and the tax rates and characteristics in nearby competing locations. Yardstick competition is taken to exist when the local tax rate is significantly influenced by neighboring tax rates. At the same time, if those rates exert more influence on tax bases, they interpret the results as reflecting tax-base competition. Since this study is concerned primarily with relatively small and scattered municipalities, as in the earlier Brett and Pinske (2000) analysis, spatial weighting plays a prominent role in the analysis. Unlike the earlier study, however, because residential and commercial tax rates bear a fixed relationship in New Brunswick (1:1.5), the focus is on all municipal taxes and not just business taxes. Moreover, provincial grants to municipalities are taken explicitly into account in the analysis. The econometric analysis in Brett and Tardif (2005) utilizes an instrumental variable approach. Considerable attention is paid to selecting instruments: for example, demographic variables such as share of children and language are labeled tax-rate shifters because they may be correlated with the demand for local public ser vices but are not direct base determinants. Provincial grants are also rate shifters, and their examination of the factors determining grants over time suggests that population density and road distance per person can be used as instruments for the grants. As Brett and Tardif (2008) show in detail, falling grants over time clearly have explanatory power with respect to increasing local tax rates, at least in the case of New Brunswick. On the other hand, the industrial composition of the workforce is considered a base shifter, while factors such as the level of educational attainment are viewed as dual shifters, affecting both base and rate. Brett and Tardif (2005) find that tax bases seem to have little effect on tax rates, which are affected especially by the proportion of French speakers (a factor they interpret as reflecting either higher ser vice demand or higher locational cost) and education variables. As already mentioned, they find little “neighbor” effect on tax bases, although some (statistically insignificant) effect on own-tax rates. Rate-base elasticities, evaluated at the mean tax rate, ranged from − 0.76 to − 0.63 in 2003 and from −1.01 to − 0.84 when evaluated at the highest rate, suggesting that those with the highest rates were very close to the top of their revenue hills. However, further analysis of these data in Brett and Tardif (2008), using two-stage least squares (2SLS) estimation, found not only no evidence in support of yardstick competition or tax-base competition, but also no effect of the tax base on the tax rate. In this later study, although the elasticity of tax base to own-tax rates was found to have increased over time as tax rates increased, at the

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end of the data period in 2003, the rate-base elasticity on the median (not mean) tax rate was still only − 0.17 and on the highest rate − 0.71. As these investigators concluded in their earlier study, “perhaps the only safe judgment to be made from these estimates is that the tax-base elasticity is less than one, which implies that total revenue increases as the tax rate increases” (Brett and Tardif 2005, 11).

The Data and Model The first focus of this chapter is to estimate rate-base elasticities, relating changes in the value of the tax base to the average effective tax rate. The secondary aim is to detect evidence, if any, of interjurisdictional tax competition. The data cover the 29-year period from 1977 to 2005. Assessment has been carried out province-wide in Ontario since 1998. For earlier years, assessed values—though also assessed by a provincial agency—were not as close to market value and were not on a consistent base throughout the period under examination. Therefore the assessed values for years before 1998 have been adjusted by “equalization factors” for each property class at the level of each lower-tier municipality. The factors used are percentages that were calculated for the purpose of allocating provincial grants by the (former) Property Assessment Division of the Ontario Ministry of Revenue. These figures measure the ratio between the assessed value of all of the taxable assessment in a class of property in a municipality and the estimated current market value of the properties in that class. Equalization factors were calculated for each class in each municipality, based on the estimated market values and assessed values of all properties in the class sold in arms-length transactions. If sales numbers were insufficient in classes of property where the sales method of assessment was used, estimates of market value were made, based on a 10-percent sample. For properties in multiresidential, commercial, and industrial classes, for which values were assessed on the basis of an incomecapitalization or depreciated-replacement cost approach, sampling was also used. Until 1989, such equalization factors were prepared annually. The 1989 factors were also applied to assessments for 1990, 1991, and 1992, and new factors were then calculated for 1993. Although the intention was to revise the factors every four years, this plan was overtaken by the major assessment and tax reforms of 1998. To obtain consistent time series data for every municipality in the GTA over the entire period, equalization factors have been interpolated for the missing years. The total marginal tax rate applying to any specific property class in Ontario is the sum of lower-tier, upper-tier, and education tax rates. Since 1998 these three rates have been imposed separately by lower-tier municipalities, by uppertier municipalities (regions), and, with respect to education, by the provincial

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government. Before 1998, as discussed in chapter 6, education rates were set by local school boards, within strong provincial guidelines. All three taxes are collected by lower-tier municipalities. The effective property tax rate in this chapter is the total tax rate (including lower-tier, upper-tier, and education tax rates) imposed on a given property class. To obtain this rate, the appropriate property tax revenue is divided by the value of the equalized market assessment for each property class. Separate equations are estimated for each of the two broad property classes considered here: residential and commercial/industrial/business (CIB) property.9 In general, we employ a 29-year panel data set including 25 lower-tier GTA municipalities, one of which is the City of Toronto.10 Since all relationships are estimated in one-period lagged differences, the effective number of time-series data points for each region/municipality is 28. For some purposes, however, separate panels are run for each of the upper-tier regions (including Toronto), as well as for certain cities in each region, as discussed later. As table 8.1 shows, the sample includes 24 lower-tier municipalities, excluding Toronto, that constitute four upper-tier regions. For certain purposes, some data from the Toronto census metropolitan area (CMA) are also used; while the CMA has minor differences from the GTA in terms of municipal composition, it is a good proxy for the GTA.11 Data on variables available only at the regional, Toronto CMA, or provincial levels were used largely to help capture the intertemporal component of data behavior rather than cross-sectional differences across municipalities and regions. Within each property class, coefficients are estimated at two levels of aggregation: municipal and regional. At the municipal level, regression parameters for the largest municipality from each region as measured by its 2005 residential and CIB-equalized assessment are evaluated. This large-municipality list includes Toronto (the City of Toronto, a single amalgamated lower-tier municipality), Oshawa (Durham Region), Oakville (Halton Region), Mississauga (Peel Region), and Vaughan (York Region). At the regional level, equation parameters for the “average” municipality are similarly estimated within each region, including 9. As discussed earlier, the separate business property tax was abolished in Ontario in 1997. However, the CIB data include this tax for all pre-1998 observations. Over time, there have been a number of changes in the composition and treatment of each of the two classes of property. Many of the complexities subsumed in the necessarily aggregated approach employed in this chapter are discussed further in Slack, Tassonyi, and Bird (2007). 10. The City of Toronto, which was created in 1997, was preceded by an upper-tier regional government, Metropolitan Toronto, which consisted of six lower-tier jurisdictions (Etobicoke, East York, North York, Scarborough, Toronto, and York). Data from these jurisdictions have been aggregated as necessary to create a consistent time series. 11. Essentially, the CMA includes, in addition to the GTA, the town of Orangeville and three largely rural municipalities north of the GTA boundary, but excludes Burlington (which is included in the neighboring Hamilton region), Oshawa, and four other municipalities in Durham Region.

550,318 141,083 86,885 76,222 87,699 106,429 12,006 21,185 18,809

426,453 161,700 53,868 49,447 161,438

426,453 412,132 657,425 55,761

Halton Region Burlington C Halton Hills T Milton T Oakville T

Peel Region Brampton C Mississauga C Caledon T

2,498,922

Durham Region Oshawa C Ajax T Clarington M Pickering T Whitby T Brock Tp Scugog Tp Uxbridge Tp

Toronto

Population

94,674 64,085 76,773 106,191

94,674 85,330 85,490 86,255 109,678

68,800 53,902 70,761 66,125 79,934 73,664 65,722 80,527 91,637

78,746

Residential assessment per capita (dollars)

17,272 15,254 26,059 12,196

17,272 18,397 8,437 20,184 18,200

10,021 10,714 8,929 7,298 14,264 10,258 4,155 5,875 8,204

21,592

CIB assessment per capita (dollars)

Greater Toronto Area Population, Assessment, and Effective Tax Rates, 2005

TABLE 8.1

1.0870 1.2398 1.0533 1.0231

1.0870 1.1173 1.0802 0.9715 1.0930

1.4685 1.7281 1.4253 1.3738 1.3805 1.4259 1.6263 1.4118 1.2893

0.9067

Effective residential tax rate

(continued )

2.9671 3.0186 2.8168 2.7481

2.9671 3.0011 3.0326 2.7738 2.9882

3.7707 4.2411 3.5325 3.9293 3.5549 3.5617 3.8626 3.3236 3.3465

4.4946

Effective nonresidential tax rate

87,402

93,128 74,211 133,652

20,967 41,731 19,297

5,460,696

102,070 110,011 98,389 99,941 79,581 108,556 112,766

859,685 227,498 46,135 250,983 72,592 156,570 23,912

Population

Residential assessment per capita (dollars)

13,646

9,010 4,276 6,781

20,719 34,552 13,304 20,896 15,525 13,771 13,015

CIB assessment per capita (dollars)

1.2209

1.1845 1.4063 1.1378

1.0995 1.0723 1.1660 1.0679 1.1782 1.0709 1.0933

Effective residential tax rate

3.1360

2.6455 2.9585 2.6632

2.6264 2.6245 2.6822 2.5904 2.7743 2.5942 2.6413

Effective nonresidential tax rate

source: Ministry of Municipal Aff airs and Housing, Financial Information Returns.

notes: The effective tax rate is the total for municipal and education purposes. Figures shown for the regional governments are, for population, the total of the lower-tier municipalities and, for the other columns, the average assessment and tax values for those municipalities. C = city, T = town, M = municipality, Tp = township.

GTA total/average

York Region Vaughan C Aurora T Markham T Newmarket T Richmond Hill T Whitchurch-Stouff ville T East Gwillimbury T Georgina T King Tp

TABLE 8.1 (continued)

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Toronto Metro, Durham, Halton, Peel, and York. Note that for comparative purposes Toronto is treated as both an upper-tier and a lower-tier jurisdiction. It is assumed that property tax bases and rates are simultaneously determined, which requires two equations for each property class under consideration. The first equation is a tax-base equation, which estimates equalized assessment values as a function of property taxes, demand and supply factors in the real estate market, and other economic conditions and events that are likely to affect property values. The second equation is a tax-rate equation, which estimates the property tax rate as a function of such factors as government policy, the characteristics of the local tax base, and general economic and market conditions that seem, a priori, likely to have an impact on local government policy, perhaps causing the government to respond by adjusting property tax rates. All regressions are estimated in log-linear one-period lagged differences, for several reasons. First, this is a convenient formulation because the coefficients in a log-linear differenced tax-base equation represent the long-term tax elasticities. Second, differencing is one approach to dealing with some of the estimating problems arising from the nonstationarity of the underlying data series; this issue was relevant here with respect to some of the series exhibiting long-term trends. Third, differencing the series also helps resolve the autocorrelation problem. It is well known that OLS estimation may not be the best choice in the presence of several simultaneously determined variables, owing to endogeneity bias. If tax rates and tax bases are determined simultaneously, some common factors may have an impact on both, with the result that the error terms in the tax-base and tax-rate equations may be correlated with the endogenously determined variables on the right-hand sides of the equations. The result would then be inconsistent and biased regression coefficients under regular OLS estimation. A common way to estimate model parameters in a system with several endogenous variables is to use a simultaneous-equations approach using 2SLS regression analysis. In the first stage of the 2SLS approach, tax rates and tax bases (endogenous variables) are estimated using a set of exogenous independent variables from the system equations and perhaps some additional exogenous instruments. At the second stage, the fitted values of endogenous variables, which are based on the first-stage estimates, are substituted back into the original system of equations and, along with the exogenous variables, are used to obtain more consistent and presumably less biased (albeit not highly efficient) regression coefficients. Other sources of endogeneity may arise owing to tax competition between local governments and the interaction of tax rates and tax bases across different property classes. Most GTA municipalities are contiguous (or nearly so) and are hence presumably likely to compete for residents and businesses.12 12. For this reason, distance factors are not explicitly modeled as they are in Brett and Pinske (2000).

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Moreover, changes in values of one class of property—residential or commercialindustrial—may have an impact, negative or positive, on values in the other class. For example, rapidly increasing residential property values may, by increasing land prices, reduce the attractiveness of the jurisdiction for new industrial or commercial development. Since tax-rate and tax-base data are available separately for residential and commercial/industrial property for all GTA municipalities, the presence of both tax competition and cross-category tax-base effects could be tested for using regression analysis. However, if both of these factors are present, not only may there be endogenous and possibly strategic relationships among property tax rates across local jurisdictions, but in addition values across different broad property classes within each jurisdiction may be simultaneously determined in the local real estate market and hence be subject to common shocks and policy changes. After taking all these sources of potential endogeneity into account to the extent possible, the model consists of several tax-rate and tax-base equations that relate tax bases and tax rates both across broad property classes and across neighboring local jurisdictions. However, not all of these simultaneous relationships should necessarily hold. Since separate OLS regressions of key equations did not yield any significant correlation between error terms in these equations and potential endogenous variables, endogeneity problems might not be very serious. If so, OLS estimates need not be either inconsistent or biased. Nonetheless, to check the robustness of OLS results the model is estimated using the 2SLS method, which takes into account the endogenous nature of relationships among several model variables. Using 2SLS one can account for endogeneity between tax rates and tax bases and between the two broad property classes (residential and commercial/industrial), as well as endogeneity in the determination of tax rates across jurisdictions. Two sets of equations are estimated, each consisting of two equations for tax base and tax rate for two broad property classes, residential and nonresidential (CIB), as follows: Equation 1: CIB tax base ΔC = α C + β C Δτ + γ C ΔR + MC μ C + υ; Equation 2: CIB tax rate Δτ = α τ + β τ ΔC + η τ Δτ * + Mτ μ τ + ε; Equation 3: Residential tax base ΔR = α R + β R Δt + γ R ΔC + M R μ R + u; and Equation 4: Residential tax rate Δt = α t + β t ΔR + η tΔt* + M t μ t + ε.

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Where: Superscripts C and τ indicate that variables or parameters belong to the CIB taxbase or tax-rate equation and superscripts R and t indicate that variables or parameters belong to the residential property tax-base or tax-rate equation; ΔC is a linear lagged difference of equalized residential tax assessment per capita and ΔR is a lagged difference in per capita residential equalized assessment; Δτ is a linear lagged difference of the effective average CIB property tax rate and Δt is a lagged difference in the effective average residential property tax rate; Δτ* is a linear lagged difference in the weighted-average effective tax rate of the neighboring GTA municipalities/regions; Δt* is a tax competition component which includes (1) a lagged difference in the across-regions average effective tax rate in regional-average equations; and (2) lagged differences in the same-region average and across-regions average tax-rate components in equations for the largest-municipalities; M C and MR are vectors of market characteristics and shift factors in the taxbase equations; and τ M and M t are vectors of market characteristics and shift factors in the taxrate equations. Box 8.1 defines and discusses the various independent variables used in estimation, as well as the expected signs. The benchmark estimation was done using the regular OLS method. The standard tests indicated that the estimated regressions did not have any significant problems associated with endogeneity bias, multicollinearity, cointegration, or autocorrelation. To check that the OLS results were reasonably robust, the same relationships were also estimated using the simultaneous-equations approach and 2SLS regression analysis. At the first stage of 2SLS estimation, adjusted/fitted values of both residential and CIB tax bases and own and neighbor tax rates were obtained by regressing these variables on a set of exogenous variables used in the tax-base and tax-rate equations (see box 8.1) plus three additional exogenous variables derived from the equations estimated for neighboring regions (see table 8.2). The objective of the first-stage estimation was to obtain fitted values for the endogenous variables of interest: own and neighbors’ tax variables and own-tax base for each broad property class. At the second stage, these fitted values were substituted for the original values of the endogenous variables in both the taxbase and tax-rate equations, along with the original values of the exogenous independent variables, and the resulting regressions were run to get the estimated 2SLS regression coefficients.

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BOX 8.1

Independent Variables Used in Estimations 1. The eff ective average residential tax rate (%) mea sures the direct own-tax effect on the residential tax base. In the presence of this effect, one would expect to see a statistically significant coefficient on this variable with a negative sign. 2. CIB- equalized assessment per capita ($1,000) is used in the commercial/industrial/business (CIB) rate equation as a direct mea sure of the possible feedback effect that changes in CIB property values may have on the CIB tax rates set by local governments. For example, if the government decides to reduce taxes in a rapidly developing nonresidential real estate market, given a stable level of local spending and other sources of fi nancing, we would expect to see a negative relationship between CIB assessment values and CIB tax rates. Th is variable is also used in the residential-base equation to account for the possible presence of same-jurisdiction cross-category base effects. A statistically significant positive coefficient on this variable would suggest that residential and CIB broadclass property values act as complements, with more local investment into new businesses, amenities, and shopping areas having a positive impact on the value of local residential housing. A positive sign on this coefficient may also reflect a situation in which an increased CIB assessment may alleviate taxation pressure on residential property, which would also have a positive impact on local property values. A negative sign on this coefficient suggests that the two property classes act as substitutes, perhaps because residents prefer segregation of residential and commercial/industrial areas. In this case, a higher level of commercial/industrial activity might induce residents to move elsewhere or at least lower the capital value of existing residences and hence reduce residential values. (These base interaction variables are insignificant and hence not reported for the rate equations.) 3. Residential housing completions in Toronto CMA (1,000 units) is a proxy for the current residential housing supply in the Toronto census metropolitan area (CMA). An increase in housing completions may saturate the market and lower the value of residential property. However, any such negative effect would likely be short term in nature and may perhaps be reflected only in the contemporaneous relationship between completions and property values. Over time, as new houses are sold, they will become a part of total residential assessment and increase its value. 4. Employment rate in Toronto CMA (%) relates to current local labor market conditions and hence to some extent reflects the purchasing power of local residents. With higher employment rates, people have more income that they can use to purchase housing or to bolster other economic activities within their locality; a positive sign is expected. 5. Net intraprovincial migrants as a share of population, by region (%), may again influence the demand for residential housing. To some degree, this variable may also serve as an indicator of the residential/labor (amenity/employment) attractiveness of a given region or lower-tier municipality. If an inflow of residents from other regions in the province increases the demand for local housing and hence its market value, a positive sign is expected with respect to the residential base. If most within-province migrants to the GTA are looking for better job prospects or planning only a short-term stay, they may be more likely to rent rather own housing and a negative or statistically insignificant sign may perhaps be expected.1 Since a substantial migrant inflow presumably implies higher local

6.

7.

8.

9.

10.

11.

12.

spending, however, regardless of the characteristics of the migrants, a positive sign is more likely with respect to rates than to bases. With the CIB base, since an influx of migrants presumably is associated both with an increased labor force and with higher local demand for goods and ser vices, a positive coefficient is expected. Breaking and entering (residential) crime rate per person, Toronto CMA, reflects the attractiveness of the area in terms of personal and property safety as well as, perhaps, the level of locally provided public protection ser vices. One would expect a negative sign with respect to residential property values. School board expenditure per capita, Ontario ($1,000), reflects the level of public education ser vices that residents can expect to receive. Since this variable is—like Ontario’s public education system—not locality specific, it serves mainly as an indicator of longterm expenditure trends on local ser vices and should have a positive sign. Dummy for the 1998 reassessment (1 for 1998; 0 otherwise) appears in all equations to correct for possible shift effects due to major policy changes during the period that may affect outcomes. Because the “equalized assessment’ ” database shows that the 1998 reassessment resulted in a shift in total assessment value, this dummy was introduced to account for the effects of this shift on base values and effective tax rates. Dummy for Toronto’s amalgamation since 1998 (1 in 1998 to 2005; 0 otherwise) reflects the impact that the 1998 amalgamation of Metro Toronto’s six municipalities into one lower-tier City of Toronto might have had on property values both in Toronto and in the rest of the GTA. There are no prior expectations of how this variable should be signed. Residential equalized assessment per capita ($1,000) is introduced into the residential tax-rate equation to check for the possible feedback effect that changes in residential property values may have on residential tax rates set by local governments. If local governments observe sustained high growth rates in residential property values, their property tax revenue will increase, given property tax rates and levels of local public ser vices. All things being equal, local governments may want to lower taxes under such circumstances. If so, one may observe a negative sign on the coefficient of this variable. Of course, to the extent local officials use other criteria in setting their taxes, the coefficient on this variable may be close to zero or positive. As in the case of the similar CIB mea sure, this variable is also used in the CIB estimation to mea sure the cross-category base effect. For example, if an inflow of new residents is followed by a stream of new retailers and other businesses, which seems plausible, one would expect a positive and statistically significant coefficient on this variable. Share of residents under 19 in the regional population (%) is a variable used as a proxy for the local demand for education and other youth-related local public ser vices, such as cultural and recreational ser vices, protection ser vices, social housing, and support ser vices. Because higher demand for such ser vices may require local governments to raise taxes, other things being equal, a positive relationship is to be expected between the ratio of young residents and the level of locally raised residential property taxes. Per capita total grants received from provincial and federal governments, by municipality or region ($1,000), is introduced as a control variable that mea sures (or reflects) the extent to which local governments need to raise extra revenue from higher taxes. As (continued )

BOX 8.1 (continued)

13.

