An Idea to reduce the impacts of Property Re-Assessments

First off, let me be quite clear that I am not an expert in Property Taxes. Let me also state though that I often fail to give myself enough credit and that I may indeed be an expert in Property Taxes relative to most people, even though I've only briefly paid them directly in my life.

All properties in Ontario are assessed by the Municipal Property Assessment Corporation (MPAC). Re-assessments are conducted on a semi-yearly basis. I say semi-yearly since there have been frequent adjustments made to this system since its introduction by Mike Harris' Conservatives in 1997. The original goal was to have every property receive a Current Value Assessment each year and for local governments to base next-year taxes on those assessed values. However,  in Toronto at least, there have been phase-ins of increases and decreases within property classes and clawbacks between classes of assessed properties.

The idea is based in an idea of financial fairness - all properties should be assessed on the same market value. However, financial fairness does not always mean fairness in application. For instance, updating a property to current value means that those people who have built equity over many years of home ownership can be driven out of their home or forced to take drastic financial measures to stay, if their incomes drop. 

Now, I am very cold and rational when it comes to home ownership and believe that an asset must be used appropriately for one's position in life. In other words, to me, it doesn't make sense for a retired couple to own a 4-bedroom home after all the kids have left - my own parents included. I wonder why one would tie up that equity and those extra bedrooms when we have both a senior's income crisis and a housing/homelessness issue. Certainly other forms of investment can offer more stable, reliable and as high return on investment without the volatility of taxes that are based on the market value of an investment.

I believe therefore that it is up to individuals to make decisions based on their own interest - the system of Current Value Assessments is itself is fair in its basis - all properties are treated the same. What is unfair is the application of current value assessments to the system of property taxation.

Let's delve further. First, there are a number of separate classes of property from a simple residential class which includes condominiums to multi-residential (6 units or more) and onto Industrial and Commercial classes. Each assessment class has its own formula for the calculation of assessed value. Multi-res for instance factors in market value of similar apartments in a largely de-controlled rental market -typical incomes are factored in as they are for a commercial property. Property Taxes then have to be split into their two components - school taxes and local/municipal taxes.

Education taxes are curious. All properties pay the same tax rate so that a condominium owner pays more in education taxes than someone who rents an apartment of the same time (because all things being equal, condominiums have a higher assessment per sq foot than rental) yet a homeowner with the same number of children pays substantially more than the renter. So in essence, homeowners subsidize the education of the children of tenants. This has an effect of equalizing the inequality in the mill rate between homes and rented units which the left often complain are taxed unfairly. More unfair is the difference between a condo owner and a tenant of a multi-res unit who consume the exact same amount of service and the similarity in the mill rate between the condo owner and the home owner - when the homeowner is less efficient in the consumption of public services like Garbage Collection, Fire and Water to name a few.

Each year, the City gets both a figure for the entire assessment of the Cities properties in each class and for each property individually. It uses those assessments to calculate who gets what share of the total tax bill for the City - the cost of providing current programs and servicing debt associated with Capital expenditures. In other words, the City slices the pie - first according to class - each class gets a certain weight - Residential 1, Industrial and Commercial something like 3.14 but coming down due to a phasing of weight towards residential to attract more business. Then those classes are divided up so that the Forest Hill Mansion worth 10 Million gets its share relative to the Junction bungalow worth 350,000 and the Rosedale tenant gets there share relative to the tenants of north Scarborough (through their annual rent.)

The difficulty with using Current Value Assessments is largely their volatility and the average homeowners ability to manage significant year-to-year increases in Current Value and resulting taxes. Not many people can withstand an after-tax increase in one cost center of 3 to 5 percent which is by no means unheard of. CVA also disincents homeowners from making improvements to their own home since those improvements may result in the value and consequently, the taxes. However, CVA, is still in its basis, fair because it reflects wealth, as closely as it can. If a home increases in value, so too does the homeowner's wealth increase, notwithstanding liquidity issues.

So here is the idea. Since the City receives the Assessments on each property, presumably it has the ability to retain those records and to perform such tasks as calculating a five-year running average of each assessment. Therefore the City could greatly reduce the volatility of the property tax system by basing taxes on a Five-year running average, thereby removing the cross-sectoral and inter-sectoral subsidizing that occurs through clawbacks and phase-ins. In essence, this is a budgeting tool for residents that allows them to see a gradual increase in taxes while also basing them on current values. This would smooth volatility while decreasing complexity of a system to minimize impacts. A system such as this was not possible prior to now but since MPAC has been running for nearly 10 years, it should be easy.

This came to mind after I saw a headline that said something to the effect that assessment had grown by 20 percent in the 3-years while the Ontario Liberal Government had frozen assessments. Clearly, some property homeowners in the province will be hit with massive increases while others will see mild reductions due to revenue neutral tax shifting. So the short-term benefit of the freeze will result in extreme pain in the short term for those whose assessments increases are among the highest. 

I see lots of elderly homeowners in my Parkdale neighbourhood and I wonder how they will handle the hotness of this neighbourhood when they get their reassessments. Of course, I think they should sell their asset for over a million to one of many willing buyers and live comfortably without having to climb stairs or shovel sidewalks, but that's my insensitivity right?