September, 1998
Montréal, Québec
Page
Executive Summary
Introduction and Acknowledgements 1
Section One: The Negative Effects of the Current Property Tax 2
Section Two: The Need for a New Approach to the Taxation of Property 4
Section Three: Proposal for a Two Rate Property Tax in Montréal 7
Section Four: Description of the Property Assessment Database in
Montréal and the Budgetary Requirements of the Municipality 9
Section Five: Two Rate Property Tax Options for Montréal 11
Tax Impacts of Two Rate Property Taxation 14
Cadastral Analysis 21
Section Six: Recommendations 23
Section Seven: Bibliography 24
Annexes Tabs 1 to 20
1. Assessment Roll - CIEB 1998
2. Index of Real Estate Values 1975-1995
3. Principal Tax Rates
4. Construction Permits in Dollar Values 1987-1997
5. History of Tax Rates 1991-1998
6. Variation in Tax Bills by Type of Immovable Property
7. Description of Codes of Use
8. Total Land and Building Values by Category and Number of Properties Above and Below the Average Building to Land Ratio of 66/34%
9. Spreadsheet Analysis of Scenario One - 50/50 Two Rate Property Tax
10. Spreadsheet Analysis of Scenario Two - 60/40 Two Rate Property Tax
11. Spreadsheet Analysis of Scenario Three - Single Rate on Land Value Only
12. Building/Land Ratios by Category
13. Tax Impacts Under All Three Scenarios by Category
14. Property Taxes Payable Where Land and Building Values Conform to the Average Municipal Building/Land Ratio
15. Property Taxes Payable Under Two Rate Scenarios Where Building Values are Below the Average Municipal Building/Land Ratio
16. Property Taxes Payable Where Building Values are Above the Average Municipal Building/Land Ratio
17. Cadastral Descriptions
18. Tax Impacts by All Cadastres for the City of Montreal
19. Examples of Two Rate Property Taxation in the United States
20. Comparison of Per Capita Income in Relation to Property Taxation in the United States
The Canadian Research Committee on Taxation (CRCT) has a long history of submissions to municipal governments in Québec on the issue of how to design more equitable and efficient methods of property taxation. In September, 1962 the CRCT discussed methods of constructive taxation in a report to the Special Investigating Committee on Municipal Taxation of the City of Montréal. The CRCT submitted a report on property taxation to the Bélanger Royal Commission on Taxation in the Province of Québec in December, 1963 and shortly thereafter to the La Haye Commission d'urbanisme du Québec in September, 1964. More recently it presented a report to the Québec Commission on Taxation and the Financing of Public Services. The universal and constant theme prevalent in these presentations is the declaration that it is possible to design a property tax system that promotes employment, enhances productivity, reduces municipal government costs and which is compatible with the objectives of sound urban planning and environmental protection. It is towards the design of such an incentive oriented system of property taxation that this Study is directed.
The system of local government finance in Québec relies on the taxation of immovable property for the provision of municipal services. In this respect Québec is the same as other provinces in Canada where the taxation of real estate constitutes a significant proportion of overall government services and thereby substantially distorts the economic impacts on individual property owners and business people. Taxes are today the most important and pervasive determinant of economic activity in Canada. Their burden is direct and obvious, ubiquitous and subtle.
A two rate property tax reverses the detrimental and counterproductive tendencies which are presently inherent in our systems of local government finance. The single rate property tax discourages improvements to properties, promotes land speculation and land price increases, fosters urban blight and suburban sprawl and contributes to inadequate housing and homelessness. Two rate property taxation reduces the tax burden on buildings and increases the amount of revenue received from the land value component. This can be achieved by simple and flexible algebraic adjustments to the current property assessment and tax machinery. The beneficial economic and social effects of such adjustments can be profound.
The City of Montréal is an extensive urban mosaic of diverse communities and real estate usages that yield overall revenues of approximately $1.8 billion per annum. $940 million of this revenue comes from the general real estate tax which has a taxable assessment base of $45 billion. The general tax rate is 1.99% (yielding approximately $900 million) with surtaxes on vacant land and non-residents (yielding $40 million). A business tax on annual rental value produces another $218 million in revenue. The balance of the budget comes from water charges, payments in lieu from more senior levels of government, fines, fees, government transfers and other non-fiscal measures.
This tax impact study does not adjust for revenues from payments-in-lieu, water charges and non-fiscal measures. It proposes to roll in the business tax on annual rental values and obtain the same amount of revenues from a modified general real estate tax. Total revenue requirements from the property tax under this scenario will therefore be $1.158 billion with the rolled-in business tax as opposed to the current $940 billion. However, the modelling in this Study is restricted to the general real estate tax on a revenue neutral basis. A phase-out of the business tax and a roll-in into the general real estate tax base is recommended.
The following three property tax reform options for the City of Montréal are analyzed in this Study:
(1) The first option proposes that 50% of property tax revenues be raised from the building component and 50% from the land value. Currently the taxable assessment base of $45 billion generates 66% of its revenues from the building values and 34% from the land or site value. The average building to land ratio for Montréal is therefore 66/34%. If a property is above this ratio it will receive a tax decrease under this proposal, if it is below there will be a tax increase. The degree of tax decreases and increases will depend on the property's variance from the average building to land ratio.
