If nothing is done, middle class families will be looking at double digit property tax increases every year for at least the next four years! TIARA Director Lukas Meuter 1 October, 2008
The new MPAC assessments that have begun arriving in our mailboxes once again rekindle the debate over fairness in property taxes. Properties that are more expensive have always borne a higher tax burden, but in some communities such as Leeds & the Thousand Islands often punitively so, since many of its properties are on lakes, or on the islands, where they receive minimal services from the township. In many other cases, the services received from the Township are far outweighed by the property tax burden. Now that the new 2008 MPAC assessments indicate a further worsening of the level of fairness if nothing is done to prevent it, it is time to consider putting a cap on the taxes levied on these properties.
What will happen if nothing is done?
Since the Province of Ontario introduced Market Value Assessment in 1998, the distribution of property taxes is increasingly skewed towards higher-priced properties. Why? The Province has legislated the use of MVA and the use of a single tax rate over each class of properties. At the same time, of the three beneficiaries of the property tax, namely the County, Education, and the Township, the Township only controls tax rates for its own portion. The County and the Province control the other two, respectively. Namely, the County charges the same rate in each of its municipalities, and the Province does the same for education, in this County. This means that those municipalities with higher assessment totals such as Leeds & TI pay a disproportionately larger share of the County pie. It also means that when taxes go up, the Township gets the complaints, even though its taxes amount to only a third of the total. In reality, the township gets to deflect much of the blame, while neither County nor Province takes direct responsibility. At the same time, the Province continues to offload programs to the municipal/county level, shifting the burden from income taxes to the property tax, and inflationary pressures ensure that the cost of everything goes up. Thus, the tax burden will continue to go up. But if nothing is done, the accelerating redistribution of the tax burden under this system will become intolerable. This is illustrated in the following example.
Example 1.1:
Say there are twenty houses in a township: eighteen houses each assessed (2005 values) at $125,000, one house near the river assessed at $400,000, and one on an island assessed at $800,000. The total value of the housing stock is $3,450,000. If this township's tax burden is $34,500, then the total mill rate computes to 0.01.
This means that currently, the eighteen $125,000 houses pay $1250 each, the $400,000 house pays $4000, and the $800,000 house pays $8000. All nine houses on the mainland receive a similar level of service, but the island home receives far less, even though it is paying more than 6 times what the lowest-priced house pays, and more than 4 times the $1725 average tax.
Using the announced percentage increases of 20% to 50%, depending primarily on the location of each property, the MPAC reassessments increase the value of the houses respectively to $150,000, $$600,000, and $1,200,000.
Because the Township's total assessed value increases, the mill rate would decline to 0.0076667 if the budget remained the same. (If inflation is included, nobody's taxes would actually go down.)
This example is of course just that: an example, with assumed numbers. Put into perspective: in 2007, the total residential assessment value in L&TI was $1.1B spread over approximately 7600 properties, so the average assessed house value in the Township was $146,341. This is lower than the $172,500 average in the example, so in reality, there will be an even greater redistribution of property taxes towards those with higher MPAC assessments. In addition, since under the current legislation, property tax decreases cannot be spread out over the four years, but must be granted immediately, the higher-valued properties will pay disproportionately more during the first three years.
Getting the Province to remedy this deeply flawed system may be politically difficult. However, it is necessary, and the economics are clear and simple. Property tax taxes capital, and taxation of capital is the most destructive tax possible. In addition, the assessed value of a house is neither a good proxy for the homeowner's ability to pay nor a fair basis for taxation. We suggest two possible solutions to lessen the destructive impact of the property tax and add fairness to the system.
Example 1.2:PUTTING A CAP ON THE PROPERTY TAX
(Using the same numbers as in example 1.1 above, excluding the 9% inflation)
Rather than divide a township's total tax burden by the total MPAC assessment value to arrive at the mill rate, the formula is amended to ensure that no property is taxed more than a certain multiple of the average house. In essence, an absolute cap is introduced on property taxes.
...so, the MPAC reassessments increased the value of the houses respectively to $150,000, $$600,000, and $1,200,000. The Province moves to ensure that what everyone pays in property taxes is more in line with the benefits received, and decides that no property be charged more than twice the average house in a municipality. Since the average assessed house price in this case can be calculated as $225,000, this means that both the house near the river and the island home are now taxed based on $450,000. The adjusted value of the total housing stock is then $3,600,000, and the new mill rate becomes 0.0095833.
The eighteen $150,000 houses will then pay marginally more, at $1438 each, and the other two houses pay $4313 each. This new system is phased in over four years, using the January 1, 2008 assessment as a base.
Thus, while the average tax remains $1725, the relative tax burdens become much fairer:
MPAC Value Adjusted Tax: (2008) 2009 2010 2011 2012
$ 150,000 $150,000 $1250 $1297 $1344 $1391 $1438
$ 600,000 $450,000 $4000 $4078 $4156 $4235 $4313
$1,200,000 $450,000 $8000 $7078 $6156 $5235 $4313
In order to maintain fairness, the CAP ratio used may need to be periodically reassessed and adjusted.
Example 1.3: GRADUATED TAX RATES
(Again using the same numbers as in example 1.1)
A slightly more complicated scheme that retains a measure of perceived progressivity, while recognizing the often tenuous relationship between the value of a property and the income of its owner, may be more politically palatable. Under this scheme, there is a graduated tax rate, with two levels of (cumulative) taxation.
In this case, the Province decides that properties shall face declining taxation as their value increases. In this township, it means that up to $250,000, every property is charged at a rate of 0.008961; on the part over $250,000 the rate drops by half, to 0.0044805. These rates are calculated to maintain tax revenues at the needed $34,500.
The eighteen $150,000 houses will then pay marginally more, at $1344 each, the $600,000 house pays $3808, and the $1,200,000 house pays $6496. This new system is phased in over four years, using the January 1, 2008 assessment as a base.
Thus, while the average tax remains $1725, the relative tax burdens become a little fairer:
To maintain fairness, both the $250,000 limit and the ratio between the two rates used may need to be periodically reassessed and adjusted.
What can we do?
The property tax reform of 1998 was intended to introduce a fair and accountable system of property assessment and taxation. It delivered only on assessment.
Currently, the fundamental premise of our property tax system is that properties should be taxed strictly "on the basis of their market value, not on the basis of the relative use that property owners make of local services"*. Apparently, fairness is not a consideration. The time has come for that to change.
Both the Cap system and the Graduated Rate system retain the accountability introduced by the MPAC, and introduce fairness in the system.
It is unlikely that either of these schemes can be introduced without reference to the Province, so that is where our energy must be focused.
