Part 10 WHO CONSUMES THE PUBLIC SERVICES OF THE CITY
Another argument put forward often relying upon the 1995 study done by accountants in Vancouver is the claim that businesses consume less public services of the city than the homeowners do. The KPMG Study is quoted on the point that business tax payers pay 60% of the taxes but consume less than 30% of local services.
[KPMG Report ; Study of Consumption of Tax Supported City Services, Page 7]
The difficulty is that the procedure adopted by the accountants in the Vancouver study amounted to treating the property taxes as as something like a sales tax. They would examine the records of a department, or conduct a count of some type of use like attending a place or answering the phone, to see who had purchased or 'used' a particular service and they work out an overall figure for that. For more general usage they would take a figure derived from counting the hours spent in a particular department to produce a sort of standard overhead percentage of the department labor time devoted to this or that activity and whether the first beneficiary was business or residential. So they developed estimates by counts of proxies. They did not consider the ultimate beneficiary. The difficulties with this approach, a consumption approach to the use of city resources or services, are many, but the most important one is that it is simply not an appropriate way to cost out the reason why a person or business is located in the city nor do their taxes match their use of City services. People do not pay taxes on the basis of a specific amount of services they use, excepting those services that have been shifted to a user pay basis. And it is impractical to work out an acceptable way to measure who ultimately "consumes" city cervices in most cases. This is a view that was adopted by the City Manager and the Council in deciding not to use this "consumption" approach. At one point, even the Vancouver Board of Trade agreed with this conclusion and said as much in one of their publications.
[Vancouver Board of Trade; Letter to Mayor Campbell; April 16,2003; Page 3]
In the case of a business, the city offers as concentration of people providing employees and customers, concentrated travel and freight lines in and out, and in the case of Vancouver, also a port, a railroad terminal, and an international airport. It offers such a variety of people with their skills and capacities in a concentrated area that business will have confidence to come in and expect to be able to get any number of employees who can report to work daily and live nearby; as it can expect to find any number of customers for products reachable within an hour delivery time or available for further delivery by established transport.
A business could locate out in the country if they wanted to avoid property tax in Vancouver, and one only needs to imagine what would happen to big stores, service businesses, large employers attempting to do such a thing to see what a great number of services that business will rely upon. They will not be correctly measured or counted, if one just asks how many times the department store phoned the police or the firemen. The sophistication of City services will be found to march in tandem with the state of growth in population. Consultant , KPMG, did rely however upon a consumption approach, for instance, measuring use of the police department on the basis of things like checking how many times homeowners phoned the police or fire (and to what fire hall in the city) for assistance compared to the various call from business. The only result of a consumption oriented study like that, would be to greatly underestimate the significance of the city reality to the needs of business. The best test of all is location, and if there does not appear to be a tendency of business to drift out of town as a trend, apparently because of raises in the property taxes, then it can be assumed that either it is estimated the City services are well worth the property tax or else the property tax is such a small item that it does not figure importantly in location costs. It may even be that for some business to leave would be a welcome trend, where the City has a plan to re-develop an area with residents moving into newly renovated buildings creating new business opportunities and a city that is not getting hollowed out. Such a plan is obvious in the area now called Yaletown, an area not known for better quality housing since the original construction of the Georgia Street Viaduct, but now a higher rent area with redevelopment from wharehouses to apartments.
The fact is that a number of scholars have made studies of the business tax and their conclusions appear to be that it is not a substantial item in location.
"Notwithstanding these potential problems, survey results have not shown much
support for the importance of taxes, especially property taxes, as to determine
location decisions."
[Business Property Taxation; Kitchen and Slack; Discussion papers series School of Policy Studies, Queens University, Ontario 1993, Page 41]
Again, on Page 43 of this study the comment is made that in the USA where many cities have far greater ability to raise revenue by various forms of taxation (sales tax and income tax as well as property tax), there has therefore been greater interest in location causes. Property tax has not been found to have a significant impact on business location decisions.
