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© Clive Doucet 2006
Capital Ward Council
Tax Assessment Study and Proposal
This page is available as a pdf for printing
The Indexed Market Price System (below)
Self-Help Guide to the Assessment Battle
Send a letter to Premier
Dalton McGuinty
Read through our analysis of assessment problems and our solution,
the Index Market Price Solution. Then print
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letter (MS Word format)
to send a message to the
premier that
you want a better and
more fair property tax assessment system
Write to Finance Minister Greg Sorbara about assessment changes NOW
Hon. Greg Sorbara
Ministry of Finance
7 Queens Park Cres. 7th Floor Frost Bldg South
Toronto ON M7A 1Y7
The current assessment system is volatile with wide swings from year to year. It i’s not based on an ability to pay. It i’s not fair, it i’s not transparent and it is too costly.
The current system is not fair. The cost of running the city is rising each year but not everyone’s taxes rise each year, which means some residents are not paying their fair share of increased costs.
For example, a house may rise in value each year by 10 per cent but if the average assessment increase is 12 per cent and the tax rate is dropped by 12 per cent to the average increase as it has been done for 10 years in Ottawa, this means only some home owners pay for the increased cost of running the city. This is not fair.
It is not transparent. No one knows how the assessed values are calculated.
It is volatile with wide swings from year to year that are independent of people’s income. This makes financial planning difficult.
It is not based on people’s ability to pay. A house can double in value in a few years but very few people’s income doubles in two or three years. This problem is particularly acute for seniors on fixed incomes.
The present system is too costly to administer - $10 million a year for the city, $100 million to the province and millions in Assessment Review!
The principles required for a better system
Any new system must be fair. In principle, everyone should pay something towards the increased costs of running the city. The burden of municipal tax increases should be shared and not be disproportionately high for some while others enjoy a decrease.
It must be based on people’s ability to pay. The elderly should not be forced out of their homes because their income diminishes but the value of their house or neighbourhood increases. Likewise the young should not be forced out of their homes because the assessed value of their house is increasing faster than their income.
It must be predictable and easy to understand. People should know how much they are going to pay and why without having to take a course in regression analysis, which is the method used by MPAC.
We looked at a number of possibilities for replacing the present system such as:
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A self declared assessment (Italian model). The assessment is declared by the owner with the option that the city have the right to buy the property at that price if it was judged grossly inadequate. This has many attractive qualities, such as simplicity, clarity, ease of administration, but we doubted it would be acceptable to the public.
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The un-indexed sale value of properties (California model). It is simple and costs little to administer but leads over the long term to serious inequalities of taxation.
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Place upper and lower limits on the existing system to reduce impact huge market changes and protect people on fixed incomes. This would help with ability to pay but would add more layers of complication to the non-transparent system we have now and increase the already high cost of administration.
We chose the Index Market Price System suggested by one of our committee members, Lewis Auerbach. He was unsuccessful, recently, in his attempt to obtain the MPAC equation and is referred to in the just released Ontario Ombudman’s Ombudsman’s Report (pdf).
(It should be noted that this study and proposal does not address the issue of the tax rate, which remains the responsibility of the city council.)
However, an Indexed Market Price Assessment System does correct many of the serious problems of the present system including the sense of being ambushed each year by unpredictable taxes. Moreover, it is revenue neutral for both the city and the province, making implementation relatively simple for everyone.
The Indexed Market Price The Auerback proposal assessment system has the following advantages:
- transparent
- predictable
- distributes the tax burden according to the ability to pay for a house at the time of purchase
- does not penalize people who become stranded in a neighbourhood with houses they could not afford to purchase
- is as easy to understand as a sales tax
- eliminates most of the cost of evaluation
The
Indexed Market Price Property Tax
Assessment System
A proposal for a better, simpler, less expensive system for property tax assessments.
It is very simple, inexpensive to administer and admirable in terms of the amount of money and aggravation it avoids, as well as the ease with which the assessments could be understood and be seen to be fair.
