Politics of Municipal Property Taxes: Implications for Decision-Making
Kennedy, William, McAllister, Mary Louise, Canadian Public Administration
Urban public finance constitutes an important but poorly understood aspect of local decision-making. One central element of urban finance is the role played by the highly visible property tax. This tax is the single most important source of revenue for local governments, comprising approximately fifty-two per cent of municipal own-source revenue. (1) As Robert Bish notes, property tax, for the most part, finances services where the taxes are raised. Local councils, therefore, are in a position to compare taxation costs with benefit of services provided, which constitutes "the essence of democratic decisionmaking." (2) Despite its relative importance, beyond some basic assumptions, little is known about how decisions are made with respect to property taxes. Are decisions founded on economic principles, on political expediency, or are they based on other considerations? Contrary to some of the commonly stated hypotheses in the literature, the setting of tax rates in the case study municipalities--Smithers, Mackenzie and Quesnel--did not involve consideration of economic factors of property taxation or issues of fairness and equity. Rather, the primary concern was to balance local economic conditions, community desires for services and facilities, and the municipality's financial requirements. The distribution of the fax burden takes into consideration past taxation practices, the need for stability and predictability, and the practices of other local governments. There is no evidence that property owners do not generally accept the system. However, the lack of analysis and tax policy development has the potential to generate economically inefficient taxation practices as well as undermine municipal autonomy.
General textbook descriptions suggest that local revenues or tax systems are primarily evaluated on the basis of principles of equity, efficiency and stability of source, where governments can count on a stable flow of revenues from the tax base. (3) This assumption may lead to the conclusion that municipalities engage in some rational process for the setting of property tax rates. Does this perception reflect reality? A number of areas of local finance are beyond the control of local governments, subject as they are to the dictates of senior governments and external influences. Property tax, however, is one area where local governments can exercise some discretion, and it is worth paying closer attention to how municipalities make decisions about this important area of urban policy. For example, in 2002, the three municipalities studied derived an average of sixty per cent of their net revenue from property taxation and twenty-one per cent from sales of service. (4)
Although the body of literature on Canadian local finance is not large, there do appear to be some commonly shared assumptions about what factors influence the setting of local tax rates. They include
--the political influence of residential taxpayers on elected representatives;
--assumptions about the economic benefits of differentiating between classes of taxpayers (i.e., residential vs. business-property owners);
--competition among municipalities and the effect of that on property-tax regimes;
--the effect of taxation on land-use and development; and
This list is by no means exhaustive and does not deal with some of the indirect, systemic influences such as those raised by political economists or regime theorists. Furthermore, it does not consider some of the internal dynamics at work in city hall between administrators and elected decision-makers. Nevertheless, it does highlight some of the major themes in the literature. An exploration of these factors through a case study of three municipalities in Northern British Columbia tested some of these propositions and examined how such property-tax decisions are made in practice.
Property taxation and assessment
The traditional system of property taxation has been structured on a simple formula (that is, the property assessment multiplied by the tax or mill rate will equal the taxes levied), with all properties being taxed at the same rate. …