While a majority (60%) of single family residential properties receive a tax increase under this scenario, overall 63% of the residential sector will receive a decrease. The majority of commercial (60%) and industrial (56%) properties receive increases. These properties are generally underutilized although they receive the benefits of full municipal services.
The cadastral analysis in this Study shows which areas of Montréal and which property types in those areas receive tax increases and decreases under the various two rate tax options. It is possible to generate a two rate property tax bill for any property in Montréal. The analysis in this Study is, however, limited to statistical averages, sub-averages and benchmarks.
The reduction of the tax burden on buildings gives residential property owners an opportunity to reduce voluntarily their property tax by making it easier to elevate individual properties above the average building/land ratio in the community.
(2) In the second tax reform option, the percentage of tax revenues from buildings is 40% while that from the land value is 60%. This option produces more substantial tax increases and decreases in relation to a property's variance from the average building to land ratio but at the same time provides greater scope for the improvement of property without incurring a tax penalty.
(3) The third option is a single rate of 5.852% on the taxable land value component only of all non-exempt land in Montréal which has a 1995 assessed value of $15,452,247,932. This option would be, from the standpoint of tax theory, the most desirable in order to achieve the goals of economic efficiency, equity and enhanced productivity in the region. Adopting this option in one fell swoop would, however, result in significant tax shifting between different regions in the city and between various classes of property. It is therefore recommended that Montréal move towards the third option through a multi-year phase-in utilizing an acceptable combination of the first and second options. These initial options are therefore to be treated as benchmarks for further modelling on potential tax impacts.
The tax impacts, in terms of increases and decreases, are analyzed under each scenario. The statistical summaries in this Study show that the greater the degree of taxation of the land value component the higher the tax savings for those property owners who are above the average in building/land ratio and who thus more constructively contribute to the community as a whole.
This Study concludes with a number of straightforward recommendations, which, if implemented by the Québec Government, would provide the City of Montréal and all the municipalities in Québec with the fiscal flexibility to create the economic incentives and the social well being necessary for these communities to flourish and prosper into the twenty-first century.
The CRCT obtained the electronic tapes of the property assessment database prepared by the Montréal Urban Community (M.U.C.) for Montréal which includes land and building values, cadastral references and various types of property classification. The tapes were in EBCDIC format which were then converted to DBF format on CD-ROM. A full description of the database can be found in Section Four of this Report. The M.U.C. also maintains a searchable website at http://www.muc.qc.ca where information on individual property valuations can be obtained, although not in raw data format.
Municipal budgetary documents, property assessment database updates and various other explanations were provided by the City of Montréal. The primary source of information was the Cahier d'Information Économique et Budgétaire 1998 (CIEB). It should be noted that 1998 will be the fourth year of the current valuation roll which is an extension beyond the previously legislated triennial roll, 1995 - 1997. The next assessment roll will be biennial and should be deposited in September, 1998 for the 1999 - 2000 fiscal years. We do not believe there will be a substantial change in valuations with the return of the next roll. If, however, that turns out to be the case, then the figures in this Report will have to be revised and updated.
I would like to take this opportunity to thank the members of the CRCT for their perseverance and support in seeing this undertaking through its conclusion. Officials in the M.U.C. were very co-operative in providing the property assessment database in electronic format and providing assistance in interpreting its various codes. Dr. Francis K. Peddle, Director of Research, of the CRCT, wrote the Report and supervised the database analysis contained therein. Glenn Grignon of Raynon Corp. provided the technical support using Paradox for Windows in order to generate the various two rate options contained in Section Five. Harry Payne of the CRCT deserves much credit for doing the legwork necessary to obtain the electronic database, cadastral maps and budgetary information.
The CRCT hopes this Report will inspire a more fundamental re-thinking of our method of property taxation. By reducing the tax burden on buildings and capital improvements, governments can go a long way towards fostering better urban communities from an economic, environmental and aesthetic perspective.
ALL OF WHICH IS RESPECTFULLY SUBMITTED
BEN SEVACK
President
The City of Montréal obtains revenue for purposes of municipal government by applying a mill or tax rate on the total value of all non-exempt real property within its jurisdiction. The general real estate tax rate is 1.99%. The M.U.C. is Montréal's evaluator. It valuates 29 municipalities in the community with a total valuation base in 1998 of $107 bn. It is M.U.C. officials who determine the value of properties for property tax purposes. Montréal does not differ from other property tax jurisdictions in Canada in this respect. The valuations for tax purposes are, however, relatively current and in this sense Montréal is well ahead of other municipalities in Canada such as Toronto where assessments are hopelessly out of date. Ontario recently reassessed all properties in the province to the 1996, but various politically motivated tax policy initiatives, such as the capping of tax increases and decreases in Toronto for the next three years, have effectively neutralized what was achieved through assessment updating and reform.
The system of property valuation utilized in Montréal, often referred to as market value assessment, disguises the fact that a mill or tax rate applied to total property value is really two taxes -- one on the land or site value and one on the improvements located on the site. That a tax, rental payment or community charge on unimproved land values is the least bad of all taxes, with no deadweight losses or welfare costs to the economy, is perhaps the most uncontroversial and universally accepted proposition in the science of economics in the twentieth century. Why economists have not been successful in communicating this proposition to politicians and policy analysts is one of the more significant curiosities of the discipline.
