FAIR TAX COMMISSION

Themes and Issues

1. What kind of property assessment system should we have?
What may be some desirable attributes of such a system?

This question can only be answered if one distinguishes between assessments of capital improvement values and locational values. The source and economic character of both values are inherently distinct. Ultimately, this distinction is based on a conceptualization of property rights that identifies those rights generated by the individual through human effort and the economic rents created by individuals working at particular specialties in association.

Market value assessment is the only objective determination of property values either for capital improvement or locational values. If site values alone were used as the property tax base, the volatility of property values would be substantially reduced. This is contrary to popular perception because the current system of property taxation and government involvement in the housing market increases land market volatility and thus ratepayers assume that the volatility is caused by fluctuating land values and do not press further into inquiring why land values themselves are so volatile. The instability of market values is a result of monopolistic imperfections in the market itself.

2. Who should be responsible for property assessments?
And what type of resources should be used to support this activity?

The provincial government or a provincial crown corporation should be responsible for property assessments. The task of assessing property throughout the province could be greatly simplified once site values only are used as the base for property tax mill rates. Cadastral maps can be created, electronically, for all the lots and parcels within a municipal jurisdiction. Since these land value maps are easy to read and understand they could be distributed to all property owners.

After the transition to a land value tax system, assessment resources could be significantly reduced. It is estimated that currently 80% of assessment resources go into the valuation of buildings. This does not necessarily mean that only 20% would go into assessing land under land value taxation. Under the present system land values are frequently assigned as an afterthought. If land values alone were the base more resources would be put into their accurate assessment. There is a bias in the current institution of property assessment toward capital improvement assessment. It is a "bricks and mortar" discipline and art that has, however, considerably refined its techniques and methodologies in recent decades. The market value assessments of residential housing are generally accurate and unassailable on appeal. The system as a whole, however, would be immensely simplified and made more understandable to the general public if land values alone constituted the property tax base. Over time this would reduce substantially collection and compliance costs.

3. Which valuation method(s) should be used?
What are the three approaches to value?

The answer to this question is dependent upon what is being valued. Generally speaking the assessment of land values is not all that different from assessing buildings and improvements, although a number of different variables have to be taken into account. There exists a well established research literature on assessing land values although assessors in Ontario are for the most part not all that familiar with these techniques. Some of these valuation methods are outlined below - several references appear at the end of this answer.

There are three approaches to assessing value: cost, market data, and income, see, Kenneth Back, "Land Value Taxation in Light of Current Assessment Theory and Practice," in Daniel Holland, ed., The Assessment of Land Value (Madison, University of Wisconsin Press, 1970), p.38. With respect to valuing land, the market or comparative method, the land residual method, the development method, and the allocation method must all be utilized (vide, Back, Id., pp. 41 et seq.). Numerous sales of vacant lots that represent all the determinants of land value such as corner location, depth and width variance, topography, zoning, location, subsoil conditions, shape and size, would make the assessor's task easy and inexpensive. Unimproved lot sales in most cities are, however, few and far between. It is therefore necessary to supplement the direct evidence obtained by the market method with benchmark site values that represent allocated portions of the selling prices of improved real property.

The land residual method can help establish benchmark site values by analyzing the income data of investment properties. The residual income imputable to the land, which is derived from the highest currently economical use of the site, is capitalized into value. The underutilization of urban land parcels often disguises the capacity to serve of these parcels. The land residual method gives evidence of the site value of underused properties.

The development method postulates improvements to the site and then projects a selling price for the total property. Improvements are then subtracted from this price and the site value is obtained. This anticipated use method is applicable primarily to unimproved land but can also be used for valuing underused sites.

The allocation method identifies the ratio of building value to land value, that is, it allocates value to improvements and value to the unimproved land parcel. Each improved parcel is unique because of age, condition, physical character, and the economic suitability of the improvements. As such it is impossible to obtain a uniform ratio and thus the same inequities will remain as under the general property tax. However, if certain data is available, it is possible to establish the pattern of land-to-total-value ratio variance (vide, Back, Id., p.46.). Back, who was Director of Finance and Revenue for the Government of the District of Columbia notes:

"When values derived by its (the allocation method's) use are added to those obtained by the direct, land residual, and development methods, we acquire a body of land-sales data adequate to the requirements of a highly competent land-appraisal product capable of standing up under the sternest tests for accuracy and uniformity, even in an urban area where there seemingly exists a paucity of direct evidence."(Id., pp.46-47)

It is also possible, by calculating the average ratio of improvements to land value in a municipality, to determine which properties will have their taxes decreased under site value taxation and which ones will face an increase. Those properties with an improvement to land value ratio higher than average will receive a tax decrease, while those below the average ratio can expect an increase.

