Don Cayo
Sun
In a city known for runaway land costs, the property tax policy of “averaging” has been a godsend for many business owners.
It means that a given year’s tax bill is based not on their current land assessment — which might be up dramatically from a year or two earlier — but on the average land value for the past three years. The tax bill will eventually grow to reflect the new value, but it takes three years and the hit isn’t as bad as if it all came at once.
The trouble is that, while this tool works well for some businesses, it also becomes a weapon that works against many others. It lowers the tax load for businesses that can take advantage of averaging — and, in this real estate climate, that’s most firms. But it also foists the cost of what they save onto businesses that don’t qualify.
In a normal real estate market, any commercial property that has been rezoned within a year or two won’t qualify for averaging. And in the specific Vancouver market as it’s unfolding these days, a whole group of businesses — downtown office tower tenants — find themselves penalized, not helped, by the policy.
It takes a little head-scratching to understand why, but Paul Sullivan, the property tax guru at Burgess Cawley Sullivan and Associates, walked me through it. The crux of the problem, he says, is the uneven rate at which commercial land values are rising. In most parts of Vancouver, the average land increase in 2008 was 20 per cent, making businesses in these neighbourhoods prime candidates to benefit from averaging.
But in the downtown, where prices were already sky high, the latest assessment recognized that land prices had already maxed out. Thus the land value assigned to most downtown office towers went up little or not at all.
It sounds at first blush like good news — at least on the property tax front — if land values don’t rise. But when taxpayers think about how office towers’ total tax assessments are calculated, it’s not good news at all.
The total assessment is based on rent paid, and rents have been going up sharply. So total assessments are also up sharply. With the land value stable, this means much higher values are, somewhat arbitrarily, assigned to the buildings in order to bring the total to what it should be. Only land, not these higher-valued buildings, are eligible for averaging. But the buildings are subject to tax which, as I’ve written before, is assessed at a stiff rate, nearly six times greater than homeowners pay.
The long and the short of it is that non-downtown businesses can profit from averaging because it makes their assessments smaller than they would otherwise be. But downtown businesses wind up with much larger assessments and no break to offset the increase.
The total tax burden paid by all businesses is also fixed. So when most businesses can use averaging to lower the portion they must pay, Sullivan notes, the upshot is a big shift of tax burden from other parts of the city onto the downtown core.
A better way to help businesses cope with escalating assessments would be some variation of the solution proposed by Stanley Hamilton’s Property Tax Commission last year. It simply involves phasing in increases over a specified number of years — the commission suggests five — when assessment increases pass a specified threshold.
That is, however, administratively less convenient than averaging, and a city staff report in late February recommends against it. Indeed, the report argues for extending the averaging formula over five years, instead of the current three — a policy that would worsen the hit on businesses that can’t take advantage of averaging.
Sullivan is a technical co-chair of the Vancouver Fair Tax Coalition, which had such success with the tax-shifting issue earlier this year, and his company represents a lot of downtown office owners. He has got his oar in early on this one, writing to City Hall before the matter goes to council for a decision.
It’ll be interesting to see what response he gets — a continued push for administrative convenience, or a genuine effort to help all taxpayers equally in this difficult time of soaring costs.
© The Vancouver Sun 2008
