Moreso than for cities in other countries, Canadian municipalities rely heavily on the property tax for their revenues. In 2007, property and related taxes represented almost 47% of municipal revenues, with user fees a distant second at 22% and conditional provincial transfers third at 14%. This reliance is partly a product of historical circumstance, and partly because Canadian municipalities lack access to most of the revenue generators used by the other orders of government such as income, sales and corporate taxes.
Unlike other revenue generators like income taxes that are deducted from paycheques or sales taxes that are paid frequently but are difficult to total annually, the property tax is very visible – taxpayers are billed once or twice a year for it. It is a largely inelastic tax, as property values generally do not closely follow economic cycles and income or corporate tax yields. It promotes local autonomy, as municipalities can generally levy their own rate (although they are very constricted in Ontario). It can act partly like a benefits tax on local residents or businesses, as the services it funds directly and indirectly enhance property values.
Property assessment is always a contentious issue. There are a range of different types of residential assessments in use, with the ultimate purpose being to get as close an approximation as possible of the price a buyer and seller would agree upon for a property (i.e. market value). Rental income methods estimate market values based upon current value in the form of rental rates. Unit value systems are less oriented to market value, as they assess based upon the size of the property or the house. In the UK, a banding system is used whereby market values were assessed in 1991 and put in one of eight bands based upon property value. California employs a ‘time of sale reassessment’ system, where property values are only updated when a house is sold – creating obvious inequities, often between homeowners next door to one another. The method used in Ontario is a comparable sales market value assessment. Residential properties are assessed relative to a range of recently sold properties that have comparable characteristics. Under the new assessment regime put in place in 1998, Ontario residential properties are now assessed every four years by the provincial Municipal Property Assessment Corporation (MPAC).
While the Ontario reforms updated what had been an antiquated residential assessment system, it did so at the expense of increasing significantly the complexity of the property tax regime in the province. There are now seven classes of properties, including residential, multi-residential, commercial and industrial, all of which are subject to different rates and conditions. Municipalities can create other optional property classes and identify tax rates, but they must be within provincially identified bands for each class that limit some increases. Taxation for non-residential classes is made murkier by a range of other mechanisms and regulations such as graduated tax rates, capping and clawbacks, phase-ins, mitigation measures and incentives, and provincial control over property tax rates for education.
Much of this complexity was the product of a provincial desire to protect residential taxpayers from significant increases immediately after the reforms. This tendency to provide favourable treatment to residential property at the expense of commercial is apparent in many jurisdictions. But while the political benefits are obvious, there is little economic rationale for favouring residential property. Commercial properties generally use fewer municipal services. The stability of the tax base can also be threatened by imposing higher taxes on more mobile factors like businesses. In Toronto, for instance, commercial taxes are four times higher than residential, though efforts are gradually being made to begin to bridge this gap.
The property tax has been called many things: ‘unfair’ because it is based on property value as opposed to ability to pay, and because it penalizes improvements that increase property value; ‘regressive’ because it generally consumes a higher percentage of a lower income budget; and ‘unsuitable’ because it supports services unrelated to property. Others argue that these are only part truths. In many cases there has been a tendency to overestimate the value of the structure compared to the value of the land in assessing property value. For instance, many homebuyers in Toronto purchase property only for the land, with the express purpose of knocking down the house to build anew. Municipalities also provide a range of grants, exemptions and credits to provide relief to groups such as seniors who struggle to pay. In addition, that the property tax funds services unrelated to property – some of which are redistributive – further lessens its supposed regressivity in some ways. In fact, Bird and Slack maintain that the residential property tax “appears to be about as fair and efficient a tax as can be administered at the local level.” They conclude that “on the whole, the property tax is not nearly as bad as a fiscal instrument as it has sometimes been painted,” though “in an ideal system its role would no doubt be smaller.” (1993, pp. 101-2)