|
REPORT of
The Peterborough Two Tier Property Tax Committee Peterborough, Ontario
December 6, 1991
PREFACE
This Report by the Peterborough Two Tier Property Tax Committee would not have been possible without the voluntary effort and financial support of many individuals and organizations. First of all, we would like to thank all members of the Committee who gave their time and services so as to ensure that this project was brought to a timely conclusion. The cooperation of the City Council for Peterborough as well as municipal staff is greatly appreciated. In particular, thanks are due to David Hall, City Administrator, Ron Chittick, City Treasurer, and Randy Pagett of the Peterborough Data Centre for their very constructive assistance. Financial support for this study came from the School of Economic Science in Toronto, the Oscar Boelens Foundation, the cities and towns of Peterborough, Lindsay, Belleville, Orillia, Cobalt, Port Hope, Niagara Falls, Brantford, Paris, Dundas, the Kiwanis Club of Scott's Plains and various individuals. This Report would not have been possible without the analytical abilities and assistance of Hanno Beck, Assistant Director of the Center for the Study of Economics in Maryland. Frank Peddle, Director of Research for the Canadian Research Committee on Taxation, helped in drafting and editing the Report for publication. The Peterborough Two Tier Property Tax Committee hopes that this Report will inspire other municipalities and property tax reform groups with limited resources to do their own studies of the two tier property tax alternative.
Malcolm McCarthy Eldon P. Ray, Ph.D. Director Chairman
Peterborough Two Tier Property Tax Committee
P.O. Box 1575, Peterborough, Ontario K9J 7H7 Phone (705) 743-9493 Fax (705) 876-1408
EXECUTIVE SUMMARY
This Report by the Peterborough Two Tier Property Tax Committee is the culmination of many years of work by various individuals and organizations. Only after filing a complaint with the Access to Information and Protection of Privacy Commissioner for Ontario, did the Committee obtain from the Ministry of Revenue the separate land and building value assessments for Peterborough upon which the current property tax bills are based. This assessment data is outdated - it relies on 1975 market values.
This Report combines a wide-ranging critique of the present property tax system in Ontario with a detailed analysis of the implications of shifting to a two tier property tax in Peterborough. This Report demonstrates that if sound principles of taxation are adhered to then local systems of taxation can be harmonized with such socio-economic objectives as the provision of more affordable housing, less wasteful allocation of urban land resources, greater capital investment, enhanced employment opportunities and more flexibility for municipalities in the management of current fiscal constraints.
The database obtained from the Ministry of Revenue contains values for 21,085 properties in the five wards which comprise Peterborough. The city wide building to land ratio was established and various "two tier tax scenarios" were developed. On a revenue neutral basis tax redistributions were looked at when it was assumed that 50% of the revenue came from the assessed land component and 50% from building values. A 50/50 two tier tax on all property classes resulted in little disruptive tax shifting. There is a 2% decrease in the tax burden on industrial property and a 2% increase on residential properties. Nevertheless, this scenario would cut taxes on improvements by 29%, which would be shifted to the taxation of land values.
Another two tier scenario offered in this Report is a 50/50 rate on land and building values with an outright exemption on the first $6,000 of improvement value. This proposal would cut the improvement tax burden by 17.65%. Adjustments of this sort demonstrate the flexibility of the two tier approach - a feature which is very attractive to municipal administrators and politicians. In Peterborough 119 properties received tax bills in 1989 of less than $100 and over 98% of these properties were vacant. Of those properties receiving tax bills of over $50,000, 0% were vacant.
This Report concludes with a number of recommendations to Peterborough City Council and the Ontario provincial government.
Table of Contents
Introduction
Chapter One: The Negative Effects of the Current Property Tax
(A) Discourages Improvements to Properties
(B) Encourages Land Speculation/Increases Land Prices
(C) Contributes to Urban Deterioration
(D) Results in Inadequate Housing
Chapter Two: The Need For a New Approach to the Taxation of Property
Chapter Three: Proposal for a Two-Tier Property Tax in Peterborough
(A) What is a Two-Tier Property Tax?
(B) Benefits of the Two-Tier Approach
Chapter Four: Description of the Property Assessment Database for Peterborough
Chapter Five: The Economic Impact of Shifting to a Two Tier Property Tax in Peterborough
(A) Specific Two-Tier Options for Peterborough
(B) How Average Taxpayers Can Benefit
(C) Implications of the Two-Tier Tax for Peterborough
Chapter Six: Conclusion
Recommendations
Appendices
INTRODUCTION
This Report by the Peterborough Two Tier Property Tax Committee (the "Committee") examines the economic impact of shifting the burden of property taxation from buildings and improvements towards site values in Peterborough. Three scenarios are laid out for consideration by taxpayers and their elected representatives in this Report. First of all, we examine the present property tax burden on Peterborough residents. The actual property tax bills for 1989 are used, which are based on 1975 assessed property values. Under the current property tax régime, in which the mill rate is applied to total property value, about 20 to 30 per cent of tax revenues come from the site value of a property and the remaining 70 to 80 per cent from the building or improvement value.
Secondly, we analyze the property tax burden for Peterborough residents and businesses under a 50/50 two tier tax. This property tax alternative generally equalizes the tax burden on site and building values. The economic rationale for such a change is developed in Chapters One through Three of this Report.
Thirdly, we develop a scenario in which a 50/50 two tier tax is coupled with a $6,000 exemption on buildings and capital improvements. Such an exemption provides greater incentives for productive economic activity in the Peterborough area.
A two tier property tax is different from the present system of property taxes. Land, and the capital improvements to it, are currently assigned undifferentiated property values. To these values are applied the various mill rates determined by each municipality. Many economic studies have shown, however, that a tax on site values results in positive economic benefits for municipalities while a property tax that falls mostly upon improvements or capital values goes against many of the social and economic objectives of governments. The proposals made in this Report for reform of the property tax system are designed to prevent governments from continually working against themselves.
Although the negative effects of the current property tax on the total market value of properties are well documented in the tax literature, we believe it is necessary to review briefly some of this research in Chapter One of this Report in order to highlight the need for fundamental reform of the system of local taxation. Chapter Two gives an overview of the basic principles of tax reform, while Chapter Three defines the concept of a two tier property tax and outlines the benefits of such an approach for a medium-sized city like Peterborough.
Chapters Four and Five provide a detailed analysis of the property assessment database for Peterborough. The distribution of the property tax burden is then examined under the 50/50 and a 50/50 two tier tax with a $6,000 exemption for capital improvements. Beneficial economic impacts are closely tied to the degree to which a municipality shifts to a site value tax base. With respect to Peterborough we have endeavoured to isolate a number of areas where there may be increased investment, employment and productivity as well as enhanced efficiencies in the delivery of municipal services if a two tier approach to property taxation is adopted. However, these efficiencies can only be accurately gauged after a implementation of a 50/50 two tier system and ongoing analysis. The Report concludes with a number of recommendations to the government of the Province of Ontario, which has ultimate legislative responsibility for enacting revisions to the property tax.
In general, Canadian municipalities raise a significant proportion of the funds required to pay for the services they provide by taxing property owners on the basis of the assessed values of their properties. This system of taxation is variously referred to as the real estate tax, the property tax, the capital value tax, the improvements tax or now more generally as "market value assessment." Most municipalities across Canada presently use, to a greater or lesser degree, a system of market value assessment. This system is essentially the tax assessor's judgement of the dollar or market value of a home, which, when multiplied by the mill rate set by the municipality or the school board, forms the amount to be paid on the property tax bill.
The key to market value assessment, according to its supporters, is to have the assessment program as up-to-date as possible. In other words, a home or commercial establishment ought to be assessed as close as possible to current market values. Only accurate assessments of current market value can guarantee fairness and equity in terms of tax liabilities.
The system of market value assessment disguises a fundamental fact about property taxation in Ontario and in Canada. The property tax is really two taxes - one on the land or site value, and the other on the improvements located on the site. On average, 70 to 80 per cent of real estate taxes are assessed on improvements, and 20 to 30 per cent on land - these percentages being subject, of course, to a wide number of variables. In the current inflated real estate market, however, and especially in southern Ontario, land prices frequently take up the largest proportion of real estate prices. In general, however, it is the capital and labour tied up in buildings and other improvements to the land that bear most of the burden of property taxation.
The value of improvements is created by individuals through the application of labour and capital. The value of land is created by the presence and activities of the community growing and developing around it. Land prices are primarily generated by the community as a whole through public investment in infrastructure and through what economists call "synergistic spillover". The products that result from the application of labour and capital can be increased. Land, on the other hand, is relatively fixed in quantity. While the products of labour and capital are susceptible to decay and thus depreciate in value, land remains stable and appreciates in value as populations grow and communities prosper.
Since the value of land is determined by factors quite different from those that determine capital improvements, it follows that a tax on land or site value has very different economic and social effects from a tax on improvements.1 For example, given the fact that a tax tends to diminish the base upon which it is levied, a tax that has land as its base is going to differ in its economic impact from one on improvements for the obvious reasons that land cannot be hidden or moved, like most capital improvements, nor will it depreciate in a growing community. Improvements are elastic, land is inelastic in economic terms. A principal aim of this Report is to show that meaningful tax reform at the municipal level will only come about through differential site or land value taxation, that is, when site value is taxed at substantially higher rates, and improvements at significantly lower rates. This type of property taxation is referred to in this Report as a two tier tax.
A unique feature of property taxation is that the property owner's tax liability is established by someone else - the tax assessor. The assessment function establishes one aspect of the property tax bill. The other aspect is determined by the locally fixed mill rates. The intent of the assessment function is to value real estate for the provincially legislated statutory purpose of creating a tax base. It was because of extremely wide variations in assessment practices and techniques across Canada that provincial governments, over the past twenty years or so, have been persuaded to move to market value assessment. Prior to this, such techniques as the square foot method, the cubic foot method, frontage, and so on were used to calculate the value of properties. Such diversified techniques existed because municipalities originally determined their own forms of assessment.
In the nineteenth century municipalities in Canada raised revenues by means of a variety of tax devices including real estate taxes, taxes on personalty, income taxes, poll taxes, business taxes and land taxes. There was considerable dissatisfaction with personal property taxation and, as in the United States, it was gradually phased out.2 Real property taxes have always been the most widely used revenue source for municipalities. For example, by the 1920s municipal income taxes existed only in Nova Scotia, New Brunswick, Ontario and Saskatchewan.3 Municipalities by the 1970s had moved away from poll taxes, personal income taxes and taxes on business profits.4
In terms of the valuation of real property for local tax purposes, three systems could be identified in Canada before the 1980s. One is the annual, or annual-rental, system. In this system land and improvements are assessed according to the estimated rental incomes of the properties. For example, if a property has a market value of $100,000, and its rental income is 10 per cent of market value, then its annual rental income for the year, for tax purposes, would be $10,000. The adoption of this system in Canada was very limited, though St. John's, Nfld. used it until around 1980.
