Presentation to: County of Middlesex December 16, 2014 Presented - - PowerPoint PPT Presentation

Presentation to: County of Middlesex December 16, 2014

Presented by: Carla Y. Nell, Principal CYNell Consulting Inc.

DECEMBER 16, 2014 Page 1 of 39

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Property Tax as a Funding Mechanism

 The property tax plays a unique and important role in Canada’s

• verall tax structure by providing municipal and provincial

governments with a source of revenue to support the delivery

• f services within communities

 It is important to understand and recognize the strengths and

weaknesses of the property tax as a principal source of funding for municipal governments

 Understanding the purpose and merits of this form of taxation

provides an important context and foundation for all stakeholders in the property tax process

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DECEMBER 16, 2014 Page 2 of 39

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The Importance of the Property Tax

 What is the role of the property tax?

 Unlike other forms of taxation which are linked to

income (income tax) or spending and consumption (sales tax) – the property tax is directly linked to a person’s wealth – as measured by the estimated market value of any property that they own

» Ex: Your house, your business, your farm,

your industrial warehouse, etc . . .

The amount of property tax you pay is determined by the value of your property “AD VALOREM”

DECEMBER 16, 2014 Page 3 of 39

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The Property Tax in Ontario

 What is needed to establish how much property tax

each person will pay?

 The market value of all properties within a municipality

must be estimated by an assessor and then the tax is determined and administered by the municipality

 The amount of the property tax burden is controlled by

taxing authorities who establish tax policies and set rates against the assessed value of all property within their jurisdiction to raise sufficient revenue to delivery local services in response to the public’s needs

DECEMBER 16, 2014 Page 4 of 39

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The Property Tax in Ontario

 In Ontario, tax policies are established annually by the

upper-tier municipality, which dictate the distribution of the tax burden both within and between tax classes

 Tax Ratios  Discounts for subclasses of property  Tax protection mechanisms  The upper-tier has no jurisdiction over the education tax portion

• f the tax bill; this falls under the purview of the Province

 Local municipalities are bound by these policies and must

set rates for their own purposes and administer the property tax in accordance with them

DECEMBER 16, 2014 Page 5 of 39

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The 2015 Tax Policy Process

 Of particular interest to the County of Middlesex is the relative

rate of taxation that property classified as “farm” is subject to because of input and concerns received from affected stakeholders

 The issue of whether any adjustments should be made to that

class’s regulated tax ratio of 0.25 must be comprehensively addressed as part of the 2015 tax policy decision making process

 A comprehensive study and analysis of factors that should

inform this decision has been prepared by CYNell Consulting to assist the County

DECEMBER 16, 2014 Page 6 of 39

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The 2015 Tax Policy Process

 Key Considerations include:

 Changes implemented in 1998 as part of the new Ontario Fair Assessment System

(OFAS) ;

 The rationale for establishing a farm rate for municipal purposes at 25% of the

residential tax rate;

 The range of flexibility available to municipalities to alter or vary the tax burden of

any class of property using the variable tax rate mechanisms currently in place;

 Factors municipalities consider in approaching this range of flexibility and key

considerations associated with adjusting tax ratio relationships;

 Sensitivity analysis to quantify the impact on other classes of lowering the farm tax

ratio and the effect on the overall distribution of the upper-tier’s between its constituent lower tiers;

 A survey of upper tiers to determine which municipalities in Southwestern Ontario,

if any, have reduced the farm class tax ratio to below the 0.25 starting point;

 Factors affecting changing market values and current value assessments (CVA’s)

relied on for property tax purposes for farm property; and

 An analysis of current value assessments versus sale prices for this property type. DECEMBER 16, 2014 Page 7 of 39

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DECEMBER 16, 2014 Page 8 of 39

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Overview of Reform

 Throughout the early 1990’s, various comprehensive

reviews of Ontario`s assessment and property tax system were undertaken:

 Report of the Provincial-Municipal Social Services Review  The Hopcroft Report  Fair Tax Commission  The Golden Commission  The Who Does What Panel

