Part 1: Tax Rates
Back in February city council spent thirty minutes debating a $25,000 cut to the City Centre Development Agency’s budget. The previous month council passed a $160 million infrastructure budget, serviced by long term debt, without a single comment.
If we want to control the rise in government costs we need to understand the main pressures cities face. Debating service level cuts are one part of the debate, but to make a serious impact we need to understand the systems that created our current environment. And focus on areas of highest costs—infrastructure and emergency services.
3 Pillars
There are three foundational pillars for every municipal council. The overall budget, property assessment and how we distribute the tax burden. The first two get the public’s attention, but though property tax rates are often overlooked they are critical to the long term sustainability to cities. The specific number isn’t important for the tax rate, rather the relation to each other is, since that determines our relative share of the municipal budget.
First a refresher. Council sets the overall budget, then we divide the tax burden through tax rates and assessed values. That determines your personal share of local taxes.
“YOUR PROPERTY TAXES =
THE TAX RATE MULTIPLIED BY YOUR ASSESSMENT VALUE / 1000”
Here are the tax rates for 2019.
On the bottom line are the increases for this year. Not every property type increases equally. The non-residential tax rate actually goes down, multi-family and single family are going up. (Ignore farmland, it’s a tiny portion of the land within city limits.)
The easiest way to understand the implications of this distribution is to look at the taxes for three different properties assessed at the same value:
A $250,000 single family residential house will pay $2,356.38 in taxes this year. (9.4255 X 250,000 / 1000)
A $250,000 multi-family residential property (think condos) will pay $2,851.20 (11.4048 X 250,000 / 1000)
and a $250,000 non-residential property (think commercial/business) will pay $4,703.70 (18.8148 X 250,000 / 1000)
Three different types of properties of equal value with significant difference in taxes.
Taxation without justification
The problem with this distribution is that council has no basis for charging multi-family and commercial properties higher taxes than single family residential properties. We don’t know what it costs to service each property type. I hypothesize that it’s unlikely that the cost is equal across the three tiers.
This is not a new issue, nor is it an issue that is isolated to Medicine Hat. Every year council has a debate over what the appropriate res to non-res tax ratio is. Here is how we compare with other Alberta cities.
But this debate over what is the right ratio between non-res and res taxes and how competitive we are compared to other cities obscures more important questions. Namely: what is the cost to service each type of property and do our tax rates reflect those costs?
Do commercial properties consume more infrastructure than residential properties? Perhaps.
Do commercial properties consume more police and fire protection than residential ones? Perhaps.
Do commercial properties consume more social services? Perhaps.
Commercial properties might consume more services. Banks rely on the police. Businesses use roads at a probably higher rate. But we should try and establish some justification, even a rough one. The answer to these questions has profound implications for cities.
Now let’s take multi-family properties. They are taxed 21% higher than single family residential properties this year. Yet, every city planner drills into me the importance of higher density housing for sustainable cities. That’s because higher density housing costs the city less to service than single family developments.
The more spread out a city—the more infrastructure that needs to be maintained and the more emergency services are needed. It takes more police to patrol a geographically large city. It takes more fire stations to meet our standards for response time. Low density developments also drive high public transit costs.
This is important because infrastructure and emergency services form the biggest budget items. Emergency services alone account for 40% of our budget.
It doesn’t matter to me what type of house Hatters want to live in. The city tried selling smaller residential lots in Saamis Heights and they have been a flop. People want larger lots. Fine, but if there is cost that comes with that type of development that should be properly accounted for. If we don’t recover costs appropriately through neutral tax rates development will be distorted.
How much money are we talking about?
Here’s how much we collect from each property type.
The first column is the total assessed value of those property types for 2019. The second column is the municipal tax rate for each type (separated from the education and Cypress View foundation taxes that the city collects on behalf of the province) This is what the city collects to fund its budget:
Single family residential taxes: $45,417,664.94
Multi-family residential taxes: $2,490,013.09
Non-residential taxes: $29,595,318.18
Since we split up the budget among ourselves—if someone is paying too much, someone else is paying too little. This is hypothetical because remember city council hasn’t yet answered this question. What is the cost to service each type of property and do our tax rates reflect those costs?
Does it matter which pocket we take it out of?
If you live and work in the city does it matter which pocket we take it out of? After all, this doesn’t impact our overall budget at all. So you pay less for you home and more for your business.
Yes, it does matter. We lowered business taxes this year (and last year) while increasing multifamily taxes by 5% last year (compared to only 3.24% for single family properties). This year multi-family is rising again faster than single family homes. These manual adjustments are clumsy because there is no principle guiding our actions.
But a true distribution of costs would change behaviour. If hypothetically we’re charging more for multi-family developments than we should that is an artificial disincentive. If that tax distribution changed multi-family properties would start looking more attractive because it’s a more affordable lifestyle than single family houses.
If non-res tax rates were in line with our actual costs to service them that might mean a significant tax cut. That’s more money for business struggling with increased costs.
Even if a small portion of residents decided it’s now better to live in multi-family developments that increase offset by less single family developments would lessen the pressure of municipal budgets overall.
The path forward
The first step is answering this question: What is the cost to service each type of property and are we neutrally recovering those costs through taxation? If one type of development is shouldering more of the tax burden we should be intentional about it.
If this hypothesis is correct we will need to rebalance our tax distribution. This change cannot be done overnight and most likely require 15-20 years to slowly change gears.
Calgary is recognizing that their business taxes are too high, but are also realizing how painful it is to switch gears. Switch too quickly and the rate shock would be high. Everyone should have plenty of time to understand what changes are coming.
While Calgary recognizes that their business taxes are too high, they also don’t seem to appreciate what impact this distribution has had on past development. Cities across the province might be subsidizing the very types of developments creating unsustainable costs for communities. They have done so at the expense of our local business and the types of higher density developments that would help cities. (Lethbridge charges multi-family properties 40% higher than single family properties!)
A tax distribution based on justified costs would alleviate major cost drivers for cities. Likely making multi-family developments cheaper and removing a major drain from business. It’ll have far reaching effects for how our cities develop.
Because it’s potentially a disruptive change we would first have to study the question and I would need to convince at least four other councillors that this issue warrants further study.