“No one is happy with the property tax. It is expensive to administer. The property tax is regressive – it puts a heavier burden on people with low incomes than on everyone else. Property tax rates are divisive, varying between classes of property owners – such as residential, commercial, and industrial; and between locations – urban, suburban, and rural. Rates also vary within a class, for example single residences, apartments, and condominiums. The property tax cannot reflect user costs because many local expenditures are for shared services, e.g., public transit, roads, or libraries, and the benefits cannot be identified with any particular class or type of property owner.”
This was written in 2013 as background to a proposal for a municipal income tax as part of CCPA-NS’ alternative budget process. What follows is an edited version of a presentation given on January 30th, 2020 to the All-Party Committee on the CAP organized by the Nova Scotia Federation of Municipalities. We maintain what we said in 2013 and argue for shifting away from using property taxes as the main fundraising tool for municipalities.
Introduction: Taxation principles
Taxes are the price we pay for a civilized society is a truism which leads to several principles:
1. Taxes should be progressive – people with a greater capacity to pay should pay a higher rate of taxation;
2. Taxes should be transparent, i.e., understandable as to why they are collected, how they are calculated, how the rules are applied and to whom;
3. Taxes should be easily administered in collecting them and in dealing with anomalous circumstances;
Of course, there are many difficulties in designing taxes. For instance, how do we measure “capacity to pay”? Usually it is in terms of income; sometimes based on wealth. Do we distinguish between tax payers on the basis of their characteristics such as family-size; how do exceptions complicate the administration and the acceptance of a tax. Is the “market” price a fair estimate of value?
In Canada, the property tax is the major source of revenue for municipalities but elsewhere, e.g., Scandinavia, they are a small fraction of total revenues. Our property taxes violate all three principles and the cap on increases in property assessment is an example of the difficulty of dealing with some concerns without exacerbating others. For instance, the efforts to distinguish between uses and users, e.g., residential, commercial, resource, or speculation.
We contend that there are better ways to raise revenues for municipalities, to increase the progressivity, efficiency, and transparency for all concerned while reducing the impact of any given change in property valuations.
Income tax alternative
Our alternative proposal is for a provincially-levied REfunded Municipal Income Tax (REMIT), which could be adopted in Nova Scotia, with low administrative cost to the Province, but with the potential to dramatically reduce our reliance on property taxes.
We focus on an income tax as this is the primary progressive tax in our tax system which is built around regressive taxes such as sales and property taxes. The municipal income tax would require one additional line on our provincial income tax, a surcharge on the currently calculated provincial tax of the filer. This surcharge would be remitted to the municipality of the filer, as indicated by their postal code.
Income taxes make up the majority of local tax revenues in many advanced economies, including Austria, Switzerland, Germany, and all four Scandinavian countries. Furthermore, the income tax approach to municipal funding honours all three basic principles of taxation.
The “wrinkles” in the design of the municipal income tax can be ironed out once its benefits are recognized and this approach accepted. With a significant income tax source of revenue, the level of the municipal property tax can be decreased dramatically, as would the impact of shifts in property valuations. Thus, the need for the cap on changes in assessments is reduced.
In addition to this fundamental shift in the tax base of municipalities, there can be improvements to the property tax itself.
A progressive property tax on non-primary residences
A key issue with the cap on property valuations for taxation is fairness.
A progressive municipal income tax in place of a property tax on Nova Scotian’s primary residences would help solve the problem of fairness, by allowing Nova Scotians with relatively low income to retain high-valuation family property.
However, non-residents – both Nova Scotians owning second properties and out-of-province residents – also benefit from municipal services and, therefore, should contribute their share of taxes. This contribution should be based on the same principle of fairness associated with progressive income taxes – that the most fortunate should pay the highest tax rates.
Thus, we propose that in addition to initiating a progressive income tax, municipalities adopt a progressive property tax that would apply only on properties that are not a primary residence. This tax would not be subject to a valuation cap, but rather based on market valuations with progressively higher marginal tax rates on properties with higher assessments.
Progressivity would promote fairness, creating a system where those with the greatest fiscal capacity actually pay the highest tax while limiting the cost to Nova Scotians with modest vacation properties. In addition, the revenue collected from such a tax on non-residents could be used to further reduce the municipal tax payable by low-income Nova Scotians or to improve municipal services.
Our proposals improve the equity and efficiency of the tax system while also making tax payments less subject to the vagaries of market land price swings. The complicated implementation details for removal of the CAP do not address any of the underlying issues embedded in the assessment process itself.
Removing the CAP risks creating further problems without also addressing the need for municipalities to be adequately funded to provide needed services.
Michael Bradfield is a Research Associate with CCPA-NS, and James Sawler is an Economics Professor at Mount Saint Vincent University.
This article, based on a presentation to an all-party committee on capped assessments, was originally posted on the CCPA-NS website. Please consider supporting its important work: https://www.policyalternatives.ca/donate-ccpa-ns-research-fund
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In attempting to further understand this I am curious about a few scenarios. How might one go about taxing an individual with a higher income, yet a smaller and less valuable property. And vice versa, how might an individual with a smaller income whom chooses to purchase and maintain a larger home be taxed. Would this not mean that individuals are now taxed on income and not the actual value of their home? I see this perhaps being beneficial in collecting from the higher income individuals, however it would be unfair to the family with a household income of $150,000 with kids and car payments whom might only reside in a $200,000 home. Or the millionaire whom only chooses to live modestly should not pay based on their income (income tax is income tax; increase it for the millionaire but leave the properties out of it).
In this model two families making the exact same income, yet living in greatly dis-similarly valued homes would pay the same amount? And it sounds as though it also would not matter the location or services used, simply how much money they make. I am uncertain how this is fair and equitable.
In addition you mention the need to maintain valuation on properties in order to permit a tax on second homes or for those out of province. Would this not still require a service to maintain and track these values? I am uncertain if the monies saved in administration would be as great as you think. Anyways, it is an interesting proposition however one that I feel has many holes in which people of varying incomes will not agree or understand the purpose. A good first step would be abolishing the cap to assure the wealthy are paying their fair share which would in term promote lower taxes to new home owners and others as it smooths the revenue stream.
Cheers.