In 2005, in the Policy Report of City Finance to the Council at April 28,2005 , it was pointed out that the question of who consumes many city services is not a straightforward one , particularly when direct and indirect benefits are taken into account. In short, a set of user fees for everything is simply not practical as a method of determining use of city services between the two chief classes of rate payers. We can comment that this would be too much like an oldster standing on his front porch and arguing with the neighbor that he should not have to pay some part of the property tax because he no longer uses the road in front of his house, having sold his car when he retired, and therefore, the cost of the city crew working on the street should in some way be deducted as to his share. The end of that development, just as would be the case with extended use of user fees, would not be a community, but chaos, and no real City government at all but a jungle of private walled compounds and hundreds of security firms generating a tyranny for all but a very small number. And a much higher social cost of living, for those who could afford to pay it and live in such a savage place.
The finance director's comments on this matter in the April 28th report were not supportive of the use of consumption based taxes:
"Determining true consumption of city services is not really possible.
Determining who "consumes" many of the services the city provides is not a
straightforward undertaking, particularly when direct and indirect benefits are
taken into account. Who is "consuming" the city's roads, police and fire
services, planning services, library services, and so on? The answers to these
questions may to a large extent be dependent the approach taken to and the
assumptions underlying the analysis." As the finance Director adds, the
Vancouver City Council chose not to pursue the KPMG study.
[Report of the Finance Director to the Committee of CS&B, April 28,2005, Page 9]
This argument is constantly made by business advocate such as the CFIB, that "business, especially small ones, actually use fewer services than homeowners", and reliance is often supported by reference to the KPMG study. We submit this is not supported by the City of Vancouver as shown by the above history. Neither doe it make any sense since it turns the whole idea of a community upside down and this is not a useful way of developing a community.
[CFIB submissions on Property Tax Inequities in Saskatchewan, Page 7]
Another argument made appears to rely on the idea that there is some obligation of municipality to subsidize business. This argument states that most businesses are very small, having fewer than five employees, and operate on very tight profit margins. Thus, they cannot afford to pay business tax. Passing over the obvious response that economic hardship is very true of individuals as well, particularly those who are on fixed incomes, like old age pensioners, and the equally obvious fact that these businesses do not pay the business tax they pass it on, we must submit as stated earlier that this is not relevant to property tax. This is simply a case of what is called special pleading. In fact property tax is very regressive, and if we assumed that it really was a burden to small business, which does not appear to be true in terms of Federal Income taxation then a reasonable remedy would be to introduce a rebate based on 15% of the property tax as required by the existing tax rate, payable from the lowest valued property, with the rebate to be reduced to 0, in regular sequence, at the median property value. This would work but we doubt that it would be a well received idea at the Vancouver Board of Trade which really speaks for large business interests, despite its show of solicitous concern for small business.
Before that would be done, however it would be necessary to first of all reduce the tax in a similar way for all the ratepayers for whom the regressive feature was most onerous and who have no chance at all to make deductions as the business class can do. For this it would be necessary to establish a rebate at 30% of the tax payable based on the tax rate for the lowest value property, declining to 0 at the median property value. Residential owners, the ratepayers of the city, must always come before merchants. This would not involve the homeowner grant, which is a separate expression of the policy we will find clear across Canada, encouraging citizens to have a stake in the economic system by assisting them toward ownership of their own home and so fostering social stability.
Introducing such remedial measures for home owners and small business will reduce regressive aspects of the property tax as it is now, without drawing the City into quick fix measures that only delay tax increases and unfairly load even more burdens onto the paying ratepayers,like term averaging or caps.
Of course there may be some millionaires in $200,000 business properties and some wealthy old people in homes rated at less than $500,000 but in both cases concern here would be to focus attention on income rather than wealth and the property tax has been the preeminent form of wealth tax in our society at the local level. There is no lack of taxation as regards other measures including income tax, imports, sales and excise taxes on specific items like liquor and tobacco.
This argument about who uses City services invites attention to the regressive features of the property tax. Whether one is considering the size of business or the size of residential units, there is a vast difference in the case of Vancouver Between a property owner like the Bentall block where five large office buildings are under common ownership, or a small business tax payer who may own a modest commercial property in South Fraser. The difference is between a few hundred thousand and many hundreds of millions.
