IXElIütAÆENINKjTnAJCIlATnES: j4J%J3]P1t()rTE3t]^ïrTr/L)C]RjA;riiS I)ISTTEIlAd]]Sn3I) CNN TTHDEli/USÜSCWF PCHLITICCLAJL F,ACT()RS, BY POLITICIANS? by William D. Kennedy B.Com., University o f British Columbia, 1965 TTEEKHS SUBA/CrrinED IN PAIHTAJL injTLFnDLI.AdlEhJT't)!; T:t[E;i%IS()IJIEli;AdOEI4TrSlF()It irCE DISOItEE ()]? MASTER OF ARTS in POLITICAL SCIENCE © William D. Kennedy, 2003 IHE LnNTVTEHRSITVlOMF INCIRTlHOEIiN BRTITSH (:C)L,lLnviBI/l April 2003 All rights reserved. This work may not be reproduced in whole or in part, by photocopy or other means, without the permission of the author. H I National Library of Canada ue nationale Bibiiothèqui du Canada Acquisitions and Bibliographic Services Acquisitions et services bibliographiques 395 Wellington Street Ottawa ON K1A0N4 Canada 395, rue Wellington Ottawa ON K1A0N4 Canada OurfUe Notreréférence The author has granted a non­ exclusive licence allowing the National Library o f Canada to reproduce, loan, distribute or sell copies o f this thesis in microform, paper or electronic formats. L’auteur a accordé une licence non exclusive permettant à la Bibhothèque nationale du Canada de reproduire, prêter, distribuer ou vendre des copies de cette thèse sous la forme de microfiche/film, de reproduction sur papier ou sur format électronique. The author retains ownership of the copyri^t in this thesis. Neither the thesis nor substantial extracts from it may be printed or otherwise reproduced without the author’s permission. L’auteur conserve la propriété du droit d’auteur qui protège cette thèse. N i la thèse ni des extraits substantiels de celle-ci ne doivent être imprimés ou autrement reproduits sans son autorisation. 0-612-80659-6 Canada Name: William D. Kennedy Degree: Master of Arts Thesis Title: DETERMINING TAX RATES: ARE PROPERTY TAX RATES DETERMINED ON THE BASIS OF POLITICAL FACTORS, BY POLITICIANS? Examining Committee: Chair: Dr. Robert W. Tait Dean of Graduate UNBC Supervisor:Greg Assistant Professor & Chair, Political Science Program UNBC Committee/Menfber: Dr. Gary Wilson Assistant Professor, Political Science Program UNBC Committee Member: Dr. Mary Louise McAllister Associate Professor, Environment & Resource Studies University of Waterloo External Examiner: Dr. Tomson Ogwang Associate Professor & Chair, Economics Program UNBC Date Approved: A pril 14-, . p o o 3 Abstract British Columbia municipalities may through pursue differential tax treatment of different classes of property as a policy objective. This thesis tests the hypothesis that the choice of tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision­ making process with municipal staff playing a supporting role in terms of providing technical assistance. As property tax policies have an impact on the economy at the local, provincial and national level it is desirable to understand the issues that are considered in the course of setting tax rates, the role played by participants in the decision-making process, and the decision-making process itself. The literature is reviewed and possible explanatory factors are identified. These are tested by way of a case study of three municipalities in northern British Columbia. The findings of the case study are analyzed and conclusions are offered. u TABLE OF CONTENTS Abstract 11 Table of Contents iii List of Tables V List of Figures vi Acknowledgement vii Introduction 1 Chapter One Thesis Question and Literature Review Thesis Question, Rationale and Importance Thesis Question Rationale and Importance Limitations and Delimitations Property Taxation in British Columbia: Setting tht Context Property Taxation Legislation in Other Provinces Review of Literature: Summary and Discussion of Related Research Political Factors Taxation of Business Competition Municipal Tax Competition in the United St tes Municipal Tax Competition in Canada Land Use Process British Columbia Research Gaps in the Literature Implications of the Literature Review 4 4 4 7 10 12 20 21 22 23 30 34 34 37 38 39 50 51 52 Chapter Two Methodology Problem for Analysis and Investigation Study Design Study Variables Data Gathering Instruments and Procedures Procedures Questions Process Political Considerations Economic 55 55 56 58 70 70 71 72 74 76 111 Input Roles Data Analysis Plan Permission and Human Subjects' Approval 78 80 81 82 Determining Tax Rates in British Columbia —Possible Explanatory Factors Factors Considered in Decision-Making Political Factors Taxation of Business Municipal Tax Competition Land Use Revenue Requirements Process and Participants Conclusions 83 83 84 88 89 91 91 92 96 Chapter Four A Case Study of Three Municipalities Background and Context for the Case Study Findings of the Case Study The Decision-making Process Political Considerations Economic Aspects ofTax Rates Input Into the Decision-making Process Roles of Elected and Appointed Officials 98 99 107 108 112 118 119 122 Chapter Five Analysis of Findings and Conclusions Explanatory Factors and Process - Conclusions and Implications Factors Considered in Decision Making Political Taxation of Business Competition With Other Municipalities Land Use Revenue Requirements The Process of Determining Tax Rates Setting Municipal Tax Rates - A Theoretical Explanation Implications for Municipal Finance The Hypothesis Lessons for Municipalities 125 Assessment and Taxation Data - Mackenzie Assessment and Taxation D ata- Quesnel Assessment and Taxation Data - Smithers 163 164 165 166 Chapter Three Appendix 1 Appendix 2 Appendix 3 Bibliography IV 125 126 127 135 136 138 139 139 143 149 158 160 L û t of Tables Table No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Page Comparison of Assessments and Tax Burdens In British Columbia Municipalities Summary of Municipalities by Population Percentage of Assessment in the Residential Property Class Percentage of Municipal Taxation Derived from the Residential Property Class Summary of Municipalities by Characteristics Municipalities Considered for Case Study Residential Proportions Taxes on Representative Houses - 2002 Business/Other Class Proportions Major Industrial Class Proportions Tax Rates and Multiples Changing Relationships Between Assessed Value and Taxation Major Industrial Tax Rates and Multiples 17 60 62 63 65 66 102 103 104 105 106 152 154 Lbt of figure» Figure No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Utility Class Tax Burden Major Industry Tax Burden Light Industry Tax Burden Business/Other Tax Burden Residential Tax Burden Population - Selected Municipalities Average Municipal Assessed Value Total Assessment - Selected Municipalities Total Assessed Values Total Taxation Percentage of Taxation - Mackenzie Percentage of Taxation - Quesnel Percentage of Taxation - Smithers Property Tax Revenue VI Page 18 18 18 19 19 67 68 68 101 101 130 130 131 149 Acknowledgement The writing of a work such as this is highly dependent on the motivation, support and encouragement the author receives from others. In this regard, I have been most fortunate. I would like to acknowledge the support and assistance given by Dr. Greg Poelzer. His wise counsel in helping me through the process of selecting a topic and completing this thesis is appreciated. The fact that I completed the task is in no small part due to the support and encouragement of the political science faculty. The role that Dr. Boris DeWiel, Dr. Tracy Summerville, and Dr. Gary Wilson played in providing insights into academic research and writing is most gratefully acknowledged. Special mention must also be given to Dr. Mary Louise McAllister, Associate Professor, Environment and Resource Studies, University of Waterloo, who volunteered her services as a member of my thesis committee. I greatly appreciate her assistance in defining the issues to be addressed and her constructive but friendly criticism. I also appreciate the many hours that she must have put into commenting on a variety of issues and drafts via e-mail. She, together with the other members of my committee. Dr. Poelzer and Dr. Wilson, willingly read through a great deal of sometimes very rough material in order to provide helpfiil suggestions. While they all provided great support, assistance and counsel, they are in no way responsible for any shortcomings of this work. The faults and errors are all mine. I would also like to acknowledge the great cooperation and assistance that I received from provincial and municipal staff in the course of research for this thesis. In particular, I would like to thank those individuals at Mackenzie, Quesnel and Smithers who gave so willingly of their time. This work would truly not have been possible without their willing assistance. Two other people deserve special thanks. One is Dr. Edwin R. Black, who introduced me to the study of local government many years ago at UBC, and who encouraged me to go on with my studies (advice that I ignored for several of decades). The other person deserving of special thanks is my wife Yvonne. To become the wife of a student after thirty years of marriage is not easy. Yvonne never wavered in her belief that what I was doing was “right,” despite a re-ordering of family priorities to meet my scholarly needs. For that, and for her active support and encouragement, I am very, very thankful. Vll Imtrodncdom The Aimg generally raised en Chy land b taxes.^ Property taxes are an imposition paid by virtually all property owners. We all, at some time, have probably wished that they were lower, and we all have our own understanding of why we pay what we do. The factors and processes that are involved in the setting of property tax rates, and the policies that govern the distribution among the property classes, are not always clear, even to those whose professional fate involves participating in the decision making process.^ This study is an attempt to explore the decision-making process as it relates to property taxation, and to draw some conclusions about the nature of the process and the implications for municipal finance in general. Property taxes are the most important source of municipal revenue; they are central to the viability of municipal government. Money raised from property taxation comprises over half the annual revenue for local general government in Canada.^ Yet the political process by which municipalities determine the level of taxation and the distribution of the burden of taxation is not well understood. The purpose of this thesis is to expand our understanding of the considerations that are taken into account in the processes of choosing tax rates and tax policy objectives. * Inscription on a wall plague given to the author by an (admiring?) taxpayer. ^The author spent over three decades employed in local government, and was intimately involved in setting tax rates. ^Revenue from Property and related taxes has ranged from 50.6% o f total revenue to 52.4% during the years 1997 through 2001. Source: Statistics Canada, Local seneral government revenue and expenditure. Canada. http://www.statcan.ca/english/Pgdb/govt06a.htm (26/10/20021 and particularly our understanding of the role of local elected and appointed officials in the decision-making process. It is concluded that major factors in the determination of tax rates include local economic conditions, community desires for services and facilities, the financial requirements of the municipality, and the need for stability and predictability in taxation matters. The time frame applied to these factors is relatively short term. There is no evidence that long term planning takes place at the municipal level with respect to municipal taxation policies. Elected officials play a dominant role in the process, although municipal staff are engaged in providing technical support. The process is generally incremental, with elements of mutual adjustment (as discussed in Chapter Five). The work begins with the statement of the thesis question, an outline of the rationale for and importance of the question, a review of the mechanics of property taxation, and a review of literature that is related to the question. The methodology employed to address the thesis question is explained in Chapter Two. Chapter Three draws on the literature review to enumerate a set of factors that may be considered in the course of choosing tax rates and tax policy objectives, as well as expectations for the decision-making process and the roles of the various participants. Case studies of three municipalities were conducted with the objective of determining what factors and processes are used in actual practice. The results of the case studies are reported in Chapter Four. Chapter Five summarizes the findings, offers conclusions about the hypothesis posed in this thesis, and draws on these conclusions to make suggestions about the implications of the study for this important area of public policy. Chapter One Thesis Question and Literature Review Thesis Question. Rationale and Importance 7%e$6 gwatfpf: Property taxes are a significant source of revenue for local government. In 1996, total local government revenue in Canada was $19.3 billion. Some 49.6% of that amount ($9.6 billion) was derived from property and related taxes. In British Columbia, total local government revenue amounted to $2.2 billion, and 50.1% of that was derived from property and related taxes.* Many questions could be asked about such a significant amount of taxation, including vfro pays the tax and what the revenues are used for. The purpose of this research is to seek to answer the general question: What is the basis for the setting of municipal tax rates, and who makes the decision? The hypothesis to be tested is that the choice of tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision-making process with municipal staff playing a supporting role in terms of providing technical assistance. In order to test this hypothesis it is necessary to determine what factors drive the decision making process used in setting municipal tax rates, including identifying the following: 1. the issues that are considered in the course of setting tax rates; *Karin Treff Karin and David B. Perry, Finances o f the Nation 1988, (Toronto: Canadian Tax Foundation, 1998), 6:2. 2. the role played by participants in the decision-making process (primarily elected members of council, staff, and the public); 3. the decision-making process used by the participants; and 4. factors related to procedure, organizational structure or location that have an influence on the issues considered in setting tax rates. British Columbia is one of the few jurisdictions in Canada where municipalities are able to determine, in an open and transparent manner, how the tax burden is to be shared among the differing types of property owners in the community.