The municipal tax base is based on property taxes rather than income taxes or sales taxes. They assess the market value of your property and charge you a percentage of that assessed value in tax.
Why does this exist? How is it fair? How is it superior to income tax?
The amount of property tax we pay may be fair at the time we buy our homes, although that assumes that we're leveraging more or less fully. For example, suppose you buy a home for the largest value they'll give you a mortgage for with the minimum down payment they'll accept. Not the most optimal way to do it, but houses are expensive, you know, sometimes we don't have a choice. At the same time, some billionaire buys the house next door, which is assessed at exactly the same value. This billionaire is so rich they can buy the house outright, in cash. They could afford way more house, but they simply don't need it - it's a perfectly decent house, after all. So you're mortgaged to the hilt, but they've paid out pocket change and own it outright. They make as much in a day as you do in a year. But you both pay exactly the same number of dollars in property tax. Is that fair? Is that optimal?
Now suppose a couple of years pass. Due to some external influence, the assessed value of your home (and your neighbour's home) has skyrocketed, and your property taxes have therefore skyrocketed as well. But you've lost your job and run out your EI benefits, so you have literally no income (and not a whole lot of savings, because two years ago you were fully leveraged.) Meanwhile, your neighbour's stock options have also skyrocketed, so they're now earning even more money. You don't earn enough in a year to pay your property taxes, but they earn enough to pay their property taxes in 30 seconds. And yet you still owe the same number of dollars. How is that helpful?
Think of the elders in your life. Think of someone who is retired and has been living in the same home for decades, perhaps the home where they raised their children. Now run their income through a mortgage calculator. Do they make enough money to buy their house at its current assessed value? Probably not. House values tend to rise over time, which can really add up over decades. How is it useful to make them pay the same number of dollars in tax as someone who just moved in and does have an income proportionate to the assessed value of the house?
At this point, people usually say that you can borrow against the value of your home. But that's unsustainable. If I don't have $5,000 to pay my property taxes this year and I borrow it out of my mortgage, then I owe an extra $5,000 into my mortgage (which is accruing interest and increasing my required mortgage payments), plus I'll have to come up with another $5,000 (or probably more) next year. Unless my income is increasing significantly, I'll never catch up and eventually lose my home.
So who decided this is a good idea? Why does it exist? What benefits does it have over an income tax? Wouldn't it be better to just have a municipal income tax to make sure taxes owed doesn't exceed your income or threaten your housing security?
5 comments:
The thing is, property values are assessed in Ontario by a third-party evaluator (MPAC) so they actually don't rise or fall very quickly at all. I believe houses are assessed every two years, and there is recourse if you feel your assessment was unfair (which I've never used so I don't know whether it's any good).
So here's some anecdotal grist for the argument mill: our previous house was 15 years old when we bought it. I believe the current property assessment regime came into effect while we owned the house (more on that in a sec). It was initially assessed somewhere in the ballpark of what we paid. I do remember that by the time we sold it (5 years after buying it), the assessment had risen in value, and we ended up selling it for about 30% more than we paid for it.
Our current house was assessed just a little while ago. It's assessed at almost 20% less than the sale price of the house, and the prices in our neighbourhood have risen about 10% in the year and a half since we bought it.
I think the MPAC approach was designed to deal with exactly the problem that you're asking about. Assessments are not tied to market value, so you get a reasonable increase assessed by an arm's-length agency.
As for why they changed -- I remember in the 90s Frank Magazine loved to publish pictures of houses in Rosedale and such places that belonged to prominent figures. These houses would be selling for $2M and would be assessed at $150k or less. The point they were making was that the rich were not paying their fair share of the property taxes, and the new regime (I hope) addresses that.
As for why municipal taxes are not tied to income: those taxes pay for the services enjoyed by the people who live there. Whether you're super-rich or retired, you use a certain slice of the city's roads, infrastructure, snow ploughs, schools, and so on.
Plus there's the fact that income taxes are jealously guarded by the provinces and feds -- so much so that municipalities (at least in Ontario, I'm not sure about elsewhere) are only legally permitted to tax their constituents through property taxes.
Don't provincial and federal taxes also pay for services provided to people who live there? What's the difference? And why tie it to something as arbitrary as property value? Is property value somehow meaningful? Because to me it looks just as meaningful as tying it to the number of pairs of shoes you own.
And I knew that the province has laws that prevent municipalities from having an income tax, but what is gained by this? How does it benefit the provinces and the feds to force the municipalities to use this one specific and rather arbitrary basis for taxation?
I'm not sure how it works now, what with the changes that have happened in Ontario since the start of the Harris days, but municipal services and infrastructure are paid for by property taxes. As an example, roughly half of my property tax goes to elementary and secondary schools. If the feds or province pay for any of it, they do so with transfer payments.
There is a big and generally well-defined divide between the province and its municipalities to define who pays for what. Post-secondary education, province. Roads, city. Highways, province. You don't get cities paying for some of a university budget, and you don't get the province paying for a city's stoplights or gardens.
But I don't see how the property tax system is unfair. If you are getting a road ploughed, sending your kids to school, using parks, whatever, it makes sense that the money for those things would come from the people who live in the municipality. If we agree that a fair amount of property tax is (or could be) levied using a third-party property assessment, then it seems to me to be a reasonably fair and equitable tax.
I don't know whether there's any question of whether the assessment system itself is unfair. I've never heard any criticism but that doesn't mean people aren't upset about it. In about nine years of home ownership, I've paid property taxes to three different cities, on progressively larger homes; I started paying about $2900 a year and now I pay just over $4000. I don't feel I can complain.
I don't know if unfair is le mot juste...I guess what I'm really going for is that the value of your property is less closely related to your ability to pay. Your income is pretty much representative of your ability to pay. Sales tax is less representative of your ability to pay (b/c groceries cost the same regardless of your income) but still pretty much works. I'm not going to ever owe more sales tax than I have money because I can't buy that much more stuff than I have money.
But property tax has no such failsafes. It's probably proportionate at the beginning (unless you have a whole lot of money and buy significantly less than your maximum amount of house) but as time goes on it's less and less representative of your ability to pay and more and more representative of external factors.
Whether or not it's fair, to me it seems in every way inferior to other methods of taxation and I can't see any particular advantages over other methods. I wonder why it exists in the first place.
It's clear that municipal taxes are meant to pay for the cost of services provided by the municipality. What is not clear is how the value of the property is related to this.
For example, in the suburbs with wide streets and large wide properties a given length of sewer pipe will service fewer homes than in the city centre. But the suburban municipal taxes will likely be lower because they are tied to property values and not the actual cost of providing the services. Urban sprawl is expensive, but that cost is not reflected in the municipal taxes paid.
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