 All proposed various changes to Ontario’s regime dealing

with: assessment, service responsibility (province, municipalities and school boards)

Pre - 1970 1970 - 1997 1998 1999 - 2003 2004 - 2009 2009 - 2011 2012 & Beyond

DECEMBER 16, 2014 Page 9 of 39

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Overview of Reform

 Under the Harris Government’s leadership the Ontario Fair

Assessment System (OFAS) was officially implemented effective January 1, 1998 to achieve the following goals:

 Reduce Government costs through Provincial-Municipal

Service Realignment

 Lower property taxes  Bring consistency to assessments across Ontario  Improve transparency of the system: simple to understand,

comparable taxation Province-wide, increase accountability

• f local government

Pre - 1970 1970 - 1997 1998 1999 - 2004 2004 - 2009 2009 - 2011 2012 & Beyond

DECEMBER 16, 2014 Page 10 of 39

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Overview of Reform

 The core elements of the original 1998 reforms included:

 A re-centralization of the Assessment Function and the formation

• f the Ontario Property Assessment Corporation (OPAC),

subsequently re-named Municipal Property Assessment Corporation (MPAC)

 The introduction of a Current Value Assessment (CVA )  Frequent and consistent valuation updates and uniform valuation

dates

 Establishment of new assessment appeal processes and

mechanisms

Pre - 1970 1970 - 1997 1998 1999 - 2004 2004 - 2009 2009 - 2011 2012 & Beyond

DECEMBER 16, 2014 Page 11 of 39

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Overview of Reform

 The core elements of the original 1998 reform efforts included:

 Elimination of the Business Occupancy Tax (BOT) and the

introduction of multiple property classes and a system of variable tax ratios

 A “tool kit” of optional policies and programs to allow local

municipalities to shape their individual taxation schemes to local circumstances, priorities and preferences

 Provincial take-over of tax levy and rate setting authority for

education purposes (tied to education finance reform and introduction

• f

per-pupil funding) – Local Service Realignment (LSR) and changes to municipal grant structures

Pre - 1970 1970 - 1997 1998 1999 - 2004 2004 - 2009 2009 - 2011 2012 & Beyond

DECEMBER 16, 2014 Page 12 of 39

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Overview of Reform

 The core elements of the original 1998 reform efforts included:

 Provincial take-over of tax levy and rate setting authority for

education purposes (tied to education finance reform and introduction

• f

per-pupil funding) – Local Service Realignment (LSR) and changes to municipal grant structures

 Downloading of the farm tax rebate program to

municipalities

Pre - 1970 1970 - 1997 1998 1999 - 2004 2004 - 2009 2009 - 2011 2012 & Beyond

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DECEMBER 16, 2014 Page 14 of 39

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Tax Treatment of Farm Properties

– Pre and Post OFAS (1998)

 Pre- 1998:

 Municipalities

collected property taxes from farm properties at the full residential mill (tax) rate for both municipal and education tax purposes

 Under the Province’s Farm Tax Rebate Program, the

Provincial government provided farmers with a rebate of their property taxes equivalent to 75% of the amount they paid upon receipt of a qualifying application for a reduction in their property tax liability

DECEMBER 16, 2014 Page 15 of 39

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Tax Treatment of Farm Properties

– Pre and Post OFAS (1998)

 Post 1998:

 The Farm Tax Rebate Program was eliminated  The Province created a unique “farm” class of property and

regulated that the rate of taxation to be applied to such properties would be 25% of residential tax rate for both municipal and education tax purposes

 Adjustments were made to Provincial grants in response,

however, the net result was a redistribution of the “cost” to taxpayers in other classes of property who ultimately absorbed this change in farm tax burden

DECEMBER 16, 2014 Page 16 of 39

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Tax Treatment of Farm Properties

1998 through 2014

 The mandatory reduction of the farm tax rate to 25% of the

residential property class has remained in place

 Municipalities have also been granted an expanded range of

flexibility to provide further tax relief to the farm class in the form of lower tax ratios