The same mill or tax rate applies to both properties within business class, which presently is $15.52 for every $1000 of market value. But that rate is significantly different from the residential rate ($2.52 for each $1000 of market value) because of the total mass of property in each class, the class shares, and the number of properties in each class. The total class value in business class is clearly dominated by the small number of very high value properties, just as it is for the residential side.
The property tax is not a tax on income, it is a tax on wealth, and while all pay the same rate, based on property class and wealth, the rate is set by taking the total amount of money to be collected from the whole class, and dividing that by the total mass of property value of all the properties in that class. The unfairness of averaging in that circumstance with respect to disposable income, not wealth, has been noted.
The whole mass of tax to be paid is known as the LEVY. This means the not so well off are financing the very well off, both in business and residential classes, since the only equality is an average result from a range that has very large numbers at one end. Nobody can claim a further subsidy from a rate that is equal to all in the class, but tax fairness also has to do with avoiding regressive aspects where they appear in the structure of a tax. And business already has several dispensations so that it is in no position to claim any further subsidy, which of course does not stop business from grinding away at it through business advocacy organizations. If remedy there should be, it should go to the low value end of the residential class first, where over 60% of the population of ratepayers live.
[the formula for the rate and payment procedure, is set out in the Policy Report of the Director of Finance to the City Committee on Services and Budgets, April 28,2005, at page 4]
Saturday, October 6, 2007
Friday, October 5, 2007
PROPERTY TAX IN VANCOUVER 9
Part 9 Other Taxes Collected by Vancouver
We add that it is not the City of Vancouver that sets certain other elements of the total amount of taxes paid based upon the property tax notice that comes out yearly from the city. Provincial taxes relating to education are collected by the city and appear on the tax notice but the values that are claimed, the method of claiming them, and specifically the amount of these "taxes" are set completely independent of the City by the Province. There are also the other classes of the nine listed in the Assessment Act of which Vancouver derives income from seven as is stated in City Policy reports. Some of the minor ones are set by historical tradition, it seems, some by a formula in a Federal or Provincial law, and with some it is not clear if there is any set rate and it maybe whatever and whenever the Federal Government pleases, (revenue from the Federal business of the Port of Vancouver). Since the proportion of the class shares are fairly close as between business and residential, it may be useful to review the extent to which Residential or Business include items that are perhaps, not really either, and as to the exact amount of the rest, other than residential and business, is it 2% or 5% or what. Should something be added to business, or taken away, and vice versa as to residential,. However, it seems unlikely that the answers to these points will substantially change the tax rate.
Cross-Subsidization Claim
Not only do the advocates of business complain about property tax ratios without any attempt to expain why a difference should exist, they try to introduce, by implication, the argument that there should be no difference at all. They do this by complaining that there is some sort of a cross-subsidization when the ratios of class shares, of business to residential are not equal (1:1) in the different municipalities, although they mean tax rates, not shares. For instance we find the CFIB producing a report complaining about tax inequities and the "tax gap" in Saskatchewan in which they reason that such differences are not equitable and that therefore "...a cross subsidization results."
[Property Tax Inequities in Saskatchewan, publication is CFIB,December 1,2003,page 7]
When tax rates between business ands residential properties are not equitable a
cross-subsidization results. This means that if businesses are paying for more
than their share of services consumed, they are sbsidizing residential property
owners."
A little earlier they say that there should be a "relationship" between the amount of tax paid by business and the costs of the services received by the business. They state:
"When this correlation exists, the tax is fair , based on the benefits received
and accountable, as the consumers of the services know their true cost."
