EVALUATION OF THE RECENT REFORMhttp://www.ctf.ca/
**see bottom
The result of the Ontario property tax reform is a tax system that has not changed
much in terms of equity but has changed dramatically in terms of the complexity of
administration. Current value assessment is being used for residential properties. This
means that residential taxpayers have finally moved to a market value system—in
some cases, with a phase-in. The assessment on multiresidential, commercial, and
industrial properties, however, has virtually been frozen at pre-reform levels.
A uniform assessment system with variable tax rates provides much more visibility
and accountability than the previous system, in which property tax differentials
were hidden in the assessment method. Wherever anyone locates in the province,
similarly valued residential properties are assessed at a similar value. Tax rates
differ by location depending on the level of service and local government decisions
about relative tax burdens.
In terms of neutrality, differential property taxes will be distortionary unless
they ref lect different benefits received. It can be argued, for example, that the
benefits from local public services are different for different property classes. In
particular, a case can be made on benefit grounds for taxing non-residential properties
at a lower rate than residential properties. However, it appears that, under
the Ontario property tax reform, differential property tax rates ref lect the desire to
maintain relative tax burdens and not to achieve fairness based on benefits received
from municipal services....
RECENT REFORM OF PROPERTY
TAXES IN ONTARIO
Starting in January 1998, a uniform assessment system based on “current value”
(similar to market value) was implemented province-wide. Every property was
assessed as of the same valuation date, June 30, 1996. The next reassessment has
been done for 2001; after 2005, annual updates will be done using a three-year
rolling average.
The change to a uniform province-wide assessment system by itself would have
resulted in large shifts in tax burdens within and between classes of property. For
this reason, tax policy changes were introduced along with assessment reform.
Indeed, the provincial government introduced seven pieces of legislation in all.
Before the reform, municipalities were required by legislation to levy differential
tax rates on residential and non-residential property. Specifically, the residential
rate had to be 85 percent of the non-residential rate. Following the assessment
reform, municipalities are allowed to levy variable tax rates for different classes of
property:
residential,
multiresidential,
commercial,
industrial,
pipelines,
farms, and
managed forests.
Subclasses to which rate reductions apply are vacant commercial (35 percent
reduction), vacant industrial (30 percent reduction), farmland pending development,
and certain theatres in the city of Toronto. Furthermore, the commercial
class can be divided into three subclasses according to value, with graduated tax
rates applied to each subclass. The tax rate on farms and managed forests is
legislated to be 25 percent of the residential tax rate.
As well, optional classes that municipalities can choose include
new multiresidential,
shopping centres,
office towers,
property tax reform in ontario: what have we learned? 581
parking lots and vacant land,
professional sports facilities, and
large industrial.
Variable tax rates permit municipalities to shift tax burdens among property
classes within provincially determined ranges of fairness. Transition ratios were
calculated for each property class to ref lect the relative distribution of burden by
tax class before reform (“the starting point”). Transition ratios were calculated as
the effective tax rate (property taxes relative to market value assessment) for each
property class relative to the residential class. The transition ratio for residential
properties—the benchmark—was set equal to 1.00.
Ranges of fairness were set by the provincial government as shown in table 1.
Municipalities could set their tax ratios so as to maintain the transition ratios,
move toward the range of fairness, or vary tax ratios within ranges of fairness. For
example, if the transition ratio on multiresidential properties was 4.1, a municipality
could reduce it to 4.0 or below, or it could maintain it at 4.1. It could not increase it
to 4.2 or beyond. In short, municipalities are not allowed to worsen the inequities,
but they can maintain or reduce them.
Variable tax rates within ranges of fairness were used to allow municipalities to
maintain the existing tax burdens between classes and reduce the impact of a reassessment.