The second system is the capital value system, the one with which most are familiar. Its assessment is on the basis of the capital value of land and improvements. The Maritimes, Quebec, and Ontario have always used this system. Since land and improvements are taxed at the same rates in the annual rental and capital systems, the economic effects of both types of valuation are generally the same. Market value assessment is basically the same as the capital system except that it strives for a more precise and up-to-date determination of current market value.
Finally, there is the site value system which has site or land value as the tax base. In Canada there has been a highly modified site value system in some provinces where there are separate assessments on land and improvements in relation to market value. The four Western provinces have, throughout their history, adopted site value assessments to a greater or lesser degree. At no stage in their fiscal history did they fully implement this system.
The general movement in Canada towards market value assessment on total property values has not eliminated or even noticeably lessened the tremendous variables operative in current assessment practices. For example, researchers have found that assessors tend to overassess properties with a very low market value and underassess those in the highest value categories.5 Studies have also shown that the ratio between assessed value and market value varies widely across Canada. Problems of this sort persist whether or not the province uses a fully implemented system of market value assessment or a differential assessment on land and improvements. For instance, the Municipal Assessment Act (1970) of Manitoba requires land to be assessed at market value and buildings at two-thirds of market value. Nevertheless researchers have found that land tends to be underassessed relative to buildings and low-valued property overassessed relative to high-valued property.6 Permitted deviations from true market value assessment give assessment authorities quasi-legislative functions in both Canada and the U.S. since provincial and state legislation generally calls for true market assessment.
There are numerous reasons for questioning the current system of property assessment on the grounds of fairness, equity, certainty, and needless complexity. It will be seen in this Report that the system of property taxation in Peterborough is as complex as our income and sales tax systems. Many of the variables and complexities in property assessments derive from the fact that both land and improvements are included in the assessment base. Every building and improvement has its own unique characteristics and must be assessed individually, at tremendous cost, if precise accuracy is to be obtained. The cost effectiveness of this method of assessment must be questioned. Most of the complexity and inequity in property taxation could be removed if site values only, and not diversified improvements, were made the basis of property assessments. Many of the other complexities come from exemptions, from the attempt to achieve horizontal equity in the system both for municipalities and individuals and from the régime of factored assessments and differential tax treatment by property class.
The second part of the property tax bill is determined by the municipally established tax rate. Property taxation is therefore split between provincial responsibility for assessments and municipal responsibility for tax rates. Municipal tax rates are usually determined on a millage basis, i.e., per $1,000 of assessed property value. Varying mill rates, to some extent, alleviate differences in tax bills caused by diversified assessment practices and assessment lag. Nevertheless, as a percentage of market value, municipal tax bills differ widely across the country.
As a percentage of market value, the annual property tax bill may seem insignificant. If, however, one takes into account the total property tax over the life of a building, then on average it will amount to over a 50 per cent sales tax, or higher, depending upon assumed interest rates and other variables. This is a degree of taxation normally reserved for such luxuries as tobacco and alcohol. As for tenants, the property tax not infrequently averages out to around 20 to 25 per cent of rental payments. For most urban dwellers, property taxation, whether felt directly or indirectly, is not insignificant.
Across Ontario and the country there is considerable pressure to increase municipal expenditures beyond the capacity of the present tax levies and in excess of the normal growth of towns and cities. As there is no balance in the present system, and given the pressure to increase expenditures plus the current restraints on intergovernmental transfers, property taxation in its present form will undoubtedly result in higher tax bills for the homeowner and for businesses in the foreseeable future. The elasticities in income and sales taxes will also give rise to a greater governmental focus on the relative inelasticity of real estate for revenue purposes. Property taxation is, however, more susceptible to taxpayer revolts. It is therefore inevitable that the confluence of these various trends will result in greater taxpayer agitation at the local tax level than has hitherto been the case.
Despite its numerous critics and obvious defects, the property tax has persisted as primarily a tax upon improvements for widely varying reasons. First, the public has not been given an opportunity to consider land separately from its improvements.7 Market value assessment lessens even further this opportunity since the dollar value of an assessed property, which forms the basis for the current tax, does not require the distinction to be made. It is not impossible to arrive at such separate assessments. Many provinces have successfully done separate assessments in the past. Differential assessments are also required for such business enterprises as the insurance industry.
Secondly, land ownership data have not been extensively gathered, collated, and publicized at the national, provincial, or even municipal levels. There is no Land Price Index comparable to the Consumer Price Index, even though land values have appreciated constantly and at relatively high rates since World War II. It should be a matter of deep concern for the discipline of economics that land price inflation, which is the chief cause of overall inflation in the economy - for wages chase land costs disguised primarily as mortgage interest - has not been accurately factored into the Consumer Price Index. Nor have land value maps been prepared for significant proportions of urban areas in the country. Such maps are necessary for accurate and up-to-date land value determinations and indeed for accurate real estate appraisals in general. The precise aggregate revenue potential of land value taxation is not known, although there are indications that it is much higher than many might suppose. Nor are there good estimates of how much of the total national wealth of Canada is represented by the value of land. All of these gaps in our economic intelligence mean that land (or nature) as one of the primary factors of production is not adequately accounted for in our national economic statistics.
Thirdly, the fiscal crisis of many municipalities, until now, has been seemingly alleviated by an increase in funding, primarily from provincial sources of revenue (now making up approximately 50 per cent of gross municipal revenue), or by the transference of many municipal responsibilities (fiscal, administrative, health, social services, etc.) to the more senior levels of government. The provision of local services has thus become hidden in the general system of income taxation and intergovernmental transfers.
Fourthly, another reason for the persistence of the property tax on primarily buildings is that land usage in the twentieth century has increasingly become subject to non-fiscal methods of control.8 Planning Acts are now the chief legislative instruments for controlling land utilization. Regulatory instruments have thus partially supplanted tax policy as a means for controlling land development and usage in the greater interests of the community. Non-fiscal methods of land usage control, however, often interfere with the neutrality and efficiency of resource allocation. Land use regulation is therefore necessarily in conflict with market efficiency. The ideal is, of course, a municipal tax instrument that harmonizes socially acceptable and rational land use with greater efficiencies in resource allocation.
Finally, it is clear that a major shift in the direction of land value taxation would, over time, result in a significant redistribution of tax liabilities.9 There is thus an inevitable, obvious and inescapable political component to tax reform. At the municipal level this component is unimaginably complex given the myriad of jurisdictions and interests involved. This has mitigated against meaningful property tax reform on an organized national level despite the simple, site value, alternative that is available. However, gradual implementation of property tax reform towards higher taxation of site values and lower taxation of improvements need not affect any individual unduly, and certainly less so than the now prevalent programs of re-assessment to bring properties up to current market value or the large scale distortions of economic activity caused by the GST and high income taxes. Indeed, there is research available which indicates that the average homeowner would have not only a simpler but, more importantly, a lower property tax bill under site value or two tier property taxes. This Report on a two tier alternative for Peterborough adds to that research base.
It will become more obvious as time goes on that, despite careful efforts at administrative reform and a general centralization and professionalization of tax assessment procedures and personnel, the present municipal tax structure is flawed in application because it is not based on sound principles of taxation. It is a tax that acts as an obstacle for activities that are desirable for the community and an incentive for those that are undesirable. In general, it is a negative form of taxation which is counterproductive to the health of municipal economies. This Report of the Peterborough Two Tier Property Tax Committee is a specific example of how local governments can implement positive tax reform in an efficient, non-disruptive and equitable manner.
Chapter One
THE NEGATIVE EFFECTS OF THE CURRENT PROPERTY TAX
(A) Discourages Improvements to Properties
A tax is by its very nature a disincentive. In most cases it will diminish the base upon which it is levied. This negative tendency of taxation applies primarily to the finite, depreciable products of labour acting on our environment. Since the greater part of the property tax falls on buildings, it follows that the present municipal tax structure will discourage capital improvements to properties. It is obviously not a complete deterrent to property improvement. Large expenditures are made by individuals and businesses every year in most communities to improve their properties.10 This addition of value to property, however, is made in spite of local taxation and under certain provisions of exemption. For example, in Ontario, at the present time, any home improvements which add less than $5,000 to the market value of the property are exempt from an increase in assessment value.11
The present property tax puts municipal governments in an unfortunate dilemma. By taxing primarily improvements they are diminishing the very base they hope will expand so as to maximize tax revenue. The deterrence effect of taxes on buildings has been noted for a long time. For example, according to a 1969 discussion by representative leaders from a wide range of fields concerned with municipal government in the U.S.:
"The deterrent effect of the improvement tax is so obvious and so widely recognized that whenever government wants to encourage some favoured project the first thought is to offer the builder a tax exemption on the new construction. But this makes the city-wide problem worse by making it necessary to increase the improvement tax everywhere else, thereby increasing the tax deterrent for all other improvements."12
The property tax forces municipal governments to grant a bewildering array of tax exemptions, but in doing so they merely exacerbate the problem they are trying to alleviate.
The former Director of Planning and Development for the Canadian Federation of Mayors and Municipalities, Eric Beecroft, made statements, some time ago, that are even more relevant today, given the widespread acceptance of market value assessment on total property values:
"A tax based on improvements seems to discourage improvements at a time when a municipality wants to accelerate improvement. An improvement tax may discourage the rehabilitation or replacement of bad housing at a time when citizens want a higher improvement of industrial and commercial property because taxes on new building will be higher than on the old. Improvements taxes may hold back investment in new construction at a time when in the interest of employment, in the interest of higher living standards and in the interest of a more efficient and economic urban plant, we need to accelerate renewal."13
The property tax is an obstacle and deterrent to the economic activities which municipal governments want to take place within their jurisdiction. Local governments finance and support a wide range of programs to encourage economic development and yet they are very much dependent on a tax system that systemically undermines orderly economic development and urban revitalization. If productivity is taxed then it will have a negative impact on the creation of wealth. Real estate taxation is one of the main reasons why the private sector's investment in lower and middle income building development is rapidly disappearing and being replaced by government subsidization.14
One way of looking at the present municipal tax structure is to divide property owners into two groups. The first group makes "desirable" use of its property, while the second group does not.
The first group builds and maintains such structures as houses, apartments, hotels, stores, offices, factories, etc. The greater the value created in these structures or added to them, the higher are their taxes. Improvements to a property can be expressed as the ratio of total property value to land value.15 This can be called an improvement ratio. The municipal taxpayers who have made desirable additions to their properties have improvement ratios which exceed the average ratio for the city as a whole.