^ As such, it provides a setting in which to explore the factors involved in tax rate decision-making in more detail than is possible in jurisdictions where the apportioning of the tax burden is largely regulated by provincial legislation applicable to tax rates or by the proportion of market value that is subject to taxation. It also provides a setting in which to explore decision-making in small to medium-size municipalities rather than in the urban or metropolitan settings that are often the subject of municipal governance research. Much has been written about the political and economic aspects to be considered in the course of determining tax rates and about the role of public municipal administrators and their relationship to elected officials. Unfortunately, there has been little research into what actually occurs “in the field” where decisions on tax rates and tax policy objectives are required to be made within strict time constraints, and often with less information than would be desirable. One might ask ^Robin W. Boadway and Harry M. Kitchen. Canadian Tax Policy, 3"* ed. (Toronto; Canadian Tax Foundation, 1999), 352. whether elected and appointed officials are aware of, and actually consider, the issues that theory suggests are considered in the course o f deciding on tax rates. One might also ask whether the issues concerned are. regarded as highly political (with the outcomes largely determined by the elected officials) or whether they are regarded as highly technical (leaving the administrators as the dominant players, working within general political direction). This research is expected to contribute to our understanding of municipal government by: 1. identifying the factors that are actually considered in the process of determining local tax rate policies; 2. clarifying whether the process o f tax rate setting is primarily established by the elected representatives or by municipal administrators; and 3. verifying whether our theoretical expectations about the factors considered in the process of determining local tax rate policies are correct. As indicated by the review of literature, there is a paucity of empirical studies of administrative decision-making processes in small to medium size municipalities, particularly in tiie area of budgeting and taxation. It is hoped that this study will contribute to a better understanding of the ways in which these municipalities address financial issues. In the following pages it will be shown that a policy change has taken place since 1991 at the municipal level with respect to the allocation of the burden of taxation. Municipalities have been moderating the taxation of major industrial properties and utility properties, while shifting the tax burden slightly to business/other and residential properties. There is little explanation in the literature that contributes to an understanding of what brought about the change. It may have been triggered by changes in provincial policies regarding assessment and taxation of the utility property class, or by any number of other factors, or it may simply be the outcome of municipal efforts to maintain, as best they could, stability in the amount of taxes paid by various types of property owners. Most literature on municipal taxation is relatively general in nature, and/or directed to a particular issue in economics, such as inter-municipal competition for investment, discussion about the regressive or progressive nature of the property tax, and the economic impact of property taxation on business and industry. Little published material explicitly addresses tax policy decision-making processes. It is important to consider this topic as municipal tax policies have an impact on individuals and businesses at a local level, and on the national, provincial and local economies. An understanding of the topic will lead to a better understanding of the challenges facing local government, assist in evaluating the way in which they have responded to those challenges, and assist in evaluating the legislative and administrative framework within which they establish policy objectives for municipal property taxation. A better understanding of the way in which tax rates and tax policy objectives are set would be of benefit in several areas. At the local level, better understanding should make for more informed debate about tax policy and for better accountability for the decisions that are made. The ability to pursue differential tax treatment of different classes of property means that some taxpayers will be privileged over others, depending on the policy goals. For example, in British Columbia the effective rate of municipal general taxation on residential property is lower than it is on non-residential property. This may mean that residential interests are favoured over commercial taxpayers and that short-term political considerations drive the decision-making process. In the absence of an imderstanding of factors that contribute to property tax policy decisions society is unlikely to clearly imderstand the choices that have been made. In addition, since the decision-making process will be affected by institutional biases and by the biases of the individual participants (local elected and appointed officials), if we do not understand the decision-making process and the role of the participants, we cannot be sure how local government is defining “the public interest” insofar as it relates to property taxation. At the provincial level, better understanding may better inform provincial legislation governing municipal taxation discretion, provincial policies with respect to conditional and unconditional grants to municipalities, and provincial understanding of the financial capacity of municipalities. For example, political necessity may require that municipalities impose a disproportionate burden of taxation on industrial properties, as appears to be the case in a number of municipalities where major industrial tax rates are more than seven times the residential tax rate.^ This may be because the municipal councils feel that neither a reduction in service levels nor an increase in property taxation is acceptable to their electorate, or because they are of the view that commercial property taxation is ultimately home by residents outside the municipality. The resulting higher taxation may impair provincial policies which seek to reduce taxation on industry to improve the province’s competitive position. An uninformed provincial government may fail to understand the factors underlying the municipal policy decisions. This could lead to regulation to restrict municipal taxation discretion, when the more appropriate response may be to increase municipal fiscal capacity by increasing grants or making other revenue opportunities available. If municipalities are making property tax decisions largely on the basis of local political calculations, and are not considering factors relating to efficiency, effectiveness and equity, they may continue to increase commercial taxation and unwittingly bring about provincial action to limit their discretionary power. The action taken by the Government of British Columbia in 1995 with respect to taxation of utility properties is an instance where a provincial government limited municipal taxation jurisdiction. Over the years, several municipalities had ^See Table 13, Major Industrial Tax Rates and Multiples. continuously increased the tax rates applicable to the utility property class (which consisted largely of railway properties). The railways (lead by the CPR) were of the view that the resulting tax levels were excessive, and were hindering their ability to compete effectively with railways in the United States and, as a consequence, threatening their economic viability. Although many municipalities were aware o f the railways’ position, no coordinated action was taken. The railways were ultimately able to convince the Provincial Government of the need for action. As a result, legislation was introduced which effectively reduced the extent to which railway property was assessed, and limited the tax rates that could be applied to the utility property class.'* It is possible that, in addition to the enumeration of the possible reasons for the policy change listed above, the decline in the tax burden imposed on industrial properties is the result of municipalities becoming sensitive about the possibility of other industrial interests successfully pleading their case with the provincial government. We cannot know if that is the case without more knowledge of the decision-making process. Limitations and Delimitations Issues involving economic considerations and organizational behaviour are important to our understanding of the tax rate decision-making process and must be considered in the course of the study. It is not the intent of this work, however, to * Province of British Columbia, Miscellaneous Statutes Amendment Act (No. 3), 1995. 10 appraise the economic or political suitability of the property tax regime in British Columbia, nor is it the intent to develop a prescription for an “ideal” tax regime or decision-making model. As mentioned above, property taxes are levied by the provincial government, regional districts and regional hospital districts, and the Assessment Authority and Municipal Finance Authority. This thesis is concerned only with the process of establishing tax rate for municipal purposes. The setting of tax rates for other purposes is not addressed. Due to limitations of time and resources, the case study included in this thesis focuses on the perspective of municipal officials. It would have been useful to expand the case study to include the views of others from the community such as business leaders, managers of major industrial facilities, reporters, and leaders of civic organizations. Other perspectives would have contributed to a richer and more nuanced case study. The question of why business properties are taxed more than residential properties was not explicitly addressed, for similar reasons. British Columbia municipalities tax non-residential properties at much higher rates than residential properties, seemingly with relatively little protest. In recent years, there has been a tendency for municipalities to increase the use of user fees and services charges. The revenue derived from user fees has enabled municipalities to avoid increases in the property tax that might otherwise have taken place. Although a decision to implement user fees is to some extent analogous to a decision to allocate the burden of financing municipal services to a 11 particular class or group of citizens, it is not a subject for consideration in this study. Factors considered in the course of choosing user fees in place of property taxes to finance municipal services are deserving of separate consideration.^ An understanding of the legislative and organizational arrangements governing the imposition and collection of municipal property taxes is necessary before exploring the issue of property taxation. The following section provides an outline of the municipal property taxation system in British Columbia, together with comments about the implications for this study. Property Taxation in British Columbia; Setting the Context Property taxation in British Columbia is governed by provincial legislation. A number of bodies are financed to some extent by property taxation. These bodies include municipalities, regional districts, regional hospital districts, the British Columbia Assessment Authority and the Municipal Finance Authority. In addition, the provincial government levies property taxes throughout the province to finance the school system. The province also levies property taxes on land and improvements not included in a municipality, to recover some of the costs of providing services. The regional districts, regional hospital districts, the Assessment Authority and the Municipal Finance Authority set their own tax rates, using a tax * For a discussion o f user fees and property taxation see C. Richard Tindal, A Citizen’s Guide to Government, 2“*edition (Toronto/Montreal: McGraw-Hill Ryerson Limited, 2000), 189-191. 12 rate structure that is established by the provincial government,^ Since this research deals only with taxes imposed by municipalities, property taxes imposed for other purposes will not be discussed further. This research suggests that municipal tax rates are set independently of the tax rates for other bodies. Further discussion of property tax rates established for other bodies would not provide any useful information that is relevant to the purpose of this study. British Columbia has established a variable tax rate system that allows municipalities to determine not only the level of taxation but also the distribution of the burden of taxation among property classes. ’ Municipal councils have sufficient autonomy to enable them to establish their own tax rates and policy objectives with respect to differential tax treatment of different classes of property (subject to some limitations in the case of the utility property class). The determination of tax rates and the setting of policy objectives for the distribution of the tax burden may be influenced by a number of factors. The purpose of this study is, in part, to identify the factors. Property taxation in British Columbia is based on the actual value of property as determined by the British Columbia Assessment Authority pursuant to the Assessment Act and related regulations. The British Columbia Assessment Authority (established in 1974) has been assigned the responsibility of preparing the assessment rolls for all property in the Province. The assessment rolls are prepared * Strictly speaking, the Regional Districts and Re^onal Hospital Districts set tax rates in Electoral Areas. They requisition a sum of money from their member municipalities, who are responsible for enacting the actual tax rates. ’ Revised Statutes of British Columbia, Local Government Act, c. 323,1996, Parts 10 and 10.1. 13 annually, using a variety of assessment techniques to establish the actual value of the property. An ^)peal process is available to property owners viio wish to dispute the valuation assigned by the Assessment Authority. Properties are assessed at the M l actual value, less certain exemptions including a basic $10,000 exemption for business and industrial property, $50,000 for farm improvements and a wide variety of exemptions for uses such as schools, churches, charitable organizations, etc.* In some cases, it is very difficult to establish actual value either because there is no market for the property or because property transactions occur infrequently. In such cases, the Authority uses rates prescribed by the Assessment Commissioner to determine the value of the property. This approach is used in the case of continuous structures (pipelines, railway tracts, electrical and telephone lines, and rights-ofway), farm land, forest land and major industrial property.