How would an assessment be arrived at?
The assessment would be the sale price of a property in the open market at the date of sale. Increases in assessment would be indexed to inflation using the Consumer Price Index.
Why this system is better than the current system:
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It is transparent and easy to understand. Everyone would know approximately what the taxes will be when they purchase a property.
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It is affordable and predictable. The assessment would be known at the time of a house purchase, and a buyer would not have to worry about an unanticipated increase in assessment.
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It does not penalize the elderly with sudden large increases. Older residents would not have to pay abript tax increases to a level they could no longer afford.
Exceptions
Exceptions that would require a full assessment process would include non arm’s- length transactions, and new custom houses, not sold in the open market by a builder. Assessments could be calculated by tendering the service to the private sector — an independent appraisal by a certified appraiser (AACI) — just as the major banks require for private real estate sales. Or they could be performed by a quasi-governmental body.
Renovations
To account for value added to property from major renovations only 40% of the value of the renovations would be added to existing assessment. There is no point in penalizing people who wish to improve their properties. The threshold for what constitutes a major renovation would be building permits issued for renovations of $20,000 or more.
Appeals
Any assessment could still be appealed to the ARB (Assessment Review Board), which, with a much smaller case load, could respond more easily and completely. Retaining provision for appeals would allow house owners to ask for a lower assessment for properties whose value has declined due to serious damage from fire, pests, floods, vandalism, or other causes.
Commercial and multi residential
Commercial and multi-residential properties would use the same system where a sale price can be determined. The only modification would be that if the loans on the property exceed what otherwise would be the assessment, then the assessment would equal the value of the loans. The justification for this is that since the value of commercial properties tends to increase as their revenues increase, lending practices ensure that there is adequate revenues to justify the loans. Therefore, the related market value assessment, if the properties are refinanced, rather than sold, should reflect this, since the basic principle of a market value assessment is that it should reflect ability to pay, which in turn is reflected in the ability to obtain financing.
For the sake of symmetry, the same principle could also be applied to residential properties, but it would be the rare residential property indeed that would be refinanced for more than its indexed market price.
Implementation
This simplified assessment system would also be easy to implement. Sale prices are known, as is the CPI index fir each year. The only large assessment increases would be properties recently purchased for far more than their current assessment. To take two simple examples, a house purchased for $60,000 in 1975 and a house purchased for $250,000 in 2005. The CPI from 1975 to 2005 using Statistics Canada’s information corresponds to an increase in value of 3.79. The 2005 purchase would be assessed at $250,000. The CPI from 1975 to 2005 using Statistics Canada’s information corresponds to an increase in value of 3.79. The 1975 purchase would be assessed at 3.79 x 60,000 = $227,400.
Conclusion
The Indexed Market Price system would be easier to understand, transparent, very predictable and fairer to all taxpayers.
Other advantages of the Indexed Market Price concept:
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Cost savings to municipalities and citizens of Ontario would be about $100 million per year less because neither a complex evaluation bureaucracy nor property inspections would be required. The City of Ottawa alone would save most of the $10 million per year it now pays to fund the Municipal Property Assessment Corporation.
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Appeals and reconsiderations would be reduced by 80 to 90%, or even more. This would reduce costs to Ontario taxpayers even further.
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There would be no sharp rise in assessments for long-time residents of areas with rapidly increasing property values, since assessments could only go up at the rate of inflation until the property is sold.
The Ward Council is a new organization brought together by the Councillor Doucet to address major issues that affect residents across the ward. Tax re-assessment was judged to be the most serious problem facing the ward and was taken on as the first project by the council.
Report Authors
David Archer, Lewis Auerbach, Bob Brocklebank, Patrick Courcelles, Clive
Doucet, Desmond Hassell, Ian Hassell, Pierre Johnson, James
McLaren, John Smart and Greg Strahl.