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Over the past several months, we have used this space to examine a few dimensions of property tax’s foundational elements. We explored the rationale for property tax, pointed out key differentiating factors between residential and commercial, looked at tax policy according to asset class, reviewed methods of calculation, and conducted a detailed analysis on property tax reliance by state.
These represent basic elements, but we find ourselves in a period where falling occupancy rates in key sectors (think office) threaten to lower valuations and reduce the revenue cities are able to generate. Depending on the criticality of the services offered, cities might be more aggressive in their desire to maintain the status quo.
Clearly, these dynamics have a way of establishing real battle lines between payors and payees, so as these dynamics continue to evolve, a useful exercise is seeing how funds, once collected by tax authorities are allocated, as it provides a window to view the range of services that could be curtailed in the absence of funding.
In this paper we have gathered some examples demonstrating the urgency of various levels of government to maintain projected revenue inflows from tax, and how this represents one of the core reasons why in this period of uncertainty, the frequency of property tax disputes will only rise.
At their highest level, property taxes represent the financial backbone of local governments, a fact speaking to its underlying importance. From the perspective of total revenue, consider property tax accounts for nearly three-quarters of all local tax collections. Once collected, this provides a significant local revenue source for a range of services like schools, protection, amenities, and infrastructure that are so engrained in our daily life, we often assume are a given, and subsequently taken for granted.
As we have previously discussed, the tax treatment and allocation formulas can vary depending on the type of property class subject to tax. Owners of different classes of property, including residential, commercial, and industrial, are all subject to varying tax treatments. On top of the variances occurring across asset types, once tax revenues are collected, they are in turn allocated to different stakeholders.
Let’s illustrate this using a case example. Consider the city of Mississauga Ontario, a sprawling community just to the west of Toronto. As the city is responsible for collecting taxes, once they are received, they need to be portioned off to other constituencies or stakeholders who will put those funds to specific use.
The city is actually part of a larger economic region called the Greater Toronto Area (GTA), and as such, represents one of four levels of government. Above the actual city of Mississauga, there is a region called Peel Region, which has other cities and unincorporated areas under its control. The Province of Ontario resides above this, and the Federal Level at the top.
As far as allocation is concerned, for each property tax dollar is first collected at the residential level, with about a third staying with the City of Mississauga, in turn the balance is allocated to Peel Region of Peel and the Government of Ontario. Ontario’s portion is earmarked to the Ministry of Education, which funds regional and provincial services.
A slight variation occurs with tax revenue generated from commercial and industrial properties as opposed to residential. For these categories, the City receives about a quarter of the total revenue generated from property taxes, with the balance allocated to the Region of Peel and the Government of Ontario. Specific allocations are presented in the graphic below:
Of all the categories of spend, education is perhaps the most important, as balance, uniformity, and consistency are required across a geographically large area, and thus must be handled by that level of government. In the province of Ontario, property taxes are levied by upper-tier governments (for example, at the regional level, which using the Mississauga example would be Peel Region), as well as at the single-tier level (Mississauga) municipal level, and by the provincial government single-tier (for example, Toronto, Hamilton) municipal governments, as well as by the provincial government. An allocation formula is created between these tiers with the express purpose of satisfying educational requirements.
At a high level, property taxes are the primary revenue source for providing funding for local governments across North America. After collecting funds, they are allocated to a number of public services including, but not limited to the continuous operations and maintenance of road and sewer services, local libraries, protective services (i.e., police), schools, fire services, and public transportation. Owners of different property classes such as residential, commercial, and industrial are in turn responsible for the timely payment of property taxes.
As we have cited in previous communications, a well-defined property tax cycle is established consisting of assessment, review, appeal, and payment.
It goes without saying that property taxes represent the financial backbone of local governments, and account for nearly three quarters of local tax collections. They are a significant local revenue source for funding K-12 education, as well as police and fire departments, parks and other services.
If we return to our Mississauga example, at the city level, further allocations may be made as well. This might include services such as by-law enforcement, culture and arts programs, economic development, parks, local forestry initiatives, planning and development, snow removal, and tax collection.
At the regional level, they might fund programs such as paramedic services, public health departments, housing, social services, recycling, water treatment and supply, as well as wastewater management.
When considered together, we start to understand the true interrelationship between needs and responsibilities from the perspective of multiple stakeholders, and highlights that at its core, property taxes represent a dependence-based issue.
In this regard, take a moment to now consider the degree of dependence local governments have on property taxes. At its core, this presents the foundation of the severity of property tax disputes. Even a small percentage decline in a local government’s ability to generate property tax revenue can have a significant impact on its ability to fund those critical municipal services cited above. Philosophically, a property owner may wonder if they should be the ones responsible for maintaining services at the cost of paying higher tax. Local governments will do what they can to fight for every possible dollar they can so as to not affect the delivery of municipal services.
Undoubtedly, property taxes represent the largest revenue instrument for municipalities, as well as the only tax revenue they have at their disposal. These are all funded fully or partially by the revenue inflows from property taxes, which in turn are wholly dependent on property assessments.
Property tax reliance is one of the primary reasons why tax rates can vary across cities. While some cities raise most of their revenue from property taxes, others, who may have lower assessed values, often need to rely on alternative funding sources. This topic was covered at length in a recent blog post we published earlier this year. Cities with high local sales or income taxes don’t need to raise as much revenue from property tax, and thus have lower property tax rates.
It stands to reason that cites with high property values can impose lower tax rates, as the revenue generated at lower rates can still fund the types of services, as would a city with lower assessed values and higher rates.
But this also brings to bear the idea of gentrification. This occurs when large numbers of high-income households move into what were previously low-income neighborhoods. If, through the forces of gentrification, assessed values rise, it can potentially displace financially vulnerable, long-term homeowners. This happens when property values increase, which increases the financial burden on those who are on fixed income.
This discussion has largely focused on the generic idea of ‘property taxes’, but the idea of commercial property taxes becomes much more significant in places that are large centers of commerce. Given their size, commercial property values can be significant, and fluctuations in these values given the onset of hybrid work, has had a noticeable impact on the coffers of cities scrambling to maintain city services.
In the period following the pandemic, the whole property tax ecosystem has been turned on its head. Cities scramble to find ways to maintain critical services, while owners of large commercial portfolios continue to contend with lower occupancy rates of their buildings. Over time, when original leases expire, some may not renew which affects their ability to generate revenue. So when assessment notices arrive at values remaining the same, or even higher, we begin to see the dimensions of the battle lines that are rapidly emerging.
Undoubtedly, property owners need the tools required to mount appeals, especially during the period that we now find ourselves in. itamlink can play a critical role the effective execution of property tax management given these circumstances. If you haven’t yet seen what itamlink can do for your organization, please contact us for a demo.
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