OP-ED: High Business Taxes Unsustainable

Business Taxes Too High?By Bob Laurie and Paul Sullivan

Across British Columbia, municipal budgets have grown beyond the rate of inflation and population growth. As residential properties exceed 90 per cent of total properties in many cities, the issue of the property tax load on the remaining commercial properties becomes increasingly critical.

Commercial taxpayers excessively subsidize the residential classes in many municipalities. For example, in the City of Vancouver, the commercial classes consume 24 per cent of municipal services and pay for 50 per cent. Adjusting for the income tax deductibility (if you make a profit) suggests commercial taxpayers should pay no more than 30-35 per cent of the tax load.

KPMG and MMK were commissioned by the City of Vancouver to study the consumption of municipal services by class (residential vs. commercial) in both 1995 and 2006. In 1995 residential taxpayers consumed 72 per cent of municipal services in Vancouver.

In 2006 it was not surprising that residents had increased their consumption share to 76 per cent of services provided, but only paid for 48 per cent. The problem is commercial properties have next to no growth relative to the growth of residential properties. Failure to adjust for this physical change in the make-up of our city is causing an unsustainable policy of commercial property taxation.

Virtually every real estate organization in BC, combined with the business improvement associations (BIAs) from all communities in the city have assembled as the Vancouver Fair Tax Coalition (VFTC). As far as we know, this is the largest movement for fairness in commercial taxation in Canadian history. Progress is slow but certain, with tens of millions in property tax dollars shifted to the residential classes.

An overview of some key issues are as follows:

Community Retail

Vision Vancouver and the Coalition of Progressive Electors included in their election platforms a new tax class for big business. Taxing large employers out of your town is clearly a poor economic strategy. Let's hope common sense prevails. Building Owners and Managers Association (BOMA), the Board of Trade and other executives of the VFTC are at the table with the province to find an alternate provincial solution for properties where commercial tenants are paying excessive property taxes due to being located on residential development sites.

We hope to bring some further relief to many of the BIAs who shoulder too much of the tax load, while trying to deliver the diversity and choice needed in our communities. These are our community retailers, and warrant alternate tax policy as we redevelop our city. Our solution is split class, and requires a change to the regulations of the Assessment Act.

Split class is when the assessed value of your property is greater than the value of the current use of the property. This typically occurs when a property is improved with a low density or lower quality building, and the residential redevelopment value exceeds the value of this current use.

This is a basic appraisal principle of highest and best use. So the solution is to place a residential tax rate on the unbuilt residential density that would otherwise be taxed at commercial rates. Unbuilt density value consumes no municipal services and is unfair taxation where commercial properties already subsidise the residential class.

Planning With Economic Analysis

Property tax topography is a related topic where we are trying to implement an economic impact analysis of the change in demand (consumption) of municipal services, and payment of property taxes, before and after redevelopment. With every new residential property paying for only 63 per cent of the municipal services it consumes, we are creating an unsustainable society. We need to shift the tax burden to account not only for the change in use of a property, but also for the new growth.

There is one small adjustment that needs to be made each year, but for over 20 years our failure to do it correctly is partially responsible for the current situation. The issue occurs when a commercial property in say, Yaletown, is redeveloped to condos. The commercial tax load that property was paying is not shifted to the residential class.

Instead, they take half of the tax that property was paying, and re-charge it to the commercial class. So, with one fewer property, the commercial class continues to carry 50 per cent of the taxes. When you build three or four thousand condos a year in Vancouver, this problem gets out of control. This needs to be fixed for our next generation of businesses.

Land Averaging

In the City of Vancouver, only residential class and business class properties do not pay taxes on the assessed value on your property assessment notice. The taxable value is different, and equal to the current year's building value on your notice, combined with the average land assessment over the previous three years. When land values go up, this mitigates the immediate 100 per cent tax increase. When land value goes down, you can end up in a situation where your taxable value exceeds the value of your property. This can occur through changes in land use policy, or changes in market demand and value.