14.

15.

16.

17.

18.

Brett and Tardif (2008) suggest in a study of New Brunswick, if grants fall, the pressure on local property taxes may increase. Conversely, if transfers rise, the pressure may decrease. The sign of this variable in the residential tax-rate regression is therefore expected to be negative. On the other hand, if local spending is growing rapidly for demographic or other reasons, unless grants increase at least proportionately the sign may be positive. The five-year average residential mortgage lending rate (%) may again be viewed as a demand-side factor since changes in rates affect consumers’ ability to use credit for house purchases and to pay for existing housing. If the increasing cost of credit decreases the demand for residential property, local property tax revenues will fall. In such circumstances perhaps the government may lower taxes or keep them stable. A negative relationship between taxes and mortgage rates is expected. Th e eff ective average CIB tax rate (%) mea sures the direct tax effect on CIB property values. A negative and statistically significant regression coefficient on this variable is expected, and it is employed to estimate the tax elasticity of the CIB property tax base. Per capita value of nonresidential (CI) building permits, Ontario ($1,000), is primarily a proxy for demand for commercial/industrial property. However, it may also indicate a higher supply of CIB property in the future. Th is variable may thus be signed either positively or negatively, since in the former case it reflects market conditions and a higher demand for nonresidential property, and in the latter case it may signal lower prices of CIB property in the future and thus reduce current prices. Chartered bank prime business rate (%) is used as an indicator for the ability to finance leases and purchases of nonresidential property. As in the residential case discussed earlier, since credit costs may affect the demand for CIB property, a negative relationship between this rate and CIB assessments is expected. Per capita provincial GDP, Ontario ($1,000), is included as a general market indicator of CIB property demand. The sign may be positive or negative depending on the level of local public ser vices and the existence of incentives for new businesses (a matter not explored in this study). Finally, four versions of a constructed variable labeled assessment-weighted average tax rate (%) are employed to test for the presence of tax competition effects, one for each of the regional and municipal regressions for the residential and CIB rate equations, respectively. The regional version is an assessment-weighted average tax rate based on the tax rates in neighboring GTA regions, and the municipal version is a similar average tax rate based on the rates in the remaining lower-tier municipalities in the same region.2 A statistically significant and positive sign on each or either of these variables suggests the presence of tax competition among GTA municipalities. If spatial contiguity is significant, one might perhaps expect a relatively stronger effect of the sameregion rates. Although the difference between competition for tax bases and “tax mimicking” or “yardstick competition” is not discussed here, as noted by Brett and Tardif (2005), when local tax rates are found to be significantly influenced by neighboring tax rates, yardstick competition may be at work. If neighboring rates significantly influence tax bases, the results may be interpreted as reflecting tax-base competition. In the end, however, since after experimenting with model-fitting tests these

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variables were found to be insignificant for the base equations, we report them here only for the rate equations, so that our results do not really test explicitly for tax-base competition. 1. Although much of the rental accommodation in the GTA region constitutes part of the commercial and not the residential tax base (except for the education tax), this factor is not adjusted for in the estimates. 2. Technically, a weight on a tax rate from each neighboring municipality/region is calculated as a share of that neighbor’s equalized assessment in the sum of equalized assessments from all applicable municipalities/ regions.

TABLE 8.2

Exogenous Variables Used in First Stage of 2SLS Estimation • • • • • • • • • • • • • • • •

Dummy for the 1998 reassessment initiative Dummy for Toronto’s amalgamation since 1998 (one for all periods since 1998) Residential housing completions in Toronto CMA (1,000 units) Employment rate in Toronto CMA (%) Breaking and entering (residential) crime rate per person, Toronto CMA School board total expenditure per capita, Ontario (current $1,000) Net intraprovincial migrants as a share of population, by region (%) Share of young residents (under 18) in regional population (%) Total grants from federal and provincial governments, by municipality or region, per capita ($1,000) Average residential mortgage lending rate, five-year (%) Nonresidential (commercial/industrial) building permits, value per capita, Ontario (current $1,000) Chartered bank prime business interest rate (%) Provincial GDP per capita, Ontario (current $1,000) Population-averaged total grants per capita across the neighboring regions (current $1,000) Population-averaged share net intraprovincial migrants as a share of regional population, averaged across the neighboring regions (%) Population-averaged share of young residents (under 18) in regional population, averaged across the neighboring regions (%)

notes: All variables are regressed in lagged differences, except dummies. CMA = census metropolitan area.

Discussion of Results This section discusses four aspects of the results. First, it presents in summary form the core results with respect to the signs on the various independent variables in the equations, and relates them to the earlier discussion. Second, it interprets the core elasticity results for both the residential and business property taxes. Third, it notes the implications of this analysis for our initial question, about the potential revenue that might be raised from property taxes in the

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GTA. Fourth, since, like most empirical analysis of complex policy issues, these results in some ways raise more questions than they answer, it concludes with some brief remarks on the nature and extent of local tax competition in the GTA. In the appendix to this chapter, tables A8.1 through A8.8 report the principal regression results. As emphasized earlier, the Ontario property tax on residential property and that on commercial and industrial/business property, though related, are in many ways very different taxes. Therefore, the two (aggregated) components of Ontario’s classified property tax have been treated separately here.13 The regional levels of government (including the City of Toronto) and the larger local governments in each region (again including the City of Toronto) are also considered separately. Table A8.1 contains the results for the CIB base equation (Equation 1) for the upper-tier local governments (Toronto and the four regions). Table A8.2 contains the results for the same equation for Toronto and the largest lower-tier municipality in each of the regions. Tables A8.3 and A8.4 similarly present regional and local results for the CIB rate equation (Equation 2). The remaining four tables follow the same sequence with respect to the two residential equations (Equation 3 and Equation 4). Nonresidential Assessment Base The critical interaction to assess the revenue-hill hypothesis in the context of the business property tax in the GTA is the relationship between the mea sure of the commercial/industrial assessment base and the corresponding tax rates. In the OLS regressions reported at the upper-tier level (table A8.1), the coefficient of the tax rate is, as expected, universally negative and highly significant for each of the five regions.14 The results are similar when the regression is run using data for the principal lower-tier municipalities in each regional municipality (Oshawa, Oakville, Mississauga, and Vaughan). The coefficient of the tax rate is again universally negative and highly significant (table A8.2). These results are both expected and reassuring, as this coefficient measures the impact of a change in the tax rate on the tax base: increases in rates tend to decrease the base, and decreases to increase it. These results may largely be explained by simple capitalization theory, since an increase (or decrease) in the property tax rate, if the capitalization rate remains unchanged, automatically reduces (or increases) the return on investment in real property, and hence its value. If any real increases and (less likely) decreases in investment in CIB real property also occur as a result of rate differentials, they would also be reflected in this measure, but there is no way to 13. Essentially, we combine residential and multiresidential into the residential class, and all the remaining classes (see box 4.1) into the nonresidential or CIB class. 14. Th is discussion is based on data using the mean values of the variables for the period.

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separate them from the capitalization effect. Matters are not quite so clear when the second-stage equations are estimated, however, since the relationship between CIB rates and bases is significantly negative only for Toronto (table A8.1). The hypothesized relationship between the commercial/industrial assessment base and the residential assessment base is also supported by the econometric evidence. In the OLS regressions at the upper- and lower-tier levels, the coefficients are consistently positive and significant in accordance with expectations: growth in the commercial/industrial base is positively related to residential assessment growth. In the 2SLS regressions, the coefficients for Toronto and Oakville are similarly positive and significant. A plausible explanation for this interaction may lie in the considerable expansions that have taken place in the road network of the GTA, linking new subdivisions to work opportunities. In addition, in the localities mentioned, local zoning policies have often linked permission to build residential housing to providing land for commercial and industrial uses. Finally, the differences in development charge policy, discussed in chapter 7, may also have an impact on the process and pattern of land development. Turning to the other variables included in Equation 1 (CIB base), as expected, net intraprovincial migrants as a share of population proved to have positive and statistically significant coefficients in every region but Toronto, although only in Durham did this coefficient retain statistical significance at the second stage (table A8.1). Given the substantial population growth that has taken place in the GTA outside of Toronto during the period covered by the data, this result is not surprising. In contrast, although changes in nonresidential building permits per capita might be expected to have a more generalized impact on the rate of change to the business property assessment base, it is only in the OLS estimates for Toronto, Oshawa, and Mississauga that this coefficient is significant, and negative, perhaps because, as suggested in box 8.1, additional buildings may have the long-run impact of reducing the prices of business property. Interestingly, it appears that the amalgamation of Toronto had an impact, at least statistically, in two regions to the west (Halton and Peel), with a negative impact on property values in those areas, although this dummy had no significant effect in the lower-tier results, with the exception of Mississauga (table A8.2). Finally, the dummy variable for the 1998 reassessment was negative and statistically significant in Toronto, Durham, Peel, and York (table A8.1). Given the tax policy limits placed on Toronto and the limitations on increasing taxes on commercial property discussed in previous chapters, as well as the internal levels of differences in assessment-year bases prior to the reassessment among the area municipalities in the three regions, this result is perhaps to be expected, although it is a bit puzzling that no such effect is to be seen in Halton. Haughwout et al. (2004, 577) noted that “the recent literature on weak instruments cautions that first-stage F-statistics should be 3 or larger and ideally

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have values above 10.” The OLS regressions reported in tables A8.1 and A8.2 pass this test for the upper-tier governments (table A8.1) and also for all the lower-tier governments except Vaughan (table A8.2). On the whole, the results with respect to Equation 1 (CIB base) are reassuring, at least in the OLS regressions, suggesting strongly that change in the commercial/industrial assessment base is not only driven by rate changes within a jurisdiction but is also related to growth in the residential base. Nonresidential Rates Equation 2 (CIB rates) tests the susceptibility of effective commercial and industrial tax rates to changes in total grants per capita, provincial GDP per capita, the proportion of migrants in the population, the impact of the amalgamation of Toronto, changes in the business assessment base, and changes in commercial and industrial tax rates in neighboring jurisdictions, again using both OLS and two-stage regressions. The results are reported in tables A8.3 and A8.4 for the regional and local levels, respectively. The OLS coefficients on change in the commercial and industrial assessment base were, again as expected, consistently negative and highly significant at the regional level in the GTA (table A8.3). The results are broadly similar at the lower-tier level in table A8.4. In effect, increases in the CIB base appear to have been offset by rate reductions (in line with provincial policy on education rates) as well as, perhaps, local political pressures. Turning to the neighborhood variables constructed to test for tax competition effects, at the regional level the coefficients for changes in tax rates in neighboring municipalities were negative and significant at the 2-percent level in Toronto and were also significant at the 10-percent level in Peel and York. At the lower-tier level, similar results held in the lower-tier OLS regressions for Vaughan and Oakville. Based on these findings, there does appear to be at least some competition with respect to CIB tax rates between Toronto and some of its GTA neighbors. Within regions, however, although the competition coefficient was again significant for Oakville and Vaughan, its sign was positive, indicating that CIB rates in those cities moved together with the rates in other municipalities in the same region. On the other hand, no such association was found for the cities of Mississauga or Oshawa, perhaps because their positions in their respective regions are much more dominant than those of Vaughan and Oakville in their regions. On the whole, however, changes in neighboring jurisdictions emerge as one of the most significant drivers of business property tax rates in the GTA: yardstick competition, it seems, is alive and well in the GTA. Interestingly, the coefficients on the provincial-grants variable were positive and significant for Toronto, Durham, Peel, and York—that is, CIB tax rates and

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grants moved together. This result may (as suggested in box 8.1) simply reflect the fact that for other reasons local spending was changing even more. In particular, since the most significant driver of provincial grants is social ser vices, and local governments in Ontario have to finance a portion of such ser vices, this result is not too surprising. The coefficients on the reassessment dummy were negative and significant in Durham, Halton, and Peel: in those regions, it seems, the 1998 reassessment was most strongly associated with tax-rate decreases. Similarly, the Toronto amalgamation dummy was negative and significant not only in Toronto but also in both Peel and York, suggesting that these neighboring regions reacted in similar ways, for competitive reasons.15 Residential Assessment Base Turning to Equation 3 (residential base), a parallel analysis at the regional and municipal level was carried out, as reported in tables A8.5 and A8.6. Again, the coefficient on the residential effective tax rate was negative and highly significant for Toronto and the neighboring upper-tier municipalities in the GTA for the upper-tier regions and the larger municipality sample. In Durham and Oshawa as well as Oakville, the second-stage regression of this equation also resulted in high levels of significance. In the lower-tier second-stage estimates, the coefficient for Oshawa and Oakville on the residential tax rate was negative and significant, in contrast to the lack of significance in the second-stage regressions for the other large municipalities. On the whole, the residential tax rate emerges as the most important variable in terms of explaining variation in the residential assessment base. The possible codependence of the residential assessment base with the commercial tax base— see the discussion in box 8.1—was decidedly less important. At the upper-tier level, only Durham Region has a statistically significant negative coefficient below the conventional 10-percent limit, in the OLS equation. Levels of significance are also found in the OLS equations for Oakville and Vaughan and in the 2SLS equation for Vaughan. In addition, as expected, the coefficient on per capita expenditures on schooling was positive and significant in Oshawa, as was the proportion of net migration in the population in Mississauga, as well as in Peel and York Regions in the OLS equation. On the other hand, the coefficient on average residential housing completions in the Toronto CMA was significant and negative in Mississauga (as well as Peel and York), presumably reflecting a stronger short-term impact on residential values in that city than in others. The coefficient on the 1998 reassessment dummy variable 15. As noted earlier, the nonresidential assessment base was also negatively affected by reassessment in Peel, though not in Halton, and both dummies negatively affected this base in these two regions.

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was negative and significant at the lower-tier level in Mississauga and in Durham, Peel, and York Regions in the residential OLS tax-base equation. Neither the crime rate nor the employment rate was found to be statistically significant. Again in this equation, in general the F-statistics appear to meet the weak instrument threshold in the OLS regressions; however, in the second-stage estimates, the F-statistics for Toronto and Mississauga are below the threshold. Residential Rates For Equation 4 (residential rates), tables A8.7 and A8.8 show that, as for the CIB-rate equation, in the upper-tier OLS regressions the coefficients on the equalized assessment base with respect to rates are negative and highly significant. However, for the cities of Oshawa, Oakville, and Vaughan, the lower-tier regression, which includes tax-rate variables for the neighboring municipalities inside and outside the regions, resulted in insignificant coefficients for the assessment-base variable with respect to the residential rate, combined with positive and significant coefficients for the competitive tax-rate variables. In contrast, in Mississauga, although the coefficient on assessment was negative and significant with respect to the residential rate, the results show that only rates in other municipalities in the same region had a significant effect on residential rates in Oshawa and Oakville. At the regional level (table A8.7), the coefficient on school-age population was, contrary to expectations, found to be negative and significant at a conventional level in two regions (Peel and Halton). Paralleling the result found with respect to CIB rates, the grants coefficient was significant and positive only in Toronto and Durham. Finally, the reassessment dummy, found to be significant for CIB rates only in Mississauga, emerged as significant in both Durham and Peel Regions with respect to residential rates, while the Toronto amalgamation dummy was only significant in Toronto and Oshawa.

Elasticity and the Revenue Hill As noted earlier, rate-base elasticity provides a measure of how far up its respective revenue hill a city is. To reiterate, the peak of the hill is where the rate-tobase elasticity is −1.0. If the elasticity is greater (smaller) then a small increase in the rate will increase (reduce) revenues. Table 8.3 compares the rate-base elasticities for the commercial and residential property tax bases of the City of Toronto, the four GTA upper-tier municipalities, and the largest lower-tier municipality in each of those four regions, based on the log first-difference OLS regressions for the period 1977 to 2005. As discussed, all the tax-rate coefficients were found to be negative and highly significant.

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TABLE 8.3

Tax Rate to Base Elasticity for the Sample Period, 1977–2005 Commercial/ industrial

Toronto

Durham

Halton

Peel

York

−0.90

−0.86

−0.56

−0.88

−0.73

Oshawa

Oakville

Mississauga

Vaughan

−0.92

−0.53

−0.89

−0.46

Durham

Halton

Peel

York

Toronto

Residential

−0.83

−1.00

−0.88

−0.96

−0.93

Oshawa

Oakville

Mississauga

Vaughan

−1.04

−0.92

−0.98

−0.67

The City of Toronto and Durham and Peel Regions are very close to the top of their respective revenue hills when it comes to taxing nonresidential property, with elasticities at or near − 0.90. By contrast, the Regions of York and, especially, Halton are well below the peak of the hill. These regional results are also replicated in the large lower-tier municipalities, although Vaughan appears to be considerably lower on the hill than the Region of York, in which it is located. These results are broadly consistent with concerns raised by the business community over the relative tax burdens faced by the business sector in Toronto compared with the neighboring regions. In 1998 the province established transitional tax ratios to set a maximum relative relationship among the tax rates applicable to the various business property classes, relative to residential taxes in the regions and Toronto. Table 8.4 shows the comparatively heavy tax burden historically imposed on commercial and industrial properties in Toronto and Durham (for the large industrial class) relative to the other GTA regions. By 2002 the business-residential difference in Toronto— but not in Durham—had been considerably reduced, owing to reassessment and the many policy changes discussed in earlier chapters. These reductions have since continued. However, as emphasized earlier, there are really two revenue hills in Ontario’s property tax. As table 8.3 shows, the other side of Toronto’s pushing higher up the nonresidential hill than its neighbors is that it has much more room to advance up the residential hill than they do. The residential rate–to–tax-base elasticities show that all of the GTA regions are closer to the peak of their respective revenue hills than Toronto is. The Region of Durham, according to these estimates, is at its revenue-maximizing rate on the residential side: one more tax increase and it will end up losing revenue. Turning to cities in the GTA other than Toronto, only the City of Vaughan in York Region is well below the peak,

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TABLE 8.4

Business-Residential Tax Ratios by Region and Property Type, 1998 and 2002 1998 regulated tax ratios Commercial

Toronto Durham Halton Peel York

4.2759 1.4819 1.4565 1.2971 1.1190

Office building

Shopping center

2.2960

1.2078

Industrial

5.9685 2.0907 2.3599 1.5986 1.3427

Large industrial

3.8036

2002 adopted tax ratios

Toronto Durham Halton Peel York

3.8000 1.4819 1.4565 1.2971 1.1000

1.4819

1.3300

5.3000 2.2598 2.3599 1.5986 1.3000

2.9000

source: Ministry of Municipal Aff airs and Housing, Financial Information Returns, 1988 and 2002.

which presumably means that the remaining municipalities in York Region must be farther up the hill. In contrast, the City of Oshawa is actually over the hill; to increase revenue from residential property taxes it would need to decrease rates. This result—which obviously strongly influences the peak position of Durham Region in general—reflects Oshawa’s unfortunate position in a number of respects. It is a relatively mature city which has an old (and not thriving) industrial base in the automobile industry, as well as an especially large share of (relatively more highly taxed) multiresidential properties and unusually costly expenditure responsibilities with respect to local transit and other ser vices.16 Toronto may moan a lot more about property taxes than its neighbors, but on the whole it appears to be in a considerably better position with respect to the past, present, and probable future of both the residential and nonresidential components of the tax than Oshawa, its neighboring city to the east. Moreover, as table 8.3 shows, Toronto’s neighbor to the west, Mississauga, although a newer, larger, and more diverse city than Oshawa, seems not only to be comparable to Toronto and Oshawa in terms of its limited leeway to push nonresidential property taxation much further, but also, unlike Toronto, to be comparable to Oshawa in terms of pressure on its residential property tax. The data reported here imply that Oshawa already has a serious sustainability problem if it continues to rely on property taxes to finance local ser vices to the 16. Local transit was transferred to the regional level in Durham in 2006.

