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Property taxation in British Columbia and the city of Vancouver: averaging and phasing options for land valuation.

Averaging or phasing land values for the property tax rolls may help municipalities in British Columbia maintain stability and certainty in the taxation base during periods of rapid change in local real estate market conditions.

Market value is the approach used for assessment of real property in British Columbia. An independent assessment agency appraises all land and buildings on a biennial basis and assigns them to several classes based on use, i.e., residential, utilities, industry, commercial, farm. The taxable values for each property class are then established at 100 percent of the market value. There are no fractional adjustments to these values.

Variable Tax Rates

There is not a common tax rate for all classes of property; rather, there is a unique tax rate for each class of property. This system is referred to as variable tax rates. Expressed as a rate per $1,000 of taxable value for each property class, tax rates are set annually by the municipal councils to yield the desired tax revenue for each class of property. The purpose of these variable tax rates is to allow the municipality to maintain the proportionate share of the total tax burden for each class of property. For example, if commercial properties were to double in value while residential properties remained constant, to keep the relative shares constant, the commercial tax rate would be halved and the residential rate maintained. Although this concept allows the shares of tax burden among classes to be maintained, there has not been a similar mechanism to stabilize the burden within classes. It is the potential for differential shifts in market value within a class of properties, resulting in a shift in tax burden, that is the focus of this article.

While the taxation system is based on market value, with market value deemed to be a measure of the ability to pay taxes, occasionally in times of volatile price changes there is a need to dampen the changes. To illustrate: In 1989, rapid fluctuations in real estate prices in Vancouver resulted in shifts of the land tax burden within property classes. The market values increased at a greater rate for the residential properties on the west side of the city than on the east side. Some areas had increases of more than 100 percent, whereas the average increase for the residential class as a whole reached only 35.5 percent. Strip commercial properties also increased in value, some as much as 300 percent, although the average for the commercial class was 21.2 percent.

Through a public consultation process, various legislative options were introduced to give municipal councils some choices to help deal with their changing tax bases. Some of these options were:

* residential land value capping (limit to average class increase plus 15 percent);

* flat tax for residential class;

* separate tax rates for residential land and buildings; and

* residential/commercial tax capping (limit to previous year's taxes plus specified increase).

Tools for Change

In 1993, recent legislation has given another option to municipal councils to help maintain stability and certainty in the taxation base, without compromising equity for taxpayers. The legislation does not eliminate either market value assessments or the variable tax rate system, but rather provides ways to enhance their effectiveness. The most significant change to the overall system is the option for averaging or phasing of the taxable land values.

This change addresses the basic premise that, although market values are generally accepted as a reasonable base for property taxation, there is a need for the tax burden to change more gradually within a property class than would result from the response to rapid changes in market conditions.

Ideally, the assessments should be produced as close to the time of tax billing as possible to ensure an equitable distribution of the tax burden. On the other hand, municipal councils and taxpayers need accurate assessment information well in advance so that they can plan ahead. Through the establishment of a different assessment cycle, the new legislation seeks to balance these two objectives.

Under the new assessment cycle, property will be appraised on an annual basis, rather than on the former biennial cycle, with July 1st as the valuation date in the year during which the assessment roll is completed. The new cycle adds three months to the interval between the valuation date and the mailing of the assessment notices to the property owners. This change will allow sufficient time to analyze the July market information to produce accurate assessment values for the notices, which will be sent out December 31. Thus, the quality of the assessments will improve, and this, it is anticipated, will reduce the number of taxpayer appeals to the Court of Revision.

The dates for determining physical conditions and roll completion likewise have been moved forward to allow a two-month period between the evaluation of physical inventory and the mailing of the notices, with the resulting expectation of better quality assessments.

The timing of the appeal process for assessments has been changed. The Court of Revision, which formerly sat during November and December, now will not begin sitting until February, and the deadline for filing appeals has been extended to January 31. These changes will improve field work conditions, which should result in a more accurate assessment roll and, thus, reduce appeals.

Averaging or Phasing of Values

The 1993 legislation also introduces the provision for averaging or phasing of land values. Simply stated, averaging allows the land value to be averaged over three years. The tax rate is imposed on the average of the taxable land value in the current year (1993) and the two preceding years, plus the taxable improvement value in the current year. This option provides a practical, administratively straightforward way of reducing property tax change within a property class without providing unfair advantage to taxpayers who have built or rebuilt on their land within the averaging period.

A typical Vancouver home would have experienced up to a 48 percent reduction in property tax volatility if averaging and annual assessment had been in place in the volatile real estate markets of the late 1980s and early 1990s. The combined effect of averaging and annual assessments is illustrated in Exhibit 1 and contrasted with property taxes payable under the biennial assessment system.

The phasing option provides a similar effect, but it is more focused on properties within a class that have had larger-than-average increases. The tax rate is imposed on the taxable improvement value in the current year plus the taxable land value in the current year adjusted by a percentage (between 50 and 66 percent) of the difference between the value increase of an individual piece of land and the percentage increase in the value of all land included in the same property class. This option helps to stabilize property taxes by narrowing the gap between the average change in taxes and the change that would occur in an individual piece of property had phasing not been undertaken.

Both options apply only to land values in specified property classes--residential, light industry, commercial and recreational/non-profit organization property. Both options are applicable to the calculation of all tax levies, not just municipal taxes, on a revenue-neutral basis. In other words, municipal councils have been given the authority to modify the tax rates established by other taxing authorities to take into account the adjusted assessment base produced under averaging or phasing in order to raise the same amount of tax dollars as requisitioned by those authorities.