For assessment purposes, the two aforementioned values are necessarily distinct and have been rightfully kept separate by the M.U.C. valuators. It is, however, from the standpoint of the politicians who insist on retaining one mill or tax rate for the total property value that the property tax system implodes from its own counterproductive weight.
On average, 66% of total property values, and 66% of the tax revenues derived therefrom, are attributable to building values, and 34% from land values. The major part of the local property tax burden in Montréal therefore falls on capital improvements, that is on that component of the property the value of which is created by the application of individual labour and capital.
The two rate property tax reform advocated in this study is aimed at reducing the tax burden on the building component of real property.
The two rate mechanism allows local municipalities to achieve genuine tax reform in an incremental, nondisruptive and flexible manner. It is a highly cost effective method of tax reform that utilizes the already existing assessment and tax collection infrastructure to realize economic benefits that are not being achieved within the present framework.
By overtaxing the building component, the current property tax system encourages numerous activities which are detrimental to the community. Several of these activities are cited here for illustrative purposes.
First of all, Montréal's property tax discourages improvements to properties. The tax system penalizes those who make economically and socially beneficial investments and improvements in their properties. On the other hand, the current property tax system underwrites and subsidizes those who neglect their properties or who take advantage of municipal services while caring little about the capacity of their property to serve the community. Inactivity with respect to land utilization places a cost burden on every municipality.
Secondly, the present property tax encourages land speculation and land price increases. It is a significant contributing factor behind inflation in the housing and commercial real estate markets.
Montréal is an extremely diverse community. Only 5,679 taxable properties out of a total of 188,324 taxable units are classified as vacant land. This constitutes only $827.5 million in taxable land value assessment out of a total taxable land valuation base of $15.5 billion or $45 billion in total for 1998 or .01838% of the valuational base. Montréal, from this perspective, is therefore a built-up community. The greater problem is the underutilization of property, especially in the commercial sector. For example, the 4K Code of Use in the property assessment database classifies land, not built on, but used for commercial purposes. There are 566 properties in this category, with a total assessed land value of $337 million but a building value of only $23 million. Much of this property is underutilized. Under a two rate system this valuable resource would gradually be brought into life-blood of the urban economy.
There is wide variation in lot utilization in relation to permissible zoning ceilings, although this Report contains no actual property utilization analysis. It is recommended that the M.U.C. in conjunction with municipal and provincial authorities undertake extensive spatial modelling of the tax impacts on land utilization and resource allocation using Geographical Information Systems (G.I.S.) software in order to gain greater insights into the correlations between property taxation, land utilization and economic activity. Lack of information in this area is one of the primary reasons for misconceptions by the public about the constructive role property taxation plays in our society and about how the property tax can be even further modified to benefit the community.
The underutilization of land resources within a taxing jurisdiction is a greater impediment to efficient resource allocation than vacant lots per se. The undertaxation of land tends to increase land hoarding which leads to urban sprawl, thwarts effective urban planning and renewal, and increases land costs which makes housing less affordable, thus adding to the problem of urban homelessness.
Thirdly, the present municipal tax structure causes urban blight because it makes it relatively more profitable to let buildings deteriorate rather than to renovate or replace them. Taxes tend to reduce the base upon which they are levied, except a tax on land, because a natural resource is not a product of human effort. Since the major part of the property tax falls on buildings, it follows that this tax encourages urban decay.
Fourthly, by discouraging investment in capital improvements and adding to the cost of land, the traditional property tax contributes to inadequate and substandard housing. Affordable housing is therefore possible only with some form of direct or indirect public subsidy. This is yet another example of where the method whereby governments levy taxes in and of itself necessitates increased government expenditures. Our methods of raising public revenue frequently exacerbate social overhead costs.
Property assessment and tax policy, or the determination of what is taxable and the degree of taxation on that base, are the two principal aspects of the property tax system. Both aspects must be based on sound principles so that the taxation of real estate meets the revenue requirements of local government and at the same time the method of taxation is harmonized with the aspirations and efforts of individuals and with the advancement of the overall well-being of the community. The importance of property taxation should not be underestimated in the furtherance of the broader objectives of public policy.
The assessment of real property for tax purposes must be fair, up-to-date and accurate. Our general analysis of the property assessment database for Montréal indicates a number of peculiarities with respect to the valuations pursuant to the Real Estate Assessment Act. It is also unfortunate, in our view, that the triennial roll has been extended for the 1998 taxation year. This has introduced unnecessary assessment lag into the return of the roll. Assessments or valuations should be done on an annual basis. The delay in the return of the next roll is not significant for Montréal as property values have probably stabilized somewhat. There has been a substantial decline in valuations since the early 1990s. However, in a volatile real estate market assessment lag usually introduces unfairness and inequity into the property tax system. There are the usual appeal and review procedures in place in the M.U.C. so that ratepayers can challenge the assessments assigned to their properties.
Montréal's average building to land value ratio is, however, more reminiscent of 1970s ratios than those in the 1990s where the land value percentage is frequently much higher. Built up and desirable residential areas such as Mount Royal have a significantly higher land value component. It is generally the case that a change to a two rate property tax with greater emphasis on the land value component leads to closer scrutiny of the techniques whereby land values are assessed for tax purposes. Many assessment jurisdictions frequently treat land values as an afterthought and incorrectly under-assess them.
