OP-ED: Rethink Business Property Tax Breaks

By Doug McArthur

Municipal governments all across the province are busily developing their budgets for the next tax year, which starts January 1, 2010. Most will be trying to restrain their budgets.

The affects of the recession are now being felt full force and one can bet that taxpayers are not going to be receptive to paying substantially higher taxes. Municipal councils can expect vigorous public opposition to tax increases imposed to help close the revenue-expenditure gap.

Part of the challenge for councils is to distribute the tax burden among different tax categories or property classes in a sensible and fair way. The property classes each have their own tax rates or mill rates set by the councils. Getting the right balance of tax rates is challenging both politically and in terms of good policy.

There has been intense political lobbying over the past few years about differences in tax rates across the classes of property. In particular, business and industrial taxpayers have been active in protesting the fact that they pay tax rates that are significantly higher than homeowners as a percentage of property value. These differences reflect long-standing views about fairness, responsibility and balance.

Last year Vancouver's council responded to this pressure by legislating a lower tax increase on business properties than was imposed on residential properties. There was little public discussion about it, partly because the traditional anti-tax lobby, dominated by big business, accepted it as a business friendly move.

An important question to ask is whether reducing the property tax rate is the best way to help the business sector, or if business needs or deserves this break. The amount of tax paid by business depends on two things - the market value of business property and the tax or mill rate for business properties. The market value of all business properties increases each year in response to the increase in the value of the small number actually sold.

Market value is determined by the British Columbia Assessment Authority using formulae that adjust the value of the properties that have not changed hands based upon comparable properties sold in the market. Market values depend upon the revenue and costs including property taxes of businesses actually sold on the market. The lower the taxes the higher the market values of properties actually sold, and the higher the value of all business properties.

One of the clear results of a property tax break for business is that the market value of business properties increases in response to the lower tax rate. Indeed, based on the iron law of economics, the increase in property values will exactly offset a tax decrease. In other words a tax cut or a lower rate of increase will in a short time be translated into an offsetting increase in business property values. Of course other things may affect property values as well, but that doesn't change the argument about the impact of changes in tax rates.

In part to deal with this potential erosion of tax changes, changes in property values are calculated ahead of tax changes. In this way the property taxpayer is shielded from immediately having the gains of lower tax rates being undermined as a result of direct consequent increases in property values. The municipality sets a target revenue number for business properties as a class each year, based on a rate against last year's assessed values.

But what should be the basis for determining the share of revenue attributed to each class of property? It is commonly argued by those favouring the tax shift away from business that this should be evaluated by looking at the relative share of aggregate assessed property values. But because the tax rate will be an important factor in determining the following year's assessed values, relative assessed values do not provide a fixed continuing basis for determining how much of the burden each class of property should bear. Objectively, the relative shares can only be determined by drawing on some other means upon which to base the proportionate share of the tax load by class.

If the share is to be shifted in favour of a particular class of property, upon what underlying principle is the proportion to be based? If it is based on the relative aggregate assessed values for each class, changes in this proportion will be driven to a considerable degree by the relative changes in tax rates themselves. There is something odd about following a principle for these purposes that has, as one of its major impacts, changes in assessed values through time that work against the principle.

There is also an important question about who really gains. Since relative tax relief increases the market value of business properties over time, the cost of acquiring properties goes up and so too does the cost of doing business, eroding the benefit of the tax relief. And this erosion falls immediately and most heavily upon new, usually young start-ups who are purchasing or renting property. Indeed, the supposedly preferred tax treatment puts the new and younger business operators at a competitive disadvantage, which is the opposite of what most advocates for the tax shift would want to see.

It is time for a principled discussion about the reasons for the tax shifts that some cities are pursuing, and for greater transparency about the consequences of these shifts. Otherwise tax changes go to those who push the hardest and who are most successful at playing the lobby game.

And if business needs help, it might be better to look at things that will be more effective, such as support for young start ups, as well as high growth and high value sectors, knowledge dependent hubs and small, independent business. Or perhaps make the case for a lower corporate tax rate for small business. But these ideas appear to make a lot more sense than blanket property tax shifts from business to residential taxpayers.

Doug McArthur teaches in Simon Fraser University’s Graduate Public Policy Program.

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