Carmean, Patricia A., Site Value Taxation, International Association of Assessing Officers, Chicago, 1980.

Murray, J.F.N. Principles and Practice of Valuation, Sydney, Commonwealth Institute of Valuers, 4th ed., 1969.

4. What is market value assessment?
What are its strengths and drawbacks?

Market value assessment is defined in section 18 of the Assessment Act as "the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer."

The strength of this form of assessment is that it is the only objective, non-bureaucratic and accurate representation of the value of property or of the fiscal generating capacity of a site. It is frequently criticised as too volatile and not indicative of ability to pay. The problem lies not in the inherent volatility of the market but in the often government-induced distortions which spur speculative activity in the real estate, be they monetarist, fiscal or regulatory. Government itself encourages land speculation and an artificial scarcity of land by overtaxing buildings and undertaxing owners who underutilize their properties. The drawbacks to market value assessment are not integral to the concept but are more properly attributable to external determinations which vitiate the "open market" in which a willing seller and a willing buyer are willing to participate. For example, it is well known that the taxation of buildings reduces capital investment in the improvements to land. The property tax is therefore directly responsible for the reduction in housing supply which increases demand relative to supply thus driving up the price of housing.

5. How should fairness in property assessments be established and measured?

Fairness in assessments and taxation is conditioned by the principles of ability to pay and cost benefit properly defined and applied. If the ability-to-pay or cost-benefit approaches are applied only to in personam taxes then horizontal and vertical inequities will arise relative to wealth and taxable capacity as can be found with property tax "circuit breakers" and "poll taxes". These inequities are also temporally conditioned. Cost benefit cannot be reconciled with ability to pay if the taxable capacity of the individual is the only criterion for measuring tax fairness. Individuals working as particular specialists in association generate a community-created taxable capacity that reflects the ability to pay of the site which is a value function of its benefits received.

Fair property assessments can only be established and measured by the current market value of sites as assessed according to the methodologies outlined above.

6. Who should review the validity and fairness of property assessments? How?

The current system of property tax appeals can be left in place with greater access to property tax information by the appellant. Also the reverse onus currently embedded in the appeal process is unfair, and perhaps unconstitutional, and should be eliminated.

Under a land value assessment system there would be few appeals since it would be obvious to most ratepayers what "similar property in the vicinity" meant. Adjustments for lot size, corner location and so on would be cadastrally represented. Horizontal equity under a site value system is much more easy to achieve than under the current property tax which includes both buildings and land in the assessment of property for local tax purposes. Capital improvements are elastic, mobile, continually amortizing and invariably give rise to assessment lag and horizontal inequities. Land appreciates in a growing community, but will do so at a stabile and accurately measurable rate if the current monopolistic impediments to the market are reduced and eliminated.

7. Should the future property assessment system feature property classes?
What would be the relative merits?

No. Property classes result in large scale inequities in the property tax system. In Ontario each class of property pays a set proportion of the total tax bill. In addition, mill rates between different classes cannot vary by more than 15%. The consequence has been that apartment buildings and the commercial and industrial sector have increasingly been burdened with a disproportionate share of the overall property tax levy. The inequity in tax burden between property classes is also negatively affecting the efficiency and competitiveness of the Ontario economy. Under a site value system there would be no differential tax treatment by property class. What is needed are extensive tax incidence studies to determine the transitional and long-term impact on residential home-owners of abolishing the property class system.

8. Should all residential properties be similarly assessed?

This question is unclear. Market value assessment by definition means that residential properties will not be similarly assessed. Market values of residential properties will vary primarily according to location. Similar assessments, i.e. horizontal equity, are conditioned primarily by locational value. Underutilization of residentially zoned property, encouraged and subsidized by the current property tax, is a wasteful, environmentally impairing, and economically inefficient use of precious land resources. Similar locational assessments, however, would encourage a more equitable allocation of this resource while at the same time having beneficial effects in the affordable housing market and in the development of public transportation.