The property tax assessor is frequently in conflict with commercial property owners who give as low a value as possible to land so they can take as much depreciation as possible for the building pursuant to the Income Tax Act. This often results in the overdepreciation and multiple depreciation of buildings. Land obviously cannot be depreciated, so there is no income tax advantage to giving it a correct value. The economic intelligence gathered through the property tax system is therefore an important check on the economic obfuscation that is unfortunately, but understandably, generated by the income tax system.
Like most other jurisdictions in North America, Montréal applies a single tax rate to total property values. There is a surtax on vacant parcels which is double the general rate. This surtax is an implicit recognition of the cost benefit principle which lies at the heart of the two rate tax philosophy as well as an attempt to dissuade property owners from deliberately destroying buildings in order to reduce taxes. Taxable vacant land in Montréal has a total assessment of $865 million.
Section 486.2 of the Cities and Towns Act provides the statutory authority for such a surtax:
The amount of the surtax is determined by the council and may amount to up to 100% of the total real estate taxes referred to in subsection 1. The council may fix different amounts for serviced vacant land and for unserviced vacant land, in which case the amount fixed for the former must be higher than that fixed for the latter...
We support the legislative intent behind the surtax on vacant land. It is recommended that it remain in place even if the tax rate on land is significantly increased. The surtax could be justifiably removed once the system has progressed to a taxable rate of 5.852% on land value only. The theory is to capture as close as possible 100% of the economic rent of the vacant parcel for public revenue.
Since vacant land owners are usually the most vociferous opponents of property taxation, it would be interesting for a study to be conducted to establish to what degree municipalities in Québec exercise their discretionary powers under section 486.2 of the Cities and Towns Act and actually place a significant surtax on vacant parcels. The legislation in Québec is significantly more progressive than in Ontario, where recent legislative changes have frequently resulted in preferential tax rates being given to vacant land and parking lot owners. Such tax discrimination is completely contrary to the objectives of regional official plans and other urban form goals.
Montréal receives grants-in-lieu from more senior levels of government, primarily provincial, as well as revenues from various user fees. The M.U.C. has put an assessed value on exempt properties at approximately $14 billion. These exempt properties are schools, parks, municipal buildings, churches and synagogues, among others. The tax loss from the general property tax rate is $278.5 million or more than $60 million greater than the amount received from the business tax on annual rental value.
The valuation of exempt properties at $14 billion by the M.U.C. is laudatory and should be continued. We have not determined the accuracy of these valuations. In general, exempt properties are usually undervalued in most jurisdictions. Often municipally owned land appears at a book cost which may be decades and decades old. It is recommended that the Commission take a close look at exempt properties and determine whether some or any of them should be subject to taxation, either partially or on the same basis as, for example, commercial enterprises. In principle the community charge on unimproved land values should be as broadly based as possible. We do not, however, view this principle as being in conflict with current zoning provisions or the constitutional restrictions on intergovernmental taxation.
Most municipal politicians feel their hands are tied at budget time. The municipality needs so many dollars to provide services, the valuation or assessment is fixed and therefore the tax rates must be a certain percentage. Either services must be cut or the tax rate increased. It is thus always a lose/lose situation for elected representatives. They generally try to perform a balancing act within the status quo by incrementally raising taxes or incrementally reducing services so as to alienate the least number of voters.
The only viable alternative to the current lose/lose alternatives which local municipal councils face is a two rate tax policy. This policy seeks to downtax buildings and proportionally uptax land values to a degree determined by local government. Why is this the only alternative? There are several important reasons:
(1) reducing the tax burden on buildings is an incentive to invest in a community and this has the effect of increasing the land value tax base;
(2) by encouraging more efficient land use there will be less parcels in the municipality not paying their fair share of the total tax burden in relation to the benefits they receive from the community;
(3) home building, renovation and business enterprises will not be penalized by the tax system but encouraged;
(4) land costs will be stabilized and thus the municipality will not have to worry about dramatic and volatile increases and declines in the property valuation base;
(5) municipal costs are lowered since all serviced parcels pay taxes in relation to the costs of those services regardless of whether the lot is underutilized or not, which is a management decision of the individual landowners and not something that should be underwritten by the public finance system.
Efficient taxes, equitably applied and directly related to the cost of providing public services are the taxes of the twenty-first century. By adopting a two rate property tax as advocated in this Report, Montréal would be on the leading edge of an important new approach in future tax policy development.
A two rate property tax substitutes a pair of different tax rates for the current system of one tax rate. In order to make the property tax system more transparent, it is now becoming customary to express the actual tax rate in terms of a percentage, like the income tax system, rather than utilizing the older and more confusing mill rates. For example, recent reforms in the property tax system in Ontario have abolished mill rates and substituted a percentage tax rate on the total market value of the property. Unlike Ontario, however, Montréal applies a single tax rate to all property classes. We recommend against adopting a variable rate system across property classes. Such a system is in place in British Columbia and is currently being imitated in Ontario. Granting favourable tax treatment to different, and often arbitrarily defined, property classes is contrary to the efficient resource allocation philosophy underlying the proposals in this Study. In addition, it severely undermines the long-standing principle of equity in property taxation. This principle is best achieved through a single rate only on unimproved land values across all sectors.
