On the Threshold of a Cure
For more details
On the Threshold of a Cure:
Full Report
May 2005
Ted Mallett, Vice-President Research and Chief Economist
Introduction
Of the major forms of taxation present in Canada, property taxes are easily the least principled from a standpoint of economic efficiency or political accountability. Sales and income taxes are passably integrated and consistent from one jurisdiction to another. The federal and provincial governments, which each utilize these forms of revenue collection, have tried to ensure that these taxes do not impose seriously unequal burdens or significant distortions on economic activity. In addition, these taxes are well studied in academic and tax policy circles, which helps keep them closer to efficient ideals.
Unfortunately, property taxes, which are mainly administered by local governments, have largely escaped the checks and balances—primarily because data for proper study are not consistently available and because fewer political incentives exist to maintain an economically efficient system. As a result, property tax systems in most jurisdictions have been eroded into following paths of least resistance. In other words, municipal governments have actively and aggressively sought to shift property tax loads from residents to businesses. Over many decades, this approach has created significant problems for businesses and harmed their ability to turn earnings into investment.
The most efficient forms of taxation, from standpoint of maintaining economic health, focus on final (consumer) demand rather than intermediate (business) production. That is why sales taxes are applied to consumer sales or value added production, and why corporate income taxes are based on profits rather than gross revenues. Property taxes, on the other hand, are almost universally much higher on business properties than on residential ones, which cause a chain reaction of undesirable effects. The extra tax burden starts to cascade within business-tobusiness transactions, therefore constraining property-intensive types of businesses and favouring imported products and services. In major cities like Vancouver, Calgary and Toronto, commercial property tax rates are between 4.34- and 5.33-times the rate applied to residential properties of the same market values. Industrial property ratios are even wider.
In other cities like Ottawa and Winnipeg, the business property tax rates are about 2-times the respective residential rates. These distortions would no doubt be higher if it were not for provincial laws that limit local governments’ abilities to shift tax burdens between property classes.
Local governments’ desire to shield property taxes from residents as much as possible is seemingly noble, but ultimately damaging because residents pay a greater price in terms of constrained wages, fewer jobs and misdirected government spending.