Averaging or phasing requires municipal councils to approve a municipal by-law by March 31st. This by-law must set out the terms and conditions for either option as prescribed by legislation. It also must include the appeal procedure to allow the property owners to complain, firstly to the collector and then to the municipality's local Court of Revision about any errors made in applying the by-law to their property. Provincial regulation outlines the uniform practice for handling special assessment conditions, such as a change in zoning, use or density.

If a council intends to adopt an averaging or phasing by-law, taxpayers must be notified both before and concurrent with the billing of property taxes. The newspaper advertisements are meant to inform taxpayers on the estimated impact that these options will have on property taxes by using sample properties within the municipality. The notice also must outline the appeal process as set out in the by-law.


Factors to Consider

Averaging and phasing are similar techniques but differ in some respects, so one will often be more appropriate than the other in certain situations. Averaging deals with three years, while phasing considers only the current and immediately preceding year. Also, phasing targets only those properties within a class which have land value increases in excess of the average, while averaging is applied to all properties within the class, irrespective of their relationship to average changes.

Municipal councils will have to consider other factors, as well, each year when deciding to use one of these options. Some of the major considerations are identified below.

Current and Expected Future Change in Property Values. If trends related to disproportionate increases in areas or in a particular range of property values are observed or expected, will averaging be useful to mitigate these effects? Will phasing?

Definition of "Fairness." Property taxation policy has a direct impact on children and families. Taxation polices that are regressive will hit hardest those that are the least well-off financially. In the averaging/phasing options, for each property that "saves" taxes as a result of a lower assessment, there will be corresponding properties that are paying more tax than they otherwise would in order that the total revenue be consistent. Is this fair?

Neighbouring Municipalities. If a neighbouring municipality chooses the averaging option, will there be some political pressure for nearby municipalities to also choose averaging?

Taxpayer Communication and Understanding. Is the reason for choosing averaging/phasing clearly set out? Can the resulting effects be adequately defended and explained? Have all factors been considered, such as past comments/requests from taxpayers, attitude of the local media and degree of support on council?

Discontinuing the Use of Averaging/Phasing. Will this decision be precedent setting? Will taxpayers expect and even plan for taxation changes next year based on smoothed assessment increases once such a system is implemented? How and when can averaging/phasing be stopped without sudden, large tax fluctuations?

Administrative Costs. Is the municipality prepared to assume the additional administrative costs that will be incurred if it chooses to average/phase? Such costs will include

* research to consider effects of averaging/phasing,

* calculation of adjusted assessed values,

* modification of tax notices for communication to taxpayers,

* procedures for handling errors and appeals plus resulting taxpayer enquiries, and

* newspaper advertising.

All these factors will have to be considered by municipal councils each year when making the decision to use or not use the averaging or phasing options. Council members must carefully weigh the consequences of adopting one of these options. They must ask, "Are the problems caused by the variation in assessment change within a single property class sufficiently serious to warrant using the option, given that its use will result in more complicated assessment calculations, higher administrative costs and modification of tax notices?" There will be debate in subsequent years over the continued use of the options and therefore, the impact on individual taxpayers must be considered.

Near the end of February, when this article was prepared, there were 13 total out of 150 municipalities in British Columbia that had given notice to consider the use of the new phasing and averaging options. Whether these options are effective for these municipalities and their particular assessment situations the taxpayers will ultimately be the ones to decide.

Vancouver: Analysis of Options

To illustrate Vancouver's situation, Exhibit 2 sets out the projected taxation impacts in selected neighbourhoods of the city. Shown in the exhibit are the projected 1993 taxes--municipal portion only--on the median residential and commercial properties in those neighbourhoods for each of the three options available this year: the present system (base), three-year land value averaging and current-year land value phasing which shelters 50 percent of the 'excess' land value from taxation.

The citywide perspective to the taxation distributions produced under each of the taxation options is shown in Exhibits 3 and 4, where the resulting tax changes are grouped in percentage intervals for residential and commercial properties. The tax changes are based on comparisons with actual 1992 taxes. The 1993 taxation distributions produced under the three tax-calculation options available to Vancouver suggest that three-year averaging is the best option for residential and commercial properties this year.

On March 2, 1993, the Vancouver City Council approved the use of three-year land assessment averaging for residential and commercial properties for the 1993 tax year. Property taxes will be calculated on the averaged value of 1991, 1992 and 1993 assessed land values, plus the 1993 assessed improvement value. In newspaper advertisements of the action, the council explained the change to the citizens:

Averaging will work to smooth out large year-over-year property tax changes caused by uneven market value assessment changes. This problem has existed in Vancouver over the past four years and has been a special concern of City Council.

PENNY BRUIN, C.G.A., city treasurer and collector for Vancouver, British Columbia, served during 1991-92 on the Provincial Technical Committee on Property Tax Options. She is the President of the GFOA of British Columbia, the GFOA's provincial representative for B.C. and a member of GFOA's Committee on Cash Management. Portions of this article are adapted and reprinted with permission from the Province of B.C., Ministry of Municipal Affairs, Recreation and Housing.
COPYRIGHT 1993 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Bruin, Penny
Publication:Government Finance Review
Date:Apr 1, 1993
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