 Only a handful of municipalities across the Province have

approved decreases in the farm class tax ratio to below the regulated 0.25 threshold; these include: the Municipality of Chatham-Kent, the Cities of Ottawa, Hamilton and North Bay, as well as Halton and Durham Regions

DECEMBER 16, 2014 Page 17 of 39

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Ontario’s Tax Ratio Structure

 Tax ratios govern the tax rate of each property class in

relation to the tax rate for the residential property class

 The municipal tax burden is apportioned among and

shared by each property class based on the municipality’s tax ratios

 By changing tax ratios, the municipality can influence

how much of the tax burden is shouldered by each class

 Responsibility for establishing tax ratios rests with upper-

tier and single-tier municipalities

 Provincial education tax rates are not subject to municipal

tax ratios

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DECEMBER 16, 2014 Page 18 of 39

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Explanation of Ratios

Each Building is Assessed at $100,000

Class Residential Commercial Industrial Tax Ratio 1.00 (Legislated) 2.00 3.00 Tax Rate 1.0% 2.0% 3.0% FINAL Tax $1,000.00 $2,000.00 $3,000.00

DECEMBER 16, 2014 Page 19 of 39

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Middlesex – Tax Ratio Summary

Class 2014 Tax Ratio Range of Fairness Provincial Threshold Ratio Lower Limit Upper Limit Applicable Residential 1.0000 1.0000 1.0000 Farm 0.2500 0.0000 0.2500 Managed Forest 0.2500 0.2500 0.2500 Multi-residential 1.7697 1.0000 1.1000 2.7400 No Commercial 1.1449 0.6000 1.1000 1.9800 No Industrial 1.7451 0.6000 1.1000 2.6300 No Pipeline 1.0555 0.6000 0.7000

DECEMBER 16, 2014 Page 20 of 39

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Tax Ratio Rules

 In accordance with Provincial guidelines, The County of

Middlesex’s Council in satisfying its annual tax ratio setting responsibility may in any given year choose to do one of the following for each class of property:

1.

Adopt the previous year’s actual tax ratio for the class for the current tax cycle in order to maintain the “status quo”; or

2.

Establish a new tax ratio for any class that is closer to or within the Range of Fairness; or

3.

Employ a revised “revenue neutral tax ratio” to limit the impact

• f reassessment related tax shifts that might occur between

class in accordance with the regulated formula.

DECEMBER 16, 2014 Page 21 of 39

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Tax Ratio Decisions

 Tax shifts will inevitably result; the tax burden will shift

between property classes and between area municipalities comprising the upper tier regardless of any tax ratio adjustments

 Tax ratio reductions for any class of property will trigger

increases in tax rates/taxation for all other taxpayers within the same jurisdiction

 Tax ratio changes may either exacerbate or offset tax shifts

related to market updates and physical changes to property

 Tax ratio changes approved by Council only affect the

distribution of the municipal levy; tax rates for education purposes, which are annually regulated by the Province, are not subject to municipal tax ratio decisions

DECEMBER 16, 2014 Page 22 of 39

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Tax Ratio Decisions

 Tax ratio reductions may be permanent. The rules affecting tax

ratio movement apply to any and all revised tax ratios

 Approved tax ratio decreases for any one class of property may

result in additional requests for preferential tax ratio treatment from other classes of ratepayers

 The existence of other compelling evidence, if any, to support

tax ratio changes and the demands of special interests or specific stakeholder groups pertaining to the setting of tax rates must be carefully weighed

 The competitiveness of each class of property’s tax ratio

relative to the treatment of that same class in neighbouring jurisdictions should be considered

DECEMBER 16, 2014 Page 23 of 39

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County of Middlesex: Sensitivity Analysis

