Vancouver Sun
Tuesday, April 17, 2007
Page: A13
Section: Editorial
By: Jon Kesselman
Tax reform needed for the city's sake; High business rates are punishing and counter-productive
Upset that they pay municipal property taxes at nearly six times the residential rate, Vancouver business owners are pressing the city to shift more of the burden to homeowners.
Business properties in the downtown core and adjoining areas are being converted to pricey condos, boutique hotels and other uses. The loss of commercial, retailing, and office space is affecting jobs and also the character of our neighbourhoods.
As noted in the minutes of a city council committee meeting, "small business operators and lessees who cannot afford the high tax rates move out of the city; many properties then get redeveloped as residential, resulting in possible loss of the commercial base in Vancouver."
The shift of properties from business to residential also poses a double burden on municipal finances. Properties reclassified from business to residential have their tax rate cut by almost five-sixths, although this is partly offset by the associated construction or renovations. At the same time, the new residents pose greater demands on city services than the businesses they displace.
Council has struggled over this issue for more than a decade but with no final resolution. It has shifted bits of the municipal property tax from business to residential owners, and is considering a further shift for 2007.
Nevertheless, the tax rate on business properties remains much higher than that applied to residential properties; in fact, Vancouver's business-residential tax ratio is by far the highest of larger Canadian cities.
In short, Vancouver has been pursuing baby steps and makeshift measures to address problems that are large and still growing. Crucially needed are more innovative policies to address these problems.
One approach would be to continue taxing properties at the business rate even if they are converted to residential use. This would at least maintain the tax base, and the tax burden would fall on current landowners rather than subsequent residents (who would buy at prices that discounted their future higher taxes.)
Owners' decisions on whether to convert would then be driven solely by market economics and not by the differential in tax rates. One would expect more businesses and jobs to be maintained, thus reducing the pressures of workers commuting to the urban centre.
No doubt this proposal would be vigorously opposed by existing owners of business properties, particularly those with high conversion potential.
Yet this policy is consistent with the efficiency principles of modern tax economics: Tax alternative uses in a neutral fashion and apply heavy taxes to immobile factors such as land value.
This policy proposal would not relieve businesses from their current heavy property tax burdens, but would reduce the rate of conversions. However, as currently conceived by council and its property tax policy review commission, the problem is a zero-sum game: The business tax burden can be relieved only by shifting part of it onto residential properties.
Another approach would be for the city to acquire expanded taxing powers so as to reduce its reliance on property taxes. Local access to sales, payroll and income taxes has been common among American cities since the 1930s, and provincial legislation in B.C. should consider similar powers for our municipalities.
Most promising would be municipal access to a small supplement to the provincial sales tax -- say at a 0.5 to 1.5 per cent rate. A municipal tax of 1.0 per cent would raise $700 million annually province-wide, or about $100 million for Vancouver. This new levy would allow the city to cut its business tax rate to below 3.5 times the residential rate -- a tax cut of 40 per cent for business properties.
Alternatively, the new funds could be channelled to steeper tax rate reductions for the first $1 million or $1.5 million value of each business property. That approach would greatly encourage the preservation of small businesses in neighbourhoods throughout the city.
When new municipal taxing powers were discussed in legislation for the Vancouver and Community Charters in 2003, business groups lobbied strongly in opposition. The Vancouver Fair Tax Coalition has maintained pressure on the city government to reduce the property tax burden on businesses, but without proposing an alternative revenue source.
Perhaps if provincial legislation made municipal access to sales taxes conditional on constraining the ratio of business to residential tax rates to a figure such as 4.0 or lower (versus the current 5.8 ratio in Vancouver), business groups would be more supportive. They would pay much less in property taxes but have to live with the impact of higher sales tax.
In any event, consumers bear much of the business property tax burden (the part on structures), just as they would with an increase in the sales tax.
These policy options illustrate the potential for moving beyond stopgap exercises of the kind that Vancouver has been pursuing to policies with substantial, enduring results.
The reward could be a less congested, more vital and more neighbourhood-friendly city.
Jon Kesselman holds the Canada Research Chair in Public Finance with the graduate public policy program at Simon Fraser University. |
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