The second group is comprised of taxpayers who make the least desirable uses of their properties or sites, such as owners of vacant land, of decaying structures on valuable land, and the often absentee landlords of slum dwellings. These properties have an improvement ratio below that of the average for the city. Under the present tax system, the lower the ratio, the lower the tax bill for such owners. The tax system therefore subsidizes activities that have a negative impact on the community.
The ultimate effect of the current municipal tax structure is to reduce the tax burden of the property owners making the least effective use of their sites by placing a greater tax burden on those making the most effective use of their property. The more inferior the property, the greater the subsidy from the local tax structure. Our tax system must share much of the blame for our growing urban problems since it rewards socially undesirable land and building use with lower taxes while penalizing more desirable use with higher taxes.
Dick Netzer, in his widely acknowledged 1966 work Economics of the Property Tax, declares:
"In concept, any tax on improvements, whether on a capital value or on an annual value basis, is likely to have an adverse impact relative to no tax at all, on investment in new construction and remodelling of old structures. If the tax is borne by tenants, the quantity and quality of building demanded is reduced; if borne by owners, the quantity and quality offered is reduced."16
Consumer choice is thus restricted with respect to affordability and availability. From the standpoint of the developer and the perspective of the consumer, free enterprise is hobbled by traditional municipal tax policy. Governments generally try to avoid taxation on the necessities of food and clothing, but when it comes to the necessity of shelter, oddly enough, a different policy takes over.
New investment is discouraged in a number of different ways by the current property tax. That portion of the tax that falls upon a building will usually be at its peak during the first few years of ownership. It then declines over the years as the building gets older, assuming no new improvements are added. Coupled with the various one-time charges incurred at the outset, this must be regarded as a very serious disadvantage under existing conditions of house purchase. While at this stage the home-buyer has least equity in his property, the effect of the property tax system is to make it more difficult to acquire such equity.
The property tax may also make it profitable for the owners of factories and industries within a community to neglect the upkeep of their properties. Highly developed industrial properties carry a much higher tax burden than those which are poorly developed and that are often an eyesore to the community. A tax primarily on improvements has a pronounced anti-social effect by discouraging the improvement of industrial facilities and inducing the erection of poor structures with low taxable value. Present property taxation thus subsidizes industrial deterioration with its accompanying negative health and environmental impacts. A poorly improved factory may occupy a site of the same approximate value as that of a highly improved facility, and benefit from municipal services to the same degree, yet pay much less in property taxes than the improved facility. This not only undermines equity in taxation by creating different tax burdens for properties receiving the same benefits but also the ability to pay of the property, measured in terms of its capacity to serve, is also ignored.
Property tax inducements to industry are extensively used by municipalities to attract new facilities to their area. This increases competition between municipalities and regions. It also lessens municipal revenues which in turn necessitates higher rates for those already owning property in that community. Paul Alyea, a noted tax economist, says there is only one way to get rid of such negative competition:
"The only way to remove all competitive influences of property taxation would be to confine the tax base to land - the only productive factor which is fixed in a physical sense. Variation in the effective tax rate on land - such as that between jurisdictions - would not be an influence in the same sense as differences in the effective rates applied to improvements would be. In fact, that jurisdiction with the highest rate on land would probably have a competitive advantage, i.e. the tax would be capitalized thus reducing the cost of land acquisition."17
As this Report by the Peterborough Two Tier Property Tax Committee shows, a shift away from an improvements tax to a tax on land or site values by means of a two tier tax would benefit property owners as well as municipal governments.
Summary
The present municipal property tax has a counterproductive impact on local economies. Real estate taxes are inherently contradictory for they are levied primarily on a base (improvements) which ought to be enhanced by the community rather than negated by its tax structure. Municipal taxes wrongly benefit property owners, business firms, and industrial concerns which show no willingness to make greater investments to improve their properties. On the other hand, it penalizes those willing to make such social and economically beneficial investments. Local economies require a property tax system that does not primarily fall on buildings and other improvements.
(B) Encourages Land Speculation/Increases Land Prices
Real estate and land have long been looked upon as the best hedges against inflation. Farm and urban land price indices, since World War II, have increased much faster than the consumer price index.18 Feverish land price inflation has been thought to precede, in a causal sense, business cycle depressions.19 And, as John Stuart Mill said, it is the easiest way to make money, for landlords grow rich in their sleep without working, risking, or economizing.
Land speculation is a disservice to the general tax paying public in many different and subtle ways. And just about everyone who owns real estate hopes to participate in the speculative game. Ordinary homeowners hope their properties will appreciate sufficiently to act as a hedge against inflation and provide a nest-egg for retirement. People continually "trade-up" in the housing market in order to take advantage of tax-free capital gains on principal residences. There are many forms of land speculation. Large corporations and wealthy individuals are not the only participants. Houses depreciate as soon as they are completed like all products, while land appreciates in a growing community.20
It is quite natural and predictable that property owners should try to take speculative advantage of the increasing cost of their land. The first principle of political economy is that human beings seek to satisfy their desires with the least exertion.21 Who would not take advantage of being able to get something for nothing? The problem is that when certain individuals seek to satisfy their desires with the least exertion by means of property speculation others are forced to increase their exertions in order to acquire property in the first place. This is the source of much economic inequality in our society and throughout the world.
Governments not only induce land speculation and real estate boom and bust cycles by not appropriating land rents for the public treasury, but also by providing various types of direct and indirect subsidies which create artificially high real estate costs. Adjustments in depreciation schedules for commercial property affect real estate costs as does liberalized credit rationing to the building industry with land being the primary form of collateral. Speculative land prices are also very sensitive to interest rates. Adjustments in monetary policy have noticeable affects on the construction and real estate industries in general. Governments are in many ways responsible for the very instabilities that Keynesian economics states should be corrected by their intervention in the economy.22
Governments exacerbate the problem of land speculation by providing greater capitalization for the subsidized housing market. This capitalization primarily enriches the private sector while putting added tax pressures on lower and middle income earnings. Property owners spend a lot of time trying to anticipate and lobby for the provision of government goods and services. The expected value of these services is always capitalized into higher prices for land. This activity is sometimes referred to as "economic rent-seeking".23
How does land speculation negatively affect land usage and land costs? First of all, it creates an artificial scarcity of land. It is a common assumption that the central districts of many cities are overcrowded and congested because of land shortages. This assumption is, however, false. For example, Mark London, an architect and freelance writer, reported in the Montreal Star:
"There is enough empty land in downtown Montreal to accommodate all foreseeable development for over a century without demolishing a single building."24
From a study "Centre Ville: Bulletin Technique No.8" published by the City of Montreal's Service de l'Habitation et de l'Urbanisme, he concludes that about one-fifth of downtown land is available to be built upon. Underutilized or vacant land is a feature common to many cities. There are indications that the amount of this type of land is steadily increasing. Not making this land realize its full capacity to serve puts immense pressure on the cost structure of municipal services and on the amount of interest which must be paid to meet capitalization costs in order to develop the land or put it back into use. Land assembly is also the main obstacle for the various governmental programs designed to provide affordable housing, such as federally and provincially sponsored non-profit and co-operative housing programs.25
Secondly, land hoarding for speculative reasons creates urban sprawl. Developers find it necessary to leapfrog over close-in parcels of land in order to find cheaper land further out. Often, close-in land is not only overpriced but simply not for sale since speculators are holding it off the market in anticipation of greater profits in the future.
Thirdly, land speculation thwarts effective urban planning and renewal. Vacant lots often occupy prime redevelopment land. The present tax structure encourages owners to withhold land from the market because this land is lightly taxed and is grossly underassessed in most jurisdictions. If one remembers that at least a quarter and perhaps half of the cost of housing is spent on land, then the close interrelation between property taxation, land speculation, and the housing shortage will become clear.26 The property tax rewards those who let houses deteriorate into slums and slums into vacant unused tracts of valuable inner city land. If government buys the land then taxpayers get penalized twice. By subsidizing unearned appreciation in land value and by paying this appreciation to the landowner in order to facilitate urban renewal, the undertaxation of land leads to the double taxation of the legitimately earned wealth of individual taxpayers.
Fourthly, land speculation leads to increased land costs. Inflated land costs obviously deter housing construction and prevent many from owning homes. J.J. Astor's dictum, "Buy at the fringe and wait" can be as lucrative a procedure today as it was a hundred and fifty years ago. Frequently, speculators buy to protect themselves from other speculators doing the same thing. This vicious circle inflates aggregate residential and industrial demand for land.
Indirectly or directly the price of land enters into all economic activity and thus into the cost of everything simply because it is a primary factor of production. It may be true that land is an excellent hedge against inflation. But it should also be remembered that land prices are one of the main causes of inflation.
Speculative activity centering on fringe and close-in land around cities is paralleled by speculation on vacant lots within metropolitan areas. The 1969 Hellyer Task Force on Housing and Urban Development, which was the last major federal inquiry into the nation's housing problems, had this to say about speculation within city limits:
"It involves not a lack of use of land, but its serious and purposeful under-use for speculative purposes. It finds its reflection in tracts of prime urban land on which dilapidated structures sit idle or near idle for which its owners seem unable or unwilling to find any more constructive use than a parking lot. It reaps its socially-created value increment, too, when governments expropriate it or private developers pay a large price for it to put the land to the kind of positive use its position within the community demands."27
Land speculation taxes in the past have been ineffective in restricting speculation because they have been designed as a form of capital gains tax. In other words, the conventional tax assumption that a tax liability should only be incurred when an activity or transaction takes place determined the tax base. Speculation taxes on windfall profits or realized capital gains thus had the effect of encouraging speculation since landowners would simply hold the land off the market while it accrued its unearned increments. Land speculation taxes thus led to a tightening of the land market and further inefficiencies in the allocation of urban land resources.
Summary
The apparent shortage of land, especially in and around metropolitan areas, has been artificially created by land speculation. Such speculation is a disservice to the community and has substantially increased land costs. The inflation of land prices has been substantial and has outstripped inflation in most other sectors of the economy. Land price inflation has also had dramatic and widespread detrimental effects on local economies. The present property tax system encourages land speculation, which causes higher land prices that are passed on to the consumer in many direct and indirect ways. Property tax reform, in the direction of collecting more revenues based on site rather than building values, would discourage land speculation and stabilize land costs.