By incrementally downtaxing the building component and uptaxing the land value component of the total market value of a property, it is possible to present to local governments a revenue neutral tax reform proposal, utilizing a simple algebraic equation, without causing any dramatic tax shifting between putative classes of properties or between individual property owners.
Incremental redistribution of the tax burden between the two components of total property value can be easily illustrated. With differentiated land and building assessments one can propose an equalized revenue yield from both assessed values that required 50 mills, or say .50 per cent of market value and 100 mills on the land value or 1.0 per cent of market value, if a community's buildings constituted twice as much of the tax base as the value of the underlying land.
A two rate property tax can be expressed as a variable percentage of land and building assessments. For example, in Pennsylvania where there are approximately 15 cities on the two rate property tax system, the tax rate is often given as a percentage of land and building assessment. In Hazleton, the rates are 7.9% (79 mills) on land and 2.5% (24 mills) on buildings, as opposed to a former undifferentiated rate of 3.3% (33 mills) on both. In Oil City it is 5.55% on land, 2.74% on buildings instead of 3.28% on total property values. The tax burden on buildings in these Pennsylvanian cities and towns varies. For example, Pittsburgh receives 55.7% of its property tax revenue from land, while Aliquippa obtains 85.3% of its tax revenue from the land component or assessment.
These municipalities can and do change these percentages annually on the basis of economic need and the perceived and documented benefits that follow a shift from the taxation of buildings to the taxation of land values. A primary source of documentation is the increase in building permits in municipalities where there has been such a shift. We recommend that if Montréal moves to a two rate property tax that the issuance of building permits for both renovations and new homes be tracked and compared with historical patterns. Over the past decade, there has been a significant decline in the dollar value of construction permits in Montréal. Based on the empirical and historical evidence from jurisdictions which have adopted a two rate system, we would expect to see the long-term trend in the dollar value of building permits to increase. Annexed to this Report are some comparative figures from Pennsylvania.
The two rate property tax is a "carrot and stick" approach to enhancing the economic vitality of a community. The carrot, a lower tax on improvements, makes economic growth easier; the stick, a higher tax on land values, lessens the obstructions to increased productivity, employment and sound fiscal management.
The property assessment database obtained from the Montréal Urban Community for purposes of this study covers the 1995-1997 triennial roll. The database was converted from EBCDIC format (packed field data of 6250 bpi) and Paradox for Windows software was utilized for analytic purposes.
There are six lists of data classification in this database:
(1) List One - Units Appraised or a Description of Each Property
There is a substantial amount of property description data in this list, including the property I.D. no., municipal address, building category code or property classification (codes of use), economic level, serviced vacant sites, frontage, depth, site area, effective age, building model and previous values.
(2) List Two - Identity of Owners
This list was not used in this study. The identification of property ownership is irrelevant for a tax impact study of this nature. It is, however, useful for the identification of those economic entities which receive more benefits from the community than they return in tax dollars.
(3) List Three - Property Values
This list contains the crucial data for this study. It provides the separate land and building values for each property as well as whether the property is subject to a tax exemption.
(4) List Four - Cadastral Numbers
This list contains cadastral, or property boundary, data, such as frontage, depth, area and subdivision boundaries. This list is useful for identifying the various parishes, villages, towns and quarters in Montréal which experience the most dramatic tax shifts in any given two rate scenario.
(5) List Five - Adjusted Values
This list was not available from the M.U.C.
(6) List Six - Summary of Totals
This database contains the total building and land values exempt and the total building and land values which are taxable.
The tax rate history of Montréal has had a stable average rate of almost 2% since 1994. See Annex One for the CIEB tax rate history since 1991. The current rate for 1998 of 1.99% is the basic general rate for all taxable real estate.
Montréal imposes an annual surtax on all vacant serviced lots that is equal to 100% of the total general tax imposed. We recommend that Montréal continue this tax policy in any two rate option.
There is average 12% business tax on the annual rental values of all business establishments, which yields approximately $218 million per annum.
Montréal has an overall budget in 1998 of $1.8 billion. Taxes and water charges account for approximately $1.3 billion of overall revenues with the balance coming from grants-in-lieu, user fees and other revenues.
Tax and quasi-tax revenues of approximately $1.8 million are made up of $940 million from the general real estate tax and the surtax on vacant lots and non-residents, $157,111,000 from water charges, and $218,438,000 from the general business tax. The annual non-vacant rental value of business establishments in Montréal has been determined to be $1.7 billion in 1997. The rates range from 11.01% to 12.99%. Properties exempt from the business tax have an annual rental value of approximately $1.5 billion. It should also be noted that vacancies make up over 20% of the total annual rental value of businesses.
The business tax rate in Montréal is very high and punitive. It is also on an assessment basis, known as annual rental value, which is no longer widely used in most property tax jurisdictions. The economic theory behind the two rate principle of taxation requires that this tax be phased out and abolished. Since this tax comprises approximately 19% of the overall revenues of the municipality from the real estate base, excluding water charges and payments in lieu, there would have to be an immediate increase of 19% in local taxes on real property in Montréal in order to make up for the shortfall. This would be politically unacceptable.