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extent it now does. Other cities, like Mississauga, may be moving in the same direction. In short, a good case can be made for exploring alternatives to property tax for financing urban growth in the GTA, and in Ontario as a whole. This topic is discussed in chapter 9. Turning to tax competition, on the whole this study provides some evidence for the existence of at least yardstick competition in the GTA. Local tax rates imposed on both the residential and nonresidential sectors, but especially the latter, do appear to show some sensitivity to the rates in nearby jurisdictions. Nonetheless, large differentials remain, particularly in Toronto. Under Ontario’s classified property tax, the higher rate imposed on nonresidential property in effect acts as a relief mechanism for homeowners, enabling governments to shift some of the tax burden away from the group that Fischel (2001) has accurately called homevoters. As Lee and Wheaton (2010) have recently argued, when a classified system gives communities the choice to tax business or residents, most will choose business to the extent that their circumstances permit. In particular, as Hill (2008) discusses, such built-up urban agglomerations as the City of Toronto are peculiarly able to shelter their residents by shifting more of the tax burden to the business sector since the additional burden is absorbed by the “rents” arising from agglomeration and is thus unlikely to result in base shifting.17 Despite the overriding importance of the provincial government in shaping and directing local property taxation in Ontario, and its efforts to reduce the residential/nonresidential rate differential— and despite the evidence of some rate shifting in the GTA, reported above— substantial differences in this differential seem likely to persist among Ontario municipalities, and perhaps especially between Toronto and its neighbors, for some years to come.

17. For example, recent studies in Spain (Jofre-Monseny 2010) and Germany (Koh and Riedel 2010) find strong evidence that local business taxes are higher in municipalities with relatively higher firm and industry agglomeration.

Appendix TABLE A8.1

CIB Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Municipal Average Toronto Independent variables

OLS

2SLS

−0.904 0.039 ***

−0.620 0.203 ***

0.315 0.098 ***

0.778 0.390 *

−0.229 0.307

−0.912 0.802

−0.110 0.046 **

−0.154 0.092

0.040 0.050

0.058 0.120

−0.171 0.057 ***

−0.343 0.196 *

−0.033 0.021

−0.002 0.057

Constant Coefficient Standard error Significance

0.050 0.013 ***

0.020 0.036

R-squared

0.987

0.952

Adjusted R-squared

0.983

0.936

217.797

26.347

***

***

Effective total tax rates, CIB Coefficient Standard error Significance Equalized residential/multiresidential assessment Coefficient Standard error Significance Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance Nonresidential (CIB) building permits value per capita, Ontario Coefficient Standard error Significance Chartered bank prime business interest rate (%) Coefficient Standard error Significance 1998 reassessment dummy Coefficient Standard error Significance Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

F-statistic p value for F

notes: CIB = commercial/industrial/business; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level. Dependent variable: Commercial/industrial (CIB) equalized assessment per capita.

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Durham OLS

Halton

2SLS

OLS

Peel

2SLS

■

203

York

OLS

2SLS

OLS

2SLS

−0.864 0.137 ***

−0.806 1.018

−0.563 0.106 ***

−0.261 0.872

−0.878 0.081 ***

0.000 2.395

−0.729 0.094 ***

−0.395 0.270

0.137 0.051 *

−0.136 0.371

0.250 0.058 ***

0.780 0.913

0.157 0.067 **

0.700 0.906

0.297 0.079 ***

0.487 0.433

0.872 0.213 ***

1.422 0.519 **

0.487 0.237 *

−0.243 1.372

0.614 0.326 *

0.462 2.709

0.702 0.332 **

0.567 0.779

−0.051 0.037

−0.011 0.071

−0.055 0.037

−0.088 0.118

−0.066 0.045

−0.042 0.273

−0.069 0.056

−0.086 0.078

0.039 0.040

0.011 0.103

0.042 0.039

0.088 0.131

0.054 0.046

0.008 0.278

0.018 0.059

−0.012 0.083

−0.132 0.063 **

0.075 0.246

0.020 0.068

−0.233 0.560

−0.244 0.069 ***

0.046 1.463

−0.141 0.079 *

−0.038 0.285

−0.011 0.016

−0.037 0.048

−0.040 0.019 **

0.046 0.152

−0.046 0.023 *

0.000 0.139

−0.030 0.025

−0.022 0.064

0.071 0.009 ***

0.091 0.040 **

0.068 0.010 ***

0.016 0.092

0.080 0.014 ***

0.023 0.103

0.066 0.016 ***

0.046 0.048

0.922

0.774

0.965

0.754

0.952

0.650

0.932

0.889

0.894

0.695

0.952

0.667

0.935

0.527

0.909

0.850

33.595

8.033

77.966

7.797

56.198

3.535

39.432

9.952

***

***

***

***

***

**

***

***

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TABLE A8.2

CIB Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality Toronto Independent variables

OLS

2SLS

−0.904 0.039 ***

−0.620 0.203 ***

0.315 0.098 ***

0.778 0.390 *

−0.229 0.307

−0.912 0.802

−0.110 0.046 **

−0.154 0.092

0.040 0.050

0.058 0.120

−0.171 0.057 ***

−0.343 0.196 *

−0.033 0.021

−0.002 0.057

Constant Coefficient Standard error Significance

0.050 0.013 ***

0.020 0.036

R-squared

0.987

0.952

Effective total tax rates, CIB Coefficient Standard error Significance Equalized residential/multiresidential assessment Coefficient Standard error Significance Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance Nonresidential (CIB) building permits value per capita, Ontario Coefficient Standard error Significance Chartered bank prime business interest rate (%) Coefficient Standard error Significance 1998 reassessment dummy Coefficient Standard error Significance Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

Adjusted R-squared F-statistic p value for F

0.983

0.936

217.797

26.347

***

***

notes: Dependent variable: CIB equalized assessment per capita; CIB = commercial/industrial/business; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Oshawa (Durham)

Oakville (Halton)

OLS

2SLS

OLS

−0.915 0.125 ***

0.522 1.980

−0.533 0.139 ***

0.132 0.055 **

−0.027 0.303

0.721 0.267 **

2SLS

Mississauga (Peel)

■

205

Vaughan (York)

OLS

2SLS

OLS

2SLS

−0.272 0.391

−0.892 0.065 ***

−2.262 17.872

−0.459 0.173 ***

0.663 0.997

0.171 0.059 ***

0.252 0.116 **

0.151 0.063 **

−0.367 8.359

0.508 0.103 ***

1.080 0.655

1.012 0.879

0.360 0.231

0.223 0.296

0.395 0.291

1.045 11.822

0.000 0.319

−0.603 0.793

−0.093 0.038 **

−0.016 0.153

−0.076 0.046

−0.080 0.052

−0.089 0.045 *

−0.026 1.107

−0.063 0.095

−0.077 0.178

0.067 0.039

0.045 0.114

0.000 0.049

−0.011 0.060

0.075 0.046

0.094 0.243

0.009 0.100

−0.033 0.191

−0.050 0.099

0.866 1.289

0.046 0.089

0.130 0.212

−0.286 0.061 ***

−0.701 4.455

−0.146 0.147

0.251 0.436

−0.013 0.019

−0.091 0.120

−0.029 0.021

−0.019 0.026

−0.040 0.021

−0.082 0.769

0.009 0.043

0.069 0.106

0.070 0.010 ***

0.070 0.028 **

0.067 0.012 ***

0.056 0.017 ***

0.077 0.014 ***

0.129 0.862

0.017 0.026

−0.073 0.096

0.939

0.520

0.857

0.825

0.945

0.524

0.804

0.316

0.917

0.352

0.807

0.764

0.925

0.324

0.735

0.076

43.604

4.617

17.168

11.386

48.740

1.820

11.686

1.698

***

**

***

***

***

***

206

■

Chapter 8

TABLE A8.3

CIB Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Municipal Average Toronto Independent variables

OLS

2SLS

CIB equalized assessment per capita, region Coefficient Standard error Significance

−0.927 0.033 ***

−0.806 0.113 ***

Neighboring regions’ weighted average CIB tax rate Coefficient Standard error Significance

−0.200 0.081 **

−0.504 0.304

−0.396 0.251

−0.876 0.516

0.418 0.073 ***

0.428 0.100 ***

Provincial GDP per capita, Ontario Coefficient Standard error Significance

0.002 0.201

−0.221 0.338

1998 reassessment dummy Coefficient Standard error Significance

0.012 0.065

−0.060 0.181

−0.054 0.018 ***

−0.083 0.035 **

Constant Coefficient Standard error Significance

0.029 0.014 *

0.032 0.020

R-squared

0.992

0.985

Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance Total municipal grants per capita, Ontario Coefficient Standard error Significance

Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

Adjusted R-squared F-statistic p value for F

0.989

0.980

345.580

76.419

***

***

notes: Dependent variable: CIB effective tax rate; CIB = commercial/industrial/business; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Durham

Halton

OLS

2SLS

OLS

−0.707 0.091 ***

−1.109 0.500 **

−0.886 0.121 ***

0.001 0.051

−0.062 0.139

0.198 0.297

Peel

2SLS

■

207

York

OLS

2SLS

OLS

2SLS

−2.394 2.547

−0.880 0.068 ***

−1.114 1.666

−0.754 0.095 ***

−2.008 2.231

−0.041 0.091

0.622 1.145

−0.112 0.058 *

−0.086 0.627

−0.204 0.098 *

0.234 0.884

0.855 0.947

0.363 0.399

2.794 4.161

0.165 0.373

0.650 4.295

−0.214 0.496

2.711 5.373

0.174 0.071 **

0.152 0.110

0.064 0.084

0.300 0.464

0.179 0.065 **

0.198 0.115 *

0.275 0.093 ***

0.153 0.381

0.064 0.186

0.008 0.293

0.159 0.295

0.653 1.238

−0.028 0.239

0.031 1.032

0.224 0.342

−0.534 1.770

−0.125 0.049 **

0.002 0.165

−0.187 0.094 *

0.612 1.381

−0.182 0.058 **

−0.069 0.632

−0.058 0.085

0.380 0.848

−0.022 0.016

−0.039 0.031

−0.046 0.028

−0.139 0.190

−0.063 0.021 ***

−0.087 0.122

−0.061 0.028 **

−0.155 0.201

0.045 0.016 **

0.077 0.045 **

0.062 0.023 **

0.186 0.223

0.061 0.019 ***

0.084 0.163

0.032 0.031

0.220 0.345

0.927

0.837

0.940

0.472

0.966

0.943

0.929

0.235

0.901

0.780

0.918

0.288

0.954

0.923

0.905

−0.032

36.273

12.965

44.417

3.877

80.670

28.749

37.629

1.870

***

***

***

***

***

***

***

***

TABLE A8.4

CIB Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality Toronto Independent variables

OLS

2SLS

CIB equalized assessment per capita, region Coefficient Standard error Significance

−0.927 0.033 ***

−0.806 0.113 ***

Neighboring regions’ weighted average CIB tax rate Coefficient Standard error Significance

−0.200 0.081 **

−0.504 0.304

0.000

0.000 . .

−0.396 0.251

−0.876 0.516

0.418 0.073 ***

0.428 0.100 ***

Provincial GDP per capita, Ontario Coefficient Standard error Significance

0.002 0.201

−0.221 0.338

1998 reassessment dummy Coefficient Standard error Significance

0.012 0.065

−0.060 0.181

−0.054 0.018 ***

−0.083 0.035 **

Constant Coefficient Standard error Significance

0.029 0.014 **

0.032 0.020

R-squared

0.992

0.985

Same regions’ weighted average CIB tax rate Coefficient Standard error Significance Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance Total municipal grants per capita, Ontario Coefficient Standard error Significance

Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

Adjusted R-squared F-statistic p value for F

0.989

0.980

345.580

76.419

***

***

notes: Dependent variable: CIB effective tax rate; CIB = commercial/industrial/business; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Oshawa (Durham)

Oakville (Halton)

Mississauga (Peel) OLS

2SLS

■

209

Vaughan (York)

OLS

2SLS

OLS

2SLS

OLS

2SLS

−0.813 0.151 ***

0.778 2.319

−0.451 0.167 **

−0.310 0.623

−0.895 0.098 ***

−0.055 3.589

−0.155 0.069 **

−2.021 7.601

0.078 0.078

0.188 0.384

0.130 0.097

0.241 0.186

−0.046 0.083

−0.324 2.453

−0.177 0.095 *

1.457 6.126

−0.001 0.141

0.265 1.341

0.333 0.102 ***

0.506 0.270 **

0.087 0.193

−0.199 5.876

0.613 0.114 ***

1.182 2.886

0.964 0.335 ***

−0.582 2.623

0.389 0.248

0.422 0.485

0.620 0.340 *

−0.513 6.311

0.127 0.171

1.404 4.917

0.052 0.028 *

0.003 0.127

0.052 0.042

0.036 0.078

0.016 0.023

−0.046 0.327

0.039 0.038

0.217 0.970

0.085 0.238

−0.108 0.910

0.342 0.252

0.387 0.393

0.102 0.311

−0.331 1.776

0.075 0.276

−1.151 5.524

−0.139 0.085

−0.943 1.228

−0.094 0.089

−0.022 0.325

−0.196 0.096 *

−0.552 3.569

−0.064 0.120

1.243 5.567

0.004 0.024

0.116 0.166

−0.008 0.022

−0.001 0.029

−0.054 0.025 **

−0.034 0.092

−0.052 0.023 **

−0.072 0.272

0.062 0.019 ***

−0.042 0.154

0.028 0.023

0.019 0.068

0.073 0.021 ***

0.009 0.275

0.031 0.021

0.222 0.778

0.923

0.406

0.904

0.889

0.944

0.524

0.957

0.827

0.891

0.156

0.863

0.842

0.920

0.324

0.939

0.350

28.589

3.077

22.338

15.978

39.627

1.820

53.247

0.701

***

**

***

***

***

***

210

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Chapter 8

TABLE A8.5

Residential Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Municipal Average Toronto Independent variables

OLS

2SLS

−0.832 0.119 ***

−0.964 0.971

0.037 0.044

−0.484 1.282

−0.059 0.060

−0.229 0.433

Employment rate, CMA Coefficient Standard error Significance

1.246 1.272

8.036 14.891

Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance

0.503 0.520

2.556 4.444

−0.135 0.150

−0.670 1.225

0.557 0.338

−0.512 2.522

1998 reassessment dummy Coefficient Standard error Significance

−0.105 0.075

−0.772 1.591

Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

−0.019 0.027

−0.019 0.091

0.041 0.026

0.172 0.296

Effective total tax rates, residential/multiresidential Coefficient Standard error Significance Equalized assessment, CIB Coefficient Standard error Significance Residential housing completions, CMA Coefficient Standard error Significance

Residential crime rate per capita Coefficient Standard error Significance School board expenditures per capita Coefficient Standard error Significance

Constant Coefficient Standard error Significance

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Durham

Halton

Peel

■

211

York

OLS

2SLS

OLS

2SLS

OLS

2SLS

OLS

2SLS

−0.998 0.059 ***

−0.828 0.149 ***

−0.882 0.105 ***

−0.411 0.543

−0.957 0.070 ***

−0.760 0.509

−0.928 0.116 ***

−0.694 0.608

0.237 0.122 *

0.578 0.453

0.231 0.193

1.472 1.159

0.080 0.081

0.665 0.565

0.164 0.131

−0.199 1.073

−0.066 0.048

−0.013 0.081

−0.044 0.062

0.032 0.145

−0.092 0.051 *

−0.064 0.134

−0.174 0.084 *

−0.117 0.169

0.453 0.931

0.109 1.213

0.339 1.755

1.951 5.720

0.649 0.958

2.394 2.950

0.499 1.409

−2.654 5.906

0.629 0.332

0.094 0.805

0.287 0.378

−0.542 1.030

0.676 0.353 *

0.165 0.866

1.161 0.554 *

1.400 1.579

−0.001 0.110

0.027 0.141

−0.068 0.156

−0.177 0.468

0.075 0.122

0.018 0.287

0.060 0.201

0.351 0.542

0.063 0.273

0.177 0.353

0.315 0.348

−0.448 1.325

0.321 0.265

−0.194 0.825

−0.318 0.500

0.777 1.628

−0.177 0.065 **

−0.139 0.104

−0.122 0.099

−0.538 0.752

−0.227 0.073 ***

−0.379 0.462

−0.209 0.111 *

0.239 0.471

−0.010 0.019

−0.016 0.024

−0.038 0.030

0.005 0.071

−0.033 0.026

−0.020 0.056

−0.035 0.036

−0.039 0.062

0.057 0.019 ***

0.028 0.041

0.045 0.025 *

−0.025 0.075

0.067 0.023 ***

0.047 0.054

0.100 0.035 ***

0.080 0.078 (continued)

212

■

Chapter 8

TABLE A8.5 (continued ) Toronto Independent variables

OLS

2SLS

R-squared

0.918

0.060

Adjusted R-squared

0.878

−0.411

22.498

1.311

F-statistic p value for F

***

notes: Dependent variable: residential equalized assessment per capita; CIB = commercial/industrial/business; CMA = census metropolitan area; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

TABLE A8.6

Residential Equalized Assessment, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality Toronto Independent variables

Effective total tax rates, residential/multiresidential Coefficient Standard error Significance Equalized assessment, CIB Coefficient Standard error Significance Residential housing completions, CMA Coefficient Standard error Significance

OLS

2SLS

−0.832 0.119 ***

−0.964 0.971

0.037 0.044

−0.484 1.282

−0.059 0.060

−0.229 0.433

Employment rate, CMA Coefficient Standard error Significance

1.2463 1.2720

8.0360 14.8911

Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance

0.503 0.520

2.556 4.444

−0.135 0.150

−0.670 1.225

Residential crime rate per capita Coefficient Standard error Significance

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Durham

Halton

Peel

■

York

OLS

2SLS

OLS

2SLS

OLS

2SLS

OLS

2SLS

0.980

0.969

0.976

0.915

0.973

0.890

0.940

0.819

0.971

0.953

0.963

0.873

0.960

0.835

0.910

0.729

99.604

46.738

79.654

13.390

73.281

9.715

31.457

5.182

***

***

***

***

***

***

***

***

Oshawa (Durham) OLS

2SLS

−1.039 0.062 ***

−1.078 0.123 ***

0.092 0.140

Oakville (Halton) OLS

213

Mississauga (Peel)

Vaughan (York)

2SLS

OLS

2SLS

OLS

2SLS

−0.917 0.087 ***

−1.125 0.249 ***

−0.982 0.065 ***

−0.357 1.614

−0.667 0.140 ***

−0.377 0.273

−0.156 0.634

0.410 0.222 *

0.343 0.547

0.025 0.066

1.071 2.066

0.658 0.155 ***

0.859 0.461 *

−0.005 0.050

−0.024 0.061

0.013 0.080

−0.019 0.118

−0.095 0.053 *

−0.015 0.321

−0.055 0.129

0.072 0.204

−0.5737 0.7485

−0.6298 1.0722

−0.0520 2.1810

1.3464 3.0871

1.0829 1.0591

1.1868 4.9971

−1.7111 1.9741

−1.4120 2.4941

0.524 0.328

0.703 0.566

0.296 0.389

0.184 0.542

0.721 0.347 *

0.660 1.368

0.770 0.534

0.485 0.640

−0.110 0.115

−0.110 0.143

−0.099 0.190

−0.195 0.278

0.055 0.126

−0.078 0.567

−0.030 0.295

−0.108 0.487 (continued)

