May 6, 2006
Mike Harris was one of the greatest redistributionists in Ontario history. He left behind a self-perpetuating property-tax mess, and also the highest property-tax regime in the Western world. Now property owners have had enough and Harris’s Liberal successor, Dalton McGuinty, vows to clean it up.
Harris’s perpetual redistribution came via his Current Value Assessment, a property-tax system whose levies bounce around with the booms and busts in real estate markets, but with one big difference. Taxes don’t just depend on the change in your property’s value; they also depend on the relative change in your property’s value relative to those in neighbouring districts. When property values boom, such quirks in the Current Value Assessment system will cause property taxes to actually drop in neighbourhoods that experienced below-average increases, while property taxes in areas that see above-average increases can go through the roof. Likewise, when property values collapse, wiping away much of the net worth of people and businesses, Current Value Assessments have a piling-on effect: They can mercilessly jack up property taxes when people can least afford it.
Current Value Assessment is perpetually redistributing, and in unpredictable ways. This is random tax redistribution, dumber than a doorknob, and far, far worse than the darling of most redistributionists, the progressive income tax.
The progressive income tax, for all its faults, has a compelling logic in taxing people in proportion to their ability to pay: In lean years, when incomes shrink, the taxman takes less than in abundant times, when higher taxes can be drawn from higher earnings. But where’s the logic in varying taxes on illiquid real estate assets, whose appreciation or depreciation from one year to the next says nothing about the owner’s ability to pay?
Those especially gouged by this system include pensioners whose modest inner-city homes happen to be situated in an area that’s suddenly gone trendy. Or small businessmen, who happen to have a down year in an up neighbourhood, and see the property tax finish them off. As the Canadian Federation of Independent Business put it to the McGuinty government earlier this year: “These profit-insensitive taxes accelerate business failures in rough times. Every year, thousands of money-losing small businesses draw down capital to pay these taxes. A disincentive to business formation, property taxes also prevent home-based businesses from growing into commercial or industrial properties.”
Even aside from the many horror stories, Current Value Assessment destabilizes businesses by creating uncertainty. Companies will naturally hedge against the possibility of outsized tax increases, making these taxes an unseen sink on the economy.
Because the Mike Harris property-tax system is so senseless, the movement against it is growing. The Coalition After Property Tax Reform, a province-wide alliance of 700 ratepayers’ groups representing 500,000 voters, demands that the Ontario government cap property-tax assessment increases. Its approach is understandable: In this taxation year, more than half of Ontario property owners received assessments that increased by 10% or more, one-fifth saw assessments increase more than 20%, and some saw their assessments increase by 50%.
Their demands for change received a boost from Ontario’s ombudsman, who, acting on numerous complaints from homeowners bitter about the provincial assessment system, decided in 2005 to investigate. In a report released a month ago, ombudsman Andre Marin confirmed that the system is broken, highlighting the arbitrariness and illogicality of the bureaucracy that annually assesses 4.4 million Ontario properties valued at $1.1-trillion. He proposed almost two dozen reforms. Numerous politicians, from MPPs to mayors to rural reeves, also clamour for change.
Most want a cap of some kind on assessments, a repeat of the “hard cap” solution that Mike Harris was forced into after the enormity of his error became apparent. Ottawa Mayor Bob Chiarelli now argues for an absolute freeze; the ratepayers’ coalition would settle for annual increases limited to 5%. McGuinty, who came to office promising that “Ontario Liberals will uphold the ‘hard cap’ and will work with small business to fix the property-tax mess,” now opposes a cap, possibly because he, himself, had removed the cap in one of his many broken promises.
Instead, McGuinty proposes improving on the cap, and going further than the ombudsman’s recommendations. “What we intend to do is to take our time, to approach this in a way that is both thoughtful and responsible and to ensure that we get this right,” he said.
What he should do, if he truly wants to get this right, is abolish or, at a minimum, vastly scale back this regressive tax that gets nothing right. It is neither progressive nor does it relate to the actual cost of delivering services. Thanks to Harris’s reforms, Ontario jurisdictions – both the province and municipalities – now milk the property tax much more than any other jurisdictions in the Western world. Property taxes account for 3.7% of Ontario’s GDP, 25% higher than the rest of Canada or the United States, about twice as much as Japan or New Zealand, four times as much as Scandinavian countries and 10 times as much as Germany or Switzerland. Rather than depending on this outdated tax, the rest of the developed world prefers income taxes, sales taxes and user fees, alone or in some combination. Any are preferable to a system based on property tax.
Lawrence Solomon, author of the forthcoming book Toronto Sprawls, is executive director of Urban Renaissance Institute and Consumer Policy Institute, divisions of Energy Probe Research Foundation.;