TAX NEWS - June 2010

Property taxation: the misunderstood process

"My house is worth less than it was last year. Why are my taxes up?" This, and other similar but all-too-common complaints, indicates that the process by which we pay for municipal services is broadly misunderstood.

Firstly, it needs to be understood that the principle on which assessment is based is that those with more wealth should pay more tax. At the federal and provincial levels, wealth is measured by income; at the municipal level, wealth is measured by the value of one's property. It used to be that all property was assessed on the basis of specifically-mandated amounts for attributes that a property had or didn't have. In those days, assessed values had absolutely no relation to what a property might be worth on the open market.

Some years ago, though, the basis of assessment was changed to the market value system, largely because this better reflected the "taxation on the basis of wealth" concept and because it was thought that property owners would have a better understanding of how their holdings were being assessed. "Everyone understands market value," the thinking went. Well, nothing pertaining to taxation is as simple as it seems, or at least not until some additional explanation is offered, which is what will be attempted here.

Point #1: The "market value" assessment is not based on the market value on the day you receive your assessment notice. Standard procedure in Alberta is that the assessed value is what the market value was on July 1st of the previous year (i.e., the 2010 assessment is based on the market as at July 1, 2009), which takes into account market activity immediately prior to that time. Thus, your assessed value might be more or less than what a current appraisal or realtor's opinion might be today (10 months later). Ultimately, however, the actual value doesn't matter, as I'll show below.

Point #2: Assessments are determined by trained experts in that field, while elected people decide tax rates based on the level of services they are being asked to provide their citizens. If you have good reason to think your assessment is too high, there is an administrative appeal process to address that. If you think your taxes are too high, that's an issue you want to take up with your elected representatives, while bearing in mind that the amount collected in taxes reflects the level of service they think that you, as citizens, are demanding.

Point #3: The change in value of your property from year to year (and this is the crux of the matter) is absolutely irrelevant to the taxation process. The only things that matter is: 1) that properties similar to yours are taxed exactly the same (horizontal equity), and 2) that properties different from yours (either superior or inferior) are taxed differently (vertical equity). I had a chat with someone recently, who said that Camrose's zero per cent change in tax from this year to last is actually a tax increase because assessments are down. "You're paying the same amount for fewer tomatoes," he said. This is a fallacy, though, because the "tomatoes" in this case are the services you are receiving for your tax dollars, not the property on which the tax level is based. Look at it another way: a municipality of 100 people provides $100,000 of services, and it asks its residents for $100,000 (average of $1,000 per household) to pay for those services. The size of your assessment (i.e., the value of your property) will determine whether you pay more or less than the average, but it will not change the fact that the municipality still requires $100,000 to serve its residents.

It wouldn't make any difference if your property were assessed for $1,000 or $1,000,000, as long as other similar properties in the municipality were assessed the same as yours and superior properties were assessed higher (and inferior ones lower) so that you're paying the amount of tax that your wealth level (as measured by the type of property you own) dictates you should. Therefore, if Camrose has raised its tax rate by the same percentage that the overall assessment has fallen, the net result should be zero per cent change in tax.

After all, as a ratepayer, what do I care whether my assessed value is $100,000 and the tax rate is 10.00 or my assessed value is $10,000 and the tax rate is 100.00? Either way means that $1,000 is coming out of my pocket and all I really need to know is whether I'm getting value for that expenditure or not.

To take this point further, I've heard from people in both municipal and provincial levels of government tell me that, "Look how much your assessment has gone up over the past number of years. You should expect to be paying more tax." Aside from the inflation factor, this is absolutely wrong because, if the level of services I am receiving hasn't gone up over that time, there is no logical reason I should be paying more tax. Again, the assessment determines how much you should be paying relative to your neighbour, but it has no bearing on how much tax you should be paying overall.

Now, none of this is to say that assessed value is the right way for municipalities to raise tax revenue as opposed to using income as a basis of taxation or something else entirely. That's another discussion for another time but, in the meantime, the level of our assessments from one year to the next are one thing we can all definitely scratch off our "worry" list. As for how much tax you're paying from one year to the next, that's another matter entirely.

Jerry Iwanus is the Mayor of the Village of Bawlf, as well as a member of the county-wide regional Assessment Appeal Board and a property appraiser.