It is therefore recommended that the business tax be phased out over a six year period with a 2% reduction in the rate per annum. This would constitute a $45 million shift in tax burden to the general real estate tax in the first year. Base broadening in the tax rate scenarios presented in this Study would make up for some of these lost revenues. Additional revenues will be received from the serviced vacant land component if the rate thereon remains as double what the general rate is on the land value component. The two rate scenarios in this Study do not adjust for the business tax. In other words they are limited to the general real estate tax. We recommend, however, that the business tax be rolled into the general two rate system over the six year period.
There are several mitigating factors in the above tax reform proposal. The reduction in the business tax would increase the annual rental of businesses in the Montréal. Over time, there would be less of a tax shift to the general real estate tax given the increased business valuational base. Secondly, by lowering the tax burden on capital improvements there will be on overall increase in general land valuations. If the two rate tax rates remain at the 1997 and 1998 percentage of 1.99% in terms of total property values, then there will be an increase in revenues to the municipality which will substantially reduce the anticipated increase from the abolition of the business tax.
We have developed three two rate property tax options for Montréal, although in fact the third option is a single rate on the land value component only. Given the overall assessed building to land ratio in Montréal of 66%/34% the first option in this type of tax impact study is a 50/50 split in revenues between the land and building components. This option is generally chosen on the basis that it is often the case that the overall assessment base is divided roughly 70% building value and 30% land value. This is definitely the case if there has been considerable assessment lag and the base year goes back to the 1970s. Studies in other jurisdictions, however, have shown that as the base year is moved up to the later 1980s the land component of total property value increases significantly while the building value component correspondingly decreases. In some cases, such as the reassessment that was conducted in Ottawa in 1992 for the 1993 taxation year, the percentage of land and building values became almost reversed.
The 50/50 split has been chosen as a first option for Montréal because of the overall 66% building and 34% land values distribution. In 1997 the taxable valuation base according to CIEB and property assessment database for Montréal is $45 bn with approximately $15.5 bn attributable to taxable land and $29.5bn attributable to building values.
It should be noted that these figures are not exactly reconcilable between the M.U.C. and the CIEB or with the charts and tables annexed to this study because of constant additions and deletions, such as supplemental assessments, to the assessment database, rounding, and because all large databases of this sort contain inconsistencies and input errors. Nevertheless, the general structure of the M.U.C. database is reliable and correlates with local budgetary documents. These minor variations in figures do not constitute a significant statistical assault on the conclusions reached.
A shift to 50/50 split in Montréal, i.e. lowering the tax burden on buildings by only 16%, may seem so negligible as to not constitute a significant reform of the system. It is therefore proposed that this initial phase-in of the two rate option be for only one or two years. The building and land values should be shown on the notices of property valuation and the actual tax bills should clearly show the application of the two rates to each component.
The next option chosen is 40% on buildings and 60% on land. Under this scenario the properties receiving the largest tax increases would be the almost vacant lot owners, especially in the 4K Code of Use with over 96% of their assessment on land value, who would go from 1.99% to 3.511% of market value.
The final scenario presented is a pure land or site value tax on the land value component only. In order for the municipality to meet its current fiscal requirements this would require a 5.852% tax rate on the land value only of a lot.
Those properties where the building to land value ratio is lower than the municipal average of 66/34% would see increasing degrees of taxation under the first through third scenarios. Those properties where the building to land value ratio is higher than the municipalwide average would enjoy decreasing degrees of taxation depending on which scenario is applied. See samples of taxes payable in Annex Three. Obviously those cases where there is no ratio, that is, the value is 100% land value, will face the most dramatic changes in taxation. The advantage for these properties is that they suffer no dead weight loss due to taxation from increased capital investment and property improvement.
Below are summaries of tax impact statistics under each scenario. The property assessment database allows for lot identification by specific identification number. It is therefore a simple matter of database identification to determine which owners receive tax increases and decreases under the various scenarios.
The overall average building/land ratio for the municipality was developed from the following sub-averages by property class. A complete list of building land ratios by building category can be found in Annex Two.
The following are some representative building/land ratios:
Sector -- Residential
Single Family 2A 60%/40%
Duplexes 2B 68%/32%
Condominiums 2C 82%/18%
Sector -- Commercial
Gas Stations 4G 35%/65%
Warehouses 4C 59%/41%
Sector -- Industrial
Railways 5A 30%/70%
Light Manufacturers 5C 65%/35%
Average Total Building Values/Land Values Ratio 66%/34%
From these sample sub-averages it can be seen which property classes will have the majority of properties therein see a tax decrease under any two rate scenario. The degree of the decrease or increase will depend on the extent of the shift in tax burden to the land value component. However, taxes will decline for a property overall if there are sufficient improvements to put it above the average building/land ratio. Such changes in the valuational mix will be quickly reflected in an owner's tax bills if there are annual assessments or valuations.
From the above sub-averages alone it can be seen that the majority of single family residences will receive a tax increase under a two rate proposal. On average, however, this increase will be slight given the nearness of its building/land ratio to the municipal average. Duplexes and triplexes, on the other hand, will see a significant number of properties enjoy slight tax decreases.
In the following tax change scenarios average decreases and increases have been calculated for all property categories. Actual total land and building values can be found by property category in Annex Two as well as total current taxes from each building category and the tax burden for each category under each of the three options presented. The difference between current taxes and two rate taxes is then calculated and averaged out for each property in the class. There will be a significant number of properties in each of the residential categories which will receive a tax decrease. Our objective in these calculations is to delineate overall benchmarks of tax increases and decreases in each property category.