We note the sneaky presumption contained in the statement. They do not say exactly what the relation should be (1 to 1, 7 to 1, 3 to 1?) just that there should be one. Nor do they say why there should be any particular one, just the prim and totally false claim that the consumers will know their true cost. Why? Were they, the ratepayers going to set up their own fire hall? A tax ratio does not imply any particular class share, or vice versa, so how would they know what either is until there has been some experience anyhow? The deceptive intent is clear to see. It is also rather silly. Is business subsidizing residents if more residents call for police help than businesses do? Won't business brag to lure employees or customers that Vancouver is a "safe" city to live in, which it is, or that in Vancouver "crime is going down" which it is in terms of violent crime. But is that not business as a "consumer" of City services? What shall we call it then, one of those Free Riders? Can we abandon efforts to move quickly on "domestics", calls for police help usually from wives with complaints about their spouses, because business is being unfairly taxed for this? If there are lots of fire calls from one neighborhood but very few from the few remaining businesses there, should the business "consumption" be a reason to reduce their property tax? Will business in Vancouver improve the City or the business image of the town when the news goes out that Vancouver has dropped the "zero tolerance rule" for sex or marital assault? Is it useful to try to distinguish between immediate and ultimate consumers of City services?
Shall we have Pay or Burn as a user pay principle for the Fire Department? Can a ratepayer decide to swear off using the sewer, the water lines, the roads, the political acitvities of the Mayor and Council they do not like? Do the dollars paid in property tax by any ratepayer have any direct relationship at all to "consumption"?
Has any user fee ever been set on the basis of true cost or has it been set to raise a revenue to help pay a service, and sometimes to mollify these business advocates? If so that is assuredly a wrong use of Property tax. But that is what is done.
Suppose the residential owner in Vancouver said, well it appears that business does pay the property tax at the beginning but it is all recovered from its customers, and even if it was not business can and does deduct the full value of the tax from the taxes it pays to the Federal Government, so they really cannot lose. It seems to us that we are subsidizing business by nearly $240 million a year (2005) and we think we are entitled to a level playing field, so business should pay off all that, with the individual payments based on the whole amount spread over the class and rated to each member proportionate to their property value as a proportion of the whole, same as the tax rate. This subsidy must be recovered (although it is hard to see how we can get one step ahead of Revenue Canada). Business has been babied too long and it is time it stepped up and paid its share.
The argument actually made by the CFIB was that if the tax gap is between 2.9 for one community and 1.3 for another regarding an imaginary property worth $100,000 as it will be taxed in each different community, that this was some sort of a cross-subsidization of residential property owners. The argument is a clear case of special pleading. Any business coming into one of these communities could readily determine what their property tax was before the located there. And if they thought it was too high in one community, they could relocate to another. With nearly as many different rates as there are communities in BC (153) they have their choice, if we assume the basis of location is property tax. As we have mentioned earlier, the likelihood is that the property tax is a small amount in the consideration of the firm's costs so that not much attention will be paid to it. It would not be a factor in location at all. The economic verbiage around this argument about location, cross-subsidization, inefficient use of resources, opportunity cost, unknown cost-of-service and so forth is simply posturing and has no real commercial value. Whatever happened to competition anyway, since there really should be a bunch of rates with the buyer of City services and locations (business) free to shop around.
Part 10 to come
We add that it is not the City of Vancouver that sets certain other elements of the total amount of taxes paid based upon the property tax notice that comes out yearly from the city. Provincial taxes relating to education are collected by the city and appear on the tax notice but the values that are claimed, the method of claiming them, and specifically the amount of these "taxes" are set completely independent of the City by the Province. There are also the other classes of the nine listed in the Assessment Act of which Vancouver derives income from seven as is stated in City Policy reports. Some of the minor ones are set by historical tradition, it seems, some by a formula in a Federal or Provincial law, and with some it is not clear if there is any set rate and it maybe whatever and whenever the Federal Government pleases, (revenue from the Federal business of the Port of Vancouver). Since the proportion of the class shares are fairly close as between business and residential, it may be useful to review the extent to which Residential or Business include items that are perhaps, not really either, and as to the exact amount of the rest, other than residential and business, is it 2% or 5% or what. Should something be added to business, or taken away, and vice versa as to residential,. However, it seems unlikely that the answers to these points will substantially change the tax rate.