214

■

Chapter 8

TABLE A8.6 (continued ) Toronto Independent variables

OLS

2SLS

School board expenditures per capita Coefficient Standard error Significance

0.557 0.338

−0.512 2.522

1998 reassessment dummy Coefficient Standard error Significance

−0.105 0.075

−0.772 1.591

Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

−0.019 0.027

−0.019 0.091

Constant Coefficient Standard error Significance

0.041 0.026

0.172 0.296

R-squared

0.918

0.060

0.878

−0.411

22.498

1.311

Adjusted R-squared F-statistic p value for F

***

notes: Dependent variable: residential equalized assessment per capita; CIB = commercial/industrial/business; CMA = census metropolitan area; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

TABLE A8.7

Residential Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Municipal Average Toronto Independent variables

Residential equalized assessment per capita, region Coefficient Standard error Significance Neighbor regions’ weighted average residential tax rate Coefficient Standard error Significance

OLS

2SLS

−0.850 0.067 ***

−0.755 0.131 ***

−0.025 0.044

−0.113 0.137

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Oshawa (Durham)

Oakville (Halton)

Mississauga (Peel)

■

Vaughan (York)

OLS

2SLS

OLS

2SLS

OLS

2SLS

OLS

2SLS

0.638 0.262 **

0.752 0.533

0.342 0.427

0.118 0.586

0.354 0.282

−0.284 1.642

−0.059 0.569

0.353 0.728

−0.046 0.118

0.073 0.450

−0.182 0.118

−0.332 0.301

−0.236 0.076 ***

−0.028 0.936

−0.250 0.161

−0.055 0.286

−0.001 0.022

−0.009 0.034

−0.034 0.031

−0.027 0.037

−0.035 0.025

−0.041 0.099

−0.053 0.052

−0.059 0.063

0.031 0.017 * 0.973

0.041 0.026

0.034 0.030

0.043 0.046

0.029 0.140

0.071 0.046

0.036 0.059

0.966

0.948

0.929

0.070 0.024 *** 0.971

0.548

0.903

0.879

0.959

0.949

0.921

0.894

0.956

0.322

0.854

0.819

71.807

47.071

36.059

16.409

66.063

2.443

18.543

7.842

***

***

**

***

***

215

***

***

OLS

2SLS

OLS

2SLS

OLS

2SLS

OLS

2SLS

−0.941 0.085 ***

−0.982 0.202 ***

−0.957 0.079 ***

−0.892 0.163 ***

−0.936 0.105 ***

−0.161 1.076

−0.797 0.133 ***

−1.134 0.502 **

−0.165 0.160

−0.172 0.504

0.009 0.155

0.222 0.289

0.026 0.181

1.594 2.403

0.096 0.262

−0.695 1.118

Durham

Halton

Peel

***

York

(continued)

216

■

Chapter 8

TABLE A8.7 (continued ) Toronto Independent variables

OLS

2SLS

Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance

−0.362 0.257

−0.648 0.353 *

Share < eighteen years in population Coefficient Standard error Significance

−0.527 0.631

−0.008 0.805

0.383 0.081 ***

0.410 0.094 ***

−0.068 0.060

−0.082 0.087

0.058 0.064

0.010 0.134

−0.047 0.017 **

−0.054 0.024 **

Constant Coefficient Standard error Significance

0.017 0.011

0.013 0.015

R-squared

0.946

0.930

Adjusted R-squared

0.924

0.901

41.860

20.678

***

***

Total municipal grants per capita, Ontario Coefficient Standard error Significance Average residential mortgage rate, five-year rate Coefficient Standard error Significance 1998 reassessment dummy Coefficient Standard error Significance Dummy for Toronto preamalgamation, prior to 1998 Coefficient Standard error Significance

F-statistic p value for F

notes: Dependent variable: residential effective tax rate; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Durham

Halton

Peel

■

217

York

OLS

2SLS

OLS

2SLS

OLS

2SLS

OLS

2SLS

0.151 0.311

0.247 0.764

0.657 0.364 *

0.860 0.608

0.585 0.364

1.970 2.723

0.332 0.459

−0.334 1.136

−0.782 0.764

−0.893 0.821

−2.691 1.290 *

−2.894 1.692

−2.520 1.402 *

−4.735 5.791

2.902 2.816

1.885 3.741

0.271 0.096 **

0.257 0.239

0.012 0.081

−0.012 0.091

0.080 0.083

−0.364 0.689

0.170 0.116

0.394 0.334

0.008 0.060

0.001 0.102

0.026 0.084

0.060 0.100

0.058 0.076

0.358 0.456

0.171 0.130

0.018 0.260

−0.110 0.045 **

−0.090 0.056

−0.120 0.081

−0.074 0.189

−0.222 0.059 ***

−0.233 0.274

−0.128 0.088

−0.126 0.159

−0.028 0.017

−0.031 0.032

−0.029 0.027

−0.026 0.035

−0.037 0.024

0.037 0.112

−0.035 0.033

−0.092 0.088

0.048 0.012 ***

0.051 0.017 ***

0.044 0.020 **

0.043 0.022 *

0.049 0.020 **

0.045 0.047

0.093 0.032 ***

0.083 0.043 *

0.983

0.982

0.977

0.975

0.977

0.886

0.944

0.917

0.976

0.975

0.967

0.964

0.967

0.838

0.920

0.882

138.663

107.317

100.928

54.874

100.373

12.819

40.003

15.968

***

***

***

***

***

***

***

***

218

■

Chapter 8

TABLE A8.8

Residential Effective Tax Rate, OLS and 2SLS Regression Estimates by Region’s Largest Lower-Tier Municipality Toronto Independent variables

OLS

2SLS

−0.850 0.067 ***

−0.755 0.131 ***

−0.025 0.044

−0.113 0.137

0.000

0.000

Net intraprovincial migrants as a share of population, region Coefficient Standard error Significance

−0.362 0.257

−0.648 0.353 *

Share < eighteen years in population Coefficient Standard error Significance

−0.527 0.631

−0.008 0.805

0.383 0.081 ***

0.410 0.094 ***

−0.068 0.060

−0.082 0.087

0.058 0.064

0.010 0.134

−0.0473 0.0171 **

−0.0538 0.0237 **

Residential equalized assessment per capita, region Coefficient Standard error Significance Neighbor regions’ weighted average residential tax rate Coefficient Standard error Significance Same regions’ weighted average residential tax rate Coefficient Standard error Significance

Total municipal grants per capita, Ontario Coefficient Standard error Significance Average residential mortgage rate, five-year rate Coefficient Standard error Significance 1998 reassessment dummy Coefficient Standard error Significance Dummy for Toronto preamalgamation prior to 1998 Coefficient Standard error Significance

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Oshawa (Durham) OLS

2SLS

Oakville (Halton) OLS

2SLS

Mississauga (Peel)

■

219

Vaughan (York)

OLS

2SLS

OLS

2SLS

−0.070 0.202

−0.289 0.526

−0.033 0.123

−0.229 0.401

−0.395 0.164 **

0.657 2.655

0.016 0.056

0.047 0.130

0.216 0.108 *

0.131 0.573

0.259 0.102 **

0.081 0.411

0.027 0.120

−0.320 1.969

−0.093 0.104

0.171 0.405

0.679 0.188 **

0.485 0.380

0.601 0.076 ***

0.443 0.240 *

0.578 0.166 ***

1.727 2.933

1.113 0.073 ***

1.091 0.235 ***

0.372 0.249

0.437 0.444

−0.072 0.166

−0.057 0.606

0.375 0.235

−0.609 3.718

−0.042 0.096

0.015 0.159

0.894 0.701

0.530 1.046

−0.662 0.465

−0.789 0.623

−1.735 1.038

1.418 10.060

−0.353 0.392

−0.293 0.564

0.012 0.020

0.025 0.036

−0.012 0.029

−0.015 0.075

0.001 0.015

−0.033 0.132

0.028 0.024

0.015 0.040

0.017 0.051

0.024 0.083

−0.067 0.050

−0.048 0.097

0.039 0.062

−0.063 0.420

0.037 0.062

0.079 0.118

0.038 0.050

−0.018 0.132

0.094 0.049

−0.034 0.150

−0.085 0.062

0.105 0.339

0.018 0.079

0.051 0.134

−0.0017 0.0137

−0.0046 0.0201

−0.0196 0.0167

0.0094 0.0808

−0.0077 0.0145

−0.0008 0.0256

0.0277 0.0151 *

0.0207 0.0303

(continued)

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TABLE A8.8 (continued ) Toronto Independent variables

OLS

2SLS

Constant Coefficient Standard error Significance

0.017 0.011

0.013 0.015

R-squared

0.946

0.930

Adjusted R-squared

0.924

0.901

41.860

20.678

***

***

F-statistic p value for F

notes: Dependent variable: residential effective tax rate; OLS = ordinary least squares; 2SLS = two-stage least squares; * indicates significance at the 10% level; ** indicates significance at the 5% level; *** indicates significance at the 1% level.

Pr oper t y Ta xes in the Gr eater Tor onto A r ea

Oshawa (Durham)

Oakville (Halton)

Mississauga (Peel)

2SLS

OLS

2SLS

OLS

0.015 0.015

0.027 0.027

−0.009 0.013

0.004 0.041

0.013 0.018

−0.064 0.217

−0.003 0.008

−0.001 0.016

0.984

0.981

0.988

0.979

0.986

0.941

0.990

0.983

0.975

0.972

0.982

0.969

0.979

0.912

0.985

0.974

119.002

82.639

165.348

56.958

139.796

21.583

192.098

79.323

***

***

***

***

***

221

Vaughan (York)

OLS

***

2SLS

■

OLS

***

2SLS

***

CHAPTER

9

Rethinking the Property Tax in Ontario

T

his chapter poses three questions. The first is simply whether the local property tax in Ontario is a good tax. We think that it is, within limits, but that some local governments are close to exceeding those limits. The second question is Can the present property tax be redeemed and improved? We believe that it can be improved, and that a tax adjusted along the lines suggested in this book would continue to be an important source of local finance in Ontario. However, following the suggested paths to improve the property tax—by abolishing the heavily discriminatory taxation of business property, for example—would leave a major revenue hole in local budgets, and so the third question is How can municipalities close this gap? Two approaches to this problem deserve consideration: restructuring education finance and introducing a new form of business taxation, perhaps at the provincial and the local level. Although the history of property tax reform in Ontario does not engender optimism for prospective change, it is well past time to rethink some of these issues. Over the past decade Ontario was able to successfully adopt a uniform, province-wide market value assessment system. However, Ontario’s experience suggests that unless such reforms in property tax administration are combined with sound and sustainable reforms of both property tax policy and some aspects of local governance and finance, they are unlikely to bring about the desired benefits of reform.

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Is the Property Tax a Good Local Tax? Simply put, yes, the property tax is a good local tax. It is a well-established tax that yields substantial revenue. The tax base is immobile and easily accessible to and verifiable by local authorities. Of course, the property tax has its problems, but so do such alternatives as local sales and income taxes. On balance, then, Ontario municipalities should continue to impose a property tax, and to receive most of their own source revenue from this tax. Like all taxes, the property tax is not simply a law; it is a system that comprises both the relevant laws and regulations and how they are administered. Moreover, how the system is constructed, and how it works, reflects larger political institutions as well as particular interactions of the provincial and local sectors. The system also reflects its creators’ perceptions regarding the economic and political outcomes of alternative property tax policies. The legal framework of the property tax in Ontario is based on the premise that the province controls everything. In a sense, the provincial authority over the property tax system is much like the authoritarian system described in the Bible (Luke 7:8), when the centurion says, “I say unto one, Go, and he goeth; and to another, Come, and he cometh; and to my servant, Do this, and he doeth it.” Even though considerable and often confusing adjustments have been made to the property tax in Ontario in recent years, many key features of the existing system have deep roots in provincial history. Laws reflect the interaction of interests, ideas, and institutions in the political process. All taxes are ultimately political, and few more so than the property tax. As Frisken (1991) discusses in detail, over the years the meandering course of property tax reform in Ontario has often reflected the influence of specific local interests on provincial policy. Nonetheless, any significant reform of Ontario’s property tax system has required the acquiescence and the active participation of the provincial government—and often an initiating move from that government. Economic analysis tells us that property taxes should ideally be designed to satisfy the public finance requirements of equity and efficiency. As Witte (2009) suggests, a list of adjectives describing an ideal property tax might include broad based, neutral, fair, efficient, simple, and accountable. In practice, however, as Witte (2009) goes on to discuss, none of these ideals seems to be satisfactorily attained in any jurisdiction, and Ontario is no exception. Everywhere, it seems, the way property taxes are designed and implemented differs from their economic blueprint. The reason, of course, is that “tax policy is the product of political decision making, with economic analysis playing only a minor supporting role” (Holcombe 1998, 359). Nowhere is this truer than with respect to the property tax, in part because of the specific characteristics of property taxes, especially as commonly implemented in North America.

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Pros and Cons of Property Taxes The property tax is a particularly visible tax.1 Unlike the income (or payroll) tax, property tax is not withheld at the source, before the taxpayer gets a paycheck. Unlike a sales tax, it is not paid in small amounts with each purchase. Instead, in many cases the property tax is paid directly by taxpayers in periodic lump sums. In particular, those who own single-family homes— and who are, as Fischel (2001) emphasizes, also most likely to vote— are often more aware of the property taxes they pay than they are of other taxes.2 This raises an important question: Does it make a difference if people can see the full amount of the tax they are paying?3 We often speak of taxes as “falling” on someone (or being a burden). While taxes are not quite like falling objects in that they are not wholly unexpected, it may make a difference to taxpayers if they can anticipate a tax. Such knowledge might, for example, enable them to exert their political influence to block or alter the tax legislation in an attempt to dodge or at least soften the blow. Some taxpayers, especially those with more economic resources and skilled advisors, may manage to find legal ways around the law. Still others, who have to pay, are likely to do so with increasing resentment, especially when they see no increased benefits flowing from their increased tax obligations. As recent elections demonstrated in Toronto, where the winning mayoral candidate in 2010 in effect campaigned on freezing or perhaps even cutting taxes—plus the usual addendum about cutting wasteful expenditures—most people do not like paying taxes of any sort.4 In part, the success of such antitax campaigns may reflect the fact that most taxes people pay bear no direct relation to whether they receive specific benefits from the public sector; even if they do not pay their taxes, they may still enjoy a “free ride” on the public ser vices provided. Unlike other significant taxes in Ontario, however, property taxes are in effect earmarked to finance local government and, to some extent, education.5 Most people, or at least most homeowning voters (“homevoters”), know that the property tax finances highly visible ser vices such as schools, roads, policing, garbage collection, and neighborhood parks. People are more amenable to tax increases when they see a strong connec1. The following discussion draws in part on Slack (2006) and Bird and Slack (2004). 2. In some cases mortgage institutions include property tax payments with monthly mortgage payments, thus reducing the visibility of the property tax for some homeowners. 3. Underlying this question are some serious methodological and political issues concerning the relationship between tax economics and tax policy, and the connection between tax politics and the functioning of democracy in a complex modern society. For a preliminary discussion of these issues related to sales taxes in Canada, see Bird (2010c). 4. Another mayoral candidate promised to exempt seniors completely from the property tax (Grant 2010). 5. For a more general discussion of earmarking in Ontario, see Th irsk and Bird (1994).

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tion between what they pay and what they get (Simonsen and Robbins 2003).6 Tax visibility is desirable in large part because it makes taxpayers aware of the costs of local public ser vices. From this perspective, property taxes should be an easier sell than less-connected taxes such as income and sales taxes. Increased awareness of the link between what the people in a community pay and what they receive in return should also enhance the accountability of elected decision makers to voters, which is good from an economic perspective, for dealing with budget constraints. Nonetheless, most people, especially most homevoters, seem to dislike property taxes. As one American expert has put it, the property tax is probably the “most hated” tax (Brunori 2003, 7). Another important characteristic of the property tax is that its base is relatively inelastic. Unlike the income tax or sales tax, the property tax does not automatically yield additional revenue if its base expands. Instead, explicit administrative action is required to reassess the tax base, and then overt political action is required before the increased base yields increased revenue. When property taxes are based on a market value assessment, as in Ontario, property values generally respond more slowly than incomes to annual changes in economic activity. This inelasticity is exacerbated when valuations for taxation purposes are not fully updated each year.7 Even with inflation creeping along at only 1 to 2 percent a year, as is currently the case in Canada, and even if the costs of local ser vices do not increase more quickly than inflation, with the noncurrent phased value assessment system now in place in Ontario, nominal local tax rates often need to be raised every year or two simply to maintain property tax revenues in real terms particularly where there has been either no growth or shrinkage in the assessment base.8 In Toronto, on the other hand, where the assessment base has continued to increase, the effective tax rate has actually gone down in most recent years. Even in Toronto, however, people see the increase in the dollar size of their tax bills much more clearly than they do the “real” rate of taxation on the market value of their property. Like visibility, an inelastic base may be beneficial in that it increases accountability. Local governments must explicitly increase tax rates to increase tax revenues (assuming they are on the right—that is, left— side of the “revenue hill,” discussed in chapter 8); they cannot simply let the assessment agency do the job for them. But this still does not make the tax more popular.9 6. The issue of responsiveness to local tax prices has not been explored much in Canada, although there is some evidence that suggests it exists (Geoff rion, Vaillancourt, and Vaillancourt 2005). 7. For one year, 2004, Camelot was visible and a current value assessment was actually fully applied in Ontario. See the discussion of assessment cycles and phasing in in chapters 4 and 5. 8. In fact the costs of local ser vices tend to increase more quickly than the rate of inflation, reflecting the labor-intensive nature of many local ser vices (Baumol 1967). 9. It should be noted that local residential property taxes are not deductible for income tax purposes in Canada, whereas businesses can deduct taxes on their property when calculating their income tax liability.

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Another factor contributing to taxpayers’ dislike of the property tax is the arbitrary way in which it is administered. The property tax is fundamentally a presumptive tax, in the sense that the tax base must be explicitly estimated (presumed) by someone— often an administrative agency like Ontario’s Municipal Property Assessment Corporation (MPAC)—in a way that is not true for any other significant tax. Since taxpayers may easily compare their property taxes with those of similar properties in their neighborhood, the inevitable discrepancies that arise under even the best assessment system, such as the one in Ontario, which appears to exceed generally accepted professional standards (see table 5.3), may lead both to costly appeals and to general pressure for tax relief.10 This may not matter much when property taxes are low and not increasing. However, as discussed in chapter 1, property taxes are relatively high in Ontario. Although they have not been increasing as a share of income in recent years, both the nominal tax rate and—perhaps most important from the perspective of public perception—the number of dollars collected have been rising rapidly, while at the same time many citizens have become increasingly dissatisfied with the quantity and quality of local ser vices provided. One reason the property tax is generally regarded as a good tax for local governments is because property is immovable; it cannot be shifted away in response to the tax and it cannot be hidden. Thus, the tax is difficult to evade. Although a change in property tax may be capitalized into property values in a particular community, and in the long run tax differentials may affect where people decide to live, these effects are likely smaller than those that might occur if heavy income and sales taxes were imposed at the local level. On the one hand, this characteristic of the property tax makes it somewhat easier to levy and collect at the local level than other taxes. On the other, the fact that it is hard to dodge the tax may make some people resent it more. As Sheffrin (2008) noted, it is fundamentally difficult to argue that market value assessment is a fair way to implement either the benefit or the ability-topay principle of taxation through the property tax. Since it is almost impossible to relate variations in current value assessment (CVA) to either of these fairness principles, increases in assessments are almost invariably perceived as unfair by those affected. This problem is accentuated when property prices are changing rapidly but personal circumstances are not. As Buchanan and Forte (1964) noted with respect to excise taxes, many people appear willing to accept high taxes when they think they have a choice about whether to pay them. In the case of 10. As Weber and McMillan (2010) suggest, the effect of appeals is probably to make the property tax a bit more regressive. Most appeals (in terms of the amount of money involved) are fi led for business properties, and it is probably the case, that among residential properties, appeals are launched mainly for higher-valued properties. If only because it takes money to launch a formal appeal, it would not be at all surprising if the overall effect of the process were to be a more regressive tax.

