What did we miss?

A. 100 million dollars.

How much has been siphoned off of Toronto's non residential tax base in terms of assessment values and new development? And what has this cost the city in missed revenue?

It is an important question in regards to assessing tax policy. Nearly seven years ago, the City of Toronto Urban Development Services commissioned a report entitled "The Future of Downtown Toronto" ( http://www.toronto.ca/torontoplan/background_studies.pdf ). Seeing that the city is in some dire straights regarding its financial position I thought a review of some of the potential pitfalls that were warned about would be in order. Referring in particular to Background Section 3 - A note on Commercial Property Taxes. As the report warned, there was the potential for firms which did not require being in the 'core' from leaving the city. As it appears, Toronto has been not been able to retain theses firms. Over the last decade and a half the 905 region has gained over 800,000 jobs while Toronto has lost over 100,000. By not being able to retain and attract these firms, with the resulting loss of a tax base that generates positive cash flow, the city has paid a high price. Much like how the TTC's increase in ridership has increased its costs, even after it collecting more in fares. Toronto is in the same position, every new resident or household increases the amount of subsidisation required. The city is in the unenviable position of not being able to afford to grow. There seems to be an inevitable shift occurring that may accelerate the problems.

According to city hall, Toronto has two types of properties. Those that generate positive cash flow (the city provides less service than what they pay for) and those that generate negative cash flow. These two classes align themselves directly with the non-residential and residential property classes respectively. The cost of the reduction in non-residential assessment base (generators of positive cash flow for the city) must be shouldered somewhere. If that cost is to remain within the non-residential class it will hasten the exodus of the remaining companies.

What if instead of losing 100 thousand jobs during 1989 to 2004, if Toronto could have kept pace with the surrounding regions what would that meant? A quick calculation and completely unscientific calculation shows that Toronto would have gained about 300,000 jobs instead of losing 100,000 for a difference of 400,000. Seeing that the current average assessment per employed person in Toronto is approx. $43,000 that means that the assessment base might be 17.2 billion dollars smaller than it would have been had Toronto kept pace. Of course the only way that would have happened was for Toronto to be tax competitive with its neighbours. Believe it or not, all that would have taken was a 12.5% reduction in non residential property tax. This is because as taxes are reduced values rise so the cost of cutting taxes in half for already heavily taxes properties ends up being only 12.5%.

OK, now reduce the income on the existing 50 billion in commercial / industrial properties and add back 15 billion (17.2 billion less 12.5%) and there is a net growth of 8.75 billion dollars. This would have provided the city with nearly 100 million extra in property tax per year.

What a wasted opportunity!

It seems that higher residential property taxes are inevitable, the only choice seems to be do they come earlier while keeping jobs or later when they are gone?

EBay vs. Bricks and Mortar

Link

The Canada Revenue Agency has won a Federal Court order requiring eBay Canada Ltd. to turn over the names, addresses, phone numbers and e-mail addresses of all high-volume sellers on the popular website. The CRA wants to find out whether those individuals or companies are reporting the income they made from online sales in 2004 and 2005.

Now, if the city of Toronto wanted to be fair, they could also charge the same amount of property tax as they do other commercial properties. That would certainly raise a lot of revenue.

Toronto threatened to pay similar taxes as neighbours!

Finance chief lays out doomsday scenario

Homeowners could face 'worst-case' property tax hike

Toronto's chief financial officer warns of 20% tax hike

Even if this happens, Toronto would still have rates lower than its neighbours. Look at the chart linked to in the previous post. Even with a 20% increase Toronto's tax rate would be less than Mississauga's and Vaughan's. In fact Toronto would go from having the lowest rate to the third lowest rate.

Comparing tax rates.

While tax rate information is available on most cities web sites, the city of Milton has put together a PDF chart that list all of the rates in the GTA (link). Toronto has the lowest residential rates at .5888434 %, after removing the provincial education portion (.264%) . The highest rate belongs to Oshawa at 1.445235 %. On the other side of the equation, Toronto has the highest commercial rates, being 2.11328 %. The lowest are found in Milton with a rate of .950775 %. The commercial rates exclude the BET portion which is 1.97% in Toronto and 1.37% in Milton.

Are residents in the 905 area getting ripped off?

While Toronto residents pay considerably less property tax than those in the 905 region, they also get far more in provincial transfers. On average they receive at least $1058 per person more than those in the 905. Ouch! As the 905s growth (read votes) outpaces that of Toronto, I would wager that this squeaky wheel is going to be getting some grease. I say "at least" because it has been a common complaint that Toronto gets more provincial help than other areas. There are some very valid arguments as to why this should be. Toronto does incur more demand for the types of services that these funds provide for. The question must be asked though, how much more?

