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You say tomato, I say fish: or, why we we treat property taxes differently

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Photo: Andrea_Nguyen/flickr

Recently, the Canadian Federation of Independent Business received some media attention for their report on the relationship between residential and business property taxes in Ontario.

While a step up from the norm (this report is based on some actual data as opposed to a survey of the views of its members) that the CFIB would whinge about taxes is not new, nor is the fact that their results are misleading and contradictory.

Essentially, the CFIB makes one point: that business (commercial and industrial) property tax is higher than residential property tax.

Before we unpack what that actually means, some perspective might be helpful. According to the official data from the Ontario Ministry of Municipal Affairs and Housing, residential property accounted for 65 per cent of total property tax revenue in the province in 2012; commercial property for 29 per cent and industrial property for 6 per cent.

This compares with shares in 2001 of 59 per cent for residential; 31 per cent for commercial and 9 per cent for industrial property. So the share of the property tax paid by business taxpayers has been dropping over the past 11 years.

Over those 11 years, municipal property taxes on residential property have increased at an annual rate of 5.0 per cent, commercial at 3.8 per cent; and industrial at 1.4 per cent. Include the provincial tax for education, and the annual rates of change are 4.3 per cent for residential property tax; 2.6 per cent for commercial and negative 0.3 per cent for industrial.

So, in aggregate, the relative position of business taxpayers has been improving.

Of course, that's not the focus of the CFIB's complaint. Their complaint is that the rate of tax paid by business is out of line compared with the rate of tax paid on residential property. And indeed, when you look at the data, this appears to be true. The average rate of property tax on commercial property in Ontario in 2012 was 1.4 per cent of assessed value; on industrial property, 1.59 per cent; and on residential property, 1.1 per cent. That's the "gap" referred to by the CFIB in its news releases.

What they don't say, however, is that the "gap" has been dropping rapidly over the past 11 years.

In 2001, the average commercial rate was 1.86 per cent; the average industrial rate was 2.14 per cent; and the average residential rate was 1.28 per cent.

So over the past 11 years, the residential-commercial "gap" has dropped from 0.58 per cent to 0.30 per cent and the residential-industrial "gap" has dropped from 0.86 per cent to 0.49 per cent. Again, on the terms laid out by the CFIB, the relative position of business taxpayers has shown significant improvement.

The real flaw in the CFIB's logic, however, is in comparing rates of tax on residential and commercial/industrial property in the first place. Residential and commercial/industrial taxes do not differ because the properties differ, but because the uses of the properties differ. Residential properties are used to provide housing for individuals and families; commercial and industrial properties are used to provide for business activities. Conceptually, the residential property tax is a tax on housing; the commercial/ industrial property tax is a tax on property used for the purpose of generating a business income. The tax bases are defined differently -- the residential tax base includes the fixed contents that make the shell of a house into a home; the commercial and industrial tax base does not include the fixed contents that make the shell of a property into a business. They are also measured differently. Residential property is generally valued based on market resale value; commercial property based on the rental income it generates; and industrial property based on its replacement cost.

The weakness of the tax link on which the CFIB's position is based becomes clear when the implied suggestion that individuals and businesses should receive the same treatment is applied to, say, income tax. The tax rate paid by a small business in Ontario is currently 15.5 per cent. That rate applies to income up to $500,000 per year. The personal income tax rate in Ontario ranges from a bottom rate of 15.0 per cent on income above the basic exemption to 49.5 per cent on income over $220,000. On the principle implied by the CFIB's property tax study of treating businesses the same as individuals, the small business tax rate would be 49.5 per cent on income over $220,000 instead of 15.5 per cent.

If the CFIB is prepared to live with the consequences of its "equal treatment" principle, that's a trade anyone concerned about our capacity to pay for public services would make any day of the week. But I doubt, when it comes to the crunch, that their property tax "principle" is worth accepting the same principle in other areas of taxation.

Photo: Andrea_Nguyen/flickr

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