^ All property is assigned to one of nine property classes. The classes are: 1. Residential (includes land, improvements, or both used for residential purposes, including single-family dwellings, duplexes, multi-family residences, condominiums, manufactured homes, etc.); 2. Utilities (includes land, improvements, or both used or held for railway transportation, telecommunications, pipelines, and the generation and transmission of electricity); Val Drebet, Val, “Assessment Training,” (paper presented to POLS 260, University ofNorthem British Columbia, May 2001X 30. 'A id., 29. The system of property classification is established by Province o f British Columbia, B.C. Regulation 438/81 deposited November 2,1981, as amended, httD://www.QP.gov.bc.ca/statreg/reg/A/Assessment/438 81 .htm (22/01/2003). 14 3. Unmanaged Forest Land (land that meets the definition of forest land, but is not classed as managed forest land); 4. Major Industry (land, improvements, or both which form part of a major industrial plant that was designed and built for purposes such as mining, smelting, refining or manufacturing) 5. Light Industry (land, improvements or both which is used for extracting, processing, manufacturing or transporting products, but which does not qualify for the Major Industry class); 6. Business and Other (any property not included in some other class); 7. Managed Forest Land (forest land that is managed in accordance with provincial legislation such as the Forest Practices Code and the Forest Act): 8. Recreational Property/Non-Profit Organization (land, improvements or both used solely as an outdoor recreation facility for activities such as golf, skiing, tennis, waterslides, marinas, etc., and land and improvements used as a place of worship or a meeting place for fraternal organizations). Properties with mixed uses may be included in more than one property class. Each municipality is empowered to set its own tax rates. Tax rates are expressed as dollars of taxation per one thousand dollars of assessed value (i.e. $3.29 per $1,000). The rates may be different for each class of property. Property taxes for individual properties are calculated by determining which property class 15 (or classes) the property is in, and then by multiplying the tax rate for that class or classes by the taxable assessed value." If all property classes were taxed at die same rate the burden of taxation for each class of property (that is, the proportion of total municipal taxation paid by each property class) would be equal to the proportion of assessed value in each of the property classes. This allows municipalities to shift the burden of taxation between property classes. For example, municipalities have the ability to adjust tax rates to offset undesirable impacts of changes in market values. They are also able to reflect their own community values by increasing or decreasing the proportion of the total tax levy paid by a class of property. They cannot, however, use the system to adjust the property taxes levied on an individual parcel of property. For the purposes of this study, this raises the question of what factors influence the choice of policies regarding the incidence of taxation among property classes. Municipal councils have chosen to set tax rates so that non-residential property bears a greater burden of taxation than residential property. This is illustrated in Table 1, which shows the percentage of total assessment within the five major property classes in the years 1991, 1996 and 2001. The table also shows the percentage of the total tax burden imposed on properties in those classes. Municipal councils have been moderating the taxation of major industrial properties and utility " There are exceptions that arise from the use o f legislation that is no longer available to municipalities. Seven municipalities use a flat tax, which is a uniform amount of tax per home or vacant residential lot, on residential properties only. One municipality (Kitimat) uses a split tax rate for residential land in addition to tiie flat tax (a split tax rate involves different tax rates for vacant and developed lands), as well as a flat tax. One municipality (Rossland) uses a system o f parcel taxes. Municipalities using the flat tax are Dawson Creek, Fort St. John, Gold River, Kimberley, and Powell River. 16 properties, while shifting the tax burden slightly to business/other and residential properties. The implication is that there has been a shift of policy at the municipal level with respect to the allocation of the burden of taxation among the property classes. These changes in the percentage of assessment in the major property classes, and the percentage of the total tax levy paid by each class are illustrated in Figures 1 through 5 (below). Table 1 Comparison of Assessments and Tax Burdens In British Columbia Municipalities Property Class 1991 1996 2001 78.42 52.47 83.14 81.29 55.69 55.62 % Change 1991 - 2001 Residential % of Total Assessment % of Tax Burden +3.7 +6.0 Utilities % of Total Assessment 0.61 0.44 0.35 -42.6 % ofTax Burden 2.52 2.51 1.86 -26.2 Major Industry % of Total Assessment 2.62 1.36 1.20 -54.2 % ofTax Burden 9.92 8.14 7.16 -27.8 Light Industry % of Total Assessment 0.84 0.68 1.00 +19.1 % ofTax Burden 1.99 1.81 2.30 +15.6 Business/Other % of Total Assessment 16.93 13.86 15.70 -7.3 % ofTax Burden 32.60 31.35 32.56 -0.1 Note: The Managed Forest, Tree Farm, Recreation and Farm Property Classes are not included in the above table. Source: Province of British Columbia, Ministry of Community, Aboriginal And Women’s Services, Local Government Statistics. http://www.mcaws.gov.bc.ca/lgd/srvs infra/munfin/index.htm 17 F ig u re 1 Utility Class Tax Burden 3 2 % 1991 1996 2001 I % o f Total Assessment □ % o f Tax Burden Figure 2 Major Industry Tax Burden 10 % 6 1991 1996 I % of Total Assessment o 2001 % ofTax Burden Figure 3 Light industry Tax Burden 1981 1996 2001 I % of Total Assessment o % of Tax Burden 18 Figure 4 ' Business/Other Tax Burden 40 Ml % 20 0 1991 1996 2001 of Total Assessment D % of Tax Burden Figure 5 Remldendal Tax Burden 100 % 00 1991 1996 2001 ■ % of Total Assessment □ % of Tax Burden As indicated above, British Columbia is one of the few jurisdictions in Canada which allows municipalities to determine how the tax burden is to be shared. The following section briefly summarizes the property taxation systems in place in other provinces. 19 Property Tax Leeklation in Other Provinces A survey conducted by the International Association of Assessing Officers in 1999 revealed that, ivhile there are similarities between the various ^ v in c ia l property tax systems, Aere is also remarkable diversity.^ Theproperty tax is utilized in all ten provinces in Canada, and in the territories.*^ The tax base is set by provincial legislation, and in addition to including land, buildings and structures, machinery and equipment affixed to the land is included in the base in some jurisdictions. Land and improvement values are based on the full assessed value, except in Manitoba, Saskatchewan, Alberta and the territories, where either a portion of assessed values or replacement cost is used. Municipal tax rates areset by the municipalities, subject to a variety of restrictions. Differential tax rates may be used in several provinces, with a variety of restrictions.*'* In the provinces that provide for differential tax rates the provincial government establishes the ratios between residential and non-residential tax rates, or “fairness ranges.”*^ British Columbia municipalities have a great deal more freedom in the establishment of differential tax rates than municipalities in other jurisdictions in Canada. Thus, it is important to exercise caution when applying conclusions Richard R. Almy, “Property Tax Policies and Administrative Practices in Canada and the United States: Executive Summary,” Assessment Journal, Vol. 7, Issue 4 (Jul/Aug 2000), 41-58. Harry M.Kitchen, Property Taxation in Canada, (Toronto: Canadian Tax Foundation, 1992), iii " F W , 19-38. For a detailed discussion of assessment and taxation systems in Canada, see Karin Treff and David Perry, Finances o f the Nation 1998, (Toronto: Canadian Tax Foundation, 1998), 6:1 to 6:18. 20 reached with respect to the determination of tax rates in British Columbia to other jurisdictions. Review of Lheratnre A review of the literature, it is expected, will illuminate three m;^or areas o f interest The first is the characteristics and circumstances of the property tax that influence the choice of property taxation policy objectives. The second is procedural and organizational factors that influence the decision-making process. The third is the political implications of property taxation, as they are dominant factors that will influence both the way in which explanatory factors are treated and the decision­ making process. The literature review will be used to gain a better understanding of the issues that are considered in the course of setting tax rates, the role played by participants in the decision-making process, and the decision-making process itself. The literature review will also be used to inform the approach to the case study which is to be undertaken as part of this work. This part includes two sections: 1. a summary and discussion of related literature; and 2. a discussion of the implications of the literature review for the proposed study. This review will discuss both Canadian and American literature. While there are differences between municipal government in the two countries, there are also a great many similarities. Consideration o f the literature fiom both countries expands the pool of material that can be examined. Although both the United States of 21 America and Canada have vibrant municipal structures, research on municipal issues is limited. For example, about thirty percent of the articles published in Public Tfeview over a GAeen-year period were related to ef&ctive local government management (an average of 18 per year). About twelve percent of those articles (about two per year) dealt with financial analysis and budgeting.*^ This review does not summarize the many papers which analyze the economic impact of the property tax, or which identify attributes of the property tax (good and bad) and areas of reform. Instead the review limits its focus to issues that may be considered in the course of setting tax rates and tax policy objectives and to issues about the process and its participants. Summary and Discussion o f Related Research This summary is divided into sections dealing with political factors, taxation of business, competition, land use, and process, and examines literature in Canada and the United States. The tax rate structure in British Columbia, with its relatively unfettered fieedom to set local policy for distributing the burden of taxation among the property classes, gives British Columbia municipalities considerably more freedom in taxation matters than is enjoyed by municipalities in most other provinces. British Columbia municipalities are, in this respect, much like municipalities in some American jurisdictions which have similar, if not greater. " Gergory Streib, Bert J. Slotkin and Mark Rivera, “Public Administration Research from a Practitioner Perspective,” Public Administration Review, Vol. 61, No. 5 (September/October 2001), 515-525. 22 latitude to set local tax distribution policies. Therefore, American and Canadian sources have been dealt with separately, i^ e re that ^xproach seemed helpful. Literature relating to British Columbia is separately identified. Comments concerning perceived gaps in the literature are offered in a concluding section. The key themes throughout the literature are fears of the political impact of property taxation and use of the property tax by municipalities to compete for new investment and new residents. There has been little written about the process of setting tax rates, or about the respective roles of elected officials and staff, but a review of related literature raises several issues that are relevant to the topic. This review begins with a discussion of literature relating to the politics of the property tax, and is followed by a discussion of the literature relating to the other themes mentioned above. Political Factors This section reviews the politics of property taxation. It will be seen that association with a highly visible and unpopular tax is a concern to elected officials, and that uncertainty about the amount of tax payable from year to year may be responsible for at least part of the public’s dislike for the tax. It will also be seen that the property tax has been used to cultivate a political base (by shifting the tax away fiom existing homeowners) and that municipalities are overwhelmingly concerned with avoiding tax increases for fear of political repercussions. Low levels of public interest in municipal polifics may, however, be a factor that reduces that concern. 23 It is commonly suggested that municipalities keep taxes low, and try to shift the burden of taxation to non-residential properties, in order to maintain support of the electorate,*’ and that the property tax is not a popular tax,** due to perceived or real inequities in assessment, the large single tax bill, and hardship on lower income homeowners. As a result, thirty-eight states in the United States have some form of tax limitation, eight other states limit assessments, and some require exemptions for low-income or elderly homeowners. Policymakers perceive that the public dislikes the tax and are hesitant to expand its reach. *^ Reeves has written of the effects of uncertainty about the amount of the property tax, indicating that uncertainty may be as much of a political issue as the actual amount of the tax. When tax rates are held constant in the face of rapidly changing assessed values, property owners will face rapid changes in the amount of tax payable. Taxpayer revolts (such as that evidenced by California’s Proposition 13) have been attributed to the rapid rise of taxes which are accompanied by a perception of lack of control over taxes and uncertainty about what will happen next.’** Reeves concludes that “[hjistory augurs that leadership should see that there Donald A.Hicks, “The Property Tax in a New Industrial Era” in The property Tax and Local Finance, ed. C. Lowell Harriss, O^ew York: The Academy o f Political Science, 1983), 213. Kenneth Woodside, “An approach to studying local government autonomy: the Ontario experience,” Canadian Public Administration, Vol. 33, No. 2 (Summer 1990), 211. Harry Kitchen, “Canadian Municipalities: Fiscal Trends and Sustainability,” Canadian Tax Journal Vol. 50, No. 1 (2002), 169. " Donald J. H. Higgins, Local and Urban Politics in Canada, (Toronto: Gage Educational Publishing Company, 1986), 93. C. Richard Tindal and Sasan Nobes Tindal, Local Government in Canada, 4* ed. (Toronto/Montreal: McGraw-Hill Ryerson Limited, 1995), 217. David Brunori, “Metropolitan taxation in the 21^ century,” National Tax Journal, Vol. 53, Issue 3, 541-551. “ H. Clyde Reeves, “Leadership for Change” in The Property Tax and Local Finance, ed. C. Lowell Harriss, (New York: The Academy o f Political Science, 1983), 3 . 