Jobs. Every election cycle that’s at the top of everyone’s priorities. This puts politicians in an awkward position, because government can’t create jobs without taxation and spending. That’s not a sustainable answer.
Ultimately, private enterprise must create jobs. The lower the risk to entrepreneurs, the more business activity we’ll see. Governments always chase big business, but the lifeblood of any economy is small business. Any one small business won’t be enough to save a city, but taken together small businesses account for 96% of all businesses in Medicine Hat. That’s who we need to support. If small busineeses are doing well, we’ll know things are improving.
Government’s role is to make sure our incentives are aligned with the behaviour we want to see. Here is how our assessment system discourages business investment. And how we can change it.
Reforming the way we assess commercial properties would minimize unpredictable fluctuations and remove the penalty for investment. We forget that the underlying structure of our economy is not automatic. The status quo was chosen. It is not neutral. If our local economy is sputtering, it is this framework that needs attention and reform.
Assessment of commercial properties
The assessment of property value is a complex formula set by the province. The complex formula depends on factors such as:
market inventory
renovation and addition
and market changes.
The tail ends of these bell curves get the most attention. It’s only the businesses that see the largest increase in assessed value that complain—but as you can see businesses can also see large decreases too. In between a much larger number of properties see significant swings in assessed value annually.
Assessment change 2020-2021 Taxation Year
Assessment change 2019-2020 Taxation Year
What conclusions can we draw from these graphs?
Each year sees a similar distribution of fluctuations. The consistency of results every year indicates to me that local assessors are correctly assessing properties in accordance with provincial rules. It’s predictably unpredictable.
That means the fluctuations are likely a feature, not a bug, of the system.
There is disagreement on council whether this is even a problem. According to the Assessment Department each fluctuation is warranted. With any increase in the size and scope of the business or utility costs or staffing costs or maintenance costs we should expect a change in assessed value. But some businesses also see fluctuations even if they have done nothing differently—that seems problematic. These fluctuations can be justified, but their unpredictable nature would be a difficult factor to account for. We know that business confidence depends on long term planning and predictability.
I have a couple of suggestions:
We need more information before making an informed choice about our options. It would be great to see the same charts of assessment from other cities. If the charts from other cities look similar we can confirm this issue is systemic.
There may be options available under current legislation to minimize these fluctuations. My hunch is that the fluctuations are related to assessing commercial properties through the income approach. Changing this might reduce fluctuations. I would like to direct staff to look at our options, but only a majority of council can direct staff. This view does not currently have majority support.
A different way to tax commercial properties
Assuming we can fix or mitigate this fluctuation problem there is a deeper, more serious, misalignment of our assessment policy and incentives. Even Blondie understands the conceptual problem behind our assessment tax policy.
Municipal taxes operate on a progressive scale. Two houses sitting next to each other on the same sized lot costs the city the same amount to service. But a million dollar home will be taxed more than a $100,000 home. I don’t have a problem with this. We can understand this difference in taxation as a principle of fairness. People in more expensive houses pay more taxes.
But you can see how it creates a disincentive for development. Go ahead and build a big house, but your ongoing costs (ie taxes) are going up too. For residential development I think this type of progressive taxation system is appropriate. For commercial development I think this system has serious problems.
Housing is a basic human need, but it’s also a form of consumption. No one is forcing people to live in expensive houses. You can live simply and be charged less. I agree with the taxation of consumption, but commercial development and investment are different. This isn’t consumption—but production. That’s the lifeblood of an economy. Here increasing your ongoing costs is a burden any business must consider before investing in that property.
For example, the owners of the Beveridge building downtown Medicine Hat undertook an extensive renovation that saved this historic building. Exactly the type of development that our community wants to see. Their reward is substantially higher taxes when their renovated building is reassessed. That increased overhead ironically makes it more likely that this business might fail. Sure a newly renovated building also allows for higher lease rates, but it also increases risk. Risk is what we need to manage.
Contrast the Beveridge owners to the owners of the Assiniboia Inn, the Town Theatre, and the Tramps building who have done little to no improvements to their buildings. They can sit on crumbling buildings for years—paying little in tax because of the poor condition of their buildings, which are assessed lower. In many ways this is a rational decision because of our current tax incentive structure.
Land value vs. Improvement value
There is an alternative way to distribute the tax burden that incentivizes investment—separate land value from improvement value. This isn’t a flat tax. Taxation would still be progressive as more valuable and larger lots pay more, but any investment in that property would not be taxed.
Separating land value from improvement value levels the playing field between owners who invest in their properties and those who don’t. City Hall would collect the same amount of taxes for commercial properties overall, but the tax load is redistributed within this sector.
For example, the Beveridge would see taxes decrease. The Sin Bin would see taxes increase. This policy reform solves the problem of derelict buildings that cities struggle with. Since you’ll pay the same taxes whether you sit on a derelict building or a renovated one it makes sense to invest in your commercial property. The more you invest in your property, the higher lease rates you can likely charge, but your tax burden doesn’t change. Risk is decreased.
Next steps
I prefer incremental progress to radical fast change. Since this policy change is a radical departure from our current system there are a number of baby steps to ease the transition.
City Hall can commission a report that hypothetically outlines the change in taxation for business under this new policy. Everyone could see how tax bills would change before we agree to change the policy.
Rather than change this policy for commercial businesses city wide I would first change it with one neighbourhood. This would create a limited experiment and the community would again be able to see how it works. I suggest we start with the downtown core. Downtowns in every city are the oldest neighbourhoods. Every downtown struggles with derelict properties. Cities rely on subsidies to bring old buildings up to code, but with limited resources these incentives can only cover so many buildings. This leaving the rest to languish, weighing the neighbourhood down. This policy changes the incentives for landlords.
This idea would need widespread buy-in on council and the community since this likely involves amending provincial legislation that governs municipalities. This would be a years-long process.