Thursday, September 27, 2007

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" ( ). 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?

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