Toronto has hit a tax wall and it is made of caviar.

Toronto has hit a tax wall and it is made of caviar. Really, take a look at today's Toronto Star at the back of the classifieds it compares two homes sold ("What they got"). In Mississauga a house that sold for $480,000 paid $3928 in taxes. In Toronto a house that sold for $827,000 paid $3218 (and probably insist that they paid to much).

Is current shortfall really from downloading?

Lets see what the 2007 Budget tells us (link).Have a look at page 17. It shows that between 2003 and 2006 provincially mandated programs have escalated in cost by 66 million dollars. Now turn to page 23. It shows that from 2003 to 2006 provincial funding increased by 95 million dollars, yet things are supposedly getting worse. We need and deserve a better explanation!

We need more other !

In the 2007 Toronto budget background information PDF (link)there is a simple graph that is used to illustrate how tax dollars are spent. The first thing that is apparent is that Toronto needs a whole lot of 'other' (see the bottom of the graph). Furthermore, unless I am mistaken, this does not include expenses for capital spending, which is a considerable part of the budget,1.7 billion dollars.

The score: 905 region 12.6, Toronto 1.4

Between 2000 and 2006, slightly over 14 million s.f. of office space has been
developed across the GTA with the overwhelming majority (90%) taking
place in suburbs. Mississauga itself, while being less than half the size of Toronto, had five times the amount as Toronto. To make matters worse, a large portion of Toronto's amount is being built by the city (the Courus building). This is because the private sector would not do it.

PS. It is funny how moving jobs from Queen West to the lake front can be labeled job creation.

What should non-residential taxes be.....

Here is the Ontario regulation that answers that question. Basically commercial and industrial properties should be taxed anywhere from 60% to 110% to that of residential ones. On average it means that these properties should be paying about 85% of what a similarly valued residential property should pay.

Guess the tax.

Guess the tax.......

This is a 2200 square foot commercial property (Sheppard ave west) across from Downsview park assessed at $310,000, guess the amount of property tax it pays.


As a point of reference......


Home for sale at 1.4 million, taxes $5093




The answer is $14,000

Traffic jams from 416 to 905

The governments own statistics, the Cordon Count, align with this Toronto Star story.

The 2006 tally of cars travelling designated roads in Toronto and surrounding region shows non-traditional commutes are increasingly the norm with relatively fewer cars heading into the city's core, or central business district, and more of us heading to jobs in the suburbs or the 905 communities, often skirting Toronto's borders altogether.

A free tax cut!

"The choice is simple..... you can have 2% of 2 million or 1% of 4 million. Either way you are getting $40,000."


John Barber of the Globe and Mail made a very interesting observation in his Nov 8 2006 column (My magical plan to bring jobs back).

Even Ernie Eves and Mike Harris knew that wasn't fair, so the finance minister instituted a program to reduce Toronto's business-education tax rate to a reasonable level over a period of five years. Unfortunately he cancelled the phase-in two years later, and the McGuinty government, crying poor, has failed to bring it back. The result is that today, the excess provincial take is a major component of the "tax gap" that is driving investment out of town.

But something quite astonishing happened when taxes did fall. Between 1998 and 2000, a period when assessments were frozen, the Business Education Tax rate in Toronto fell about 10 per cent -- equivalent to a 5-per-cent cut in overall business taxes. But when Ontario properties were revalued in 2001, it turned out that commercial assessments in Toronto had increased by about 40 per cent.

By comparison, commercial assessments in the rest of Ontario, without the benefit of steep BET cuts, only increased 14 per cent over the same time period.

Even if the Toronto tax cuts were responsible only for a fraction of the huge gain in property values, they were self-financing -- just as supply-side theory predicts.

Over the same two-year period, Toronto gained an impressive 100,000 new jobs -- the sharpest growth in employment since the mid-1980s. Was that a coincidence? I don't think so. Nor does coincidence seem to explain why employment immediately levelled off and began to decline when the tax cuts stopped.

Some science to back up the claims!

If anyone is doubting the effects that property taxes have on values, I offer the following as further evidence. John F. McDonald, PhD, is Emeritus Professor of Finance and Economics and Director of the Center for Urban Real Estate in the College of Business Administration at the University of Illinois at Chicago. He received his PhD in economics from Yale University in 1971, and joined the UIC faculty in that year. He is editor of the Journal of Real Estate Literature. He has published six books, including the forthcoming Urban Economics: Theory and Policy (Blackwell, 2006) with Daniel McMillen, and over 80 articles in academic journals that include Journal of Urban Economics, Review of Economics and Statistics, American Economic Review, Journal of Real Estate Finance and Economics, and Review of Accounting and Finance. (I would think that these would be enough credentials :) ). Researched this exact topic in Chicago. Chicago faces a similar, though not as dramatic, situation. His paper "Are property taxes capitalized in the selling price of industrial real estate? " came to the conclusion that they are........