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the property tax, since existing property owners obviously have no such choice, increases are likely to make them unhappy. For much the same reason, people are generally more willing to accept taxes on new acquisitions—like Toronto’s land transfer tax—than increased taxes on existing holdings. Those who buy property presumably do so knowing what the taxes will be. In contrast, those who bought property long ago and have been living in the same place in the same fashion for years may not believe anything has changed that would warrant a tax increase. Property tax revenues are particularly appropriate for financing local governments because many of the ser vices funded at the local level provide a direct benefit to property values. Houses, factories, and office buildings are worth more with paved roads, street lighting, refuse removal, and other amenities than those without such ser vices. Residential property taxes are particularly appropriate in this respect because they are paid by local residents who use the local ser vices.11 In an ideal governance structure, using local property taxes to pay for local ser vices promotes efficient public decisions, because voters will presumably support local spending decisions only when the benefits will exceed the cost of the taxes.12 Both the benefits derived from such local ser vices as roads and public transit and the taxes used to finance those ser vices may be at least partially reflected in property values through capitalization. Since taxpayers are presumably willing to pay more for better ser vices and lower tax rates, localities that offer either should, over time, end up with higher property values and potentially a larger tax base. On the other hand, if people become dissatisfied with the local ser vices they receive—perhaps they see more potholes in their streets at the same time that their tax bill is rising—their acceptance of the property tax will obviously decrease. Again, the same principle that makes the property tax a good source of local government revenue also makes it especially vulnerable to local political resistance. It is no wonder that academics tend to be much fonder of the property tax than are the politicians who actually have to impose and defend it.13 Granted, this is a highly simplified picture based on a number of assumptions of varying plausibility: for instance, that local governments do what voters 11. For purposes of discussion, we assume that renters and owners pay residential property taxes. As Bird and Slack (1978) discuss in detail, although the literature is far from decided on the final distributive incidence of the property tax, most people in Ontario seem to think that it is paid by owners and tenants, as well as that it is undesirably regressive. 12. In welfare terms, the costs of taxation are not simply the taxes paid (which are transfers) but the administrative and compliance costs of levying those taxes, as well as the distortions in allocative efficiency to which taxes give rise (unless strictly matched by benefits). Similarly, on the expenditure side, local citizens may or may not count as a benefit the extent to which certain redistributive aims are achieved by, for example, ensuring education for all children. However, these refinements are not pursued here. 13. As we discuss further below, the politics of the benefit-tax connection are quite different when it comes to the substantial portion of the tax base consisting of nonresidential property.

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want them to do, and that voters are free to move to other jurisdictions if they do not like the combination of ser vices and tax rates where they live.14 This chapter essentially takes the benefit view of local taxation. As Fisher (2009) states, although the benefit approach may work well in metropolitan suburbs, it is not as applicable in large heterogeneous cities and sparsely populated rural areas. Nonetheless, despite the concerns frequently expressed about the regressive nature of the property tax, its redistributive aspects are a secondary issue in Ontario, partly because local governments do not play a major role in allocating the provincially controlled mix of ser vices and taxes. This does not mean that local governments should not consider the distributive aspects of their policies, and as political bodies they will do so in any case. But it does imply that it is appropriate to judge local property taxes in Ontario primarily in terms of their effects on resource allocation and their fairness regarding benefits. If the province does not like the presumed regressivity of the property tax, it can readily offset such effects through other instruments, such as the property tax credit and other transfer programs, and to some extent it does. All of these points underline the highly political nature of property tax policy. In Ontario this issue is salient at the provincial as well as the local level. At least half of the property tax collected by local municipal governments reflects decisions made at higher levels of government, decisions that are often not related in visible or accountable ways to corresponding benefits to the community. For this reason, one of the key arguments underlying the case for local property taxation, that it can express the wishes of local residents and help control local government spending, is not very strong in Ontario. Traditionally, the principal rationale for the local property tax in the eyes of American scholars has been the financing of local education (Wallis 2000). Some U.S. observers have argued that this rationale has now largely disappeared, even in much of the United States (Sheffrin 1999). In Ontario, as discussed in chapters 3 and 6, the education-funding argument for local property taxation, always fairly weak, has been basically nonexistent since the 1998 reforms. Moreover, one of the most unfortunate consequences of the almost annual policy readjustments that have taken place since the 1998 reform is the degree to which they have exacerbated the already sharp cleavages between decision makers, benefiters, and payers of property taxes in the province. The adjustments made by the provincial government have made it clear that it is the province and not the local government that has both the first and the last say when it comes to property taxes. Under the present governance structure in Ontario, the strength of the local-accountability argument for property taxation has been greatly reduced, to put it mildly. 14. See Bird and Slack (2004) for further discussion.

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The basic argument for local taxation of any sort in Ontario is simply that the revenue is needed to finance local public ser vices. This group of services—which conspicuously does not include education since it is now provincial in all but name— consists mainly of so-called hard ser vices, such as road maintenance, refuse removal, transit, and parks. A local government in Ontario is thus an enterprise that provides certain collective ser vices for the residents of a particular area. In principle, ignoring distributive considerations, the best way to finance such ser vices is on a user-pay basis. However, since it is neither efficient nor feasible to charge specific users with respect to many urban ser vices, such as streets and parks, municipalities impose a sort of generalized user charge to cover service costs. A residential property tax is both a sensible and a well-established way to do this; Ontario should keep its present local residential property tax in place.15 However, the same cannot be said for the second tax in our tale, the nonresidential property tax, which currently provides half or more of total property tax revenue in many Ontario municipalities. On Balance, a Good but Limited Local Tax The municipal (and regional) residential property tax is a natural way to finance a bundle of local public services, particularly those services that are reflected in increased property values. Essentially, it is a user charge paid by property owners for benefits they receive from local ser vices.16 Both in the vast, less-urban regions of the province in which other tax bases are often small, as well as in the urban areas in which most of the potential tax base is located, there is no reason why this valuable revenue source should not be tapped. It ought to be used at least to the extent that it is now, and in some cases, for example in parts of the Greater Toronto Area (GTA), it could be used to an even greater extent than it is. Unfortunately, as Thirsk (1982) stressed, despite the solid case for the residential property tax, experience worldwide suggests that the immediate political cost to incumbents of relying heavily on such taxes is so high that governments are more likely to seek politically “cheaper” sources of financing. Transfers from the federal and provincial governments, loans, and business taxes that can be largely hidden from local voters are, from the perspective of local politicians, vastly preferable to confronting citizens with the true costs of the government’s spending decisions. In particular, the temptation to indulge in politically pain15. Presumably, nonresidents who make use of local ser vices, such as visitors and commuters, should be subject to user charges (or targeted taxes, like hotel taxes) whenever possible. The issue of how to impose such a generalized user charge on businesses is discussed later in the chapter. 16. The classic arguments for the property tax as a generalized user charge may be found in Vickrey (1963) and Netzer (1973). For a more recent view, see Fischel (1992). As mentioned earlier, we do not address the potentially larger role that more specific user charges could play at the local level, or the political reasons why they do not do so; on both topics, see Bird and Tsiopoulos (1997).

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less but economically inefficient tax exporting— shifting local taxes onto nonresidential property owners and consumers—is, on the evidence of history, so strong that it seems appropriate to impose a constraint to ensure that the provincial and local governments are unable to impose unduly heavy taxes on business compared with residential property.17 Given the generally uniform assessment of property that Ontario has achieved since the 1998 reform, perhaps the simplest and best constraint is simply to require that identical tax rates be imposed on all classes of property. Even the highest local property taxes seldom yield enough revenue to finance all local ser vices. Countries that depend to a large degree on property taxes for local fiscal resources generally have smaller local governments than countries with more diversified local tax bases (Bird and Slack 1991). In most developed countries, for instance, when local governments account for a significant fraction of total public-sector spending, one of three conditions usually prevails: they are largely dependent on national transfers (including shared taxes), as in Korea and many other countries; they can levy surcharges on national income taxes, as in Sweden and other Nordic countries; or they have access to a variety of tax bases, including local business taxes, as in Italy and Spain.18 This does not mean that the property tax is not a useful and even necessary source of local revenue. But it does suggest, as discussed in chapter 8 with respect to the GTA, that the property tax alone is unlikely to provide sufficient resources to finance a significant expansion of local public ser vices, such as the additional spending needed to make up the infrastructure deficit or even to finance the social ser vices for which Ontario municipalities are still responsible. For these reasons, some Ontario municipalities, including some of the largest, need access to additional revenue sources in order to remain viable and sustainable local-government units— that is, if the provincial government wants such units to be accountable to residents for what they do with their revenue. For the moment, the property tax, though preferably a different and more limited one than now exists, should continue to play an important role in financing local governments in Ontario. Other members of the property tax family, notably the reformed development charge (see chapter 7), may play a more limited role, particularly in rapidly expanding metropolitan areas. 17. Studies done in the United States (McLure 1967; Morgan, Mutti, and Rickman 1996; Wu 2010) and Canada (Ballantine and Th irsk 1982) suggest that exporting local taxes on business is both a common and an important phenomenon. As discussed later in this chapter, although an alternative form of local business taxation may be justified on benefit (efficiency) grounds, or perhaps simply politically necessary, such taxes must be regulated to prevent localities from shifting the costs of ser vices to outsiders and to maintain transparency in the provincial government. 18. These conclusions are drawn from Bird and Slack (1991). More recent publications by OECD (Blochliger and Petzold 2009; Blochliger and Rabesona 2009) suggest they remain largely valid, whether one considers local governments only or local and regional governments together.

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A Better Property Tax Improving the Property Tax The property tax, while a good local tax, can and should be improved in several ways. The relationship between the property tax and education finance, for example, needs serious reconsideration, as this link has been stretched close to the breaking point in Ontario. It should either be strengthened by reestablishing a real connection between local taxpayers and local education, or it should be broken completely, with education funding becoming entirely a provincial responsibility. On the whole, given Ontario’s present situation, the second path seems both the simplest and the most logical route to follow. Ideally, the province should fund all public education out of its general revenues. The present education tax levied on residential property could then be abolished, opening more tax room for local residential property taxes. However, if the present local education tax on residential property is retained, then careful rethinking will be needed to make the links among local governments, school boards, and local educational spending clear to all. Another improvement would be to change the present two-tax structure of the Ontario property tax—with the residential tax and the set of heavier taxes on various classes of nonresidential property—to a single uniform tax on all classes of property. At the municipal (regional and lower-tier) levels, nonresidential property should be subject to the same tax rate as residential property. Such a tax would in all likelihood still overtax most business activities, from a benefit point of view.19 However, it would substantially reduce the heavy overtaxation of business in general and also discourage the use of lower property tax rates as inducements to business. At the same time, and for the same reason, the present provincial Business Education Tax (BET) on nonresidential property should be abolished. Alternatively, the BET could be consolidated with the excess (above the residential tax level) nonresidential component of the municipal property tax into a new uniform provincial tax on nonresidential property. Although there is no logical reason to earmark such a tax explicitly for education finance, it could be used in that way and make up for the loss of the municipal residential education tax. These proposals are not as radical as they may appear. In some countries, such as the United Kingdom, local governments already impose property taxes only on residents, with the nonresidential property tax levied by the central government uniformly across the country. Ontario has already taken a step down this 19. For estimates of the degree of overtaxation of business in Ontario under these terms, see Kitchen and Slack (1993) and Mintz and Roberts (2006).

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path with the Business Education Tax. A next step would be to follow the British model and make the entire nonresidential property tax a uniform provincial tax, as just suggested. However, this is likely not the best way to proceed, for several reasons. First, nonresidential property taxes represent an extremely important source of local revenue, and there is no obvious way that many local governments could compensate for the lost revenue other than through depending heavily on provincial transfers. Second, a local nonresidential property tax acts as a generalized user charge imposed on businesses operating locally (Bird 2003), and although the tax may not be the best type of business-user charge, it has the major advantage of already being in place. Third, in view of both the history and the current nature of Ontario’s property tax system, it would almost be politically impossible for local governments in Ontario to remove local businesses from the property tax base while continuing to heavily tax residential properties. The best approach would therefore be for local governments to continue to impose nonresidential property taxes. Unfortunately, on the one hand, the present system of classifications for business property tax in Ontario is impossible to rationalize on any economic grounds. On the other hand, there is always a danger that local governments, if allowed to determine business taxation, will impose taxes that are too high on some businesses (those already locked into the community in some way) and taxes that are too low on potential new businesses, in order to attract more businesses and jobs to their community. Both practices— tax exporting (moving local taxes onto nonresident business owners and consumers through excess business taxation) and tax-base shifting (inducing firms to shift locations in response to tax incentives)—are undesirable features in a sound local finance system. A sensible compromise would be to require localities to impose exactly the same rates on residential property as on nonresidential property. Given the existing province-wide assessment system, which taxes about 95 percent of nonresidential properties on the same CVA basis as residential properties, the simple requirement of rate uniformity would appear to be a logical next step that would remove the temptation for local governments to over- or undertax business property. Because municipalities and the provincial government would lose revenue if these suggestions were adopted, and there would no doubt continue to be strong popular support for differential taxation of business property, the province may also want to consider adopting an alternative form of business taxation as an additional revenue source. A similar supplemental tax could also be made available to municipal governments under certain conditions. As suggested earlier, some larger urban areas, in particular, might need such an additional tax source. The structure of the property tax could in principle be substantially simplified by removing many of the exemptions and rate-relief schemes that have accumulated over the years, especially in the past decade. Much of this complexity

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reflects the sorts of incremental accommodations, made out of political necessity, that are inevitable in a democratic setting (Witte 2009). From this perspective, what most needs to be altered are not so much such symptoms as the underlying structural problems with the property tax. The main problem is that too much fiscal weight is now placed on this tax in Ontario. In addition, the implementation of current value assessment in a period of volatile real estate prices has resulted in significant increases in the dollar amount of tax bills for some taxpayers (even if there has been little or no increase in the effective tax rate relative to either property values or income), exacerbating perceptions that the property tax is unfair. To deal with these problems, two approaches are needed. First, local governments, and particularly the larger ones, need more tax alternatives as well as more encouragement and assistance in implementing better user-charge policies. Development charges, for example, should be recast to better reflect the real incremental public-service costs associated with particular development projects. Second, more effort needs to be devoted to making the property tax considerably more transparent than it is now. Truth in taxation needs to become a reality, not a slogan, if local property taxes are to continue to be the mainstay of local government finance in Ontario. As Pagano and Jacob (2008) point out, there is a striking divergence between the popular (and media) perceptions of property tax policy and those of the experts, who “speak an obscure and unrecognizable language” and “have forgotten how to communicate and ‘frame’ the property and land tax issue sensibly” (30–31). The past turbulent decade of property tax change in Ontario underlines the truth of their observation. Consider, for example, the role of MPAC in the Ontario property tax system. As discussed in chapter 5, MPAC has on the whole done a good job in establishing and updating the CVA basis for property taxation in Ontario. In a way, however, the agency did too good a job at a time when property prices were increasing rapidly in the province, albeit in a varied pattern. MPAC’s success accentuated a number of problems inherent in the market value approach to determining the property tax base. As an example, one criticism of the MPAC approach was that even when a property was sold on the date of the valuation, the sale value was not necessarily acceptable for property tax purposes; this seemed to critics like a rather strange market value system (Ombudsman of Ontario 2006). However, instead of responding, as MPAC did, that “greater weight is [now] being given to the actual selling price of homes when an assessment is challenged” (MPAC 2006, 9), perhaps people should simply have been reminded how the property tax works. Such a response might have taken the following lines: Since assessment is the basis on which the share of local spending that must be paid for by local taxes is

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allocated among property owners, and we wish to allocate this share fairly under a market value system, it is essential that the measure used for allocating the tax—the assessment value—is established for all properties on the same date and in as comparable a way as possible. This is exactly what MPAC strives to do. It is true that unless a property is sold (by a willing seller to a willing buyer in a market in which there are many sellers and buyers) on the actual valuation date, the assessed value for any particular property will never be exactly right. Nonetheless, if the CVA process is carried out properly, as it is on the whole in Ontario through MPAC’s use of carefully designed algorithms and the best available information on property values, then the estimated assessed values will provide the best possible comparable values among all properties, and hence the fairest and most equitable basis for allocating the local shares of local expenditures. Imagine explaining to an aggrieved taxpayer not only how the assessment process works, but also how the particular assessment is connected to the tax bill the taxpayer receives. That explanation would have to include the following key factors: ■

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How much local spending is paid for out of local taxes, and the extent to which this is determined by the provincial (and federal) grant money flowing to a particular locality in a particular year. How much of the local tax share falls on residential property owners. This is also determined largely by provincial policy, although local councils do have some discretion. How much education tax— again, administered by the province— and regional tax the local government is required to collect (but over which it has no control). How much the local government itself spends and how it determines those expenditures.20 Finally, how much the value of the taxpayer’s own property is estimated to have changed relative to other properties in the same municipality since this is the major factor influencing changes in the amount any individual property owner pays.

The bottom line is that the system determining a final property tax bill is designed in such a way that no one has responsibility for the outcome and very few can explain or even understand how it all works. Thus property taxes, and especially increases in property taxes, are often perceived to be unfair and arbitrary. This perception is important because taxpayers vote, and voters’ perceptions of 20. Note also that the cost of local government ser vices tend to rise by more than the rate of inflation over time because such ser vices are relatively labor intensive (Baumol 1967).

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the fairness of the property tax affect the extent to which local governments can raise it. These perceptions, combined with the unfortunate severance between the time when the assessing agency (MPAC) delivers the notice of increased assessments, the taxing agency (the local municipality and the other agencies that determine tax rates (the upper-tier municipality and the education system) decide on the rates, the time when the local municipality delivers the notice of increased taxes, and the time when citizens receive the benefits, if any, of such increases mean that those who would promote property taxes as an open and democratic way to finance local government expenditures in Ontario have substantial barriers to overcome. Reorganizing and simplifying the institutional tax structure along the lines set out above may help, but it is unrealistic to expect that local governments will be able to get much more revenue from the residential property tax than they do now. Some Not So Good Ideas Many different proposals have been put forward by different groups to “fix” Ontario’s property tax system. Few such proposals seem workable or desirable, however, and some of them would almost certainly make the system worse. Indeed, as discussed in earlier chapters almost everything done since 1998 to the property tax reform has been a bad idea. The system that has resulted from this accumulation of contradictory and confusing measures is neither rational nor effective, since many of the later reforms (capping, clawbacks, phasing-in) were explicitly intended to roll things back to something as close as possible to the pre1998 system, the very tax system that was supposed to be reformed. A number of solutions to the kinds of problems encountered in Ontario have been discussed in the literature. Sheffrin (2008), for example, suggests that some form of banding might be tried, as in the United Kingdom.21 Others have suggested various types of freezes, including a move to an absolute limitation on existing property taxes, with all increases attributable to increased assessments being deferred until the time the property is sold or transferred. Still others have suggested switching to a unit value or area basis, rather than the value-based assessments under CVA.22 However, most experts have argued that, insofar as hardships and other problems arise from market value assessment, the most appropriate way to fi x the system would be through such generalized relief measures as property tax credits and deferrals.

21. Under this system, each property is assigned to one of eight value bands and the tax rate for each band differs according to a fi xed ratio set out in legislation. For a more detailed description of the English system, see Bird and Slack (2004). 22. Slack (2006) reviews the problems with such alternative bases; see also Connolly and Bell (2009).