Summary of Upper Tier Inter-Class Tax Shifts

Class 2014 Tax Ratios Alternative 2014 Tax Ratios Taxation Change Taxable $ % Residential 1.000000 1.000000 $ 457,231 1.97% Multi-residential 1.769700 1.769700 $ 8,879 1.97% Commercial 1.144900 1.144900 $ 33,276 1.97% Industrial 1.745100 1.745100 $ 18,811 1.97% Pipelines 1.055500 1.055500 $ 19,720 1.97% Farm 0.250000 0.200000 $ (541,140)

• 18.42%

Managed Forests 0.250000 0.250000 $ 189 1.97% Grand Total $ - 0.00% Source: Online Property Tax Analysis (OPTA) System - November 2014

DECEMBER 16, 2014 Page 24 of 39

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County of Middlesex: Sensitivity Analysis

Summary of Estimated Upper Tier Tax Shifts at the Local Municipal Level

2014 2014 Municipality Upper Tier Levy: Farm Class Ratio at 0.25 Upper Tier Levy: Farm Class Ratio at 0.20 Difference $ % Newbury Village $98,728 $100,426 $1,698 1.72% Southwest Middlesex Municipality $1,886,720 $1,866,506

• $20,215
• 1.07%

Strathroy-Caradoc Township $7,567,877 $7,666,663 $98,786 1.31% Thames Centre Municipality $6,356,872 $6,376,782 $19,910 0.31% Middlesex Centre Township $8,730,282 $8,756,440 $26,157 0.30% Adelaide Metcalfe Township $1,510,105 $1,471,500

• $38,605
• 2.56%

North Middlesex Municipality $2,505,617 $2,427,418

• $78,199
• 3.12%

Lucan Biddulph Township $1,717,264 $1,707,731

• $9,533
• 0.56%

Total County of Middlesex $30,373,465 $30,373,465 $0 0.00% Source: Online Property Tax Analysis (OPTA) System - November 2014 DECEMBER 16, 2014 Page 25 of 39

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County of Middlesex: Sensitivity Analysis

 In addition to upper-tier tax impacts, a lower farm tax

ratio will also cause tax shifts in local municipal levies

 Based on a ratio of 0.20

 The farm class was estimated to experience tax decreases

• f between 16% and 20%

 The residential would experience estimated tax increases of

between 0.25% and 5.26% depending on the lower tier in question

DECEMBER 16, 2014 Page 26 of 39

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Tax Ratio Survey

Summary of 2014 Tax Ratios

Municipality Farm Multi-Residential Commercial Industrial Lambton County 0.25 2.40 1.63 2.05 Huron County 0.25 1.10 1.10 1.10 Perth County 0.25 2.15 1.25 1.97 Elgin County 0.25 2.35 1.63 2.23 Oxford County 0.25 2.74 1.90 2.63 Grey County 0.25 1.44 1.31 1.86 Bruce County 0.25 1.00 1.23 1.75 Wellington County 0.25 1.92 1.44 2.44 Simcoe County 0.25 1.54 1.25 1.54 Chatham-Kent 0.22 2.15 1.96 2.44 Norfolk County 0.25 1.69 1.69 1.69 Essex County 0.25 1.96 1.08 1.94 Halton Region 0.20 2.26 1.46 2.36 Middlesex County 0.25 1.77 1.14 1.75 Average Ratio 0.24 1.89 1.43 1.98 Median Ratio 0.25 1.92 1.43 1.97 DECEMBER 16, 2014 Page 27 of 39

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DECEMBER 16, 2014 Page 28 of 39

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“Current System” of Property Assessment

• Ontario’s Fair Assessment

System is based on assessing at current value

• Current value –is the

amount of money that the fee simple would realize if sold on the open market at arm’s length by a willing seller to a willing buyer

 This definition is

synonymous with market value

 Properties are assigned

values based on their current use and not their potential or highest and best use

DECEMBER 16, 2014 Page 29 of 39

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The Timing and Frequency of Reassessment

 Regular reassessments of all property are mandated

by the Province in order to ensure that assessments relied upon for property tax purposes are in fact reflective of changing market conditions and are kept current

DECEMBER 16, 2014 Page 30 of 39

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Reassessment Cycles in Ontario