(C) Contributes to Urban Deterioration
The relationship that property taxation creates between urban blight and the thwarting of urban renewal is symbiotic. It produces a vicious downward spiral in which blight necessitates higher improvement taxation that further intensifies the blight. Mason Gaffney, speaking before the National Committee on Urban Problems, summarizes this predicament well:
"As buildings become older, they tend to become physical deficits requiring more in cost than they return in taxes. As the central cities age, the buildings become old, and fiscal deficit generators. This requires the central cities to increase their tax rates. The higher tax rate in cities drives investors elsewhere - both homebuilders and industry - because whoever puts up a new building in this state of affairs tends to become a fiscal surplus generator, and no one really wants to be that: it means you pay more in taxes than you get back in services. Since there are many competing jurisdictions investors do not have to be fiscal surplus generators, as they can find a warm welcome in outer communities at lower tax rates. So, as the central cities move into the downspin of this unfortunate circle, they tend to lose industry and, as a result, lose employment opportunities; at the same time they tend to retain old dwellings which attract people with low incomes, who increase welfare costs. The central cities are left with a high percentage of old buildings, which generate fiscal deficits, and fewer and fewer surplus generators with which to meet them."28
As a combination of the overtaxation of buildings and the undertaxation of land, property taxation condemns municipalities to higher tax rates, spreading blight and little chance of renewal from either the private or public sector. The downward spiral of rising rates and lack of renewal is subject to the law of diminishing returns.
More senior levels of government foster the negative influences of property taxation by requiring in law that there be a non-differential rate on land and improvements. The lack of a simple distinction between these two components of property value has generated excessively complex systems of exemptions, partial assessments, tax credits, intergovernmental transfers, and countless schemes for urban renewal.
There is a close relationship between land value and building value, but it is not always directly evident. It is still generally the case that land values are rising in the centre of cities, even though these centres may be heavily blighted. The clustering tendency of cities clearly has overall spillover benefits. There are negative as well as positive spillovers, but within a city these negative spillovers in blighted areas are often not sufficient to depreciate land values. Urban renewal is self-defeating because current property taxation ensures that costs will rise almost exponentially. Perry Prentice describes this problem accurately:
"Too few people seem to understand that every public and private improvement in one piece of the land gets capitalized into the price of adjoining land so the more public and private money you spend to renew one blighted block the more you will have to pay to renew the next one. For example, if the Rockefellers say they had to pay $90 million for three blighted blockfronts on Sixth Avenue between 47th and 50th Streets in New York, the irony is that almost all this $90 million is a windfall from what the Rockefellers themselves had to spend to develop Rockefeller center across the street."29
Improvement values obviously shift to land values, and if there is nothing to stabilize land costs, then urban renewal will become more expensive with every city block.
A tax system, and its design, has to be approached as a complex of counterforces and interacting tensions. Property taxation pushes capital out of improvements into accruals of value on land. The increase in improvement value through urban renewal heightens the rate of this transfer of value from improvements to land. The obvious logical remedy is to tax land values and untax improvements. Capital will then move into the "tax haven" of improvements and thus spur urban renewal.
Summary
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. Property taxation discourages investment in new construction and rehabilitation. The failure of many urban renewal projects and schemes can be traced to the present system of real estate taxes.
(D) Results in Inadequate Housing
Few issues raise the ire of community improvement groups, anti-poverty organizations, and social reformers more than the question of adequate housing. The Hellyer Task Force On Housing and Urban Development, which reported in January, 1969, was the last high profile inquiry on the subject by the federal government, although there have been innumerable studies on housing since then at the provincial and local level. The Hellyer Task Force identified land costs as the second most important factor in rising housing prices after the cost of mortgage money.30 It was recommended by the Task Force that municipalities give serious study to site value taxation and possibly implement urban pilot projects.31 It is hoped that this Report of the Peterborough Two Tier Property Tax Committee will provide the basis for just such an urban pilot project in Peterborough.
The notion of a "housing crisis" or a "housing shortage" is ambiguous. For example, between 1955 and 1975 housing construction in Canada exceeded family and household formation in each year. In 1951 more than one family in ten did not maintain a separate household. In 1975 less than one family in thirty was not maintaining a separate household.32 It is often acknowledged that in terms of quality and quantity the standard of housing in Canada is unsurpassed in the world. Can it be said then that in terms of supply there is a shortage of housing in Canada? The answer, of course, depends upon the kind of demand one is talking about. This in turn is directly related to the fiscal capacity of the person seeking accommodation. Census data indicates that there is a mismatch in Canada between the size of household and the size of dwelling unit.33 Maldistribution of income, geographic variations and lack of mobility appear to be the reasons for this.34 From this perspective there is, for many, definitely a housing crisis because what they really seek they cannot afford in either the rental or the single-family housing market.
It is now generally recognized that the rate of return on housing as an investment has been decreasing for some time.35 The rate of return on land, however, has been constantly rising. Builders, in order to get even a modicum of profit on their investment, are thus finding it necessary to produce buildings that will rent at very high rates. The result is that only the luxury building market has flourished in recent decades. This further widens the gap between supply and the fiscal capacity of consumers. Ted Gwartney expresses the relation this way:
"Now if we could effectively increase the tax on land so it became less of a good investment and at the same time decrease the tax on buildings - presently they yield about 11 to 12 percent net - we could perhaps shift some of that tax burden so that buildings and land were more nearly on a par with each other in terms of an investment return. Maybe we could find some people who are presently investing extremely heavily in land shifting their investment to buildings. We have demands for buildings, but buildings presently are being built to rent at very high rates, in part, to provide return on the high land cost."36
The shift of investment to buildings with a change in property taxation would increase supply in relation to demand and decrease demand, in appropriate price ranges, to supply. In other words, it would enhance general equilibrium in the housing market because the real estate tax on buildings, as the non-market intervenor in that market, would be eliminated.
The property tax system not only decreases the quantity of affordable housing but lessens the overall quality of new housing. This creates a short term view that is not in the interest of either the landlord or the tenant. Poor quality construction increases long run maintenance and renovation costs. Investors buy properties for quick capital gains instead of long term income yields. Inherent deterioration of buildings is thus passed on from one owner to the next, each of whom does as little as possible to maintain the upkeep of the property while reaping capital gains. Tenants become upset and are constantly agitating for better maintenance through the courts or community action groups. The solution, however, lies in a tax and economic system that encourages owners to maintain and improve properties because it is profitable for them to do so. The key is positive or incentive taxation that lets the market establish the appropriate equilibrium between supply and demand without excluding large numbers of people from the affordable single-family housing and apartment rental markets.
Summary
There is a housing crisis in Canada because a large number of people cannot afford the kind of shelter that is appropriate to the size of their household. The present property tax, by discouraging investment in buildings and encouraging the sheltering of capital in land, makes it impossible for the market to produce affordable housing without public subsidy. The property tax also makes it more profitable to let buildings deteriorate than to improve them. It thus contributes to inadequate and substandard housing. Municipal tax reform must be in the direction of encouraging more affordable housing as well as ongoing improvements in and renovation of the existing housing stock.
Chapter Two
THE NEED FOR A NEW APPROACH TO THE TAXATION OF PROPERTY
(A) Basic Principles
It is generally agreed that there are two main concepts which relate to taxation - ability to pay and cost benefit. Philosophically these concepts are ultimately rooted in our ideas of freedom, equality and the right of ownership in the fruits of one's labour. It is also generally assumed that the ability-to-pay and cost-benefit concepts represent two different and mutually exclusive approaches to taxation. The ability-to-pay concept, however, has gained wide and unquestioned acceptance, primarily because it intuitively seems to be fair, just, and equitable.
Two forms of equity are embedded in the ability-to-pay concept. The first is horizontal. This means that people in similar circumstances should have a tax burden that is equal. Manifold adjustments in the tax base for these circumstances are the main source of complexity in the current tax system. In effect, our labyrinthine tax system is the result of unreconciled contradictions in our notion of equality.
The second form of equity in the ability-to-pay concept is vertical. This equity comes from the idea that the more money one has or earns or receives, then the less value it has for satisfying individual needs. It follows, it is thought, that the progressive taxing away of that money will affect the person less than an individual with a smaller income. Economists call this theory the diminishing marginal utility of money. This is the basis for the implementation of progressive rates of taxation throughout most of this century and for the recent move in the income tax system towards tax credits rather than deductions.
The primary limitation on the popular and academic use of the ability-to-pay concept is that most believe it only applies to people. The ability to pay of a piece of land, i.e., a site's capacity to serve, or of a natural resource, or of a government granted monopoly right such as a taxi licence, is rarely conceptualized as such in the tax literature. This is because the equity concepts buried in the ability-to-pay approach are related to the personalization of taxes in modern times. It is thought that only individuals pay taxes. The ability to pay of what is in nature, the already given, only makes sense, however, if one divorces the utilization of that resource, and its revenue generating capacity, from the taxable capacity of the person who has legal or possessory title to the resource. This is a crucial distinction, which, if not made, will forever mire the debate about tax reform in its current debilitating terms of reference.
The cost-benefit concept appears on the surface to be a much more limited tax concept than taxation according to ability to pay. It raises questions as to how costs (taxes) and benefits (expenditures) might be measured. Individuals and businesses benefit from government expenditures both directly and in more diffuse ways. Those who benefit the most from governmental income transfers and other benefits are usually the people who have the least ability to pay taxes. On the other hand, those with the greatest ability to pay taxes tend to benefit from tax subsidization in a more obscure and circuitous manner.
The cost-benefit concept is nevertheless a crucial and ineliminable element in the design of any tax system. It appears primarily today in the form of user fees and other forms of governmental charges where the cost of providing social goods or services is wholly or partially recovered directly from those using or consuming them. One of the limitations on the present use of the cost-benefit concept in the tax literature is that it is thought about primarily in terms of property or the use of resources, i.e., the provision of streets and sewers, garbage collection in municipalities, fuel taxes for conservation reasons and so on.
Another limitation, that is usually looked upon as a deficiency of the benefits approach to taxation, is the economic concern with quantifying the relation of benefits and costs. Markets uninhibited by tax and other externalities can reflect accurately this quantitative relation but generally do not do so under present conditions. So, for example, a non-monopolized and non-tax-subsidized land market will have values that are in themselves fairly accurate reflections of community bestowed benefits. The same is true for tradeable licences in a wide range of natural resources and other community granted privileges. The ability to pay of the privilege granted is its ability or capacity to serve - taking into account the factor costs incurred by the community in providing for the privilege. It is only reasonable that the market values of such privileges be the assessment base for the recouping by the community of the costs of providing such public benefits.
Ability to pay focuses primarily on persons and their taxable capacity, cost benefit emphasizes to a greater degree property, its use and what it receives from government or what its use negates in terms of society or the environment. Since tax policy for the most part concentrates on in personam taxes, the ability-to-pay approach has dominated modern theoretical discussions with respect to how tax systems ought to be designed. If we continue to focus only on individual taxable capacity, then the major systemic problems with the design of our tax laws will remain unaddressed.
The ability-to-pay approach, which may seem fairer because of its embodiment of the two theories of equity, generally comes up wanting in practice. History has been the laboratory for the ability-to-pay dogma and the experiment has had results few of its theoreticians anticipated. Inequality of income in Canadian society has not changed significantly in the post-war period and the nation is relatively more impoverished and less productive now than it was twenty or thirty years ago. Sales taxes, various taxes on businesses, on primarily buildings and improvements at the local level, and excessively high personal rates have had and continue to have profoundly distorting and deleterious consequences for the nation's economy.