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As discussed earlier, Ontario has for many years had a general property tax credit system for residential property taxes that operates in conjunction with the provincial income tax, as well as provisions for (rather limited) deferrals of property taxation, available at the option of local municipalities (though sometimes provincially financed).23 But when the 1998 reform hit the system, these measures were considered inadequate; indeed, they were so seldom mentioned that they seem to have been completely irrelevant. Instead, options for phasing in residential property tax increases were introduced along with a series of caps and limits, as well as assessment freezes for nonresidential properties. As Slack (2010) has recently shown, however, for the most part these measures (other than the phase-ins, which are often a useful transitional measure) do not really deal with the perceived problems and may, in some cases, actually make them even worse. In particular, assessment limits such as freezes and caps (even with clawbacks) generally help those who are made wealthier by the market at the expense of those whose property values have not changed. Capping may not only help most those who need it least, but also increase taxes for some whom it is designed to help. Nonetheless, much evidence in Ontario and elsewhere in North America shows clearly that assessment limits are attractive when there is volatility in market value assessment. When values rise quickly and not uniformly, some property owners face dramatic tax increases in a short period of time (Haveman and Sexton 2008). Even if the total tax revenues for the municipality do not change, there is the risk of large annual swings in the distribution of the property tax burden in times when property values are increasing. Shifts in taxes on certain properties (those increasing more rapidly than the average for the municipality) are a particular problem when the market impact is not uniform across a jurisdiction (Dornfest 2005). And when the size of the tax base is reduced by assessment limits, the rate increase required to raise revenues may offset relatively small reductions in assessed property value. In this way, reduced assessments may actually result in higher, not lower, taxes for some properties.24 Nevertheless, since taxpayers see rising assessed values as the reason for rising taxes, capping assessments seems to them an obvious solution. Taxpayers like assessment limits not only as a form of relief from the tax impact of specific assessment changes, but also to guard against large property tax increases in the future (Anderson 2006). 23. Although good economic arguments exist for using tax deferral schemes, they are not particularly popu lar among taxpayers. An earlier study suggested that the take-up rate was low for tax deferral programs, “largely owing to the strong attachment of the old to their homes and to their desire to leave them unencumbered for their heirs” (Bird and Slack 1978, 98). 24. Anderson and McGuire (2007) show this mathematically. The tax rate = total taxes/total assessed value. An individual’s own taxes = tax rate × own value. By substituting the first equation into the second, we see that one’s own taxes = total taxes × (own value/total value). Thus, an individual’s own taxes depend on the total taxes collected in the municipality as well as the value of the individual’s property relative to the total value.

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Slack (2010) has explored these issues in Ontario by simulating the impact on taxpayers if assessment capping had been introduced in 1980. Specifically, Slack estimated the impact of a 5-percent cap, a 10-percent cap, and a cap based on the rate of inflation (all imposed until the time of sale) on assessed values for residential properties across the province. The results, which are generally consistent with those in the U.S. literature, suggest that changes in assessed value arising from capping favors property owners with high incomes and high property values, at the expense of owners with lower property values and lower incomes, seniors at the expense of young homeowners, owners of waterfront and recreational properties at the expense of owners of single-family homes and condominiums, and properties sold a long time ago at the expense of properties that sold more recently. Figure 9.1 illustrates the results of the 5-percent cap. FIGURE 9.1

Impact of 5-percent Capping by Income Group (Average Change In Assessed Value)

source: Slack (2010).

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In effect, assessment limits, or caps, privilege stability as the most important feature of a good local tax, over equity, efficiency, administration, and even taxpayer understanding. Assessment limits complicate the administration of the property tax and create confusion among taxpayers because what they owe is no longer calculated simply as a tax rate multiplied by the tax base. Moreover, there is no incentive to review one’s assessment, so while volatility may actually arise from assessment errors, these errors are unlikely to be corrected. Further, assessment limitations that persist until the time of sale may distort economic decision making, for example, by reducing the incentive to move. Homeowners may not move if their job location changes, simply because even if they moved to a house of equal value, their property taxes would rise.25 As Calabresi and Epple (2010) argue, political support for property tax limitation is so strong in part because all but perhaps the very poorest are likely to perceive a clear gain from such a policy. Once established, it proves very difficult to move away from limits. As Youngman (1999, 1395) says: “Once a freeze is imposed, the process of thawing may be too painful to bear.” The current situation in Ontario, with the capping and clawbacks of commercial and industrial assessments, provides an example. It will be politically difficult to return to a straight market value assessment, even if it is more fair, after assessment-related tax increases have been capped for a period of time. Another approach is to deal with the liquidity problems arising from property tax increases by creating more payment options for taxpayers, such as more frequent payments, the use of bank cards and credit cards for payments, and even withholding payments from salaries at their source (which presumably would require provincial and federal cooperation). Davey (1999) suggests that much more attention should be paid to finding ways to make the payment of local taxes more painless. However, his main reason for doing so seems to be that local governments, being more responsive to their constituents than higherlevel governments, are especially likely to find their spending plans curbed by effective tax protests. There is some evidence, though it’s hardly overwhelming, that people treat local taxes as essentially prices for local ser vices, an outcome that seems something to be welcomed, not deplored. The problem is that, for people to respond appropriately to tax prices, they must be aware of those prices. The present Ontario property tax does not score well in this regard owing to the difficulty people have in understanding the relation between the assessment process and their tax bill, not to mention the relation between that tax bill and the ser vices they receive. More taxpayer education is often recommended as a 25. However, it should be noted that a study of an assessment freeze in Muscogee County, Georgia, did not find statistically significant evidence that taxpayers were discouraged from moving (Sjoquist and Pandey 2001).

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solution to the lack of public understanding or acceptance of rising property taxes. Education is always a good thing, but all the education in the world will not make Ontario’s property tax system either more understandable or acceptable unless there is real structural reform of both the property tax system and the local finance system, as outlined in this chapter.

Rethinking Local Government Finance Closing the Revenue Gaps Since the most critical aspect of our proposed plan to improve property taxes in Ontario is the substantial lowering of the revenue demands placed on the property tax system—in particular, on the business property tax—it is essential to examine how the resulting hole in the local finance system might be filled. Several proposals have been made in this book, each of which would improve some aspects of local finance, each of which would be worth doing on its own, and all of which, taken together, would result in a much better and more balanced system of local finance and governance in Ontario. Many of these proposals, and certainly the package as a whole, would reopen issues that the provincial and local governments may consider to be either difficult or impossible to address, given the long history of the reform effort and the public’s general reluctance to make huge changes. As a rule, it is easier to build dams or even atomic bombs than to understand social or public institutions, let alone to restructure them. Nonetheless, it is time for the people and governments of Ontario to think more carefully about the role they want local governments to play, as well as how the present property tax system affects the way that role is carried out. Turning to the numbers, in 2009 the assessed value base for property in Ontario was $1.74 trillion, and the phased-in base—the actual base to which tax rates are applied—was $1.59 trillion (MPAC Annual Report 2009). A uniform 1-percent rate applied to this base would yield $15.9 billion. The provincial government collected an estimated $5.7 billion as education property tax in the fiscal year ending 31 March 2010 (Ontario Budget 2010) and property taxes collected by local governments in 2009 amounted to about $19.2 billion.26 Total property taxes imposed on the assessed value base were thus approximately $24.8 billion, and the effective total property tax rate in 2009 was about 1.6 percent (1.2 percent for local governments and 0.4 percent for education). However, 26. Th is figure has been calculated by deducting the education property tax collected in 2008–2009 as shown in Ontario Budget (2010) from the total “property and related tax” figure for Ontario for 2009 shown in Statistics Canada’s latest consolidated fiscal table (available at http://www40.statcan.gc.ca /l01/cst01/ govt51b-eng.htm). Local governments’ fiscal year ends 31 December, while the provincial fiscal year ends 31 March.

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for the municipal sector as a whole—with considerable variation among localities (as discussed in chapter 8)—less than half of property taxes came from residential (and multiresidential property), with the balance coming from commercial and industrial properties. Owing to the complexity of the Ontario property tax system, it is not practical to go into the figures for every municipality. However, if we assume that on average nonresidential properties in Ontario are subject to rates at least double those imposed on residential properties, the effective rate on residential property in Ontario in 2009 would have been less than 1 percent, based on the figures above, while that on nonresidential property was almost 2 percent.27 Taxing all property at the same rate while maintaining the current local revenue from property taxation would therefore require increasing the average rate on residential property by at least 50 percent and reducing the rate on nonresidential property by almost the same amount. Because carrying out the first of these changes would likely be politically impossible, the only way to approach a uniform rate would be to leave the residential rate alone while cutting the nonresidential rate by approximately half. The result, of course, would be a huge hole in local budgets. Using the very rough numbers given above, the resulting revenue gap would be on the order of $3.3 billion ($19.2 minus $15.9). Fortunately, a quick fi x is available. The provincial government could simply return the education property tax (on residential property) to local governments and “redo its sums,” recalculating transfers to ensure that neither school boards nor local governments, particularly poor ones, suffer. As noted earlier, the present provincial education property tax incorporates the irrational Business Education Tax; that tax should be abolished, given the basic proposition that property taxes should be uniformly applied to residential and nonresidential properties. If the education property tax base is split between the two property categories, as assumed for the earlier calculation, and the rate differentials are similar to those estimated above, then the yield of the “reformed” education property tax—that is, the provincial BET without the excess amount beyond the residential rate—would decline in the same proportion as the local property tax (by about 17 percent). Abolishing this reformed education property tax would result in forgone revenue of about $4.7 billion. If the municipal sector lowered its nonresidential property taxes in the same way, it would lose about $3.3 billion. The abolition of the provincial tax would thus provide more than sufficient room for municipalities to adopt an additional local tax that would make up for the funding lost from lowered business property 27. Th is estimation is conservative: for example, as the data in table 8.1 show, in the GTA in 2005 the average residential rate was a bit higher, at 1.2 percent, but the average nonresidential rate— probably the highest in the province—was considerably higher, at 3.1 percent, with the rate differential within Toronto itself being even more extreme.

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taxes. Given still more tax room, created by eliminating the remaining $1.4 billion in BET revenue, provincial transfers could be reduced accordingly. Education is essentially a provincial responsibility now, and if it is to remain so, it should be financed from regular provincial revenues, for example, by raising the provincial portion of the sales tax by a point or two or adjusting income tax rates as needed. Alternatively, the province may wish to replace some or all of the revenue forgone by eliminating the BET by adopting a different form of business taxation. Or, if the province decides that municipal governments in Ontario, like those in most other jurisdictions on the continent, should continue to raise at least some of the funding for their local schools through taxing local residents, then that could be accomplished in various ways. For example, since education funding would then depend to some extent on the residential property tax, it might be desirable to permit local governments to impose supplemental levies on any new provincial business tax. In addition to switching to uniform taxation of all forms of property, it would be a good idea to clean up the property tax in other ways. Removing exemptions that seem to serve little economic or social purpose is always an attractive option to tax experts, if not to politicians attempting to accommodate various interests. Here, it is fundamentally important to clearly delineate— and stick to—the boundaries between provincial and municipal responsibilities, and match those responsibilities with appropriate resource allocation. On one hand, if the province decides that it is in the public interest to tax pipelines or railway rights of way in a particular fashion, then local taxes must be imposed in that way. On the other hand, if the province decides to grant certain reliefs to specific groups of taxpayers, the cost of such reliefs should be borne by the province and not by the municipality, as has arguably been the case with some aspects of the assessment limits that have crept into the property tax system in recent years. If a provincial action in effect reduces local taxes, then that revenue loss should be made up by increased grants. Following the same logic, if municipalities decide on their own to grant certain forms of local tax relief, they should bear the full cost of doing so. Taxing Business Sensibly One problem with imposing a relatively heavy tax on business property is that it is, in effect, a tax on a form of investment, and like all such taxes, it is likely to discourage investment to some extent.28 Moreover, by taxing one particular form 28. Smart and Bird offer an illustration of the deterrent effect of taxes on investment in Canada in their recent study of the effect of removing such a tax, imposed through the old retail sales tax, in several provinces (Smart and Bird 2009b).

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of investment, real property, the nonresidential property tax penalizes more heavily those activities and production techniques that are more real-property intensive. These distortions are accentuated when such taxes are imposed differently across local jurisdictions. Nonetheless regional and local business taxes in various forms— corporate income taxes, capital taxes, nonresidential property taxes, and all sorts of business levies— exist in countries around the world.29 It is not hard to understand why this is the case. Local business taxes often produce substantial revenue and are generally more elastic, and hence more responsive to expanding expenditure needs, than property taxes. Indeed, in many places, given the difficulty of expanding residential property taxes and the unavailability of other tax sources for local government, business taxes have provided the main vehicle by which governments, particularly in rapidly growing urban areas, have been able to increase revenues and ser vices in response to perceived local needs; this was to some extent the case with development charges in Ontario. An advantage from a political perspective is that business taxes appear to be paid by someone other than local residents. Local governments are tempted to impose taxes on business—that is, on “someone else”—whenever they can, to avoid confronting citizen-voters directly with an increased tax on their home, their income, or their consumer goods. This may not be good policy because it reduces accountability, but it is usually a good political choice. If done correctly, local business taxation may also make good economic sense. In broad terms, when local governments have good methods by which they can reap revenue gains directly from economic growth, they will be encouraged to adopt more market-facilitating policies to promote such growth, rather than, as now, being encouraged to impose levies and taxes that may discourage economic development (Weingast 2006). When budgetary needs, growth objectives, and political realities all point in the direction of taxing business, it is not surprising that local and regional governments around the world appear eager to follow suit. Tax experts, however, are generally less enthusiastic about local business taxes. One reason for this may simply be that experts are uncomfortable with effects they do not understand, and it is certainly difficult to understand who actually pays local business taxes. A more theoretically grounded reason may be that such taxes are likely to distort the allocation of resources unless they are offset by corresponding benefits to business. Since the evidence in most countries, as in Ontario (Kitchen and Slack 1993; Mintz and Roberts 2006), appears to be that business taxes usually exceed business benefits, most experts dislike such taxes (McLure 1994). However, since local business taxes are likely to continue to exist no matter what economists may say, it is important to consider whether the problem lies with the idea of local governments taxing business or with the way 29. For discussions of such taxes, see Bennett and Krebs (1988), Bird (2003), and Pola (1991).

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in which they do so. On the whole, it seems to be the latter that is the real problem. As noted above, there is a good economic case for some regional and local business taxation as a form of generalized benefit tax. When it is not feasible to recoup the marginal cost of public-sector outlays through user charges, some form of broad-based general levy on business activity is warranted. It is difficult, however, to find support for taxing any one business input, whether it be labor (payroll tax) or capital (corporate income tax or differential real property tax). This suggests that a broad-based neutral levy should be imposed, such as a tax on value added.30 Regional and local governments that want to tax business have a choice: they can use one of the tried and true but often distorting forms of business tax, such as the gross receipts taxes found in some U.S. states (Luna, Murray, and Yang forthcoming) or differential nonresidential property tax— or they can consider a simple flat-rate tax imposed on the cost of production factors employed by a business. On the whole, the best alternative in economic terms is what Bird and Mintz (2000) call a business value tax (BVT). Bird and McKenzie (2001) suggest that such a tax might even prove an attractive replacement for the provincial corporate income tax. If the changes suggested earlier were made in the property tax, it would be feasible for the provincial government to make up any revenue deficit resulting from the abolition of the Business Education Tax by instituting a new BVT, at a rate of perhaps 1 percent, on the total inputs used by business.31 In addition, local governments could be permitted to impose up to an additional 1 percent on business activities taking place within their boundaries. Given the substantial economic and accountability disadvantages of overtaxing nonresidential property to the extent seen in Ontario, there is much to be said for exploring such ideas as the BVT in more depth. Local business taxes embodying substantial elements of this model have existed at the regional and local level in Italy for some years and have more recently been adopted in Japan and, in 2010, in France. They seem to work well in those countries; there is no 30. Interestingly, as Sullivan (1965) documents, the original conception of the value-added tax was in fact as a business benefit tax. See also Brazer (1961) for an early recognition of this argument for the type of local business tax suggested here. The present discussion draws on earlier studies of Canada in Bird and Mintz (2000) and Bird and McKenzie (2001), as well as on the more general discussion in Bird (2003). 31. The base business value may be mea sured in different ways: as profits (before the deduction of depreciation), the sum of labor and capital costs (payrolls plus depreciation and other capital costs), or the value of goods and ser vices sold less the value of goods and ser vices purchased from other firms. Although the last of these mea sures appears similar to the value-added taxed by the combined federal and provincial sales tax, the HST, it differs from the latter in three important ways, consistent with its justification as a form of business benefit tax: first, it is imposed by the jurisdiction in which production (and not consumption) taxes place; second, it is imposed on investment as well as consumption activities; and third, it is imposed on an annual and not a transactional basis. For further discussion of how such a tax would work, see Bird (2003).

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reason why they could not work equally well in Ontario. Nonetheless, if the province did decide to change to a BVT system, the switch should not be made too quickly, both because much of the present differential business property tax is at least partly capitalized (Brazer 1961) and because, in accordance with longstanding provincial traditions, it would be more fair to phase in a new form of business taxation over an extended transitional period. Of course, Ontario may choose from a wide array of revenue possibilities in addition to the BVT; as others have suggested, supplemental local sales, fuel, and income taxes are certainly conceivable choices, as are more limited revenue options such as hotel taxes.32 However, the BVT option represents perhaps the best way to replace the BET and the excess nonresidential property tax, because it would not create a serious disturbance in the political homeowner-business tax equilibrium that has been formed over the years. At the same time, it would substantially reduce the distortionary costs of the present system. Better and More Responsible Local Government Designing and implementing a local tax system for Ontario that divides taxation and spending responsibilities among the different levels of government is clearly a great challenge, one inextricably linked to a set of complex and conflicting political, social, administrative, and economic issues involving both governance and the general problem of raising public revenues. As the Ontario experience shows, the “right” solution is neither easily nor quickly discerned, let alone achieved. However centralized the province may be— and it is far more centralized in many respects than most U.S. states—the provincial government, the regional governments, and the municipal governments are likely to have very different objectives and hence to view the characteristics and outcomes of revenue structures very differently. Similarly, poor areas and rich regions, or metropolitan and rural governments, may have different perspectives; the same is true for politicians, businesspeople, citizens, economists, and tax administrators. There is no one right answer to the taxation problem in part because there is no one decision maker, but even if there were, there are no evidence-based numbers for quantifying the nature and strength of the links between different aspects of the revenue structure and the desired outcomes. To illustrate, a recent discussion of the revenues that should be assigned to local governments (Bird 2010b) began by putting forth the following four principles: 32. Such revenue options are suggested in Conference Board of Canada (2008) and Mintz and Roberts (2006), for example. For a more complete review of possible alternative local revenue sources, see Kitchen and Slack (2003).