Two Rate Property Tax Scenarios:
Below are cited some examples of tax decreases and increases under each scenario. Complete compilations by building category can be found in Annex Two of this Study.
Scenario One - 50% Revenues From Land Values/50% From Building Values
Tax Rates: Land -- 2.926%
Building -- 1.507%
(A) RESIDENTIAL
Single Family Residential (2A) 45249
Duplexes (2B) 47191
Condominium (3C) 34734
Properties above overall building/land ratio
Single Family Residential (2A) 18470
Duplexes (2B) 30120
Condominium (3C) 31846
Properties below building/land ratio
Single Family Residential (2A) 26779
Duplexes (2B) 17071
Condominium (3C) 2888
Average single family residential property tax bill $2,735.13
Average duplex property tax bill $2,863.25
Average condominium property tax bill $1,945.20
TAX IMPACTS
Average increase in single family residential property tax bill $112.27
Average decrease in duplex property tax bill ($47.56)
Average decrease in condominium property tax bill ($221.55)
(B) COMMERCIAL
Above overall building/land ratio
Large commercial buildings (4B) 1448
Office buildings (4E) 483
Gas stations (4G) 11
Motels and hotels (4H) 58
Below building/land ratio
Large commercial buildings (4B) 2494
Office buildings (4E) 273
Gas stations (4G) 340
Motels and hotels (4H) 58
Average property tax bill
Large commercial buildings (4B) $15,355.76
Office buildings (4E) $154,601.46
Gas stations (4G) $9,248.25
Motels and hotels (4H) $102,675.66
TAX IMPACTS
Average increase in large commercial buildings property tax bill $133.51
Average decrease in office buildings property tax bill ($5,624.56)
Average increase in gas stations property tax bill $2,073.96
Average decrease in motels and hotels property tax bill ($1,761.46)
(C) INDUSTRIAL
Above overall building/land ratio
Factories (5B) 57
Light Manufacturers (5C) 313
Below building/land ratio
Factories (5B) 145
Light Manufacturers (5C) 306
Average property tax bill
Factories (5B) $59,135.26
Light Manufacturers (5C) $21,040.12
TAX IMPACTS
Average increase in factories property tax bill $2,385.52
Average increase in light manufacturers property tax bill $198.41
Scenario Two - 60% Revenues From Land Values/40% From Building Values
Tax Rates: Land -- 3.511%
Building -- 1.206%
(A) RESIDENTIAL
Average single family residential property tax bill $2,735.13
Average duplex property tax bill $2,863.25
Average condominium property tax bill per condominium $1,945.20
TAX IMPACTS
Average increase in single family residential property tax bill $183.16
Average decrease in duplex property tax bill ($76.42)
Average decrease in condominium property tax bill ($359.31)
(B) COMMERCIAL
Average property tax bill
Large commercial buildings (4B) $15,355.76
Office buildings (4E) $154,601.46
Gas stations (4G) $9,248.25
Motels and hotels (4H) $102,675.66
TAX IMPACTS
Average increase in large commercial buildings property tax bill $1,236.06
Average decrease in office buildings property tax bill ($9,091.59)
Average increase in gas stations property tax bill $3,371.58
Average decrease in motels and hotels property tax bill ($2,831.51)
(C) INDUSTRIAL
Average property tax bill
Factories (5B) $59,135.26
Light Manufacturers (5C) $21,040.12
TAX IMPACTS
Average increase in factories property tax bill $3,892.15
Average increase in light manufacturers property tax bill $328.39
Scenario Three - 100% Revenues from Land Values
Tax Rate = 5.852%
(A) RESIDENTIAL
Average single family residential property tax bill $2,735.13
Average duplex property tax bill $2,863.25
Average condominium property tax bill per condominium $1,945.20
TAX IMPACTS
Average increase in single family residential property tax bill $465.63
Average decrease in duplex property tax bill ($193.39)
Average decrease in condominium property tax bill ($911.80)
(B) COMMERCIAL
Average property tax bill
Large commercial buildings (4B) $15,355.76
Office buildings (4E) $154,601.46
Gas stations (4G) $9,248.25
Motels and hotels (4H) $102,675.66
TAX IMPACTS
Average increase in large commercial buildings property tax bill $3,141.54
Average decrease in office buildings property tax bill ($23,047.68)
Average increase in gas stations property tax bill $8,561.92
Average decrease in motels and hotels property tax bill ($7,165.93)
(C) INDUSTRIAL
Average property tax bill
Factories (5B) $59,135.26
Light Manufacturers (5C) $21,040.12
TAX IMPACTS
Average increase in factories property tax bill $9,894.62
Average increase in light manufacturers property tax bill $838.39
Several observations should be noted with respect to these statistics. First of all, it is generally the case that on average residential properties, especially multiresidential, duplexes and higher, have close to or higher building to land ratios than the municipal-wide average. The amount of their tax decrease under a two rate proposal depends upon two factors, the degree to which they are above the municipal-wide average and the degree to which there is a shift in the tax burden to the land value component. The statistical summaries in Annex Two show that the greater the degree of taxation of the land value component the higher the tax savings for those properties above the average building/land ratio. If need be, tax increases on smaller value properties could be alleviated by a valuation exemption on improvements, but we are not recommending this option in this Study because the increases in taxation for the majority of single family homeowners in the 50/50 two rate scenario are negligible. Furthermore, it is our view that there are valuational problems in the land value component, which are generally represented as the same in the revision of the assessment roll from 1992 to 1995, but which probably declined more than the building component.