The key to positive tax reform at all levels of government is not to treat the ability-to-pay and cost-benefit principles as mutually exclusive but rather as conceptually interdependent. In the domain of property taxation a two tier or site value tax best represents this interdependence.
(B) Application to Local Government Finance
It has been pointed out by many authors that two tier or site value taxation meets the two tests of both the ability-to-pay and cost-benefit approaches. P.I. Prentice, for instance, writes:37
"A tax on unimproved urban location values is the only tax for which the ability to pay is actually created by the taxing community through the enormous community investment needed to make land in that location richly saleable. The only pertinent question therefore, is how much of this community-created ability-to-pay does the community want to take back in taxes and how much does it want to leave to the location owner. And to the extent that the land tax falls on a value created by the community rather than by the owner it conforms closely to the principle of taxation in proportion to benefits received."
The ability to pay of a parcel of land is very much a function of its location or site value. The benefit to a parcel of land imparted by a community directly affects the land's earning potential. The community therefore has every right to tax back a part of that socially created value in accordance with the concept of ability to pay in proportion to benefits received.
Alternative approaches and piecemeal reforms to the taxation of real property assume either the ability-to-pay or cost-benefit approaches. As such these approaches are invariably flawed because they are inherently onesided and thus negate either equity or efficiency and at the same time almost always act as a burden on productive activity. Two examples can be given to illustrate the theoretical deficiencies of non-site value types of reform to the real estate tax.
Property taxes on total real estate values are often taken as regressive in relation to current income because they are taxes levied on the basis of the capital value of a property irrespective of the owner's current cash flow. In recent decades many states in the U.S. and provinces in Canada have introduced "circuit-breakers", or various forms of property tax credits or property tax relief, in order to offset this regressivity. These rebates on residential property taxes are usually aimed at the elderly or low-income households. They are tied to income and have no relation to property assessment. As such this form of property tax relief is based on the ability to pay defined solely in terms of income and not ownership of assets.
The most obvious criticism of these rebates is that they are relative only to cash flow and not to wealth. For example, someone could be occupying or holding a multi-million dollar property and nevertheless be entitled to tax subsidization if current annual income is low. The tax system is thereby underwriting a form of land speculation. Even if the unintentional speculator be in the guise of an elderly widow, it is nonetheless speculation which aggravates the housing problem and wastes a valuable resource. Provincial and state legislators have been historically very reluctant to enact laws which might have the effect of forcing, or even nudging, the unintentional speculator to sell the property or utilize it more in line with its capacity to serve the community. A site value or two tier tax would over time have this very effect. By re-allocating land resources and utilizing them less wastefully, a site value property tax system would bring the ability to pay of homeowners more in line with the asset value of their properties. In other words, the maldistribution between real estate assets and the cash flow of individuals would not be exacerbated, as it is under the current tax system.
An example of a type of tax reform based solely on the cost-benefit approach is the recently enacted Development Charges Act in Ontario.38 This legislation empowers municipalities to "pass by-laws for the imposition of development charges against land if the development of the land would increase the need for services..."39 The problem with this legislation is that the liability for the charges depends upon the condition precedent of a development, usually for housing, which is beneficial for the community. In other words, the attempt by municipalities to recoup net capital costs for the provision of services when land is improved will have the effect of negating the development of that land. Since contractors and developers will obviously pass on these costs to home-buyers, the cost of new housing will escalate. Furthermore, this type of legislation will do nothing to thwart land speculation because as long as inert property is not developed the Development Charges Act has no application.
The Development Charges Act is an example of a misapplication of the cost-benefit principle. The cost-benefit equation is formulated after worthwhile economic activity has already begun. It does not break down the barriers to efficient land development. Nor does do anything to put the breaks on ever escalating housing prices or the increasing costs of providing municipal services.
From this brief outline it can be seen that, at the municipal level, the site value, two tier or two rate form of taxation represents most accurately the principles of taxation described. It is not only more in harmony with these principles than the present property tax but is also not at odds with the economic objectives of property owners, the efficiency objectives of municipal governments and the economic needs of all members of the community.
Genuine tax reform can only come about through a critical appraisal of the assumptions which now underlie our tax system. A general recognition by all those involved in the design of any tax system that it must be based on the ability-to-pay and benefit approaches as complementary principles is a necessary first step.
At the municipal level, a movement towards site value taxation by means or two tier or two rate taxation is the best alternative to the present property tax. It would return to the community sufficient revenues to support municipal services but in doing so it would tax back community-created wealth. The reconstruction of the tax system in Canada must begin with fundamentals. The tax system has to be designed in such a way as to coordinate government revenue generation with economic activity and the basic inclinations of human nature. Only such a revised system would permit Canada to attain its long-term economic potential by freeing rather than fettering the productive forces of individuals in our economy, while at the same time providing adequate revenues to government in order to finance necessary social and other services.
Chapter Three
PROPOSAL FOR A TWO TIER PROPERTY TAX IN PETERBOROUGH
(A) What is a Two Tier Property Tax?
A two tier property tax substitutes a pair of different mill rates for the current system of one mill rate. The two mill rates apply to the factored assessed land value and factored assessed building value. This differs from the current system, which levies a single mill rate on the total factored assessment of the property.
The property tax base in communities typically consists mostly of buildings; land value makes up a smaller portion of the tax base. In Peterborough, improvements constitute 70.42% of the tax base, while land values constitute the remaining 29.58%. Thus the property tax in Peterborough draws more than twice as much revenue from buildings as from land.
We have already seen how such a heavy tax load on housing and other structures can be detrimental to a community's economy. A two tier property tax enables the alleviation of the problem. The added flexibility obtained by treating land and improvements separately can be very beneficial to a community.
A logical system for introducing the two tier property tax is to select mill rates on land and buildings that would result in a tax that collects 50% of its revenue from building assessments, and 50% from land value assessments.
For example, with differentiated land and building assessments one could propose an equalized revenue yield from both assessed values that required 50 mills on buildings and 100 mills on the land value, if a community's buildings constituted twice as much of the tax base as the value of land.
A two tier or two rate property tax can be expressed as a variable percentage of land and building assessments. For example, in Pennsylvania where there are 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% (25 mills) on buildings, as opposed to a former undifferentiated 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.40
In Pennsylvania the rates vary with each city. For example, Pittsburgh currently has a rate of 184.5 mills on land and 32 mills on buildings; the city receives 55.7% of its property tax revenue from land. On the other hand, Aliquippa has 81 mills on land, 5 mills on buildings and receives 85.3% of its tax revenue from the land assessment.
A two tier property tax can be expressed in other terms as well. For example, granting a property tax exemption to a portion of the improvements part of the tax base, and levying a higher millage on the remaining taxable property, both land and improvements, produces the same result. Improvements are taxed less and land values are taxed more, but in this case only one millage rate is used.
Yet another possibility would be to use different assessment factors for land values and improvements; if land value is evaluated closer to its true market value than are improvements, we will again achieve the effect of taxing improvements less, land values more.
These alternative methods for implementing a two tier property tax are not of particular importance in theory but could give useful options to those desiring to present the two tier property tax in politically acceptable terms.
(B) Benefits of the Two Tier Approach
The two tier approach to property taxation brings with it many benefits.
As we have already observed, Peterborough's tax base consists of 70.42% improvements and the remainder is land value. Introducing a revenue-neutral two tier property tax will mean that most property owners will see little or no increase or decrease in their property tax bills. However, property owners who have a higher percentage of factored assessed improvement value than the city's average of 70.42% will get a bigger tax cut on their improvement than the tax increase they will receive in their land. Thus their tax bill will shrink. Similarly, property owners whose factored improvement assessment is less than 70.42% of their total factored assessment will see a tax increase.
The biggest possible tax cut would come for a large office, factory or apartment building on a small or worthless piece of land; the biggest tax increases would come for vacant lots.
Although it is undeniably a benefit to say that "most homeowners and renters will pay less in taxes," the two tier property tax should be implemented so as to minimize these transitional impacts. The transition is not the most important aspect of property tax modernization. The single effect that will add most to the city's long-term economic vitality is the lower millage rate on improvements. All new improvement activity will be taxed less.
Research shows that the adoption of a two tier system results in increased construction. This is due to the lower tax on improvements. If a given construction, repair or rehabilitation activity faces less of a tax "penalty" than at present, it is more likely to occur. In Pennsylvania, a number of studies examine the issuance of building permits in cities that have adopted a two tier property tax. These studies consistently show that a city's building permit issuance accelerates following the implementation of the two tier property tax, and moreover that the building permit issuance of similar, neighboring cities did not grow similarly. A wide range of examinations of Australian cities show the same effect there.
Because construction, repair and rehab mean jobs for those persons engaged in such work, and the resulting structures mean more offices and factories, it is clear that the two tier tax stimulates employment growth.
Additionally, more new or refurbished housing comes onto the market, and this causes more competition for buyers and tenants -- the result is more affordable, more plentiful housing.
It can be seen that each of these positive benefits comes directly from a lower tax on improvements. By taxing human initiative and enterprise less, a community makes itself a more desirable location for such activity.
An additional, but closely related, set of effects comes from the other half of the two tier innovation -- namely, the higher tax on land values.
Obviously, a higher annual tax on land values makes land costlier to hold. Peterborough has over 1,000 vacant or nearly-vacant lots, totalling over $21 million in value according to the 1975-based assessment data. The actual 1991 market value of such lands may be far greater. Peterborough's land speculators, who hold lands in expectation of huge profits at a later date, will find that a two tier property tax means their cost of doing nothing with their land has risen.
The two tier property tax gives a motivation to land owners to use their lands productively, or else sell them to others who will do this. When such lands come onto the market, the resulting increase in supply will mean a decrease in price. In areas where land values are appreciating, this will not appear as an outright fall in price but merely a slowdown of the rate of appreciation. In either case, lands will be relatively cheaper to obtain and therefore new businesses and housing will be able to locate on those sites more cheaply.
The implications for Peterborough can be breathtaking. If just the five most valuable of the more than 1,000 vacant lots were developed, and developed only to an average degree, the result would still be between $6.5 million and $20 million in new improvement value added to the city's property tax base; this would obviously mean dozens or hundreds of new jobs, both in construction and on the sites after the properties have been developed.
This pro-jobs, pro-housing effect of the two tier property tax is not easy to demonstrate unless a fairly significant property tax shift away from improvements and toward land values is made. Even if no large effect is observed, however, it is still true that under a two tier tax, land speculators pay more to the government than they had been paying. This is just, since lands held out of use cannot provide jobs or housing to a community, and underused urban lands force development outward in a premature sprawl pattern. The high costs to the public sector of sprawl development should be paid for, in part, by those speculators who cause it.
