Property Taxes: Myths and Musings

Understanding property taxes and ideas about changing how they are done

Published: July 15, 2019

As Woodrow Wilson famously once quipped, the only thing certain in life is death and taxes. Many people are quite familiar with paying their property taxes and the frustration that time of year brings but I’ve found that there are some myths and misconceptions around how property taxes are determined and calculated. I would like to share some of them along with some food for thought around changing how the tax system is administered.

Assessed Value and Mill Rates

Most people are familiar with how your annual property tax bill is calculated: you take the assessed value of the real estate and multiply it by the tax rate. The tax rate – or mill rate – is a rate set by a municipality which is applied to the assessed value to determine that property’s specific tax bill. Municipalities will set multiple mill rates based on the property’s land use. For example, the majority of municipalities will have a mill rate for residential, multi-family, non-residential and agriculture. They will also breakdown each land use mill rate into municipal and education rates; the former being for the municipality’s operating budget and the latter being collected on behalf of the provincial government to fund education. Generally speaking, the non-residential rate will be double the residential rate. I’ve also been told that the amount of taxes collected from residential property taxes barely cover the expenses to administer and provide the services for residential. The bulk of the funding for our city’s services come from the non-residential sector (industrial, retail, office).

Myths

The first myth comes from the idea that if you appeal your assessed value to a lower number, then the municipality will receive less in taxes. The reality is that by appealing your assessed value, you lower your proportionate share of the total taxes. The municipality’s operating budget will be established based on the aggregate assessed value of every property. So by lowering your assessed value, that reduction is then transferred to the remaining properties in the municipality, meaning everyone else makes up your difference.

The second myth we hear is that municipalities shouldn’t be so difficult with development and building permits because by constructing a new building they get more taxes. There is an element of truth to this but going off of the first myth, the operating budget is already set. So, all other variables being equal, constructing a new building would actually lower everyone else’s property taxes because you would be taking on a portion of their tax bills. Where the truth comes from is that it increases the aggregate assessed value which means the municipality can increase its operating budget because there are more people to distribute the amount across. So again, all other variables being equal, the city can increase the operating budget and everyone’s property taxes would remain the same.

Real World Example

A recent, close-to-home example of how the system can fail if administration of city finances is not done properly is Calgary. It’s well known in this province about the high vacancy rate in Calgary’s downtown core (currently around 25%) as a result of declining oil prices and investment in the energy sector. Since these office tower’s value is derived from the rents they can generate, having a 25% vacancy results in lower rents and thus lower values. The drop in assessed value in the downtown core has been about $14 billion and a resulting $250 million loss in property taxes.

Going back to the above, this means that, if working with the same operating budget, that tax burden shifts to everyone else in the city. Some businesses in Calgary along 17th Avenue, suburban malls and other commercial/industrial areas have had their tax bills increase by up to four times the previous amounts. And because the vast majority of commercial leases are triple net leases (read here for information on them) these tax increases get passed onto the tenants. It would be difficult in good times with stable revenues to shoulder those types of increases, let alone during the current economic landscape. The problem has been an inadequate response from council and the mayor to decrease spending with the decrease in the aggregate assessed values of the tax base.

The CBC has a good article about the issue.

Reform

It is my opinion that one area of property taxation in need of reform is that municipalities should not be responsible for property assessments. It is a conflict of interest that a municipality is responsible for establishing and maintaining the assessed value of its tax base in which it receives its revenues from after setting its own operating budget. That bears repeating: a single entity should not have the ability to set its own budget while being in complete control of the revenues it generates within that budget. It is the equivalent of a company looking at how much it wants to spend that year and then telling its customers — who have no choice — to pay that amount.

Of course there are many moving parts within a municipality and it does not come down to one person or department; council is who approves the budget and the taxation department is responsible for assessments. But that doesn’t mean the opportunity is not there and it is the very reason why there are so many conflict of interest rules and regulations for governments, lawyers and even realtors.

A potential example: since the majority of residential home owners do not own non-residential properties, it is fair to say that most people do not pay attention to both sectors. An assessing authority could alternate between years in which assessed values have dramatic increases. One year residential could have a sharp increase and then the following year it’s the non-residential sector so that each group doesn’t notice the increases as much. It may sound far fetched but it’s not difficult to do. You would have people appeal and succeed but more often than not, most would let it go, glaze over their property tax assessments, or would not want to take the risk and pay the appeal fee.

A better system, one that is done in British Columbia, is that the province is responsible for assessment. If you haven’t been to BC Assessments webpage, you can enter the address of any property in the province and it will tell you the detailed information on that property, what it’s assessed at, and provide comparable sales to justify the number. Taking away assessment from a municipality removes that opportunity for manipulation and can only help in transparency and accountability.