Secondly, many commercial and industrial properties generally tend to be underutilized, that is, their building to land ratio is below the average of the taxing jurisdiction. This is true of many commercial and industrial properties in Montréal. Again the statistical summaries confirm this observation. These properties can sustain a greater degree of economic activity. The two rate proposals cited above would allow to varying degrees an increase in that economic activity without fear of a tax penalty. It is also probable that many owners of industrial property are absentee corporate owners.
Thirdly, most office, hotels and multi-storey wholesale trading buildings in Montréal will receive a tax break under any of the two rate proposals in this Study. The amount of the tax savings will depend on the extent to which the building value is above the average building to land ratio. Also all commercial property owners will further benefit if the business tax is reduced, eventually abolished and rolled in the general real estate tax rate.
Cadastral Analysis
In Annex Four there is a detailed analysis of the two rate options outlined above in terms of tax impacts and tax shifting among the various cadastral regions and building categories of Montréal. We have matched tax impacts with the cadastral divisions in Montréal in order to determine which areas of the City have greater or lesser levels of taxation under the first, second and third two rate and land only tax options. The following presents some highlights from this analysis.
Cadastral Division One, which covers the central district and is made up primarily of warehouses and docks, has a slight decrease in its overall tax burden under the 50/50 two rate option. In a land value only scenario its total current taxes of $4,662,112 will be reduced by $1,269,245.
The Côte-des-Neiges, Cadastral Division Two, wherein the valuation base is overwhelmingly residential, has a 1.3% overall increase in its property tax burden of $53,725,604 under the 50/50 two rate scenario and a 2.24% increase under the 60/40 two rate option.
Hochelaga, Cadastral Division Six, in the residential east end of Montréal, has most properties (6765) receive slight tax decreases and the remainder (4300) slight increases, given the 66.65/33.35% building to land ratio in that area.
The Parish of Montréal itself, Cadastral Division Ten, has more properties above than below the average building to land ratio, but there is an overall increase in the tax burden for the division, which ranges from 2.17% to 9.05% for the first through to the third option.
The District of Saint-Antoine de Montréal, Cadastral Division Twelve, comprises over 14% of the total valuation base for Montréal, with total general real estate taxes of $127,530,314. While the overall tax burden in this district increases under each scenario, it is interesting to note that condominiums and office buildings receive tax decreases. The 4B and 4K building categories receive substantial tax increases under all scenarios. This indicates that there are considerable land resources in the central core of the city, which are zoned for commercial purposes, but which are significantly underutilized. A study of this underutilization needs to be conducted, by means of spatial information technologies, so that the inefficient use of these valuable urban land resources can be properly mapped and visually presented to the public. Under the current tax system this underutilization essentially results in tax shifting from those who poorly use their properties to those properties which meet their capacity to serve the community. This form of cross-subsidization is the chief cause of deadweight losses to the Montréal economy and to the increase in overall municipal costs because of urban and spatial scatteration.
Saint Jacques, Cadastral Division Fourteen, a business area, receives tax decreases overall under the two rate options, while Saint Laurent, Cadastral Division Sixteen, receives increases.
Finally, the area of Rivière-des Prairies, Cadastral Division Twenty-One, which contains a significant amount of light manufacturing (5C) and warehousing (4C) as well as residential properties, receives an overall tax decrease under each option. Both the aforementioned commercial and industrial activities have their tax savings increased incrementally as one moves through the various two rate options to the tax on land values only scenario. The residential components of this Division receive tax decreases, while shopping centres (4D), gas stations (4G), commercial land (4K), railways (5A), factories (5B) and vacant land (7) all have increases.
1. That the City of Montréal seek provincial authority to adopt a two rate property tax on all taxable land and building values.
2. That the Montréal Urban Community be requested to valuate Montréal for property tax purposes on an annual basis and to continue the separate valuation and disclosure of the land and building values in the property assessment database.
3. That the Montréal Urban Community, along with municipal and provincial authorities conduct extensive digitized spatial modelling of the tax impacts on land utilization and resource allocation using Geographical Information Systems (G.I.S.) software in order to gain greater insights into the correlations between property taxation, land utilization and economic activity.
4. That the surtax on vacant land remain in place.
5. That the valuation of exempt properties by the M.U.C. be continued and further analyzed for accuracy.
6. That the business tax on an annual rental basis be gradually rolled into the general tax rates once a two rate property option has been adopted by the City of Montréal.
7. That the business tax be phased out over a six year period with a 2% reduction in the rate per annum.
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Journal Abbreviations: AJ - Appraisal Journal
AJES - The American Journal of Economics and Sociology
CTJ - Canadian Tax Journal
HPE - History of Political Economy
JLE - Journal of Law and Economics
JPE - Journal of Political Economy
LE - Land Economics
NTJ - National Tax Journal
TP - Tax Policy
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