24 are no surprises in taxation.”^* According to Reeves, many local legislators prefer to keep tax rates unchanged in times of escalating values, thereby reaping wind611 tax revenues. Through lack of understanding, the public often fail to understand that the levy could be adjusted by the elected officials, limiting the increase in taxation to those owners who had been underpaying.^ Fischel, however, suggests that reaping a “windfall” from an increase in assessed values is not as prevalent in smaller jurisdictions as it is in larger municipalities.^^ Hicks comments on the role of property tax as a political tool, pointing out that the pattern of incidence of the taxation reveals its use to cultivate a political base by shifting the incidence of the tax away fix>m existing homeowners.^^ Fischel has proposed that local governments are politically dominated by homeowners whose primary motivation is to maximize the value of their homes. They seek to have their local governments adopt policies that will stabilize or enhance home values, and are concerned about increases in property taxes without improvements in services (among other things).^^ Fischel suggests that the combination of service and taxation levels is set by elected officials “as if ’ they had been voted on in a plebiscite, to meet the demands of the owner who had the median home value.^ Ibid., 3. ^^Ibid, 6 . ^ William A.Fischel, The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies, (Cambridge, Mass.: Harvard University Press, 2001), 91. ^JIicks,213. ^ Anthony Downs, “The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance and Land-Use Policies,” Journal o f the American Planning Association. Vol. 68, No. 4 (Autumn 2002), 456-457. ^Fischel, 87-88. 25 This is influenced, he notes, by the size of the municipality, with smaller municipalities being more responsive.^ This implies that the homeowners’ view of property taxation is more complex than the view that is implied by Hicks (which appears to suggest that homeowners are primarily concerned about the amount of the tax or the share o f the tax that they pay). Hicks is not alone in seeming to focus on the amount of the tax, and the potential adverse reaction of homeowners, as evidenced by the following. Much of the literature relates to the visibility of the property tax and to the effects of assessment practices (with particular emphasis on Ontario). Woodside observed that “the visibility and non-deductibility of the property tax make changes in its rates highly contentious and encourages municipal councillors to avoid increases wherever possible.”^* Slack has noted that “as a consequence o f the visibility of the property tax...property tax rates have not increased significantly over time in Canadian cities. Indeed, in the last few years, many cities have placed a freeze on property tax increases so that the rates are not even keeping pace with inflation.”^^ Kitchen has also observed the reluctance of municipalities to raise tax rates, citing as one of the possible reasons “concern over a possible taxpayers’ revolt.”^ He also suggests that municipalities are financially sustainable at the 27 Ibid.. 90-91. “ Woodside, 211. “ Slack, Enid, “Intergovernmental Fiscal Relations and Canadian Municipalities; Current Situation and Prospects,” report prepared for the Federation o f Canadian Municipalities, 2002, at wvyw.fcm.ca/newfcm/Java/slack.htm. ""Kitchen, 169. 26 present time?’ The latter comment implies that there may be less than an urgent need for increases in the property tax. However, other data suggest that the situation may not be that straightforward. In many municipalities assessments are based on market values. When real estate values are increasing (such as in periods of high demand) market values increase. If tax rates are left unchanged, the property taxes will rise in proportion to the increase in property value. Libin reported that, as a result, some municipalities are reaping a windfall.^ Strumpf provides evidence that fully informed voters may be led to believe that property taxes are too high and unfair where reassessment occurs inftequently. The study also indicated that short lags between reassessments increased tax revenues, while longer lags reduced revenues. Bird noted that local and regional taxes levied on business are generally higher than can be justified on the basis of arguments about economic efficiency, He attributed this to political factors, stating that “it is usually as politically attractive as it is economically undesirable to impose taxes on business, both because of the common belief that “the rich” pay such taxes and the real possibility that non-residents may do so."^ Slack also discusses the fact that taxes on nonresidential property may be exported to non-residents, and that this reduces Ami, 169. Kevin Libin, “Home is where the hit is,” Canadian Business. Vol. 73, Issue 23, 132. ” Koleman S. Strumpf, “Infiequent Assessments Distort Property Taxes: Theory and Evidence,” Journal of Urban Economics, 46 (1999), 169-199. ^ Richard M Bird, “Local Business Taxes,” report prepared for the World Bank Institute, 2002 at http://www.worldbank.org/wbi/publicfinance/documents/fiscalfederalism Russia/Bird tax.pdf. pp. 5-6. 27 efBciency and accountability.^^ Hicks comments on the role of property tax as a political tool, and the inevitable tendency to shift the incidence of the property tax away 6om homeowners *%>r the political expedience of cultivating a political base..."^ Woodside has expressed some scepticism about the responsiveness of municipal politics, noting the relatively low turnout at elections, uncontested elections, increasingly high cost of elections in larger jurisdictions and the low level of voters’ knowledge about municipal politics. In addition, name recognition is important in municipal elections, giving high value to incumbency and making it easier for incumbents to ignore the concerns of constituents.^’ Woodside’s comments suggest that there is at least the possibility that the potential electoral consequences of setting tax rates and tax policy objectives may not be as great as indicated by others (especially where the tax increase is modest). Frisken has observed that the property tax “is an instrument of local administration that is particularly susceptible to pressures from and changes in the economic and social environment”^* Magnusson points out the recurring presence of ‘cutters’ and ‘boosters’ in municipal affairs. The former “cut” spending to relieve Enid Slack, “Intergovernmental Fiscal Relations and Canadian Municipalities”. ^ Hicks, 213. ” Woodside, 201-202. ^ Frances Frisken, “Local Constraints on Provincial Initiative in a Dynamic Context: The Case of Property Tax Reform in Ontario,” Canadian Journal o f Political Science, Vol. XXIV (June 1991), 358. 28 the burden on taxpayers while the latter “boost” the economy by offering incentives to business and industry and encouraging construction. Graham, Phillips and Maslove indicate that determining the tax rate is one of the more high proGle activities of a municipal council, and that setting the relationship between tax rates for various classes of property involves “heated debates about the overall fairness of the property tax system and its impacts on the economic development of the community.”^ They do not, however, explore the issue in any detail. In a very thorough review of the property tax, Kitchen simply says that municipalities first determine their expenditures, and then determine the amount that must be raised from property taxes to balance the budget.'** Slack takes the same approach.'*^ A variety o f authors, including Bird and Slack,'*^ Boadway and Kitchen,'*'* Higgins,'*^ and Tindal and Tindal,'*^ have commented on the reliance of municipalities on the property tax. While property tax is an important source of revenue to municipalities, it is not popular. Higgins refers to the property tax as “probably the most unpopular ^ Warren Magnusson, “Introduction: The development o f Canadian urban government,” in City Politics in Canada, ed. Warren Magnusson and Andrew Sancton, (Toronto: University o f Toronto Press, 1983), 38. Katherine A. Graham, Susan D. Phillips with Allan M. Maslove, Urban Governance in Canada: Representation, Resources, and Restructuring,, (Toronto: Harcourt Brace & Company, Canada, 1998), 216. Kitchen, Property Taxation in Canada. 34. Enid Slack, “Alternative Approaches to Taxing Land and Real Property,” report prepared for the World Bank Institute, 2001, at www.worldbank.org/wbi/publicfinance/decentralization/fiscalfederalism Russia.htm. ^ Richard M. Bird, and N. Enid Slack, Urban Public Finance in Canada. 2“*ed., (Toronto: John Wiley & Sons, 1993), 79. ^ Boadway, and Kitchen, 343. ^ Higgins, Local and Urban Politics in Canada. ^ Tindal and Tindal, 77-78 and 209. 29 form of revenue-raising in the minds of the public” because of its “directness, immediacy, inequity, and v is ib ility ....T in d a l and Tindal refer to the property tax as “the tax we all love to hate.”^* Vojnovic has suggested that the tax structure should establish a close relationship between service benefits and costs. Failure to establish this relationship leads to inefficiencies and economic distortions in the urban economy. Establishing this relationship also provides information to municipal officials about the standards of service desired by residents.'*^ Bird and Slack note that variable tax rates (such as are used in British Columbia) can be used to determine the distribution of property tax by property classification. This would permit a municipality to allocate the tax on the basis of the benefits-received principle of equity. If this was done, business property would be taxed at a lower rate, since (according to studies in Ontario) business property receives fewer benefits than residential property. In reality, however, the tax rates that are applied generally favour residential property.^ Taxation of Business The situation with respect to taxation of business by municipalities in the United States is similar to that in Canada, as most municipalities place a heavy reliance on ^ Higgins. Local and Urban Politics in Canada. 93. ^Tindal and Tindal, 217. 49 Igor Vojnovic, “Municipal consolidation, regional planning and fiscal accountability: the recent experience in two Maritime provinces,” Canadian Journal of Regional Science, vol. 23, no. 1 (spring 2000), 49 - 72. “ Birdand Slack, 86. 30 non-residaitial property taxes/' Few sources could be located to fully explain this situation. Given the importance placed on tax competition, and die privileged position of business in democratic policy making, one would expect Aat business would receive more favourable tax treatment ^^^iam s and Collins suggest that policy makers and business want to perpetuate policies that will insure continued capital accumulation for business and electoral success for politicians. Politicians are faced with a tacit threat of disinvestment if their policies are not compatible with profitable investment. If disinvestment occurs, they would face political reprisal arising from economic stagnation. This is taken to imply that the resulting taxation level for non-residential properties is the result of calculating the probabilities of adverse political reactions from tax rates that are higher or lower than the rates actually selected. There are also attitudes and beliefs about the taxation of business that lead to higher taxation of business property. These are reviewed in the following paragraphs. It has been argued that it is fair to charge business and corporations a higher rate of taxation, since they are able to pass the tax on to others (such as customers).^^ Whether or not this is the case is debatable, and determining the answer is beyond ' Bird, “Local Business Taxes,” 8. ^ John T. Wilson, and Brian K. Collins, “The Political Economy o f Corporate Taxation,” American Journal o f Political Science, Vol. 41, Issue 1, (January 1997). Reeves, 5, and Jack Masson, with Edward C. LeSage Jr., Alberta's Local Governments: Politics and Democracy, (Edmonton: University o f Alberta Press, 1994), 327. 31 the scope of this study. In any case, the perception of the ability of business to pass the tax on in a variety of m^rs is a perception with i ^ c h local ofGcials must deal.^ Bird suggests that there is a belief that the areas which are “hosts” to economic activity are “entitled” to part of the proceeds of the activity, whether or not their services contribute toward its production or i^dKther the oulput is consumed within the area. He also comments on the general belief by politicians and the public in most countries that taxes on business are the best of all taxes. These beliefs are used as a justification for taxation of business. He points out that if the political cost of levying taxes on business is low, it may be rational to impose such taxes even though the economic cost is high.®^ Bird noted that local and regional taxes levied on business are generally higher than can be justified on the basis of arguments about economic efficiency. If it is accepted that there is a high economic cost resulting from high taxation of business, and if that cost results in reduced economic activity, it is presumably detrimental to homeowners. If, as asserted by Fischel, homeowners press for policies that maximize property values, one would expect moderation in the taxation of business. It may be that the detrimental effects are more evident at the national or provincial level, in which case decisions by individual municipalities may have only a marginal impact. In that case, high taxation of business may be rational. No literature was found that ^ For a discussion o f who bears the burden of taxaticm o f non-residential property, see Harry Kitchen, “Municipal Finance in a New Fiscal Environment,” C.D. Howe Institute Commentary, No. 147 (November 2000), 11. Bird, “Local Business Taxes,” 6 ^Ibid,. 5-6 32 discusses this precise point. However, the point is dealt with indirectly by Ballentine and Thirsk. Ballentine and Thirsk showed that 31% of total non-residential municipal tax revenue in Ontario came from enterprises which normally sold their output to consumers outside the taxing jurisdiction.^’ They also asserted that, if local residents are of the belief (albeit mistakenly) that non-residential taxation is borne by non-residents, their perception will sway their judgement about the local level of expenditure.