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1. Revenues should be sufficient to enable at least the richest local government to finance from its own resources the ser vices it provides for its residents. 2. Taxes imposed by local governments should burden only their residents, preferably in relation to benefits they receive from the ser vices provided. 3. Governments at all levels should bear clear public responsibility at the margin for financing expenditures for which they are politically responsible. 4. Local taxes should not unduly distort the allocation of resources. Given these principles, as Bird (2010b) notes, the public economics literature suggests that a local revenue system should have the following features: 1. The tax base should be relatively immobile, permitting local authorities some leeway in varying rates without the risk of losing most of their tax base. 2. The tax yield should be adequate to meet local needs and relatively stable and predictable over time. 3. Tax yields should be sufficiently buoyant over time to maintain fiscal sustainability; broadly, taxes should be able to expand at least as fast as necessary expenditures. 4. Local governments should not be able to export to nonresidents much of the burden of the taxes they impose. 5. The tax base and rate should be visible, to ensure accountability. 6. Taxpayers should perceive the tax to be reasonably fair. It is most unlikely in the real world in which the Ontario provincial and local governments exist that everyone will agree with this list. For example, some argue that local governments should be insulated from either the tax-base consequences of their tax-rate choices or from inflation. It is equally unlikely that local governments will be quick to agree that they should not be able to tax mobile (and elastic) tax bases such as income and sales. Most important, while the provincial government, if it wishes to stimulate efficient and effective local governments, may strive to ensure that they are unable to export their tax burden to nonresidents and that the local tax base is visible for accountability, the local governments themselves are likely to take a different view. From their perspective, the more that “other people” can be burdened with the costs of local expenditures and the more that real costs can be hidden from local residents, the better it will be. No government at any level will choose to tax its own people if it has an easier way out, such as borrowing from subsidized sources, seeking additional grants from the central government, or imposing taxes that are exported to others. A key task in designing a good intergovernmental finance system is making sure such

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escape routes are closed, so that local and regional governments will use their taxing powers properly. Provincial grants as well as local taxes must be properly designed for local governments to be efficient and accountable to local residents. For example, when education is considered a local responsibility, then properly designed intergovernmental fiscal transfers or grants are usually necessary components of any local tax reform, for evening out inequalities that may arise from differing local capacities and abilities.33 Another problem may arise if, for political or other reasons, the provincial government wishes to establish a system that applies uniformly throughout the province but does not take care to address the diverse outcomes of such “equal” treatment. Provided that functions are properly allocated to different levels of government (regions, school boards, municipalities), that those governments have adequate revenue sources (taxes and transfers combined), and that they are responsible at the policy margin to local residents for what they do and how they pay for it, then if local residents do not like the outcome in their municipality, they can either move away—the traditional exit option of economic models— or change the government at the next election. When grants are badly designed or budget constraints are soft, and the province in effect accepts full responsibility for making up local deficiencies by providing additional grants, there is neither incentive nor any need for local governments to do their job correctly. The freedom to make mistakes, like the requirement that decision makers should bear the consequences of their mistakes, is an important ingredient in effective decentralization and in its inseparable twin, local autonomy over revenue and expenditures. Indeed, unless local governments are given some degree of freedom with respect to local revenues, provided that they are sufficiently accountable to their citizens, truly responsible and responsive local government is likely to remain unattainable. As Rattso (2002) notes, good intergovernmental policy design should provide three lines of defense against the possibility that fiscal freedom for local governments may lead to local fiscal indiscipline. First, as emphasized in this chapter, it should limit local governments to providing only local ser vices financed by taxes paid by local residents (allowing for any subsidization on distributional grounds through provincial transfers). Second, it should make it difficult (costly) or impossible for local governments that spend more than they can raise through their own taxes (plus predetermined provincial transfers and sound borrowing for infrastructure) to receive increased grants or subsidized loans. Third, it should establish explicit fiscal controls, such as limits on borrowing and required balances in current accounts.34 33. For extended discussions of grant design, see Bird and Smart (2002) and Smart and Bird (2009a). 34. On this third line of defense, see Bird and Tassonyi (2001, 2003) and Amborski and Nichols (2010).

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Ontario has taken action on all these fronts in recent years and has made many sensible moves to improve local-government finance. However, it has yet to address two fundamental defects. When responsibility for an inappropriate tax base like the classified property tax, which imposes much heavier taxation on nonresidential property, is assigned to local governments, wasteful competition and undesirable tax exporting are likely to result. And when education authorities (and to some extent regional governments) are able to hide behind municipal tax collectors, the link between spenders and those who pay the taxes is weakened, spending tends to increase, and spending priorities escape the control of the taxpayers. To reduce the deficits to which these defects give rise, local governments’ access to taxes borne by business (and hence in part by nonresidents) must be closely monitored, and the public and individual taxpayers need to be clearly informed about which tier of government does what, who pays for what, and what exactly a change in property value assessment means. The proposals put forward in this chapter offer a way to deal with these problems. If, as suggested, Ontario substantially reduces its local governments’ current dependence on the nonresidential property tax, additional actions will be needed to close the revenue gap. While the additional tax room for local governments opened up by the provincial takeover of education and the abolition of the BET may offset much of the revenue loss, some municipalities may need additional resources to remain fiscally sustainable in the long run. Moreover, the provincial government will also need to make up the forgone BET revenues in some way. A solution to both problems would be an alternative form of provincial business tax— one that would also permit local governments to impose a supplementary tax on the same base.

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ABOUT THE AUTHORS

Richard Bird is professor emeritus at the Rotman School of Management and senior fellow at the Institute on Municipal Finance and Governance at the Munk School of Global Affairs, University of Toronto. His research interests include tax policy and administration, local and regional finance, and intergovernmental fiscal relations. Enid Slack is director of the Institute on Municipal Finance and Governance at the Munk School of Global Affairs, University of Toronto. She is recognized internationally for her research on property taxes and other aspects of municipal finance. Almos Tassonyi is adjunct professor, Department of Economics, Ryerson University. Formerly senior economist, Provincial-Local Finance Division, Ontario Ministry of Finance, his research includes the economic history of local public finance, local taxation, and borrowing and budgeting policy.

INDEX

Italic page numbers refer to tables, figures, and boxes. amalgamations, 191; annexation and, 32; municipal, 29, 31–32; in Ontario, 2, 2n1; recommendations for, 32; of Toronto, 31–32, 195 AMO. See Association of Municipalities of Ontario annexation, 32 annualized tax, 71, 71n14 antidevelopment tax, 166 antimarket tax, 166 appeal: from assessment, 117–118; of development charges, 153; for MVA, 93–94; for property tax, 227, 227n10; two-stage process, 79 ARB. See Assessment Review Board assessed value (AV), 5, 81; before 1998, 183; by class and region, 72; distortion of, 94; MV ratio with, 46– 47; sale prices determining, 97–98 assessment, 86n4, 109; before 1998, 84– 87; annual date for, 89–90; appeals from, 117–118; appraisal of, 113–118; base values used in, 116; capping of, 237–239, 238; cost approach as method, 110–111; disclosure of, 98–99; explanation of, 235; of farmland, 59, 59nn4–5, 112–113, 112n25, 117; financing of, 88; freezes, 76, 79– 80; locational neighborhood and, 115; as MV, 85– 86; for PLT, 98, 98n16; properties exempt from, 99, 101; property tax role of, 114, 237, 237n24; provincial government and, 85– 87; regulated rates and, 112; of revenue hill,

194; rolling averages for, 90–91, 90n8, 91n9; sales method of, 106–110, 183; Smith Committee on, 85; special provisions for, 84; two-stage appeal process on, 79; U.S. and, 80– 81; weighted, 15n8. See also property assessment; special assessments and local improvement charges Assessment Act of 1793, 37, 38–39 Assessment Act of 1850, 40 Assessment Act of 1969, 85 Assessment Act of 1998, 89 Assessment Act of 2007, 78 assessment cycle, 89–92, 92; costs associated with, 92 assessment reform of 1998, 87– 89; aftermath of, 92–95; CVA and, 87; dummy for, 191, 195, 197, 198. See also property tax reform of 1998 Assessment Review Board (ARB), 77, 95, 97, 117; MPAC and, 98; property owner complaints to, 75–76; 2006 complaints to, 75n19 assessment review requests, 75–76, 76 assessment-weighted average tax, 192–193 assessor, 84– 85 Association of Municipalities of Ontario (AMO), 58 AV. See assessed value banding, 59, 236 base tax competition, 180 BET. See Business Education Tax

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BIA. See business improvement area BIDs. See business improvement districts Bilodeau, Marc, 126n8 Bird, Richard, 2, 177–178, 177n3 Board of Trade of Metropolitan Toronto (1994), 55 borrowing: as capital financing, 146–147; by municipalities, 16n13, 21, 147–148, 148n4 Brett, Craig, 180–183, 192 Business Education Tax (BET), 21, 79; abolishment of, 232, 241, 244; benefit from, 136; complaints regarding, 136n25; distribution of, 134–135; education property tax and, 241; rates of, 133, 136, 183; reduction plan for, 81, 136–137, 136n26; variance in, 33 business improvement area (BIA): benefits of, 173–174; budget and funding for, 172–173; in GTA, 173, 173–174; levies, 145 business improvement districts (BIDs), 172 business occupancy tax, 41, 51; alcoholism movement from, 42n11; graded, 42; Merritt on, 41n9; percentage rates for, 42, 42n10; vacant land and, 51n20 business property tax, 2, 10, 61; choice regarding, 244; economic sense of, 243; for education, 21, 33; estimation of, 83; Mclennan Commission proposal for, 41n8; payment of, 243–244; resource allocation and, 243; sensibility of, 242–245; support for, 233; tax shift to, 72–73; in Toronto, 177 business value tax (BVT), 244, 244n31 business-residential tax ratio, 200 BVT. See business value tax California-style freeze, 5 CAMA. See computer-assisted mass appraisal “Can Property Taxes Be Reformed?” (Bird and Slack), 2 Canada: Conference Board of, 177–178; federal government in, 11–12; intergovernmental setting of, 11–16, 11n1; property tax reform in, 57; provincial and territorial governments in,

11–12; provincial elections in, 77, 77n22; Supreme Court of, 12; upper, 37– 41. See also Greater Toronto Area; Ontario; Toronto capital financing, 146; borrowing as, 146–147; economy influencing, 147–148; for municipalities, 146–149; pay-asyou-go as, 146 Capital Grant Plan, 163 capital tax base, 180–181 capping: with annualized tax, 71; criticism of, 73–74; 5-percent on market value assessment, 6; mandatory restrictions of, 70, 70n13; MPAC on 2000 rule of, 70; phase- out of, 74; of tax assessment increases, 69–71, 80– 81; tax revenues and, 70; Toronto use of 2.5, 70 census metropolitan area (CMA), 184, 184n11 CIB. See commercial/industrial/business property CIP. See community-improvement plan City of Toronto Act of 2006, 13, 71n15, 165 classification change, MDF, 81 classified property tax, 58, 59, 60, 179 clawbacks, 7, 69–71, 73–74 CMA. See census metropolitan area CMSMs. See Consolidated Municipal Ser vice Managers Coalition after Property Tax Reform, 143n38 coefficient of dispersion (COD), 93, 93n11, 116 commercial/industrial/business (CIB) property, 184, 208–209; effective tax rate of, 192, 206–207; equalized assessment per capita, 190, 202–203, 204–205; residential assessment base relationship with, 195 Commission on the Financing of Elementary and Secondary Education in Ontario, 125, 125n5 Common Schools Act, 39, 128 Community Reinvestment Fund (CRF), 28 community-improvement plan (CIP), 104, 167

Index computer-assisted mass appraisal (CAMA), 8, 113 condominium tax, 65 Conference Board of Canada, 177–178 Conservative Party, 79– 80 Consolidated Municipal Ser vice Managers (CMSMs), 15, 15n6 consular property, 100–101 corporate income tax, 3 cost approach: as assessment method, 110–111; MPAC use of, 111; steps for, 110 Council of Public Instruction for Upper Canada, 129 CRF. See Community Reinvestment Fund current value assessment (CVA), 8, 55, 87, 227; in Canada property tax reform, 57; MDF based on, 81; phase-in of, 78; property assessed value and, 81 Department of Foreign Affairs and International Trade, 100 Department of Municipal Affairs, 85, 88 development charges, 9, 150n9, 156, 160n19, 234; accountability of, 161–162; benefit principle of, 161; bylaw appeals of, 153; calculation of, 145; critical issues of, 151; differential costs of, 162–163; double-charging and, 161; education, 163–164; evaluation of, 160–162; GTA levy of, 155, 155nn15–16; housing construction and, 151; infrastructure investment and, 162n21; land use and, 162–163; levy of, 152, 153, 154–155; marginal cost of, 151n12; mechanics of, 152–155; municipal bylaws for, 152–153; on new construction, 160–161; nonresidential, 157; Ontario Fair Tax Commission on, 164; Planning Act and, 150–151; population growth correlation with, 160, 160n18; property taxes influenced by, 145, 155–160; revenues of, 158–159; school boards levying, 164; ser vice benefits and, 151–152; ser vice standards for, 154 Development Charges Act (1989), 150, 154, 163 diplomatic property, 100–101

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direct tax, Toronto imposition of, 13 District Social Ser vice Administration Boards (DSSABs), 15, 15n7 Dupré, J. Stefan, 124, 130, 141 Durham Region. See Greater Toronto Area education, 21; demand of, 140–141; democracy related to, 35; development charges, 163–164; enrollment in, 126, 144; governance, 124–125; local government financing and, 39; promoting of, 128; provincial government responsibility for, 27, 121–122, 124n4, 183–184, 242; quality reduction in, 140; tax rates, 133, 136, 183. See also Business Education Tax Education Act, 124n3, 132, 132n21 education finance, 78–79, 121–144; before 1998 reform, 130–131; confusion regarding, 138; divisions of, 132–133; early days of, 128–130; education quality reduced from, 140; enrollment influencing, 126; formula revision for, 130, 130n14; from LSR, 36; model for, 34–35, 122, 122n1; 1998 reform and, 132–137; overburden of, 138–143; property tax and, 4n5, 8–9, 140–141; protection for, 125; provincial takeover of, 9, 34; Roman Catholic schools and, 123; societal benefits for separate system, 126; split of, 124, 126n9; tax base sharing and, 137–138; tax collection for, 129, 129n13; in Toronto, 33–34, 35; transfers for, 137–138; trustee control over, 128–129; uniform tax rate for, 133; unresolved issues regarding, 143; Wicksellian connection on, 131 education property tax, 9, 106n21, 142; assessment classes and, 109; BET and, 241; business contribution to, 133; dependence on, 142, 142n37; in GTA, 136; increase of, 33; 1998 reform of, 78–79; in Ontario, 34, 132; reform for, 39; reimbursement of, 138, 138n27; revenue costs for, 101; school boards controlling, 130–131; in Toronto, 137; trustee power over, 128–129; U.S. interest for, 139–140

268

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Education Quality Improvement Act of 1997, 122 effective tax rate, 47; of CIB property, 192, 206–207; in GTA, 190, 214–217, 218–221 elasticity: rate-base of property tax, 179, 183, 193, 198, 199; revenue hill and, 198–201; tax base, 178, 181–183 election, 77, 77n22, 225 Epp Report, 65 Equalization Grant, 29, 30–31 equalized assessment per capita, 190, 202–203, 204–205; residential, 191, 210–212, 212–214 expenditures, 4; distribution of, 16; financing for, 114n27, 147; increase of, 114; inflation influencing, 16; of municipalities, 16, 16n10; municipalities borrowing for, 21; in Ontario, 17, 18, 45– 46 fairness, 64– 69, 65, 235–236 farmland assessment, 59, 59nn4–5, 112–113, 112n25, 117 federal government, in Canada, 11–12 Financial Management Systems (FMS), 16n11 Finnis, Frederic H., 84– 85 fiscal federalism, 56n25 fiscal sustainability, 176–178, 177n3 Fischel, William, 64, 140, 201 FMS. See Financial Management Systems four-year assessment cycle, 6, 76–77, 92 frozen assessment listing, 70–71 GDP. See gross domestic product general equilibrium model of local fiscal competition, 178–180 general property tax, 40– 41 George, Henry, 43 Goods and Ser vices Tax (GST), 6, 165n24 government, 8, 55. See also specific types GPP. See gross provincial product Greater Toronto Area (GTA), 9, 48, 204–205, 230; assessment-weighted average tax rate in, 192–193; BIA in, 173, 173–174; borrowing power of, 177n3; business-residential tax ratios of,

200; chartered bank prime business rate in, 192; CIB effective tax rate in, 192, 206–207; crime rate per person in residential, 191; developmental charges levy in, 155, 155nn15–16; dummy for 1998 reassessment in, 191, 195; education property tax in, 136; employment rate in, 190; grants received in, 191–192; house prices, 78; net intraprovincial migrants and, 190–191; 19 and under residents in, 191; nonresidential building permit value in, 192; OLS and 2SLS regression estimates in, 202–203; provincial GDP in, 192; residential effective tax rate in, 190, 214–217, 218–221; residential equalized assessment per capita in, 191, 210–212, 212–214; residential housing completions in, 190; residential property tax increase in, 72; school board expenditure per capita in, 191; tax competition within, 175, 196; tax rate in, 80n25; tax rate to base elasticity in, 199; TIEGs in, 168; yardstick competition in, 201 Greater Toronto Area (GTA) property taxes, 200–201; assessment and rates in, 185–186; benchmark estimation for, 189; data and model for, 183–184, 187–189; fiscal sustainability through, 176–177; independent variables used in estimation for, 190–193; municipalities tax competition in, 175; nonresidential assessment base and, 194–196; nonresidential property tax rates and, 196–197; property class and, 194, 194n13; residential assessment base and, 197–198; residential rates and, 198; revenue hills in, 175–180, 199; revenue prospects studies in, 176–183; tax competition, 178–183 Greater Toronto Area Task Force (1996), 54–55, 57n1 gross domestic product (GDP), 3n3; property taxes amount in, 3, 4, 47– 48; provincial, 192 gross provincial product (GPP), 16, 21n16 GST. See Goods and Ser vices Tax GTA. See Greater Toronto Area

Index Halton Region. See Greater Toronto Area Harmonized Sales Tax (HST), 165n24 Harris-Lehman study, 59, 61 Haughwout, Andrew, 178–179, 178n4, 179n5, 195–196 Hopcroft Report, 25 Hoxby, Caroline Minter, 124, 143 HST. See Harmonized Sales Tax IAAO. See International Association of Assessing Officers income, 42, 113n26; approach assessment method, 111–112; Ontario property tax and, 40; in personal property tax base, 40, 40n7 inflation, 16, 226, 226n8 interjurisdictional tax competition, 180, 183 International Association of Assessing Officers (IAAO), 97, 116 international tax competition, 169 Isenburg, Carl, 88, 115 jurisdictions: of federal, provincial, and territorial governments, 12; MVA and, 8 Kitchen, Harry, 101, 111n23 Laffer curve, 175n1 Land Speculation Tax, 165–166 land transfer tax, 165–167; levy of, 165n23; in Toronto, 13, 145, 165; value added tax compared to, 166n28 Levine, Gregory, 43 live theatres property taxes, 101, 101n18 local economic activity in U.S., 178 local fiscal sustainability, 177–178, 177n3 local government financing, 56; accountability of, 40; design of, 246–247; education and, 39; limitations and uniformity of, 247; mistakes made in, 247; in Ontario, 248; property tax and, 2; responsibility and, 245–248; rethinking of, 240–248; revenue gap closing and, 240–242; revenues and, 245–246 local improvement charges. See special assessments and local improvement charges

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local ser vices realignment (LSR), 24–27; changes resulting from, 25–26, 26; as continuous project, 27; education finance resulting from, 36; hard ser vices compared to soft ser vices, 25; WDW Panel on, 25 Locke, Wade, 40, 141 lower-tier council, 14 lower-tier municipalities, 183, 194 lower-tier tax rates, 183 LSR. See local ser vices realignment MacNaughton, Charles, 49n17, 50, 50n19 market value (MV): assessment at, 85– 86; AV ratio with, 46– 47; effective tax rate for, 47 market value assessment (MVA), 227; Alternative System and, 52; alternatives to, 5– 6; appeal for, 93–94; four-year assessment cycle for, 6, 76–77; implementation of, 51, 52; indefinite 5-percent capping, 6; jurisdictions and, 8; Metro Toronto impacted by, 52–53; multiple residential buildings and, 52; municipality variation and, 53; negative perception of, 57; opposition to, 119; property tax and, 2, 50; province-wide, 51; recommendation for, 54; relative changes in, 22; tax payment on basis of, 73; tax shifts from, 50–51, 53; in Toronto, 53, 94; uniformity of, 53, 57; unit value assessment compared to, 54; volatility vulnerability of, 94, 237 mass appraisal system, 95, 106 McGuire, Therese, 169 Mclennan Commission, 41, 41n8, 52 MDF. See municipal discount factor Merritt, William, 41n9, 42n10 Metro Toronto: MVA impact on, 52–53; property class shift in, 86– 87, 87n5; tax base erosion of, 54 Metropolitan Toronto School Board, 131 Mikesell, John H., 92 Mill Rate Equalization Plan, 130 Mississauga, Canada, 39– 40, 201 MPAC. See Municipal Property Assessment Corporation multiple regression analysis (MRA), 8

