Magazine article Government Finance Review

Property Taxation in British Columbia and the City of Vancouver: Averaging and Phasing Options for Land Valuation

Magazine article Government Finance Review

Property Taxation in British Columbia and the City of Vancouver: Averaging and Phasing Options for Land Valuation

Article excerpt

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. …

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