Cross-Subsidization Claim
Not only do the advocates of business complain about property tax ratios without any attempt to expain why a difference should exist, they try to introduce, by implication, the argument that there should be no difference at all. They do this by complaining that there is some sort of a cross-subsidization when the ratios of class shares, of business to residential are not equal (1:1) in the different municipalities, although they mean tax rates, not shares. For instance we find the CFIB producing a report complaining about tax inequities and the "tax gap" in Saskatchewan in which they reason that such differences are not equitable and that therefore "...a cross subsidization results."
[Property Tax Inequities in Saskatchewan, publication is CFIB,December 1,2003,page 7]
When tax rates between business ands residential properties are not equitable a
cross-subsidization results. This means that if businesses are paying for more
than their share of services consumed, they are sbsidizing residential property
owners."
A little earlier they say that there should be a "relationship" between the amount of tax paid by business and the costs of the services received by the business. They state:
"When this correlation exists, the tax is fair , based on the benefits received
and accountable, as the consumers of the services know their true cost."
We note the sneaky presumption contained in the statement. They do not say exactly what the relation should be (1 to 1, 7 to 1, 3 to 1?) just that there should be one. Nor do they say why there should be any particular one, just the prim and totally false claim that the consumers will know their true cost. Why? Were they, the ratepayers going to set up their own fire hall? A tax ratio does not imply any particular class share, or vice versa, so how would they know what either is until there has been some experience anyhow? The deceptive intent is clear to see. It is also rather silly. Is business subsidizing residents if more residents call for police help than businesses do? Won't business brag to lure employees or customers that Vancouver is a "safe" city to live in, which it is, or that in Vancouver "crime is going down" which it is in terms of violent crime. But is that not business as a "consumer" of City services? What shall we call it then, one of those Free Riders? Can we abandon efforts to move quickly on "domestics", calls for police help usually from wives with complaints about their spouses, because business is being unfairly taxed for this? If there are lots of fire calls from one neighborhood but very few from the few remaining businesses there, should the business "consumption" be a reason to reduce their property tax? Will business in Vancouver improve the City or the business image of the town when the news goes out that Vancouver has dropped the "zero tolerance rule" for sex or marital assault? Is it useful to try to distinguish between immediate and ultimate consumers of City services?
Shall we have Pay or Burn as a user pay principle for the Fire Department? Can a ratepayer decide to swear off using the sewer, the water lines, the roads, the political acitvities of the Mayor and Council they do not like? Do the dollars paid in property tax by any ratepayer have any direct relationship at all to "consumption"?
Has any user fee ever been set on the basis of true cost or has it been set to raise a revenue to help pay a service, and sometimes to mollify these business advocates? If so that is assuredly a wrong use of Property tax. But that is what is done.
Suppose the residential owner in Vancouver said, well it appears that business does pay the property tax at the beginning but it is all recovered from its customers, and even if it was not business can and does deduct the full value of the tax from the taxes it pays to the Federal Government, so they really cannot lose. It seems to us that we are subsidizing business by nearly $240 million a year (2005) and we think we are entitled to a level playing field, so business should pay off all that, with the individual payments based on the whole amount spread over the class and rated to each member proportionate to their property value as a proportion of the whole, same as the tax rate. This subsidy must be recovered (although it is hard to see how we can get one step ahead of Revenue Canada). Business has been babied too long and it is time it stepped up and paid its share.
The argument actually made by the CFIB was that if the tax gap is between 2.9 for one community and 1.3 for another regarding an imaginary property worth $100,000 as it will be taxed in each different community, that this was some sort of a cross-subsidization of residential property owners. The argument is a clear case of special pleading. Any business coming into one of these communities could readily determine what their property tax was before the located there. And if they thought it was too high in one community, they could relocate to another. With nearly as many different rates as there are communities in BC (153) they have their choice, if we assume the basis of location is property tax. As we have mentioned earlier, the likelihood is that the property tax is a small amount in the consideration of the firm's costs so that not much attention will be paid to it. It would not be a factor in location at all. The economic verbiage around this argument about location, cross-subsidization, inefficient use of resources, opportunity cost, unknown cost-of-service and so forth is simply posturing and has no real commercial value. Whatever happened to competition anyway, since there really should be a bunch of rates with the buyer of City services and locations (business) free to shop around.
Part 10 to come
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