^* They went on to conclude that the non-residential property tax is inefficient (in an economic sense) and that it violates the principle that local taxes should rest upon local residents. They suggest that the tax has persisted because it is politically attractive to tax non-residents, and that it should be restructured as a benefrts tax. ^ They also note that Ae non-residential property tax is likely to be borne in part by the workers and landlords of the taxing jurisdiction, and by consumers “as if an origin-based sales levy had been imposed.”^ The foregoing suggests that, for a variety of reasons, municipalities tax business properties at higher rates than residential properties. In the following section it will be seen that competitive forces are thought to lead to either lower levels of taxation, or higher levels of service, in an attempt to attract new investment to communities. J. Gregory Ballentine and Wayne R. Thirsk, Taxation without Representation: The Consequences o f Taxing Non-residential Property, (Ottawa: Canada Mortgage and Housing Corporation, 1982), 2. 9. ''A id , 56. '"A id, 67. 33 Competition Municipalities are thought by some to compete by using low tax rates as an inducement to invest in their community. The following section reviews relevant literature on the topic of inter-municipal cooperation. For the purpose of this work, the nature of the models of tax competition and the conclusions that can be drawn from each are of less importance than the point that economic theory suggests that tax competition exists, its existence can (in some cases) be demonstrated, and some forms of tax competition are beneficial and may therefore be a factor considered in the course of setting tax rates and tax policy objectives. Municipal Tax Competition in the United States A substantial literature concerning tax competition by local government has been developed in the United States. Its central message is that “independent governments engage in wasteful competition for scarce capital through reductions in tax rates and public expenditure levels.”^* Wilson reports that the research was stimulated by well-publicized instances of tax competition.*^ There are two broad views of the issue. One is that intergovernmental tax competition is wasteful because it tends to result in less efficient levels of local services. The other is that competition for mobile households is welfare enhancing. In the latter case, it is assumed that the government is controlled by landowners who seek to maximize the after-tax value of John Douglas Wilson, “Theories ofTax Competition,” National Tax Journal, Vol. 52(2) (June 199,269 ^ The following discussion o f tax competition is adapted from Wilson, 269 - 304 34 their land by arranging for the government to provide public goods to attract individuals to reside on the land. Taxes must be kept low enoi%h to induce people to live in the area, given the level of public services provided. The taxes levied are assumed to be efficient, and the tax paid is equal to the marginal cost of providing the service. Wasteful tax competition results from a departure from the foregoing “idealized” state. Such a departure may result from fiscal externalities (where one government’s action adversely affects the budget of another government) or because the taxes imposed are inherently inefficient. The general view is that tax competition leads to inefficiently low tax rates. In addition to the horizontal tax competition described above, there can be vertical competition. Such competition exists where governments share the same tax base (i.e. where there is both a provincial and municipal property tax, or where there is both federal and provincial income tax). As noted above, a number of authors have addressed these issues, including Hoyt, who commented that “concern over the type of strategy governments use may have important implications for both the level of government services...and the nature of budget determination and adjustment. For example, if governments do compete in taxes, we would expect them to respond to budget shortfalls or surpluses by adjusting expenditures, not tax rates.”^ Hoyt suggests that policies that limit taxes or make it difficult to change taxes are suggestive of tax competition, while setting service standards or entitlements is suggestive of service competition. He “ William H. Hoyt, “Tax Competition, Nash Equilibria, and Residential Mobility,” Journal o f Urban Economics, 34 (1993), 360. 35 also suggests that while national and state governments may compete in taxes, local governments are more likely to compete in services, adjusting services to maintain standards. In a study of the Hartford, Connecticut, metropolitan area, Taylor found that contrary to expectations based on the literature on market-like incentives for efficient local government, the municipalities under spent on highway maintenance and repair, and that homeowners would have preferred higher taxes to support those services. 64 Hicks has pointed out that the competition is not simply for industrial assessment. He cautions that there is a need “to be especially attentive to the burden of taxes on households, since the burden of taxes on workers, more than on business, may impede the crucial job-labour matches necessary in the high-technology growth sectors. He suggests that the use of the property tax to reflect local preferences may no longer be valid in an era where life is lived at greater spacial scales.^ In a study of Ohio school districts. Spry has found that “the dominance of the property tax in local tax structures is caused by fiscal competition for mobile residents.”^’ In a study of tax rate increases in Chicago suburban municipalities, Chen found that tax competition did not exist ^ Brunori writes that local ^ Lori L. Taylor, “Allocative Inefficiency and Local Government,” Journal o f Urban Economics, 34 (1995), pp. 201-211. ® Hicks, 216 AM , 217 John Arthur Spry, “The Political Economy o f Local Taxation: The Effects ofTiebout Mobility and Referenda on Local Taxes,” (Ph.D. diss.. University o f Rochester, 2000), iv. ** Xiao Chen,”Essays on Local Taxation And Urban Development”, (Ph.D. diss., Tulane University, 1996). 36 government tries to lure taxpayers who will pay more in tax than they consume in services, and that they do this either through provision of superior services or by setting competitive tax rates (especially in metropolitan areas).^ In his view, incentives are offered because local officials think they will work (or are unwilling to take the chance that they do not work), and because they desire the immediate publicity that arises from securing new development. The foregoing implies that we may or may not find tax competition between municipalities. If tax competition exists, it may take the form of constraints on taxation (implying reductions in services in order to sustain or reduce tax rates), or it may take the form of improvements in services (accompanied by higher taxation). The presence of tax competition may hinder the ability of municipalities to achieve their preferred mix of service levels and taxation. Municipal Tax Competition in Canada The matter of municipal tax competition has not been given a great deal of attention in the political science literature in Canada. Industrial and commercial development is highly sought by municipalities. Not only are the effective rates of taxation higher on industrial and commercial properties than they are on residential properties but, as Woodside has reported, “their low overall demand for municipal services also acts as a source of cross-subsidization for residential users.”’® Since municipal fiscal strength depends on the tax base, there is ongoing competition '^Bnmori, 541-551. ™Woodskk, 205. 37 among municipalities to increase their share of commercial and industrial assessmait, to achieve the "ideal" o f getting 40 per cent o f tax revenue 6om such sources.’* Brett and Pinkse sought (unsuccessfully) to find evidence of tax competition in British Columbia.’^ The granting of selective benefits to business through assessment abatement was important, according to Woodside, as a means of attracting new investment to municipalities in Ontario. This tool was taken away from municipalities in Ontario when the province assumed control over assessment in 1970.’^ The foregoing implies that tax rate competition may not be found, and that municipalities compete for new investment through other means. Of course, it is possible that low non-residential tax multiples are, in British Columbia, a substitute for the assessment abatements that were important in Ontario. Land Use For the purpose of this study, the primary interest is in the possible effect of tax increases on development in the community. As a consequence, the large body of literature that deals with the possibility of modifying the property tax system to make it more suitable as mechanism for providing incentives (or disincentives) for particular types or locations of property development has been ignored. AW, 205 ^ Craig Brett and Joris Pinkse, “The determinants o f municipal tax rates in British Columbia,” Canadian Journal o f Economics, Vol. 33, No. 3, (August 2000). ^ Woodside, 208. 38 The obvious general concern is that high taxes discourage development, and this is an issue that is referred to in much of the literature discussed in the previous sections. However, contrary views exist. Zak and Skidmore examined die effect of tax increases on the rate of land development. Their results “flatly contradict the common assertion that property tax increases “threaten development.” On the contrary, increases announced in advance create substantial incentives to build before they take effect.”’'* Process In this section, the focus is on decision or policy makii^ process literature. It reviews literature related to the sequence of decision-making, the types of processes used, and the participants. The major areas of interest are the sequence of events, the participants and the nature of their interactions, and their role in the process (advisor, decision-making, observer, etc.). There has not been a great deal of research on these issues (insofar as municipal taxation decisions are concerned), and as a result this section includes a few references to European research. Although some of the material does not deal specifically with the municipal setting, it is possible to draw inferences from the more general literature. The process of determining tax rates has been discussed by Hicks, who asserts that “[t]he size and substance of a local budget are usually determined first. Jeffrey S. Zak, and Mark Skidmore, “Property Tax Rate Changes and Rates o f Development,' Journal o f Urban Economics, 36, (1994) 332. 39 and only then is a tax rate calculated that will raise the desired funds.”’^ This, he says, has led scholars to view the property tax as an independent variable which needs to be reformed to achieve greater equity and efficiency. In his view, it should be regarded as “a dependent variable whose form, function, and ultimate efficiency are the results of other forces at work in our society.”’® Masson and Lessage described a similar approach.” The process has also been discussed by Graham, et.al., who take a different approach.’* They indicate that the process often starts with the council and/or mayor setting a budget guideline, often explicitly in terms of a property tax guideline. Staff prepare a budget that is within the guideline, which is the subject of debate and alteration by the elected officials. Some economic studies have indicated that there is a dynamic interrelationship between municipal revenues and expenditures. However, according to Dahlberg and Lindstrom there have been very few studies of this issue, possibly because of the view that local governments respond passively to changes in revenues, and because of the difficulty of such studies. In their study of Swedish municipalities, they concluded that most local government spending was determined by rational, forward-looking decision makers.’® Tax competition literature reviewed in previous sections suggests that tax legislation is subject to substantial control by legislators and that expenditure see Hicks 219. ^ AW., 219 ^ Masson with LeSage, 326. ^ Graham, Phillips, with Maslove, 222. ^ Matz Dahlberg and Tomas Lindstrôm, “Are Local Governments Governed by Forward Looking Decision Makers?” Journal o f Urban Economics, 44 (1998), 254-271. 40 policies are delegated to the bureaucracy because legislatures cannot deal with the numerous specific expenditure decisions that affect the tax base.*® One of the factors that must be considered is the role of administrators and politicians in the decision-making process. thought on this issue. Svara has identified two schools of The first involves the separation of policy making and administration, and the concentration on “technical-rationality.” The other involves the acceptance of the premise that administrators and politicians join together in the common pursuit of sound governance. This approach stresses interdependence as well as distinct roles within a system of reciprocating values.** This interdependence was also noted in research by Hassett and Watson on long-serving city managers*^ and by Svara in his exploration of the role of the city council.*^ Feldman and Khademian have also examined the respective roles of public managers and politicians arguing, contrary to the principal-agent theory, that public managers do affect governance structures and that we should think of governance structures “as relationship created through the interactions of people in different and reciprocal roles that are relatively dynamic.”*^ " WDson, 296-7. James H. Svara, “The Myth o f the Dichotomy: Complementarity o f Politics and Administration in the Past and Future of Public Administration,” Public Administration Review, Vol. 61, No. 2 (March/April 2001), 176-183. Wendy L. Hassett and Douglas J. Watson, “Longer-Serving City Managers: Practical Application of the Adademic Literature,” Public Administration Review, Vol. 62, No. 5 (September/October, 2002), 622 - 627. ® James H. Svara, “The Roles o f the City Council and Implications for the Structure of City Government,” National Civic Review, Vol. 91, Issue 1 (Spring 2002), 5 - 24. ^ Martha S. Feldman and Anne M. Khademian, “To Manage is to Govern,” Public Administration Review, Vol. 62, No. 5 (September/October 2002), 541. 41 These latter observations suggest that the decision-making system may not, in fact, be as straightforward as set out by Hicks at the beginning of this section. The literature suggests a more dynamic process in which managers and elected officials collaborate in some way. Higgins has written that the quality of advice given to a municipal council will depend on the training and experience of the municipality’s administration, and on the lines of communication between administration and council.