These provisions raise the question whether these discrepancies between
classes of property should be allowed to remain. Two arguments can be made. On
the one hand, provincial ranges of fairness could be considered to be inappropriate
because the property tax is a local tax. Since municipal politicians are accountable
to the electorate, they should be responsible for setting tax rates without provincial
restrictions. On the other hand, municipalities are unlikely to eliminate the discrepancies
on their own (especially if it means shifting tax burdens onto residential
properties), and thus some form of provincial regulation is required to achieve
fairness. The compromise (recommended by the Who Does What Panel and
implemented by the provincial government) was to establish provincial ranges of
fairness and require only that municipalities not move further away from them.
In addition to variable tax rates, the province legislated phase-in provisions and
tax deferrals to address the shifts that would occur within classes of property,
especially within the residential property class. Municipalities, at their option, can
apply a phase-in for up to eight years for assessment-related tax changes. Interclass
subsidization is not permitted; for example, tax decreases in the commercial
class cannot be used to subsidize tax increases in the residential class. Different
schemes can apply to different classes; different phase-in periods can be used for
decreases and increases. Municipalities are required to establish a program to
mitigate assessment-related tax increases for residential properties owned by lowincome
seniors and the disabled. They can design their own mitigation programs.
The timing of phase-ins is also controversial because of the conf lict between
moving to a fairer system as quickly as possible and lessening the impact on those
whose taxes will increase. One could argue, on the one hand, that the existing
582 canadian tax journal / revue fiscale canadienne (2002) vol. 50, no 2
inequities should not be allowed to continue; on the other hand, it may not be wise
to create undue hardship by not phasing in the tax changes.
Even with all of the tax policy reforms and phase-in mechanisms, however,
there were still large shifts in tax burdens. In particular, the tax burden on small
retail commercial properties increased relative to large office towers because of the
recession in office markets in June 1996 (the valuation date). To reduce the shift
onto small commercial properties, the provincial government introduced optional
classes for office towers, shopping centres, and parking lots. Also, it introduced
optional capping. Municipalities could limit tax increases on commercial, industrial,
and multiresidential properties to 2.5 percent a year for three years (1998,
1999, 2000). This meant that the property tax could not increase more than 2.5
percent on any of these properties over what it was before reform. Furthermore,
any tax increases over the three-year period resulting from increased expenditures,
for example, would have to be financed from the residential property class. This
measure was designed to move some of the burden away from the non-residential
property classes and onto the residential class.
The result of capping was to freeze the assessment roll based on 1997. In other
words, the new assessment roll was not used to tax multiresidential, commercial, or
industrial properties from 1998 to 2000. Capping also meant that there was no
effort to remove or even reduce the inequities in property tax burdens within the
commercial, industrial, and multiresidential property classes. Instead of capping of
the amount of the tax increase arising from a reassessment, the tax itself was capped.
Only Toronto chose the capping option initially. When it became clear that
there were large tax increases on small commercial properties in other municipalities
in Ontario, the provincial government introduced another piece of legislation
that restricted property tax increases on commercial and industrial properties to 10
percent in 1998, an additional 5 percent in 1999, and an additional 5 percent in
2000. These rate restrictions were not optional, but municipalities could decide
how to achieve the 10-5-5 target—through phase-ins, capping, or some other
method. This legislation has resulted in freezing the assessment roll for commercial
and industrial properties across the province.
TABLE 1 Provincial Ranges of Fairness
Allowable range
Property class of fairness
Multiresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0-1.1
New multiresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0-1.1
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-1.1
Office building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-1.1
Shopping centre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-1.1
Parking lots and vacant land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-1.1
Professional sports facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.001-1.1
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-1.1
Large industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-1.1
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6-0.7
property tax reform in ontario: what have we learned? 583
For 2001 and subsequent years, municipalities are required to limit the assessment-
related property tax increases on commercial, industrial, and multiresidential
properties to 5 percent per year. Municipal levy increases (that is, year-over-year
municipal tax increases) are not permitted in a property class if a municipality’s tax
ratio for that class exceeds the prescribed threshold ratio. The following threshold
ratios (where thresholds represent provincial averages) have been prescribed: commercial,
1.98; industrial, 2.63; and multiresidential, 2.74. Essentially, this means
that, for those municipalities over the threshold levels for all three property classes,
any tax increase resulting from budgetary increases has to be borne by residential
property taxpayers. A frozen assessment listing is no longer required for the administration
of the new 5 percent limit.
