, , ,

Ontario is starting a new cycle of property assessment which, when the notices are mailed to property owners, will lead to lots of complaints based on a mistaken perspective.

Nobody likes paying taxes (even if they want the public services). Over time and in various jurisdictions, politicians have negotiated some very quirky tax laws to placate tax-payers. Despite Ontario’s desire to based taxes on the current value, the province has decided to reduce complaints by phasing in increases while decreases take effect immediately.

Every four years, properties in Ontario are reassessed by MPAC to ensure that the values are not out of date, which is a good thing. You may have also noticed that the prices of properties (residential and non-residential) are higher than four years ago. That makes sellers happy but tax payers worry that a higher assessed value translates into a higher tax bill. If market prices were to crash in a year or two, they would complain about the “higher” taxes based on an out of date value.

These complaints about the assessment will be based on a misunderstanding of taxes and city governments, even by some who should know better. The arithmetic of every type of tax is:

  • Tax Owed= Tax Rate X Tax Base.

In the case of property tax, the Tax Base is the assessed value and the Tax Rate is whatever the city government decides.

This formula makes it seem as though an increase in the assessed value would automatically increase the taxpayer’s tax bill, but that is based on incomplete arithmetic. Every year, cities are not supposed to run a deficit and tax-payers prefer that they not run a surplus. Therefore, for a city,

  • Total Spending= Total Revenue.

Tax payers and politicians can find lots of reasons to spend more, but spending must be matched by revenue. Since a city cannot magically increase the assessed value in a year, any increase in spending requires an increase in the tax rate. This arithmetic explains why property tax rates, unlike income or sales tax rates, are quoted to six decimal places.

A bit of thought shows why a 50 percent increase in assessed values in a city does not automatically lead to a 50 percent increase in “my” tax bill. For example, you do not hear city politicians musing how they are going to spend the supposed bonanza of revenue. There is a reason why they are not expecting it, which this video explains: any effect on “me” depends on relative price changes because of the no deficit/surplus rule.

This difference between the aggregate and the individual creates an interesting asymmetry. While a uniform increase (or decrease) in assessed values in a city would have no net effect on the taxes owed by an individual, appealing a tax assessment (to reduce the apparent value of a property) would reduce the tax owed by a successful tax payer. This reduction is actually a redistribution amongst tax payers (again because of the no deficit/surplus rule).

This shift in perspective reveals something which students of business often misunderstand. While a successful appeal is privately profitable, it is not an example of a value-added activity: it is an example of a rent-seeking activity which produces a lot of revenue for consultants (including some of our graduates).

It is easy to complain, especially by business of government. A strong business finds ways to add value (so that consumers are willing to pay that high price). Politicians need to find ways to be re-elected (by taxpayers who would prefer more spending and pay less in taxes). It is about choices, since there will always be complaints.