Infrastructure costs must be kept as low as possible. Anything that Peterborough can do to promote "infill" development, on vacant and underused sites that already lie within the infrastructure grids of existing police, fire, emergency medical, electric, gas and water services, will help to keep these costs low. Because an increased tax on land values will hit hardest those with underused or vacant sites at or near a city's center, owners of these lots will face new motivations to put them to use.
Farmers and would-be farmers in the Peterborough area will also benefit from a two tier property tax, in contrast to those who might call themselves farmers but are actually mere idle land holders waiting to make a windfall profit. Higher holding costs for land mean lower selling prices for farmland; as urban sprawl is replaced by infill development, more farmers will be able to obtain sites closer to their markets, or at the same distance for less money. Lower transportation costs will mean lower prices for consumers and greater price-competitiveness for farmers versus foreign suppliers. Facing fewer sprawl pressures from expanding urban and suburban areas, farmers who wish to keep their sites will not be forced to sell. In short, the opportunities for current and future farmers will improve.
Finally, let us recall the need to avoid runaway overbuilding, even though this does not seem like much of a threat during the current recession. A prime cause of unnecessary overbuilding, which makes areas ugly and ruins natural habitats, is land speculation. A landowner need not choose a development carefully if the underlying land will appreciate in value fast enough to guarantee a tidy profit. With a two tier property tax system, this danger would begin to abate. Because the prospect of profits from land speculation would be smaller, developers would be forced to be careful, and develop a site only when sure that the specific project met the needs and wants of the surrounding community.
Overall, the two tier property tax is a "carrot and stick" approach to enhancing the economic vitality of our communities. The carrot, a lower tax on improvements, makes economic growth easier; the stick, a higher tax on land values, makes obstructions to economic growth more difficult.
Chapter Four
THE PROPERTY TAX ASSESSMENT DATABASE IN PETERBOROUGH
Property tax assessments in Peterborough are based on periodic updates of a complete 1975 property assessment. This report is based on those figures. A 1988 re-assessment has been made but has not been adopted for use.
Each property record in the database contains the following information: ward, identification number and address of the property; tax classifications for calculating school millages, etc.; assessed land value; assessed improvement value; total assessed value; frontage, area and depth of the parcel; and property tax bill.
For our purposes, the most important numbers for each property record are the assessed land value and the assessed improvement value, along with the actual tax bill. Each parcel's record does contain this information even though these facts, and even the fact that this information exists, are not generally shared with the public.
There are 20,254 taxable properties in the Peterborough database, and 831 tax exempt properties, making a total of 21,085. The database for this study is restricted to taxable properties only.
Currently, the data in possession of the Peterborough Two Tier Property Tax Committee are in a dBase III+ format, occupying about four megabytes of computer storage. If the 1988 re-assessment or some other new assessment, new factoring formula, etc., should be adopted, the database can be updated with respect to this, and a new set of implications for the two tier property tax produced, in a matter of hours.
An overview of the city, showing totals for the properties in each land use category in peterborough, is given below:
Taxable Properties in Peterborough
Summary by Property Type
Another useful way to view Peterborough is as a collection of five wards. For example, here we see what portion of the city's total property tax revenue is provided by each ward:
Property Taxes by Ward
At first glance, it may not be obvious why being able to examine wards separately from one another is an advantage. However, any economic reform, to be effective, must be politically acceptable. In the case of the two tier property tax, examining its impacts on individual wards provides a useful test. If the two tier tax causes large shifts in the tax burden away from some wards and onto others, without a convincing explanation, the plan must be regarded as politically dubious; representatives of the various wards would be unlikely to agree to try it. As we shall see below, the actual shifts in tax burdens that would be occasioned by the two tier property tax, measured by wards or other criteria, are small or nonexistent.
In using this property tax assessment database to understand the impacts of the two tier property tax for peterborough, one caution is important to keep in mind. The two tier property tax is not a new method of assessing or evaluating property. The two tier tax is merely a more logical method of calculating the actual tax bill for each property. This calculation does not change an area's assessment, or the quality of that assessment, in any way. an up to date re-assessment, assigning realistic amounts to land value, would be beneficial to Peterborough, but it is by no means a prerequisite for the two tier property tax. Indeed, of the Pennsylvania cities that chose to try the two tier property tax, none had gone through a recent re-assessment.
Chapter Five
ECONOMIC IMPACTS OF SHIFTING TO A TWO TIER PROPERTY TAX IN PETERBOROUGH
(A) Specific Two Tier Options for Peterborough
From one perspective, finding a two tier property tax option for Peterborough is simply a matter of elementary algebra. Given a specific target for the city's revenue, and given the assessments currently in use (as well as assessment factors, adjustments for successful property tax appeals, etc.), the current property tax can only be applied in one way, no matter what the condition of the local economy:
REVENUE = (FACTORED LAND ASSESSMENT + FACTORED BLDG ASSESSMENT) * MILLAGE RATE
or, solving for the millage rate, we find MILLAGE RATE = REVENUE / (FACTORED LAND ASSESSMENT + FACTORED BLDG ASSESSMENT). Thus municipalities are currently forced to use one equation giving a unique solution for the one unknown (millage rate). This equation does not permit any sensitivity to a community's particular context or social and economic circumstances.
The two tier property tax contrasts sharply with this. By levying separate millage rates on land and improvements, we obtain an equation with two unknowns:
REVENUE = (FACTORED LAND ASSESSMENT * LAND MILLAGE RATE) + (FACTORED BLDG ASSESSMENT * BLDG MILLAGE RATE)
You may remember from school days that the solution to an equation with two unknowns is a line; in other words, an infinite number of equally good solution points. That is the situation with the two tier property tax. A community can choose what set of property tax millage rates to use, rather than being artificially constrained to accept a particular millage as under the current system.
To take a very simple example, suppose we observe a city where the total factored land assessment was $1,000,000 and the total factored assessment for improvements was $3,000,000. If our revenue target for the city is $200,000, then a millage rate of 50 mills is the only possible solution under the current system. 200,000 / (1,000,000 + 3,000,000) = .05 = 50 mills. However, the two tier property tax yields various options. For instance, 40 mills on improvements and 80 mills on land would bring in (1,000,000 * .08) + (3,000,000 * .04) = 80,000 + 120,000 = 200,000. Similarly for 20 mills on improvements and 140 mills on land; 140,000 + 60,000 = 200,000. Or, 0 mills on improvements and 200 mills on land.
It is clear that the two tier property tax adds a new range of options to the fiscal toolkits of municipalities which are trying to enhance their economies and improve the quality of life for their citizens. These options come without any cost. Municipalities are free to continue with the single-rate millage should they wish.
The natural question to arise at this point is, what criteria can be used for deciding among the many possible two tier tax rates? A process for intelligent choice is essential, to make use of the opportunity given by an array of options.
The answer to this question is definite in theory - because of the economic benefits involved, a community should shift to as low a tax on improvements, and high a tax on land values, as it possibly can. In a growing number of areas, this has been politically feasible. For example, most municipalities in Australia obtain all of their property tax revenue from land alone - no taxes on improvements.
In practice, this shift in property taxes can only be done within limits allowed by the political safety considerations of the elected officials in charge of voting on millage rates.
We can say that politicians would do well to aim for as much of a tax shift as possible, subject to the following three conditions of political acceptability:
(a) minimize the number of properties whose tax bills increase in virtue of the new system;
(b) maximize the number of properties whose tax bills decrease in virtue of the new system;
(c) make all tax bills change as little as possible.
It will come as no surprise that we find cities under a variety of political conditions implementing the two tier property tax to varied degrees. In Pennsylvania, many cities can afford to shift to a two tier property tax gently, each year adding only a small increase to the tax rate on land values, cutting only a small amount from the tax rate on improvements. In cases where new revenue is needed, they raise the tax rate on land assessments but keep the rate on improvement assessments fixed. Yet there are exceptions to this - cities facing recessions can and do move to a large two tier tax in a single step. As noted above, Hazleton, Pennsylvania, shifted from a property tax of 33 mills single-rate all the way to 79 mills on land assessments and 25 on improvement assessments at the start of 1991; Aliquippa, Pennsylvania, specifically altered its form of municipal government in order to qualify for the option to use a two tier property tax, and changed from 24.76 mills single-rate to 81 mills on land assessments and 5 mills on improvement assessments at the start of 1988; and Clairton, Pennsylvania, under bankrupt conditions, was directed by a state-sponsored recovery plan to shift to a two tier property tax using a 100 mill levy on land assessments together with 21 mills on improvement assessments, instead of continuing with a single-rate property tax of 43.8 mills. It is clear that when times are tough, political leaders are willing to use strong medicine to assist their local economies.41
For Peterborough, we would recommend initially shifting the property tax burdens away from improvements and onto land values in such a way as to bring the city 50% of its property tax revenue from each, instead of 70.42% from improvements and just 29.58% from land, as is currently the case. A smaller shift would likely be insufficient to be of significant assistance to Peterborough's economy.
To implement this 50/50 two tier system, each property tax bill could simply be recalculated. Under the current system, factored land and improvement assessments are added together and multiplied by a single millage rate. Under the two tier system, several methods of implementation are possible. The easiest administratively would probably be either:
(a) multiply a property's factored land assessment by 1.6902 and its factored improvement assessment by 0.7100; add these new figures together and multiply by a single millage rate; or
(b) multiply a property's factored land assessment by a LAND MILLAGE RATE, equal to a single-rate millage times 1.6902, and multiply the improvement assessment by a BUILDING MILLAGE RATE, equal to a single-rate millage times 0.7100, and add these two amounts together, resulting in the tax bill.
In either case, the result is that land values are taxed enough more, and improvements enough less, so that each contributes 50% of the city's tax revenue.
A second two tier option for Peterborough, which we will call the "enhanced" two tier approach, adds a slight complication in order to correct for the increasingly out of date assessments used in the city. Peterborough's property assessments have not been thoroughly revised and updated since 1975.
When assessments grow out of date, property tax burdens shift in hidden ways. Properties that change hands frequently, or are newly improved, receive enough re-appraisals often that their assessments are reasonably up to date; these properties tend to be large. Small properties, such as single family dwellings, tend to fall relatively further out of date. As they age, assessments typically tend to lag further behind market values with regard to improvements than land. The result of these effects is that large properties generally enjoy have a larger percentage of their assessed value assigned to improvements, than would be the case if they received the same treatment as small properties. Therefore small properties, through no fault of their own, will face slightly greater property tax burdens under the two tier system than they should.