^^ According to Tindal, the nature of the advice may also depend on whether the municipality is attempting to follow a “business model.” Where that is the case, the property tax may be regarded as the “price” of municipal services, and its determination may be seen as a business pricing decision rather than a political decision involving the allocation of the burden of financing community services among the members of the community.^ In writing about the structure of local decision making, Higgins discussed the linkage between policy-making and administration, pointing out that conventional wisdom has it that the two should be linked, but that two of the main models of local government structure (the council-manager structure and the council-commission structure) were designed to minimize the linkage.*’ There are two schools of thought on this matter. One approach suggests that by separating policy-making from administration, the operation of government can be made more See Higgins, Local and Urban Politics in Canada\31 - 141. For a description o f the “business model” approach, see C. Richard Tindal, A Citizen’s Guide to Government. 2"®edition (Toronto/Montreal: McGraw-Hill Ryerson Limited, 2000), 184-185. Higgins, Local and Urban Politics in Canada, 123. 42 efficient and effective. The other suggests that a close linkage between policy­ making and administration is required. Policy-making, it is argued, is enhanced by having a good appreciation of the related administrative issues, while administration is enhanced by knowing not only the letter but the spirit of the policies to be administered.** Tindal and Tindal have summarized the municipal policy-making process*^ from the perspective of the formal machinery of policy-making as well as the broader socio-economic context. He identifies the key players (council, staff, the local electorate, local groups, political parties and the mass media) and summarizes their roles. He points out the difficulties that are faced by individual councillors and by councils as a whole in consistently pursuing policy objectives over a period of time, as well as the importance of municipal staff. He notes that senior staff may be considered to be too dominant in the process, and that they are key players because of their pursuit of their own objectives and priorities and because o f the extent of their contact with the public. While the electorate ought to be key players, they are not, largely because of lack of participation in local elections and because they are not able to enforce accountability through the electoral process. They may, however, participate through membership in local citizens groups. In a review of literature on political science and urban governance, Murphy pointed out that studies of actual policy-making report a fluid, decentralized and " A K 123-124. " Tindal and Tindal, 281-321. 43 political system, where political leadership is important, and where outcomes depend on the skill with which participants use the resources at their disposal,^ As noted above, the municipal council is required to set the tax rates by tryktvv, imdfwsanasult can be sai(ltx)lia\MBlbawiiiia(k:tl&e ultimate decisitm. However, that decision is likely to have been founded on advice from municipal staff. Siegel describes a three-part policy-making process: policy development, policy adoption, and policy implementation. The stages are not separate and discrete, and no stage is the sole preserve any group of actors^*, although it is possible to make general statements about the roles of the participants. Siegel has written that: The policy development phase is the most ambiguous phase. Public servants probably have the main role in terms of researching available alternatives, considering the consequences of each, and refining them into specific proposals. However, politicians and interest groups will want to play a significant role at this phase. The policy adoption phase is fairly clearly dominated by politicians, although interest groups will have some role in influencing their actions. The policy implementation phase is dominated by the public servants, but wise politicians and interest groups will maintain a careful watch on the activities of public servants at this phase.^ Siegel also identifies four ways in which policy development can occur.^^ These include policy initiatives which come directly from members of council, as a result of initiatives of local citizens’ groups, in response to initiatives from other orders of government, and by initiatives from public servants. The public servants have a high degree of involvement in the policy development process, regardless of ^ Russell D.Murphy, “Politics, Political Science, and Urban Governance: A Literature and a Legacy. ” Annual Reviews Political Science. 2002.5. 63-85 ** David Siegel, “Politics, politicians, and public servants in non-partisan local governments,” Canadian Public Administration, Vol. 37, Issue 1 (Spring, 1994), 14-15. ^ Ibid, 15 15-16 44 the way in which development occurs. However, prime responsibility rests with the politicians.^ In providing advice on tax rate policy, municipal staff will of necessity be involved in identifying a variety of alternate courses of action for consideration by the municipal council. The selection of the courses of action to be analyzed and the factors to be considered will be the result of a number of value choices made by staff. Many of these choices will (or should) reflect staff’s interpretation of “the public interest.” The municipal council will, in turn, take the “public interest” into account when making their final determination with respect to their municipality’s taxation policy. Kemaghan and Langford have suggested that an appropriate process might involve the articulation and reconciliation of relevant values (social, political, administrative and personal) and the consideration and reconciliation of the interests of those who are not directly involved in the decision-making process. In addition, the process should be fair and open and should include an examination of the costs and benefits of the possible alternatives.^® Gould and Baker^ identify three phases of tax policy-making. The process begins with design, during which goals and priorities are established and means are evaluated in a process that often involves trade-offs among competing principles. They note that this phase is generally under-studied, except in developing countries. Design is followed by law-making (drafting, debate and enactment of legislation) in 17 Kenneth Kemaghan, and John W. Langford, The Responsible Public Servant (Toronto: The Institute for Research on Public Policy, 1991), 49-50. ^ Andrew C. Gould and Peter J. Baker, “Democracy and Taxation,” Annual Reviews Political & /ew e.2002.5 97-110. 95 45 a more structured and controlled environment. Finally, implementation occurs. They explore the political explanations for taxation, setting out alternate analytical structures and research strategies. Although their work is primarily concerned with national tax-policy making it does provide a useful re&rence point for analysis o f tax policy-making at the municipal level. Tindal and Tindal also review three descriptive theories o f decision-making: the rational model, the incremental model, and the penny arcade model.^^ They summarize the rational-comprehensive or classical approach to policy making, which “accepts that municipal decisions are made by municipal councils, on the basis of research and recommendations provided by municipal staff.”^* They suggest that in the real world the process consists largely of attempts to find a plausible remedy to a problem. In this regard, they present two alternative views o f the real world: Lindblom’s incremental model^ and Yates’ penny arcade model.’®® In describing the incremental model, the write that “Charles Lindblom argues that our problem-solving capacity is too limited to encompass all of the options and potential outcomes which might arise, that there is usually insufficient information to assess accurately all options, and that comprehensive analysis is both too time-consuming and too expensive.”’®’ They go on to say that Lindblom’s view is “that decisicm makers recognize the realities and limitations of their world. As a result, they look ^ Tindal and Tindal, 292-301. ^ Ibid., 294. ^ Tindal and Tindal, p. 296, citing Charles E. Lindblom, The Intelligence o f Democracy, New York, The Free Press, 1965, pp. 138-143. Tindal and Tindal, p. 299, citing Douglas Yates, The Ungovernable City, Cambridge, M.I.T. Press, 1977. ‘“‘ Tindal and Tindal, p. 296. 46 for simpler approaches to problem solving. Rather than attempting to identify every possible course of action, they consider those few alternatives which represent only small or incremental changes from existing policies.”*®^ The penny arcade model is offered as a contrast to the rational model. It “uses a metaphor based on three familiar games found in most penny arcades.”*®^ This model involves three aspects. The first is analogous to a shooting gallery, where there are far more targets than can be hit, and they keep popping up in different places. In this situation, there is a need to react quickly and “the player is likely to rely on reflexes more than any considered plan of action.”^®'* Secondly, the “policy maker does not know what kind of problem he will be dealing with from one moment to the next, or which of his available policy responses or procedures is likely to be relevant or useful.”**^^ Finally, a policy decision “may be knocked off course by both predictable and unforeseen obstacles” similar to the progress of a ball in a pinball machine. Tindal and Tindal also note that municipal issues often do not require analytical solutions as much as “subjective assessments and political bargaining.”^®^ This last point is illustrative of the diversity of municipal government, and of the diverse approaches to decision-making. The processes involved in choosing the location for new sidewalks is, for example, likely to be Ibid., 297 297 Ibid., 299 299 ^^Ibid, 300 301 47 quite different than the process used to choose between constructing an anaerobic or an aerobic sewage treatment plant It appears that there has been little research into the issue of public participation in the municipal tax policy development process. A paper by Lando on public participation in local government provides some general observations about how public participation can be implemented, but does not deal directly with taxation decisions.^®* An article by Denhardt and Denhardt on the new public service identifies a need (in their view) to provide for deliberation and participation in the development of public policy and services,*®^ Again, while not specific to local government taxation, some general observations about the public process are of interest. Tindal and Higgins discuss public input into the decision making process. A variety of ratepayers and residents groups exist, having as their purpose the protection of the interests of the property owners. While these groups may not have a direct or formal role in the tax rate decision-making process, they do have the ability to “catch the ear” of appointed and elected officials, although the influence of these groups tends to rise and fall.^*® Older style ratepayers’ groups had, as their main interests, municipal budgets and property taxes. These types of groups have been supplanted to a degree by neighbourhood groups whose main concerns are land *** Tom Lando, “Public Participation in Local Government: Points o f View,” National Civic Review, Vol. 88, No. 2 (Summer, 1999), 109 - 122. Robert B. Denhardt. and Janet V. Denhardt, “The New Public Service: Putting Democracy First,” National Divio Review, Vol. 90, No. 4 (Winter, 2001), 391-400. "“Tindaland Tindal, 270. 48 use planning and social issues.” * Phillips and Graham argue that “citizen engagement between elections has become one of the underpinnings of our democratic life...” and encourages “a process whereby citizens, politicians and public servants educate each other and engage in constructive and purpose Ail dialogue.”” ^ Black explored the role of local newspapers in civic affairs, including a case study of three Ontario municipalities which indicated that local newspapers influenced what was discussed by decision makers. He found that “the exercise of this function depended critically on the community’s established cleavage lines and on the relationship each newspaper had to other institutional actors in the local political system.”**^ Tindal suggests that in general the media give poor coverage to local issues. In the case of tax increases, the prominent and generally negative attention given by the media leads councils to “focus almost entirely on mill rate considerations and ignore the basic priority setting exercise which should be undertaken. Once again, the result is to reduce what should be a very fundamental political and policy making process into an administrative exercise, preoccupied with juggling and cutting expenditure figures until the resulting mill rate increases stay below some predetermined acceptable level.”**"* Vojnovic suggests (in relation to newly amalgamated municipalities) that the tax setting process should include the design of a tax structure that reflects the Ill Higgins, Local and Urban Politics in Canada, 277. Susan D. Phillips and Katherine A. Graham, “Conclusion: From Public Participation to Citizen Engagement,” in Citizen Engagement: Lessons in Participation from Local Government, ed. Katherine A. Graham and Susan D. Phillips (Toronto; The Institute of Public Administration o f Canada, 1998), 240. Edwin R. Black, Politics and the News (Toronto: Butterworth & Co., 1982), p. 250. Tindal and Tindal, 290. 49 differing costs of providing differing standards of service within a single jurisdiction and to associated equity issues."^ Analysis of the decision-making process can also be undertaken from the perspective of community power, to determine who has influence in the process. This can involve the perspectives of the elite, pluralist, growth machine and regime theories.” ® British Columbia Research Very little has been written on property taxation in British Columbia. In the early 1990's, Penny Bruin, (then Treasurer of the City of Vancouver) wrote about the need for, and use of, averaging or phasing of land values for the property tax, in the face of significant variations in the rate of change in assessed values within municipalities such as the City of Vancouver.” ^ The article provides background information on the changes in assessed values in the City of Vancouver which led to a need to moderate changes in assessed value (and taxation) from year to year in order to maintain stability and certainty in the tax base, yet it is specific to Vancouver. Brett and Pinkse have written two articles related to property taxation in British Columbia.” * One dealt with spatial independence of tax rates and the other with evidence of tax competition. Bish and Clemens devote a chapter of Local Vojnovic, 49 - 72. For a discussion o f these theories, see Graham and Phillips with Maslove, 23 - 27. Penny Bruin, “Property Taxation in British Columbia and the City o f Vancouver: Averaging and Phasing Options for Land Valuation,” Government Finance Review, April, 1993, 7 - 10 Craig Brett mid Joris Pinkse, “Those Taxes are all over the map: a test far spatial independence of municipal tax rates in British Columbia,” International Regional Science Review, 20, 131-151 and “The determinants o f municipal tax rates in British Columbia.” 