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Index

multiple residential buildings, 52 multiresidential properties overtaxation, 65, 66n9, 71 Municipal Act (2001), 12, 71n15, 104 Municipal Affairs Act, 124n3 municipal amalgamation, 29, 31–32 municipal discount factor (MDF), 81 municipal government: flexibility limit in, 36, 104; LSR and, 26; property tax exemption limitations of, 104; responsibilities of, 25; tax bases, 180–181 municipal overburden hypothesis, 139 Municipal Property Assessment Corporation (MPAC), 57, 86, 87, 93, 126, 227; ARB policies and, 98; assessment method of, 106, 106n20; assessment review requests to, 75–76, 76; CAMA and, 113; cost approach used by, 111; criticism of, 92, 94, 95, 116, 119, 234–235; fee-based ser vices provided by, 89; governing board of, 58; on HarrisLehman study, 61; information available from, 115–116; locational neighborhoods and, 115; MDF calculation by, 81; Ombudsman of Ontario investigation of, 75–79, 95–99, 96; on property sale price, 76; recommendation reports and, 98; on 2000 capping rule, 70; valuation date change and, 73; Web-based data ser vices of, 88– 89 municipal property tax base elasticity, 178 municipal tax burdens: relative, 64, 66n10; small business reduction of, 69, 69n12, 74–75 Municipal Tax Exemption Act of 1920, 43 municipalities: actual and regulated tax ratios in, 67– 68; assessment systems of, 84– 85; borrowing by, 16n13, 21, 147–148, 148n4; capital financing for, 146–149; debt of, 147–148; development charge bylaws by, 152–153; division of power in, 24–25; expenditures of, 16, 16n10; liberal treatment of, 36n29; lower-tier, 183, 194; MVA variation among, 53; phase-in of tax assessment increases, 69; provincial government influencing, 12; provincial grants to, 28–29, 183; range of fairness use by, 66;

rebate program of, 104; revenue of, 17–24, 44, 44n14; revenue-raising powers of, 12; role and responsibility division among, 24; site-value taxation and, 43; special arrangements among, 15n6; Supreme Court of Canada on, 12; tax competition in GTA, 175, 196; threshold ratio for tax assessment increase, 71, 72 MV. See market value MVA. See market value assessment New Brunswick tax competition study, 178, 181–183 New Democratic Party, 80, 80n24 1904 property tax system, 41– 44 nonresidential assessment base, 194–197 nonresidential property tax rates, 233; grants per capita influenced by, 196; overtaxing, 244; residential assessment base codependence with, 197 Northern and Rural Communities Grant, 29, 30–31 ODB. See Ontario Drug Benefit ODSP. See Ontario Disability Support Program OECD. See Orga nization for Economic Co-operation and Development OLS. See ordinary least squares OMB. See Ontario Municipal Board Ombudsman of Ontario: on ARB complaints, 75–76; assessment freeze for 2006 and 2007, 76; on four-year assessment cycle, 76–77; on information access, 97; MPAC investigation by, 75–79, 95–99, 96 OMPF. See Ontario Municipal Partnership Fund Ontario, 14, 14n5, 150n9; amalgamations in, 2, 2n1; capital financing sources for, 146; classified tax in, 179; DSSABs in, 15n7; education property tax in, 34, 132; expenditures in, 17, 18, 45– 46; government, 1–2, 7– 8; growth of, 48, 151; local government financing in, 248; local ser vice realignment in, 24–27; per capita property assessment in, 46; per

Index capita real property taxes in, 47; per capita tax base of, 45; revenue hill in, 199; revenue in, 19, 44– 45; school boards in, 33n24; social assistance cost and, 24; tax assistance programs of, 105; taxes per capita in, 20; two-tier system in, 14–15; urban development in, 45. See also Ombudsman of Ontario; Ontario property tax Ontario Disability Support Program (ODSP), 27, 29 Ontario Drug Benefit (ODB), 27, 29 Ontario Fair Tax Commission, 54, 141, 164 Ontario Municipal Board (OMB), 151, 151n11, 153 Ontario Municipal Partnership Fund (OMPF), 29, 29n22, 30–31 Ontario Property Assessment Corporation (OPAC), 57–58, 59, 87– 88 Ontario Property Assessment Corporation Act (1997), 57–58 Ontario property tax, 23, 37–56, 37n1, 240–241, 241n27; balance of, 230–231; beginning of, 38– 44; committees and commissions on, 52–54; education for, 239–240; exemption in, 99, 101; first 100 years of, 38– 41; general property tax and, 40– 41; improvement of, 223; income and, 40; legal framework of, 224; modern history of, 48; from New York tax statute, 40; 1904 system in, 41– 44; proposals for, 236–240; reform, 1, 11, 64, 80, 223; rethinking of, 223–248; single uniform system for, 232; Smith Committee and, 48–51; urban development effects from, 37; U.S. property tax compared to, 38 Ontario Strategic Infrastructure Financing Authority (OSIFA), 24 OPAC. See Ontario Property Assessment Corporation ordinary least squares (OLS), 179, 187, 189; estimation GTA, 202–203; upper-tier government regression and, 196 Orga nization for Economic Co-operation and Development (OECD), 3

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OSIFA. See Ontario Strategic Infrastructure Financing Authority overtaxation: of multiresidential properties, 65, 66n9, 71; nonresidential property tax rates, 244 pay-as-you-go financing, 146 payments-in-lieu of taxes (PILTs), 99, 176; concerns regarding, 100; diplomatic and consular property, 100–101; provincial, 101; revenue from, 100 Peel Region, 39– 40, 39n5, 66, 69. See also Greater Toronto Area personal property tax: abolition of, 45; 1904 repeal of, 52 personal property tax base: complaints regarding, 41; income in, 40, 40n7 phase-in: four-year of tax assessment increases, 78; implementation of, 81 phase-out capping, 74 PILTs. See payments in lieu of taxes Pinske, Joris, 180–181 Planning Act, 104, 150–151, 150n8 PLT. See Provincial Land Tax Police Ser vices Grant, 29, 30–31 progressive tax, 127 property: assessment exemption for, 99, 101; development charges for, 9; diplomatic and consular, 100–101; sale price, MPAC on, 76; special assessments and local improvement charges influencing value of, 149–150; taxing of, without property taxes, 167–172; undervaluation of, 94, 94n12; uniform taxing of, 242; waterfront, 118–119. See also commercial/industrial/business property; farmland property assessment, 46; CVA and, 81; exemption from, 99, 101; inaccuracy of, 48– 49; leasehold improvements and, 117; mass appraisals for, 95, 106; methods for, 106–113, 106n19, 107; for rail and hydroelectric corridors, 108n2; regulated rates for, 108; sales comparison and, 106–110, 183 Property Assessment Division of Ontario Ministry of Revenue, 183

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property class, 109, 184n9; coefficient estimation for, 184, 187; equalization factors for, 183; equation pa rameters for, 184, 187; in Metro Toronto, 86– 87, 87n5; provincial government, 64– 65, 65; tax rate/base equation for, 188–189; uniform MVA within, 53; value changes in, 188 property tax, 21n16, 22, 23, 38, 45n15, 200; appeals for, 227, 227n10; assessment role for, 114, 237, 237n24; burden of, 225; competitive neighborhood effects on, 178–179; confusion regarding, 114; corporate income tax and, 3; debt influencing, 148; demand placed on, 6–7; development charges influencing, 145, 155–160; dislike of, 5, 118–119, 226–227; education finance and, 4n5, 8–9, 140–141; effective average rate of, 179n5; as financing, 146–147; GDP amount comprised of, 3, 4, 47– 48; as GPP percentage, 21n16; growth of, 21n17, 44– 48; improvement of, 232–236; inflation and, 226, 226n8; limitations of, 10, 239; liquidity problems from, 239–240; live theatres and, 101, 101n18; local control of, 128; local government financing and, 2; MacNaughton on, 50; MVA for, 2, 50; per capita, in Ontario, 45– 46, 46, 47; perception of, 234; PILTs in Toronto, 176–177; politics of, 224, 228–229, 230–231; principal rationale for, 229; pros and cons of, 225–230; provincial component of, 9; public school support by, 127–128; rate-base elasticity of, 179, 183, 193, 198, 199; regressivity of, 228–229; revenue from, 193–194, 228, 231; revenue hill and, 199; rise of, 116–117; selling, uniformity and limitations of, 10; ser vice responsibility changes influencing, 20; shift in, 51, 237; Smith Committee recommendation for, 50–51; stability of, 91; structure of, 233; Tassonyi on, 48; taxing property without, 167–172; urban infrastructure funded by, 4; as user charge, 230,

230n16; as visible tax, 225–226, 225n2, 226n9; waterfront property and, 118–119. See also business property tax; classified property tax; general property tax; Greater Toronto Area property taxes; Ontario property tax; personal property tax; residential property tax property tax credit: calculation of, 49–50; comprehension of, 50; eligibility for, 50, 50n18; MacNaughton on, 49n17; for seniors, 79 property tax exemption, 84; cost of, 104; elections and, 225; municipal government limitations on, 104; nonprofit activities and, 102, 103nn4– 6; in Ontario, 99, 101; other items, 102–103, 103nn7–9; public sector activities and, 102, 103nn1–3; tax relief programs and, 103, 103nn10–11 property tax reform: benefit and worth of, 2; highlights of 1998–2009, 62– 63; implications of, 36; lessons learned from, 6–7; local policy influenced by, 9; objective for, 5; in Ontario, 1, 11, 64, 80, 223; politicians influencing, 8, 54; provincial government influencing, 36; success of, 9–10; technical and political achievement of, 5; view on, 55–56 property tax reform of 1998, 11, 57– 82, 83; capping and clawbacks in, 69–71; classified property tax in, 58, 59, 60; education funding reform, 78–79; fairness approach in, 64– 69; frozen assessment listing of, 70–71; irate taxpayers and, 24; mandatory capping restrictions, 70, 70n13; municipality use of transition ratios in, 66, 69; MVA in, 57; ombudsman on, 75–79; OPAC assessment function in, 57–58; postreform reforms of, 59–73; 10-5-5 target on tax assessment increases, 70–71; valuation date change for, 73–75; variable property tax rates in, 57 property-specific discount factor, 81 Proposition 13 property-tax revolt, 5 provincial civil servants, 85 Provincial Committee of Enquiry, 140

Index provincial government: assessment and, 85– 87; division of powers in, 24–25; education responsibility of, 27, 121–122, 124n4, 183–184, 242; elections in, 77, 77n22; LSR and, 26; municipalities influenced by, 12; in Ontario property tax reform, 11, 64; on property class range of fairness, 64– 65, 65; property tax reform influenced by, 36; responsibilities of, 25, 248; revenue structure view of, 245–246; social assistance in, 27, 27n20; tax ratio restriction by, 72; tax relief and, 242 provincial grants, to municipalities, 28–29, 183 Provincial Land Tax (PLT), 15, 85, 86, 98, 98n16 Provincial-Local Government Committee, 52 provincial-municipal transfer, 2, 85, 85n3, 137 public education entitlement, school boards and, 125–127 public school: progressive tax and, 127; property tax support of, 127–128; prosperity influencing, 127–128; Roman Catholic school separation from, 123 Pupil Foundation Grant, 122 rail and hydroelectric corridors, 108n2 range of fairness: municipalities use of, 66; provincial government property class, 64– 65, 65 rate regulation, 67– 68, 108, 112, 112n24 rate tax competition, 180 rate-base elasticity of property tax, 179, 183, 193, 198, 199 real-estate market, 81 recognized ordinary expenditure (ROE) per pupil, 130 reduction plan, for BET, 81, 136–137, 136n26 regression: from lower-tier municipality data, 194; OLS upper-tier, 196; of tax base equation, 187 relative municipal tax burdens, 64, 66n10 residential assessment base, 197, 210–212, 212–214; CIB relationship with, 195;

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nonresidential property tax rate codependence with, 197; residential tax rate explaining variables in, 197 residential effective tax rate, 190, 214–217, 218–221 residential property tax, 21, 61, 177, 184, 228, 230, 230n15; increase in GTA, 72; rate for, 133–134, 190, 197, 198, 214–217, 218–221; tax shift from, 72–73; transition ratio for, 64 revenue, 12; for education property tax, 101; gap closing, 240–242; intergovernmental transfers and, 17; local government financing and, 245–246; of municipalities, 17–24, 44, 44n14; in Ontario, 19, 44– 45; from PILTs, 100; from property taxes, 193–194, 228, 231; provincial government and, 245–246; in Toronto, 45 revenue hill: assessment of, 194; elasticity and, 198–201; in GTA and Toronto, 175–180, 199; nonresidential assessment base and, 194–196; nonresidential property tax rates and, 196–197; in Ontario, 199; property tax and, 199; residential assessment base and, 197–198; residential rates and, 198; in U.S. cities, 178 revenue prospects studies in GTA, 176–183; in U.S., 178–179, 178n4 revenue-maximizing tax rate (RMTR), 176 ROE. See recognized ordinary expenditure per pupil rolling average, 91n9; deferment of, 90; property tax stability from, 91; recommendation for, 90n8 Roman Catholic schools, 123, 123 Rowell-Sirois Commission, 44n13 Rural and Small Community Mea sure (RSCM), 30–31 sales method of assessment, 106–110, 183; benefits of, 110; localized knowledge needed for, 107; 90 percent property assessed by, 106; pa rameter definition of, 107; quality of, 110 Savings and Restructuring Act, 32

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school boards, 191; consolidation of, 125–126; development charges levied by, 164; education property tax controlled by, 130–131; fiscal disadvantage of, 127; negative grant positions of, 131, 131n18; in Ontario, 33n24; public education entitlement and, 125–127; separation of, 126–127, 127n10; spending authority of, 121–124, 123n2 Select Committee on Exemptions from Taxation in 1878, 41 seniors: in Brett and Pinske study, 181; property tax credits for, 79 ser vice responsibility changes, 1–2, 20 Sheffrin, Steven M., 119, 227 single-tax, 43– 44 site-value taxation, 43 Slack, Enid, 2, 177–178, 177n3 small business municipal tax burden reduction, 69, 69n12, 74–75 Smith Committee, 48–51, 85 social assistance: in provincial government, 27, 27n20; provincial-regional cost sharing for, 28; responsibility for, 24, 26–27 Social Programs Grant, 29, 30–31 social ser vice costs, 147, 147n3, 230 Social Ser vices Administration Act of 1998, 15 Sokoloff, Kenneth, 35, 127 special assessments and local improvement charges: basis of, 145; factors influencing, 149; property values influenced by, 149–150 spending authority, 121–124, 123n2 split mill rate system, 51 Student-Focused Funding Model, 122 Supreme Court of Canada, 12 Tardif, Christina, 181–183, 192 Task Force on Assessment and Property Tax, 80n24 Tassonyi, Almos, 40, 48, 141, 177n3 tax: annualized, 71, 71n14; antidevelopment, 166; antimarket, 166; avoidance, 175; condominium, 65; corporate income, 3; earmarking, 126n8; evasion, 175; forgiveness, 171; incentives, 169–170; liability, 175;

single-, 43– 44; visible, 225–226, 225n2, 226n9 tax assessment increases: from 1981 to 2009, 66n11; annualized tax cap for, 71; capping and clawbacks in, 69–71, 80– 81; four-year phase-in of, 78; limits on, 70n13; phase-in of, 69; 10-5-5 target for, 70–71; threshold ratio for, 71, 72 tax assistance programs, 105 tax base: Brett and Pinske on, 180–181; Brett and Tardif on, 181–183; capital, 180–181; education finance and, 137–138; elasticity of, 178, 181–183; Metro Toronto erosion, 54; Ontario per capita, 45; personal property, 40, 40n7, 41; schooling and localities sharing, 131, 137–138 tax base equation: model pa rameter estimation and, 187; for property class, 188–189; regression of, 187 tax competition, 187, 187n12; base, 180; Brett and Pinske study on, 178, 180–181; Brett and Tardif New Brunswick study on, 178, 181–183; coefficient of, 196; general equilibrium model for, 178–180; within GTA, 196; interjurisdictional, 180, 183; international, 169; rate, 180; through tax incentives, 169–170; yardstick, 181, 182, 201 tax increment equivalent grants (TIEGs), 167–170; in GTA, 168; location decision influenced by, 158; popularity of, 167–168; TIF compared to, 167n29, 170 tax increment financing (TIF), 145; district boundaries of, 170–171; expense of, 171–172; growth demand and, 171, 171n34; redevelopment and, 171; TIEG compared to, 167n29, 170; in U.S., 170, 172 tax rate: assessment-weighted average, 192–193; of BET, 133, 136, 183; CIB, 192, 206–207; coefficient of, 194; effective average residential, 190; effective MV, 47; Laffer curve on, 175n1; lower-tier, 183; nonresidential, 196–197; property class values influencing, 188–189; for residential property, 133–134, 197–198, 214–217, 218–221;

Index revenue maximizing, 176; in Toronto and GTA, 80n25; uniform, 133; uniform education, 78–79; upper-tier, 39, 39n4, 183; variable property, 57 tax rate equation, 187–189 tax ratios, 66, 69; actual and regulated, 67– 68; business-residential, 200; provincial restrictions on, 72; reduction in Toronto, 177; threshold ratio for municipalities, 71, 72 tax revenues: capping and, 70; Laffer curve on, 175n1; of Peel Region, 39– 40, 39n5 “Taxing Matters: An Assessment of the Practice of Property Taxation in Ontario,” 54 territorial government, 11–12 30-years’ war: commissions and, 52–54; Smith Committee and, 48–51 threshold ratio, for tax assessment increase, 71, 72 TIEGs. See tax increment equivalent grants TIF. See tax increment financing Toronto, 80n25; amalgamation of, 31–32, 195; assessment appeals and, 117–118; autonomy of, 13, 13n3; billboard tax in, 13; business property tax in, 177; direct tax imposed by, 13; education finance in, 33–34, 35; education property taxes in, 137; land transfer tax in, 13, 145, 165; MVA in, 53, 94; new housing price index in, 95; PILTs in, 176–177; revenue hill in, 175–180, 199; revenue in, 45; revenue prospects study for, 176; single-tax in, 43– 44; tax policy limits in, 195; tax ratio reduction in, 177; 2.5 capping use by, 70; vehicle registration fee in, 13, 13n4; weak mayor system of, 14. See also Greater Toronto Area; Metro Toronto transfers, 17, 137–138, 148n5; accountability problems of, 148–149; provincial-municipal, 2, 85, 85n3, 137 transition ratios: municipality use of, 66, 69; in relative municipal tax burdens, 64 2SLS. See two-stage least square two-stage assessment appeal process, 79

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two-stage least square (2SLS) estimation, 182, 187; coefficients of, 195; endogeneity accounted for, 188; exogenous variables used in, 193; in GTA, 202–203 undervaluation of property, 94, 94n12 uniform business tax, 51 uniform education tax rate, 78–79 uniform market value assessment, 53, 57 uniform tax rate, 133 unit value assessment, 54 United States (U.S.), 14, 14n5; assessment limits in, 80– 81; education property tax interest in, 139–140; local economic activity in, 178; property tax in, 38; revenue hill in, 178; revenue prospects study in, 178–179, 178n4; TIF in, 170, 172 Upper Canada, colony of, 37– 41 upper-tier government, 14, 184, 184n10; OLS regression for, 196; property tax rates imposed by, 39, 39n4 upper-tier municipalities, 183 upper-tier tax rates, 39, 39n4, 183 urban development, 37, 45 U.S. See United States vacant land, 51n20 valuation date change, in property tax reform of 1998, 73–75 value added taxes, 166n28, 244, 244n30 vehicle registration fee, 13, 13n4 veteran’s benefit, 43 visible tax, 225–226, 225n2, 226n9 waterfront property, 118–119 WDW. See Who Does What Panel weak instruments, 195–196 weighted assessment, 15n8 Wheaton, William C., 201 Who Does What (WDW) Panel, 25, 55 Wicksellian connection, 131, 171 yardstick competition, 181, 182, 201 York region. See Greater Toronto Area Zolt, Eric, 35, 127

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