To mitigate this factor until a new and fully accurate assessment can be put into place, we recommend enhancing the two tier system by adding a single new proposal. Allow all properties a tax exemption on the first $6,000 of their improvement value. This won't mean much to large properties, but will carry be more meaning significant with respect small properties. Then, take the remaining tax base and apply the 50/50 two tier property tax to it. The administrative result would still be quite straightforward:
either
(a) subtract 6,000 from a property's factored improvement assessment, or simply use 0 if the factored improvement assessment is less than 6,000; multiply the new improvement assessment figure by 0.8235. Add this to the product of the factored land assessment times 1.6902. Multiply the sum by a single millage rate. Or:
(b) multiply a property's factored land assessment by a LAND MILLAGE RATE, equal to the single-rate millage times 1.6902, and multiply the improvement assessment, minus 6,000 (or just use 0 if the assessment is less than 6,000) by a BUILDING MILLAGE RATE, equal to a single-rate millage times 0.8235, and add these two amounts together, resulting in the tax bill.
As can be readily observed, the cost to the city of exempting up to $6,000 of existing improvement value on each property necessitates a slightly smaller cut in the tax rate itself. The enhanced 50/50 approach offers a smoother transition than the regular 50/50 approach, while offering only slightly less in terms of new incentive.
(B) How Average Taxpayers Can Benefit
Benefits from the two tier property tax, as discussed above, are many. From the perspective of the average taxpayer, there are two basic ways in which these benefits are enjoyed.
Firstly, there are direct benefits. Depending on how it is implemented, many or most average taxpayers will receive a small cut in their property tax bills. More businesses along George Street and other retail areas will offer wares to supply the needs of the community. Employment will rise not only for construction and rehab businesses but also as new businesses are started on sites that were previously held by non-users. Similarly, the housing supply will increase, causing prices to moderate. Rents will moderate and homeownership will become increasingly possible.
Let us be clear that we are not proposing a magical panacea. Certainly jobs and housing are affected by a wide range of factors, only one of which is the property tax. Modernizing the property tax does not guarantee an immediate paradise. However, we do know that the current, single-rate property tax actively discourages economic activity and that removing the artificial disincentives it embodies can only be of help.
Secondly, there are indirect benefits to the average taxpayer in virtue of the two tier property tax. A great number of these indirect benefits are related to reducing overall social overhead costs. These include less urban and suburban sprawl, as infill development occurs instead. This makes future tax increases less likely, as the cost of providing infrastructure is less - infrastructure is already in place in areas where development would be encouraged. This means shorter commuting distances, less auto pollution, closer proximity to the countryside. Also, in an area where jobs and housing are increasingly plentiful, the crime rate can be expected to fall. Businesses that choose to locate in Peterborough will be providing employment to the community.
Finally, the local municipality will be taking a step toward solving its own problems, rather than tying its fate to often harmful economic policies of the provincial or federal governments. The two tier tax enables a community to "grow its own" economic health.
In the United States, there are many programs called "enterprise zones." These involve the designation of an area as economically distressed, and then the awarding of tax breaks to economic activity (business startups, housing construction, etc.) within the zone. Land speculators within such zones find that their sites are worth far more with tax breaks than without, and sell their lands for enormous profits. Taxpayers are left to make up the revenue foregone by the tax breaks, while speculators make profit; meanwhile, the "enterprise zone" area may or may not gain from this process.
Curiously, the two tier property tax is precisely what an enterprise zone ought to be. Like an enterprise zone, the two tier tax designates an area as in need of increased economic vitality. Unlike a zone, which designates just a single area and locks out those beyond its boundary, a two tier tax allows everyone in the community to be equally eligible for benefits.
Like an enterprise zone, the two tier property tax offers incentives to economic development. Unlike a zone, these incentives are not pocketed by landowners, leaving taxpayers with the bill - rather, it is the landowners themselves who, via the two tier property tax, effectively fund the tax incentives.
In conclusion, the two tier property tax can, by removing artificial disincentives, bring benefits throughout the community. The tax operates as a sort of do-it-yourself enterprise zone, promoting economic development in the entire municipality.
(C) Implications of the Two Tier Tax for Peterborough
We now turn to a very simple question. Suppose Peterborough were to implement a two tier property tax and chose the enhanced 50/50 version. What would happen?
The city's overall revenue from the property tax would remain unchanged. With time, the tax base will grow more quickly than with a single-rate tax and so tax rates could be cut, or tax increases could be made smaller.
Current property owners in Peterborough will see little or no change for the better or the worse in their property tax bills, unless they own property that is somewhat better developed, or less developed, than the city's average. (Vacant properties, which are not developed at all, will be given in-depth treatment in Appendix A. In this section we will only be considering nonvacant properties, for which we would hope the tax impact would be small.)
The initial impact of the enhanced two tier property tax on the various classes of property in Peterborough is shown below:
Property Tax Burdens Three Scenarios
Residential Properties
Non-residential Properties
Note: In this section we are considering only those condominiums that actually exist; vacant condominium lots will be considered along with vacant lots in general, in Appendix A.
The information from the above charts can be used to yield the following comparison of average tax bills:
Residential Properties
Non- residential Properties
Finally, we wish to investigate whether there will be any significant shift of tax burdens from one ward to another. Here are the basic data:
Property Tax Burdens by Ward Three Scenarios
Naturally, under either of the proposed two tier scenarios, the nonvacant properties in Peterborough enjoy some tax relief; hence the smaller totals for those scenarios on the above chart. But does each ward contribute about the same percentage to each total as it does under the current property tax system? Using pie charts to contrast the three scenarios, we find that the wards pay such consistent portions of the property tax that the pies are nearly impossible to tell apart:
Current System 50/50 Two Tier System "Enhanced" Two Tier System
Summary
we have looked at the specific impacts that the two tier property tax would have on Peterborough, and found that the increases or decreases in tax bills will, with the exception of those of vacant properties, be small. Tax burdens do not shift to any large degree, either between categories of property or among wards. Still, we can make some generalizations. Multifamily, condominium, industrial and "other" properties in Peterborough tend to be the most highly developed compared to the land value they occupy. These categories of property save the most under a two tier tax system. As a result, it is investments in this sort of property that will be most stimulated by the tax. The implication is clear - housing and jobs.
At the same time, single family dwellings about break even, while commercial properties pay a bit more on the average. In most cities, single family dwellings save considerably under the two tier system; as mentioned above, we regard Peterborough's homeowners to be suffering from property assessments that are further out of date than average, and this explains the situation. Commercial properties, as much as industrial properties, need tax relief if they are to grow in Peterborough. It is precisely these properties which are most likely to benefit most quickly from vacant lots coming onto the market and the lower tax on improvements. If further relief is desired, it should be sought from some source other than the two tier property tax, possibly from an outright tax abatement on new improvement for a fixed number of years. This idea has worked well within a two tier context in the past.
Chapter Six
CONCLUSIONS
This Report by the Peterborough Two Tier Property Tax Committee examines the theory and application of a two tier property tax system for Peterborough. The Report outlines an approach to local property taxation that in the view of the Committee achieves a greater degree of equity and efficiency than under the present system. The Committee would prefer to see an even greater shift to the recapture of community-created values. Under present conditions, however, the Committee is of the view that Peterborough City Council should take all the necessary steps to adopt the two tier proposal developed in this study.
This Report shows that a tax on buildings, like any tax on a produced commodity, inflates its price, reduces the supply of affordable housing and penalizes individuals and businesses from improving their properties and increasing their economic activity. Tax policy at all levels of government in Canada is in opposition to the goals of social and economic justice pursued by governments through their expenditure programs. This Report shows how tax policy can be made compatible with the objectives of achieving greater social and economic justice.
Finally, it is necessary that the Ontario provincial government make the necessary legislative changes to the Assessment Act and the Municipal Act so as to allow all municipalities in Ontario the option of implementing a two tier property tax if they wish. With the current pressure on transfer payments from more senior levels of government, it is incumbent upon these levels of government to enact legislation which will permit municipalities the greatest degree of flexibility in their revenue-generating programs. A two tier property tax, unlike other taxes on commodities, incomes and various types of economic activity, provides this flexibility while at the same time creating incentives for much needed economic activity in socially useful and beneficial areas.
The committee hopes that this Report will inspire other research organizations and community groups to conduct their own inquiries into specific two tier property tax proposals for their communities.
RECOMMENDATIONS
The Peterborough Two Tier Property Tax Committee makes the following recommendations:
1. That Peterborough request the Ontario provincial government to enact legislation so as to enable the implementation of a two tier property taxation system for Ontario municipalities;
2. That Peterborough, as soon as provincial legislation permits, shift the property tax burden away from improvements and onto land values in such a way as to bring the city 50% of its property tax revenue from each.
3. That continuing studies of two tier forms of property taxation be made by the provincial Ministries of Revenue and Municipal Affairs.
4. That the Ontario government work with independent non-governmental research organizations and community groups to create specific two tier tax proposals for different municipalities.
Appendix "A"
Implications of the Two Tier Property Tax for Vacant Properties in Peterborough
In Peterborough, the property tax assessment database list 865 vacant properties plus 98 vacant lots awaiting condominiums. This does not include 100-200 nearly-vacant lots, ones that are not technically vacant but have almost no improvements.
Considering only the fully vacant lots (a handful do have stray improvements on them, such as a bit of pavement, and so a few of these lots are not pure land value), we find the following facts:
(1) The 963 vacant lots constitute 4.8% of the properties in the city, yet they constitute 5.6% of the city's taxable land value. In other words, the average vacant lot is worth more than the average lot citywide - this eliminates any possible claim to the effect that Peterborough's vacant lots are useless or not worth developing.
(2) In spite of making up 5.6% of the city's land value, these lots pay just 1.8% of the city's property tax. No other category of property enjoys such light tax treatment. Yet these vacant lots, which offer neither housing nor jobs to the community, are far less deserving of tax relief than are homeowners and businesses, which participate in the community economy. Government services and infrastructure enhance the value of all properties, whether idle or in use - thus the owner of an idle site is, economically speaking, a freeloader.
(3) Of the 119 properties that received a property tax bill of less than $100, over 98% were vacant. Of those properties receiving bills of over $50,000, absolutely 0% were vacant.
(4) Of the 47 properties being taxed at an effective rate of less than one half of one percent of their assessed value, 70% were vacant. Of the 123 properties being taxed at an effective rate of more than 10 percent of their assessed value, only 9% were vacant.
The two tier property tax in Peterborough would go a long way toward rectifying this unfair situation, where vacancy is rewarded and human initiative punished. On the next page we show the overall tax burdens for vacant properties in each ward, under each property tax scenario:
Vacant Properties Property Tax Burdens
Note: Under the 50-50 two tier property tax and the "enhanced" two tier property tax, land is treated identically. The property tax burdens listed in those columns in the above chart do not match perfectly, however. This is due to the tiny percentage of improvement value that some lots still possess, according to the assessment, even though the lots are classified s vacant. Improvements are taxed differently in the proposed two tier systems, hence the slight difference.