EVALUATION OF THE RECENT REFORM
The result of the Ontario property tax reform is a tax system that has not changed
much in terms of equity but has changed dramatically in terms of the complexity of
administration. Current value assessment is being used for residential properties. This
means that residential taxpayers have finally moved to a market value system—in
some cases, with a phase-in. The assessment on multiresidential, commercial, and
industrial properties, however, has virtually been frozen at pre-reform levels.
A uniform assessment system with variable tax rates provides much more visibility
and accountability than the previous system, in which property tax differentials
were hidden in the assessment method. Wherever anyone locates in the province,
similarly valued residential properties are assessed at a similar value. Tax rates
differ by location depending on the level of service and local government decisions
about relative tax burdens.
In terms of neutrality, differential property taxes will be distortionary unless
they ref lect different benefits received. It can be argued, for example, that the
benefits from local public services are different for different property classes. In
particular, a case can be made on benefit grounds for taxing non-residential properties
at a lower rate than residential properties. However, it appears that, under
the Ontario property tax reform, differential property tax rates ref lect the desire to
maintain relative tax burdens and not to achieve fairness based on benefits received
from municipal services.
Because of the focus on tax stability for each tax class, the initial goal of the
reform—to achieve equity based on ability to pay—was lost completely. The inequities
between classes of property have not been eliminated, and the inequities
within classes (other than the residential class) have not been reduced.
The reform has meant that the assessment function has been downloaded to a
corporation comprising mostly municipal officials; the tax-setting process is, to a large
extent, controlled by the provincial government. Although municipalities have
control over the level of taxes, their control over the distribution of taxes among
classes of property has been severely constrained by the province.
Attempts to simplify property tax administration have failed. The system for
setting tax rates is so complicated and has changed so many times that some
584 canadian tax journal / revue fiscale canadienne (2002) vol. 50, no 2
municipalities have been unable to set tax rates correctly. As a result of the capping
legislation, property tax bills that were issued in 1998 had to be reissued in some
cases in 1999.
Important lessons can be learned from the reform of property taxation in
Ontario. The longer you wait to reform a tax, the more difficult it will be. Annual
reassessments for property tax purposes will create far fewer shifts in taxes than a
reassessment after 40 years.
The ability to reform the property tax is more constrained than is the case for
other taxes because of the visibility of the tax. It is particularly difficult to shift tax
burdens onto residential property. Favouritism toward residential property is an
inherent part of the property tax system. Trying to change the way this tax is levied
is politically difficult. At the very least, phase-ins and tax deferrals are an essential
part of the tax policy design.
Taxpayers need to have confidence in the assessed values and the process used
to derive them. This means taking the time to do the assessment properly. Furthermore,
before property tax reform is implemented, it is necessary to undertake an
impact assessment to determine the shifts in taxation. This needs to be done in
advance so that tax policy can be designed before the reform comes into effect, and
not in a piecemeal fashion in response to problems as they occur.
More generally, the lesson from the Ontario experience is that, no matter how
economically desirable the long-run outcome of any policy change may be, its
transitional effects may be sufficiently undesirable in political terms to kill it. From
a public choice perspective, the losers from a change in policy tend to be very vocal
(even if they are the minority) because they value their losses more than the
gainers (even if they are the majority) value their gains. This problem is not unique
to property taxes, but it is particularly significant in this case because of the visibility
of this tax.
* Enid Slack Consulting Inc., Toronto. This paper relies heavily on an earlier article by the
author, “Understanding the Evolution of Property Tax Policy” (2000) vol. 6, no. 11/12 Focus on
Assessment and Taxation 89-96.
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