The urban job core land use plan proposed up-zoning to 2.0 floor space ratio (FSR) in the central business district and eliminating residential uses. This has posed some taxation problems in the City of Vancouver. It appears there is marginal value in what is proposed for many properties, and has already caused some office towers to see increases of over $100,000 in property taxes this year as a result.

The issue is moving land values, and the impact of land averaging. If land averaging continues in Vancouver, we will see more and more commercial properties where the taxable value (the value that the mill rate is applied to) is higher than the value on the property assessment notice. Land averaging is already a detriment to the majority of commercial taxpayers.

Industrial

Class 5 properties are light industry properties, and currently get a tax rate that is five to fifteen per cent lower than class 6 (business/other-office/retail) in most municipalities. In some municipalities being in class 5 is still a detriment. This is a needed break for the manufacturing, transportation and storage industries. These industrial tenants are support industries that are critical to the diversity of our employment base, and fundamental to our gateway economy. This is the first year of receiving 50 per cent off the school tax rate.

Conclusion

Vancouver's mayor and council are on record as supporting a further one per cent tax shift from commercial to residential property. The commission report set the target at 48 per cent for business, however it failed to provide the rationale for this conclusion, or a method for measuring fairness. We believe these are important steps towards tax fairness.

OP-ED articles do not necessarily reflect the opinions of Think City. To make a submission to the OP-ED section of the Think City Minute, please email editor@thinkcity.ca for details.

Paul Sullivan will be debating SFU's Doug McArthur on the issues of municipal finances at Think City's City Budget Debate on Dec. 1. Click here for details on how to register to attend.

Bob LaurieBob Laurie is the senior vice president of marketing of the Fidelis Resource Group. He shares the co-chair position of the Vancouver Fair Tax Coalition and is a board member of the Vancouver Board of Trade.

 

 

 

Paul SullivanPaul Sullivan is a partner of Burgess Crawly Sullivan and Associates, a real estate appraisal and property tax appeal firm. He is the chair of the property tax committee for BOMA, chair of the taxation committee for the Urban Development Institute, and co-chair of the technical committee of the Vancouver Fair Tax Coalition.

Business vs residential taxes

Surely the function of cities is to provide people a safe and pleasant place to live. And the primary purpose of attracting business to a community is to subsidize through taxes the provision of local government services. So unless a city's residents (as opposed to its business lobby) want more shops, business services or jobs in their community, why should civic politicians want to decrease the proportion of taxes businesses pay for city services? Jon

Prioritizing what is "Unsustainable"

Convention centres are unsustainable. New stadium roofs are unsustainable. Selling land and resources owned by BC citizens is unsustainable. If people want convention centres and stadium roofs they can hold charity fundraisers, not use tax dollars. Schools, MRI time, health care, hospitals, school sports, earthquake proofing, decent pay for people so that they can live decent lives, etc are the priority for tax dollars, and there is plenty of money for these. It's all a matter of priorities.

property taxes: policy tool or revenue stream

Everyone knows that property taxes are "regressive" as a tax and that municipalities are forced to rely on them far too heavily. The voter (and non-voter) knows that local government lacks credibility and relevance.
What is needed are two basic changes to municipal revenues in order to provoke and support the shift towards greater relevance and control:
1) An improvement of provincial-municipal grants because they draw from more "progressive" provincial income and consumption taxes. Redistributed a predetermined pool of provincial revenues among municipalities based upon a reasonably predictable funding formula. The only provincial-municipal grants would be unconditional ones. Let the local government make the tough decisions on how to spend their money.
2) With larger, predictable unconditional grants from the province, property taxes could shrink as a proportion of a municipality's total revenues but remain in use as a "policy" tool used to influence the location and type of development that occurs. For example, designate low property taxes for areas that fit the official plan and high property taxes for development that is outside of the plan.
Just a thought.
...john

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