50 Govgr wwf M AifMA Co/fWfM to a general description of the property tax system in BritWi Columbia. In that wodc, they note that studies in the City of Vancouver found that in 1995 property taxes on business were set sufficiently high to subsidize half of the cost of servicing residential properties."^ Gaps in the Literature As indicated earlier, the body of literature dealing with municipal property taxation is not large. There do not appear to be any published studies that directly address the basis for the choice of tax rates and the role of participants in the process. For example, there does not appear to be any exploration of issues relating to information or policy transfer among local governments with respect to taxation practices or policies."” As a result, there is little information on the degree to which information is actually shared. Thus, we do not know if municipal councils arrive at their choice of actions based only on local experience, or whether they incorporate the experience of other jurisdictions in their decision-making. While there are many studies that analyze the property tax from various points of view, there do not appear to be any studies that verify which factors are actually taken into account in the process of deciding on tax rates. Many studies indicate what should be considered, and others try to determine what the municipal Robert L. Bish and Eric G. Clemens, Local Government in British Columbia, 3"* ed., (Richmond: Union o f British Columbia Municipalities, 1999), 155. For a discussion o f policy transfer among local governments see Harold Wolman and Ed Page, “Policy Transfer among Local Governments: An Infonnation-Theory Approach,” Governance: An International Journal o f Policy, Administration, and Institutions, Vol. 15, No. 4 (October 2002), 477 -501 51 strategy was by econometric analysis of outcomes. None appear to address the question of what is actually considered by councils and staff in the course of their deliberations. Do councils and staff take their competitive position into account? Do they consider the economic impact of their tax policy choices? Are political factors the overwhelming determinants or variables that they are often made out to be? Is the objective to maintain stability in tax rates, or the amount of tax paid by the typical homeowner, or in the apportionment of taxes among property classes? None of these questions is directly answered in the literature. Similarly, there do not appear to be any studies that examine the decision­ making process. Many scholars seem to be of the view that the budget is set, and that the tax rate is simply derived from the municipality’s revenue needs. In recent years, scholars seem to be coming to recognize that some type of ‘dynamic’ process may be taking place, and that the roles of elected officials and staff may be less well defined than previously thought. Thus, while the literature discusses various aspects of the “ingredients” of municipal property tax policy objectives, there is little discussion of the “recipes” and preparation methods that are actually used. Implications of the Literature Review As noted above, there are substantial gaps in the literature, particularly with respect to factors that are considered in the decision-making process, and the process itself. The literature, however, does provide some information that can be used in several 52 ways to inform the research that is to be undertaken as part of this thesis. Firstly, it identlGes a range of issues which might be taken into account by municipal councils and their staff in the setting of tax rates. These include the high visibility and unpopularity of the property tax, the effects of uncertainty about the amount of tax payable from year to year, the possibility of cultivating a political base by shifting the tax away from existing homeowners, and concerns about political repercussions from tax increases. Municipal councils and their staff may also take into account possible benefits to be gained from heavy reliance on taxation of non-residential property. They may also consider the use of low tax rates as a means of competing for mobile businesses or residents, and the possible effects of tax increases on development in the community. Secondly, the review of the literature provides alternative views of how the decision-making process might be structured, and the sequence of events. It suggests that the size and substance of a local budget is determined first, followed by calculation of the tax rate to raise the desired funds.*^* Alternatively, the process may begin with the council and/or mayor setting a budget guideline, often explicitly in terms of a property tax guideline. In that case, the budget is developed to keep within the established guideline. The process may be one which involves the separation of policy making and administration, or one in which administrators and see Hicks, 219 and Masson with LeSage, 326 Graham, Phillips, with Maslove, 222 53 politicians join together in the common pursuit of sound governance/^ The process will be a three part process, involving policy development, policy adoption and policy implementation,*^'* and it may be characterized according to a rationalcomprehensive or incremental model. *^^ As indicated in the preceding section dealing with gaps in the literature, there do not appear to be any studies that verify which factors are actually taken into account in the process of deciding on tax rates, nor are there studies that examine the decision-making process used to establish tax rates. The literature is suggestive of many issues that might be considered in the course of setting tax rates, and of processes that might be used to set tax rates but it does not provide conclusive evidence of which issues and processes are actually considered. Svara, “The Myth o f the Dichotomy: Complementarity of Politics and Administratif in the Past and Future of Public Administration,” 176-183 Siegel, 14-15 and Gould and Baker, 87-110 Tindal and Tindal, 292-301 54 Chapter Two Methodology This chapter restates the problem that is the subject of analysis and investigation. It describes the study design and variables, the data gathering instruments and procedures, and the approach to analyzing the data. Approval under the University’s research regulations is noted. The purpose is to test the hypothesis that was set out in Chapter One. The study design was derived from Yin.* A multiple-case design was used, with three municipalities being selected with the expectation that they will produce similar results. The rationale underlying the selection of the three municipalities is stated, along with the procedures for gathering data. These procedures involved telephone interviews with selected officials at the three municipalities. Problem for Analysis and Investigation The purpose of this research is to test the hypothesis that the choice of tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision-making process with municipal staff engaged in providing technical assistance. Many questions could be asked about municipal property taxation, including who pays the tax and what the revenues are used for, among others. The purpose of this research is to seek to answer the general question: What is the basis for the setting of municipal tax rates. ‘ Robert K. Yin, Case Study Research: Desigyi and Methods, 2“^Edition, (Thousand Oaks, Ca.; Sage Publications, 1994). 55 and who makes the decision? Much has been written about the political and economic aspects to be considered in the course of determining tax rates. Unfortunately, there has been little research into what actually occurs “in the field” wdiere decision on tax rates and tax policy objectives are made. It might be asked whether elected and appointed olBBcials are aware of, and actually consider, the issues that theory suggests are considered in the course of deciding on tax rates. In order to test this hypothesis it was necessary to determine what factors drive the decision making process used in setting municipal tax rates, including identifying the following: 1. the issues that are considered in the course of setting tax rates; 2. the role played by participants in the decision-making process (primarily elected members of council, staff, and the public); 3. the decision-making process used by the participants; and 4. factors related to procedure, organizational structure or location that have an influence on the issues considered in setting tax rates. The following section describes the design of the study. Study Design Yin suggests that there are five important components of a research design. His outline of the approach to designing, executing and analyzing a case study will be adopted for this work. The five important components identified by Yin are: 1. a study’s questions, 2. its propositions, if any. 56 3. its unit(s) of analysis, 4. the logic linking the data to the propositions, and 5. the criteria for interpreting the findings^ In this instance, the general question is: What is the basis for the setting of municipal tax rates, and who makes the decision? The proposition as stated in the hypothesis is that the choice o f tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision-making process with municipal staff engaged in providing technical assistance. The unit of analysis is the process of establishing the 2002 municipal tax rates. A review of literature identified possible theories to illustrate the basis for the choice of tax rates, along with theories about the respective roles of local elected officials and municipal staff. Analytical generalization was used to compare the identified theory with the empirical results and to generalize the results to a broader theory (if possible).^ A case study protocol dealt with the issue of documentation. A multiple-case design was used, with three municipalities being selected with the expectation that they will produce similar results. The process used to select the three municipalities for the case study is discussed in the following paragraphs. '/W .,2 0 ^For a discussion of analytical generalization, see Yin, 31-32 57 Study Variables This section describes the reasoning behind the selection of the three municipalities for the case studies. In considering the municipalities to be selected, a decision was made to avoid selecting municipalities that are part of a metropolitan area. We have seen in the literature review that there is an expectation that municipalities in metropolitan areas to compete to attract residents, business and industry, and that this competition may involve keeping selected tax rates low and/or enhancing certain types of service. In addition, municipalities in metropolitan areas in British Columbia are participants in a number of regional service arrangements which may have an impact on their tax structure. This creates a complex environment, and the required analysis is beyond that which can be undertaken in this research project. In addition, one of the objectives of this research is to give some attention to resource and rural communities, which have been largely overlooked in the property taxation literature. Consequently, the decision was taken not to include municipalities located in or very close to the lower mainland of British Columbia, southern Vancouver Island, and the Okanagan. These three areas include all of British Columbia’s larger municipalities (i.e. those with a population of 50,000) except Prince George and Kamloops. Since Prince George and Kamloops are much larger than any of the other municipalities outside the three excluded areas, it was decided to exclude them as candidates for the case study. 58 It was also decided to concentrate on municipalities that had a reasonable possibility of having professional administration in the form of a chief administrative officer and a trained financial officer. It was felt that this condition would be best assured by excluding municipalities having a population of less than 5,000 (in 1992) from the study. These exclusions leave twenty-one municipalities to be considered. Provincial population, assessment and taxation data for these twentyone municipalities was assembled, and the data was analyzed to identify: 1. growth rates; 2. the percentage of assessment derived from residential properties; 3. the percentage of taxation derived from residential properties. Table 2 lists the municipalities considered as possible subjects for the case studies, and shows their population for the year 1992,1997 and 2002. The data also shows the percentage growth from 1992 to 2002. The municipalities were classed as having high, medium or low growth.'* The classification is arbitrary, and was done solely to facilitate comparison. It will be noted that none of the municipalities had any significant growth from 1997 to 2002, which is no doubt a reflection on the economic situation of the non-metropolitan portions of British Columbia during that period. * Growth was classified as ‘high’ if the percentage change from 1992 to 2002 exceeded 22%. It was classified as ‘low’ if it was less than 10%. All other were classified as “medium” 59 Table 2 Summary of Municipalities by Population Campbell River Castlegar Cranbrook Dawson Greek Fort St. John Kimberley Kitimat Mackenzie Merritt Nelson Port Albemi Powell River Prince Rupert Quesnel Revelstoke Salmon Arm Sechelt Smithers Terrace Trail Williams Lake 1992 25,687 6,626 16,727 10,890 13,876 6,505 11,307 5,604 6,234 9,051 18,169 12,970 16,715 7.853 7,760 12,554 6.408 5,108 11,589 7,925 10,422 1997 30,701 7,307 19,227 11,594 15,847 6,934 11,636 6,264 7,979 9,906 19,664 13,883 17,452 9,031 8,356 15,651 8,007 5,944 13,608 7.789 11,124 2002 31,437 7,427 19,907 11,789 17,129 7,057 11,538 6,177 8,069 9,853 19.531 13,873 16,924 10,920 8,220 16,435 8,641 6,145 13,875 7,515 12.124 % Change 19922002 22.4% 12.1% 19.0% 8.3% 23.4% 8.5% 2.0% 10.2% 29.4% 8.9% 7.5% 7.0% 1.3% 39.1% 5.9% 30.9% 34.8% 20.3% 19.7% -6.2% 16.3% Average 10,951 12,281 12,599 15.0% Growth Category high medium medium low high low low medium high low low low low high low high high medium medium low medium Source: Table 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions of Taxes and Assessments, of the “Municipal Statistics” published by the Ministry responsible for municq>al afl&irs, and available on the Ministry o f Community, Aboriginal and Women’s Services’ website, and accessed at http://www.mcaws.gov.bc.ca/lgd/srvs infra/munfin/index.htm (01/24/03). Population data is printed in those statistics, based on data from BC STATS. The assessment data was then analyzed to determine what percentage of the assessment is within the residential class. The lower the percentage of total assessment that is classified as residential, the greater the percentage that is classified as non-residential (which is predominantly made up of the major industry and business/other property classes). The municipalities were classified as having a 60 low, medium or high levels of residential assessment.