There are only a few econometric studies of the selling price of improved industrial properties. The study presented here contributes to the topic by looking at the industrial real estate market near O'Hare Airport in metropolitan Chicago for 2001-2004. This study finds that comparable properties located in suburban Cook County--the central county in the metropolitan area--sold at a 16.2% discount compared to the adjacent county (DuPage County) because of the sharply higher property tax rate imposed on industrial property in Cook County: 4.32% in Cook County versus 1.69% in DuPage County for the properties included in this study. The magnitude of the property tax effect implies that the hypothesis of full capitalization of the tax cannot be rejected. In addition, the selling price per square foot depends upon a number of characteristics of the property as expected...........

Conclusions

The focus of the study is on the market for industrial property in the O'Hare Airport area, which has an unusual exogenous property tax feature. The mean property tax rate for the properties in the sample was 2.63% of market value higher in Cook County compared to DuPage County. The results show that properties located in Cook County sold at a 16.2% discount compared to properties located in DuPage County; this result is approximately consistent with full capitalization of a 2.63% property tax differential.

The full paper is available @ http://www.accessmylibrary.com/coms2/summary_0286-17604310_ITM (free registration)

Where are the jobs?

A comparison of projected employment in the city of Toronto compared to actual employment figures. Extrapolated from the City of Toronto Official Plan, 2005 projected 1,519,000, minus actual of 1,262,700, leaves a shortfall of 256,300. From the city of Toronto Places to Grow forecast, 1,460,000, minus actual of 1,262,700, leaves a shortfall of 197,300.


What possible effect can this have on the crucial non-residential assessment base? In 2005 the average non residential assessment per employed person in the city was $43,000. Taken at the average (2007) tax rate of 2.12% that means if, in a worse case scenario, the city may have missed out on a potential 230 million in revenue. While it is more likely that the city has not suffered such a large impact, even at one third of the projections that leaves a considerable amount of missed revenue. Toronto has clearly taxed its non residential sector beyond the point of being beneficial. The current rates have proven to be counter productive.

Here is some more proof!

The chart above comes from a report by Hemson Consulting done on behalf of the city of Toronto (http://www.toronto.ca/business_publications/pdf/TEDCO-Hemson-rep-jan-07.pdf) . If in 1986 one was to have spent $1,000,000 on industrial land in Mississauga today it would be worth over $4,000,000. By comparison if that money was spent in Toronto it would be worth on average today $1,800,000. Applying commercial tax rates on the current values would mean that Mississauga would receive 42,678.84 from that property (4,000,000 * 1.066971%). By comparison Toronto would receive 41,278.13 (1,800,000 * 2.2932294%). All the while it misses out on the development and other charges which net the city a lot of revenue. In the end, even though Mississauga has a much lower tax rate, it makes up for the 2% difference in net property tax ( realized income ) by increased development charges and volume.

Coincidence of South of Steels and S.O.S

There is no coincidence!

Toronto is in trouble. Much of it is self inflicted. According to the city's own research, jobs are fleeing to the surrounding 905 areas. The main cause of this is Toronto's incredibly high property tax rates on non residential properties. On average Toronto's rates are twice as high as its neighbours.

What the city seems to be overlooking is that, despite having rates twice as high, it generates the same income as its neighbours. How can that be, you ask?

Lets suppose that there are you are in the market for a new home. Again suppose that you come across a couple of nice semi-detached homes that you are considering. In this case, two of the homes that you are looking at are actually attached to one another. Both homes, the right and the left ones, are identical. I would be a fair assumption that that all things being equal, like condition and finishes, they would be worth the same amount of money. That is only logical.

Now, lets say that the house on the right pays $2000 in property taxes and the on on the left $4000 and there is no means to correct this imbalance. The house on the left will always pay twice the amount of tax as the one on the right. Would you be willing to pay the same for each? If so you must be David Miller. For the rest of us the answer is simple. Of course not!

Now back to my original point, Toronto does not gain extra revenue be having a higher tax rate than surrounding regions. Let me show you an example....

It should be plainly obvious that higher taxes rates, by means of reducing assessment, do not translate into higher revenues. This is an area that has received some attention by economist. Most of are probably familiar with the concept of "diminishing returns". Some, like Arthur Laffer and Robert Inman have tried to quantify this process. That is what is happening in Toronto.