YEARS ASSESSED VALUE

1998 - 2000 Current Value on June 30, 1996 2001 Current Value on June 30, 1999 2002 Current Value on June 30, 1999 2003 Current Value on June 30, 2001 2004 Current Value on June 30, 2003 2005 Current Value on June 30, 2003 2006, 2007, 2008 Current Value on January 1, 2005

2009 - 2012 Current Value on January 1, 2008 2013 – 2016 Current Value on January 1, 2012

DECEMBER 16, 2014 Page 31 of 39

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Reassessment related Tax Shifts

 Whenever reassessment occurs, taxes shifts are inevitable in

response to different rates

• f

market value appreciation/depreciation that property may experience

1.

Within classes

2.

Between classes

3.

Among area municipalities in a two-tier system

4.

Across the Province as the education tax burden is redistributed

 Related tax shifts are an inherent feature of OFAS as it is a “market

value” based approach

 Adjusting tax ratios to “regulate” taxation at the class level

undermines this principle

DECEMBER 16, 2014 Page 32 of 39

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County of Middlesex: Reassessment Trends

 Much of the concern articulated to date about the increasing

property tax burden on property classified as “farm” is likely due to the effect of the escalating market value of farm properties on current value assessments (CVA’s) returned by the Municipal Property Assessment Corporation (MPAC)

 In the last reassessment cycle, increases in farm values significantly

• utstripped other classes

 For example, for the 2012 general reassessment farm property

increased by 34% on average Province-wide, while residential increased by 18%

DECEMBER 16, 2014 Page 33 of 39

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County of Middlesex: Reassessment Trends

 An analysis of sales transactions involving farmland may prove

helpful in understanding the effect of market forces and influences on the assessed values relied upon by the County and its area municipalities for property taxation in any given tax year

 An analysis of 655 transactions occurring between 2007 and

2014 confirms that:

 Market values for farmland have been steadily on the rise  Farmland appears to be generally assessed at less than its full

market value

DECEMBER 16, 2014 Page 34 of 39

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County of Middlesex:

Average Sale Price Per Acre for Farmland

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 2007 Sale/Ac 2008 Sale/Ac 2009 Sale/Ac 2010 Sale/Ac 2011 Sale/Ac 2012 Sale/Ac 2013 Sale/Ac 2014 Sale/Ac

DECEMBER 16, 2014 Page 35 of 39

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County of Middlesex:

Assessment to Sale Price (ASR) Ratios for Farmland

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 2007 ASR 2008 ASR 2009 ASR 2010 ASR 2011 ASR 2012 ASR 2013 ASR 2014 ASR

DECEMBER 16, 2014 Page 36 of 39

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DECEMBER 16, 2014 Page 37 of 39

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Tax Burden Comparisons

2014 Tax Impact on Typical Property North Middlesex

RTC RTQ Description Prop Code Average 2014 CVA 2014 Total CVA Taxes FT Ratio at .25 2014 Total CVA Taxes FT Ratio at .20 $ Tax Change % Tax Change R T Single Family Home 301 190,500 $ 2,475 $ 2,562 $ 87 3.52% R T Seasonal Recreational Dwelling 395 120,500 $ 1,566 $ 1,621 $ 55 3.52% R T Farm House 211 129,100 $ 1,677 $ 1,736 $ 59 3.52% F T Farmland 211 444,050 $ 1,442 $ 1,239 $ (203)

• 14.06%

T T Managed Forest 240 68,290 $ 222 $ 230 $ 8 3.52% C T Small Office Building 400 158,000 $ 4,232 $ 4,315 $ 83 1.96% C T Small Retail Commercial 410 69,000 $ 1,848 $ 1,884 $ 36 1.95% I T Standard Industrial 520 86,250 $ 2,995 $ 3,064 $ 69 2.30% Total Taxes include: County, Local and Education Tax Levy Source: Online Property Tax Analysis (OPTA) System - November 2014 DECEMBER 16, 2014 Page 38 of 39

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DECEMBER 16, 2014 Page 39 of 39

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