We can see that the land speculators who obstruct development will be asked to pay more under a two tier tax system. This is why the two tier tax can result in immediate tax cuts for productive properties, over and above the reduced tax rate on all future improvement. Owners of the idle sites will have a new motivation to place housing or businesses on these sites, or else sell them to someone who will do this. Should owners wish instead to continue holding their sites out of production, they will at least be reimbursing the community more fully for that activity.
Here are the most striking examples of individual vacant lots in Peterborough:
Location Assessed Value
Ward Four (Ashburnham): 1098 Armour Road $1,099,000 Ward Five (Northcrest): 3328 University Heights 462,000 Ward Four (Ashburnham): 2590 Marsdale Road 419,000 Ward One (Otonabee): 1401 Whittington Drive 402,261 Ward Two (Monaghan): Cherryhill Road 336,000
Together, these five lots total $2,718,261 is assessed land value. Their actual market value is likely to be far greater.
Even if these lots were developed only to the average extent, as much as typical commercial or industrial properties in Peterborough today, the result would be between $6.5 million and $20 million in new investment in the community. This would obviously mean dozens or hundreds of new jobs, both in construction and on the sites after they have been developed.
A two tier property tax provides economic motivation to owners of these lots to start participating in the community economy.
NOTES
1. See, Ibid., H. Bronson Cowan, pp. 99-102, for the differences between land values and improvement values as a tax base. Also R.W. Lindholm and A.D. Lynn, Jr. eds., Land Value Taxation: The "Progress and Poverty" Centenary (Madison, University of Wisconsin Press, 1982), "Land vs. Products," pp. 22-28. For the economic characteristics whereby land can be differentiated from improvements see, Arthur P. Becker, "Principles of Taxing Land and Buildings for Economic Development" in Land and Building Taxes, Arthur P. Becker, ed., (Madison, University of Wisconsin Press, 1969), pp. 15-24. 2. The noted American tax economist, E.R.A. Seligman, foe of land value taxation and one of the persons responsible for much of the theory behind our current tax systems, lobbied hard for the abolition of taxes on personalty. For a thorough critique of Seligman's critique of Henry George's Single Tax in Chapter III of Essays in Taxation, 8th ed. (London, Macmillan, 1919), see Robert V. Andelson and Mason Gaffney, "Seligman and His Critique from Social Utility" in Robert V. Andelson, ed., Critics of Henry George: A Centenary Appraisal of their Strictures on Progress and Poverty, (London, Associated University Presses, 1979), pp.273-290. 3. See, Harry M. Kitchen, Local Government Finance in Canada (Toronto, Canadian Tax Foundation, 1984), p. 7. 4. For a comprehensive history of municipal taxation in Ontario see, The Ontario Committee on Taxation, (The Smith Commission, 1967), Vol.II, Chapter 10. 5. F.H. Finnis, An Introduction to Real Property Taxation (Toronto, Sir Isaac Pitman (Canada) Ltd., 1972), p. 43.
6. James M. Dean, "Assessment Bias by Property Class in Brandon," Canadian Tax Journal, Vol. 28, No. 5, September-October, 1980, p. 601. 7. R.W. Lindholm, "Public Choice and Land Tax Fairness," American Journal of Economics and Sociology, Vol.38, No.4, October, 1979, p. 352.
8. A.R. Prest, The Taxation of Urban Land (Manchester, Manchester University Press, 1981), p. 29.
9. Dick Netzer, "Property Tax Reform and Public Policy Reality," in Property Taxation, Land Use and Public Policy (Madison, University of Wisconsin Press, 1976), p. 232.
10. The home renovation market is a multi-billion dollar a year industry that will undoubtedly expand in the 1990s as the Canadian housing stock ages and the incidence of taxation on new housing grows. Marc Denhez in "Bungalows in Trouble", Canadian Heritage, Vol.15, Issue 3, Winter, 1991 writes (p.18):
In both Canada and the U.S., renovation passed new construction some six years ago (in terms of total investment), and has stayed on top for most of the years since. The gap is expected to grow wider: renovation spending is now growing at almost 12% annually (twice that of new construction), and according to the consulting firm of Environics Research, it should grow throughout the 1990s at a mindboggling 20% per year. The Canadian residential renovation market exceeds $15 billion annually, and non-residential renovation is expected to be in the same league.
Ten years ago only 21% of the nation's housing stock was over 40 years. This will double by the year 2000. 11. Taxing Matters (October, 1985), tabled in the Ontario provincial legislature, recommended a revision of the Assessment Act so as to allow each municipality, by resolution, to determine its own limit of property improvements below which there would be no re-assessment of market value (p. 117), see also s. 64 of the Assessment Act. 12. "Financing Our Urban Needs," Nation's Cities, Washington, D.C., March, 1969, p. 37. 13. Eric Beecroft, "Site Valuation as a Base for Local Taxation," Report of the Proceedings of the Fifteenth Annual Tax Conference, Canadian Tax Foundation, 1961, p. 71. 14. See, Kalev Pehme, "Untimely Thoughts About Real Estate Taxes", Our Town, Vol.21, No.10, July 1, 1990. 15. For example, a $50,000 property may be comprised of a building worth $40,000 and land worth $10,000. The ratio of total property value to land value is therefore 5:1. For some examples of these value ratios see, Franklin A. Wiles, Land Development and Taxation in a Central Commercial Zone (Vancouver, Rawson and Wiles, 1965), pp. 16-19. 16. Dick Netzer, Economics of the Property Tax (Washington, D.C., The Brookings Institute, 1966), p. 194. 17. Paul E. Alyea, "Property-Tax Inducements to Attract Industry" in Property Taxation - U.S.A., R.W. Lindholm, ed., (Madison, University of Wisconsin Press, 1967), p. 154. 18. Max Ways, "Land: The Boom That Really Hurts," Fortune, July, 1973, p. 105. 19. See, Fred Harrison, The Power in the Land (London, Shepheard-Walwyn Ltd., 1983). 20. Some houses appreciate in price for anomalous reasons, such as heritage properties or because a certain form of architecture was used in the design. 21. Henry George, The Science of Political Economy (New York, Robert Schalkenbach Foundation, 1981), p. 86. 22. Fred Foldvary puts the paradox in these terms:
Keynes, in several of his works, argued for public expenditure on public works. That many of his followers believe that continuous government intervention is needed to correct a "fundamentally flawed, non-self-correcting market economy" (Rowley, 1987, p.154) is ironic, since it is the continuous intervention by government, including public works and monetary inflation, that so often induces speculation in the real estate market, with its resultant booms and busts. Every increase in government expenditure that has social value creates an economic shock if it is not offset by a collection of the economic rent produced (p.33).
"Real Estate and Business Cycles", The First Lafayette College Conference on Henry George, June 13-14, 1991, Lafayette College, Easton, Pennsylvania. 23. Vide, James M. Buchanan, Robert D. Tollison and Gordon Tullock, eds., Toward a Theory of the Rent-Seeking Society, (College Station, Texas A & M University Press, 1980).
24. "Enough Empty Land to Last the Century," Montreal Star, February 19, 1977, p. F1. 25. Governments are very aware of the land costs problem with respect to the provision of affordable housing, but continually propose the same ineffectual solutions. For example, recent discussion paper released by the Ontario Ministry of Housing, "A Housing Framework for Ontario", June, 1991 correctly points out that "Because the cost of land is a significant portion of the cost of developing a not-for-profit housing effort should be made to reduce these costs. Land costs range from approximately 15-60% of the total cost of a project depending on location. In certain high need areas, land is a very large component of the total and may account for over 50 per cent of the cost"(p.93). The discussion paper then goes on to outline possible strategies such as seeking charitable donations in order to secure land or the intensified use of sites to reduce land costs. The obvious solution, site value or two tier taxation, is neither mentioned in this report nor in the discussion paper "Government Land for Housing", June, 1991. Of course, the Ministry of Housing could say that taxation is not its responsibility, but in the larger scheme of things such fragmentation of government policy means that for all intents and purposes nothing will change. 26. In Recent Research Results (February, 1986) the U.S. Department of Housing and Urban Development states: "The cost of land is a major factor in the high prices that keep many qualified consumers from buying homes - often accounting for as much as 40 per cent of the house's price." p. 4. 27. Paul T. Hellyer, Report of the Federal Task Force on Housing and Urban Development (January, 1969), pp. 38-39. 28. Hearings Before the National Committee on Urban Problems, Washington, D.C., Vol. I (May-June, 1967), p. 281. 29. "Method of Taxing Unused Land is Scandalous," Henry George News, August, 1968, p. 3. 30. Hellyer Task Force, On Housing and Urban Development, (January, 1969), p. 37. It should be noted, however, that the cost of mortgage money is directly inflated by high land costs, see, Dr. Les Hemingway, Rent As Revenue: The Enemy of Interest, (Warrnambool, Victoria, Australia, 1990). 31. Id., p. 39. 32. M.H. Walker, ed., Rent Control: A Popular Paradox (Vancouver, The Fraser Institute, 1975), pp. 3-36. 33. Kent Gerecke, ed., The Canadian City (Montreal, Black Rose Books, 1991), Hans Blumenfeld, "Mismatch Between Size of Households and Size of Dwelling Units", p. 201. 34. Id., p. 203. Blumenfeld concludes that there is no reason to put or maintain in place special measures for the housing sector because these measures as currently devised, especially tax favours in the income tax system, have not addressed the specific housing problems we face and have only encouraged the overproduction of big houses. The maldistribution of housing in our society is primarily a function of the maldistribution of income and only land value taxation can help rectify this. 35. See, Land and Liberty, July-August, 1986, p. 64. 36. Walter Rybeck, Moderator, Property Taxation, Housing and Urban Growth (Washington, D.C., The Urban Institute, 1970), p. 21. 37. P.I. Prentice, op. cit., p. 67. See also, Mary Rawson, "Property Taxation and Urban Development," Washington, D.C., Urban Land Institute, Research Monograph 4, 1961, p. 30, and an important Australian study by the Land Values Research Group, The Social Effects of Municipal Rating: A Study Conducted in Footscray, 1944-45, pp. 21-23. 38. Development Charges Act, S.O. 1989, c.58, as amended. 39. Development Charges Act, s.3. 40. Incentive Taxation, (Center for the Study of Economics, January-February, 1991). 41. The state of Pennsylvania actually forced the city to adopt a two tier property tax purely for its economic effects - no revenue was at stake, since the city was already raising the same revenue with its single-rate property tax. ??
Return to the CRCT Home Page | Return to the CRCT Tax Impact Studies Index
    
   
Most recent revision: February 15, 1997. |