^ This analysis is shown in Table 3. The data show that the percentage of assessment in the residential property class has been rising. This does not necessarily mean that the communities are being "de-indusliialized" (althou^ that may be the case). It is possible that the increase in the market value of residential property is greater than the increase in the market value of non-residential property. Such a situation could arise, for instance, where major industries are not renewing their physical plant, or where industries have changed and now require less in the way of land and buildings. The percentage of the municipal tax levy derived from the residential property class was also calculated. This is shown in Table 4. The lower the percentage of taxation derived from the residential class, the higher the percentage derived from the non-residential classes. The municipalities were classified as having a high, medium or low percentage o f taxation derived from the residential property class.^ * The percentage of assessment from the residential class was classified as “high” if it was more than 70%. It was classified as “low” if it was less than 50%. All other results were classified as “medium.” ®The percentage o f municipal tax revenue from the residential property class was classified as “high” if it was greater than 45%. It was classified as “low” if it was less than 25%. All other results were classified as “medium.” 61 Tables Percentage of Assessment In the Residential Property Class Campbell River Castlegar Cranbrook Dawson Creek Fort St. John Kimberley Kitimat Mackenzie Merritt Nelson Port Albemi Powell River Prince Rupert Quesnel Revelstoke Salmon Arm Sechelt Smithers Terrace Trail Williams Lake 1992 69.5% 66.8% 76.1% 68.3% 75.0% 72.2% 37.9% 40.1% 72.5% 79.0% 64.7% 64.6% 45.2% 36.4% 73.3% 77.9% 68.8% 63.0% 69.3% 33.8% 58.4% 1997 77.5% 65.1% 80.7% 77.8% 79.4% 83.5% 56.6% 53.6% 78.5% 81.3% 77.7% 79.6% 64.1% 53.1% 79.3% 83.0% 90.1% 72.2% 77.1% 50.0% 66.6% 2002 74.1% 65.2% 78.3% 75.3% 75.7% 80.5% 57.3% 51.1% 75.3% 80.4% 75.7% 73.2% 62.7% 55.0% 76.1% 80.0% 89.3% 68.2% 75.3% 52.1% 65.9% Average 63.5% 72.7% 70.8% % Change Assessment 19922002 Category 6.5% medium -2.4% medium 2.9% high 10.2% medium 0.9% high 11.5% high 51.3% low 27.3% low 3.9% high 1.6% high medium 17.0% 13.2% medium 38.7% low 51.2% low high 3.8% 2.7% high high 0.6% 8.2% medium 8.6% medium 54.3% low 12.9% medium 11.5% Source: Table 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions of Taxes and Assessments, o f the “Municipal Statistics” published by the Ministry responsible for municipal affeirs, and available on the Ministry o f Community, Aboriginal and Women’s Services’ website, and accessed at http://www.mcaws.g0v.bc.ca/l2d/srvs infra/munfin/index.htm fO1/24/031. Population data is printed in those statistics, based on data from BC STATS. 62 Table 4 Percentage of Municipal Taxation Derived from the Residential Property Class % Campbell River Castlegar Cranbrook Dawson Creek* Fort St. John* Kimberley* Kitimat* Mackenzie Merritt Nelson Port Albemi Powell River* Prince Rupert Quesnel Revelstoke Salmon Arm Sechelt Smithers Terrace Trail* Williams Lake 1992 32.8% 29.8% 48.0% 46.6% 45.5% 36.9% 15.1% 22.9% 47.4% 63.7% 29.0% 28.0% 21.6% 13.6% 45.9% 60.3% 73.4% 32.4% 42.1% 20.0% 41.3% 1997 39.2% 26.0% 55.3% 55.5% 46.9% 40.2% 13.8% 24.4% 60.6% 66.7% 34.0% 30.7% 31.5% 13.7% 49.1% 66.5% 76.1% 34.1% 43.2% 22.5% 37.5% 2002 40.4% 26.7% 59.5% 51.2% 45.1% 63.5% 9.6% 24.5% 46.2% 66.6% 37.6% 35.8% 31.0% 16.1% 47.7% 64.0% 78.2% 34.3% 45.0% 30.8% 37.9% Change 19922002 23.1% -10.3% 24.0% 9.8% -0.8% 72.1% -36.4% 7.1% -2.5% 4.6% 29.8% 27.9% 43.7% 18.2% 3.8% 6.1% 6.6% 5.7% 7.0% 54.0% -8.3% Average 37.9% 40.8% 42.5% 12.0% Taxation Category medium medium high high high medium low low high high medium medium low low high high high medium medium low high Source: Table 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions of Taxes and Assessments, o f the “Municipal Statistics” published by the Ministry responsible for municipal affairs, and available on the Ministry of Community, Aboriginal and Women’s Services’ website, and accessed at http://www.mcaws.gov.bc.cayigd/srvs infra/munfin/index.htm (01/24/03). Population data is printed in those statistics, based on data from BC STATS. * These municipalities use a flat tax. Finally, the classifications shown in Tables 2, 3 and 4 are summarized in Table 5. The geographic location of each municipality is also shown in Table 5. This analysis was undertaken to identify any “outliers” among the twenty-one selected municipalities. While there is a wide variation in growth rates, there is 63 nothing that suggests that any municipality should not be considered because o f growth considerations. Smne municipalities have relatively low levels o f assessment in the residential class, such as Kitimat, Mackenzie, Prince Rupert, Quesnel, and Trail. These are the municipalities with m qor industries, such as smelting and refining of metals and pulp and paper. These municipalities also derive a relatively low percentage of their municipal tax revenue from residential properties. On average, the percentage of assessment in the residential property class increased at about the same rate as the average percentage of taxation derived from the residential property tax. However, the average conceals a wide diversity of apparent changes in taxation policy. For example, while residential assessments increased as a percentage of total assessment by 51%, the percentage o f the property tax revenue derived from residential properties declined by 36%. A similar, but less dramatic change is to be found in Williams Lake. In Kimberly, the opposite occurred. The percentage of assessment in the residential class increased by 11%, but the percentage of property tax derived from the residential class increased by 72%, indicating a significant change in the way in which taxes are levied in that community. One might speculate that the change is linked to the closure of the mines. 64 Table 5 Summary of Municipalities by Characteristics Growth Category Assessment Category Taxation Category Campbell River Castlegar Cranbrook Dawson Creek* Fort St. John* Kimberley* Kitimat* Mackenzie Merritt Nelson high medium medium low high low low medium high low medium medium high medium high high low low high high medium medium high high high medium low low high high Port Albemi Powell River* Prince Rupert Quesnel Revelstoke Salmon Arm Sechelt Smithers Terrace Trail* Williams Lake low low low high low high high medium medium low medium medium medium low low high high high medium medium low medium medium medium low low high high high medium medium low high Location Van. Island Southeast Southeast North North Southeast North North Central Southeast Van. Island Coastal North North Central Central Coastal North North Southeast North * These municipalities use a flat tax. Since there are sufficient potential case subjects in northern British Columbia, it was decided that the cases should be limited to northern municipalities. Limiting the case studies to northern municipalities would simplify the analysis since all the subjects would be subject to similar economic forces. In addition, it was decided not to include any of the municipalities that use the flat tax option. The use of the flat tax may introduce another set of variables which may be difficult to account for. As a result, the municipalities shown in Table 6 were considered eligible to be selected as a subject for the case studies. 65 Table 6 Municipalities Considered 6)r Case Study Growth Category Medium Low H i^ Medium Medium Mackenzie Prince Rupert Quesnel Smithers Terrace Assessment Category Low Low Low Medium Medium Taxation Category Low Low Low Medium Medium Data for these five municipalities was reviewed for indications of any unusual circumstances that could make the municipality unsuitable for study. None were found. A review of population indicated that population trends for the five selected municipalities were similar to that of the average of the twenty-one municipalities originally considered. Figure 6^ shows that of the five. Prince Rupert has a slowly declining population while the population of the other municipalities has increased slowly, in line with the increase in the average population for the twenty-one municipalities. The increase in the population of Quesnel in 1999 is attributable to a boundary expansion. Source of data for all figures in this chapter is Table 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions of Taxes and Assessments, o f the “Municipal Statistics” published by the Ministry responsible for municipal afifeirs, and available on the Ministry of Community, Aboriginal and Women’s Services’ website, and accessed at http://www.mcaws.gov.bc.ca/lgd/srvs infra/munfin/index.htm (01/24/03). Population data is printed in those statistics, based on data firom BC STATS. 66 F ig u re 6 Population - Selected Munlclpalltlea 20.000 15.000 Hi if 10.000 =*_, 1 1 ' Ÿ ' " t ........................... ..... --- -X----- X— X— 5,000 $ j-... j-....t ..t tv Average Quesnel -e—Mackenzie Smithers tv Prince Rupert —#—Terrace Average assessed values in northern municipalities increased more slowly than in southern municipalities in the years 1992 to 1998 (see Figure 7). Assessments have been relatively stagnant since then (with a slight and steady decline in the case of northern municipalities). Figure 8 compares the trend in total assessment for the five selected municipalities to the average for northern municipalities. The municipalities follow similar patterns in recent years, although Prince Rupert and Terrace have experienced a faster decline in total assessed value than have the other municipalities in the group. 67 F ig u r e ? Average Municipal Aaseeaed Value M $600 o $500 = $400 : $300 -♦--Average m Average of Northern -A— Average of Non-northern Figure 8 Total Assessnient - Selected M unicipalities $1,000 o $600 B ■ -Average Northern - Prince Rupert - Smithers 68 -m—Mackenzie -X—Quesnel -•—Terrace The tax distribution practices of the five municipalities were examined. The distribution practices of the five municipalities were found to be relatively stable over the past ten years. In selecting the three communities to be included in the case study, primary consideration was given to the relative size of the non-residential sector. Smithers and Terrace are similar in that their non-residential sector is relatively small. Mackenzie’s non-residential sector is relatively large, and Prince Rupert and Quesnel fall between the two extremes. It was concluded that it would be desirable to have variety in the size of the non-residential sector, and that the municipalities selected should include one municipality with a relatively small nonresidential sector, one with a relatively large sector, and one where the nonresidential sector falls between the two extremes. This was thought that this would avoid skewing the study by concentration on one extreme or the other. Ease of access and the possibility of face-to-face interviews were secondary considerations. After considering the foregoing, the following were selected for the case study: 1. Smithers. 2. Mackenzie. 3. Quesnel. Prince Rupert and/or Terrace were considered as substitutes (in that order) in the event that one of the selected municipalities declined the opportunity to participate. Before the study began, a plan for the collection and analysis of data was prepared. The basic data gathering instrument was the telephone interview. The procedures and questions involved in the interview process are described below. 69 Data Gathering ImMtrumenta and Procedures This section reviews the data gathering instruments and procedures, including discussion of the hallowing: 1. procedures (including determination of individuals to be interviewed, arranging for agreement to participate, scheduling of telephone interviews, obtaining relevant documents); 2. questions.* Procedures The first step in undertaking the case study was to identify the individuals to be interviewed. The individuals selected were the Mayor and the Chair of the municipal council’s Finance Committee (where there is such a committee), as well as the Chief Administrative Officer and the official responsible for financial administration (usually referred to as the Treasurer or Director of Finance). A letter was sent to the Mayor of each of the selected municipalities requesting their agreement to participate (with a copy to the Chief Administrative Officer). Appointments for the telephone interviews were made in advance and the Municipal Clerk was asked to provide copies of reports to Council and/or its committees that dealt with setting the 2002 tax rates. * For a discussion ofhow to conduct a case study, see Yin, 54 - 77. 70 A record of the interviews (in the form of transcribed notes) was kept for subsequent analysis and for the documentation of the results of the case study. The record will not be published as such. Documents obtained during the course o f the study will be listed in an annotated bibliogrq)hy. This research involved elected and appointed officials who were asked about matters that directly relate to their positions. They were not asked to appraise or evaluate their work or the work of others (other than to comment on the respective roles in the decision-making process). However, it is recognized that they may have been concerned about the accuracy of any comments that may be attributed to them. Therefore, an undertaking was given to provide an opportunity for participants to review any remarks or information directly attributed to them. gwadoMs This section outlines the general direction of the questions put to the interviewees.^ Questions were intended to be as open-ended as possible to elicit facts as well as the respondent’s opinion about the process used to determine tax rates, and the specific tax rate decisions, and any special insights that they may about the those matters. The following questions were used as a “check list” of issues that should be raised during the course of the interviews. The questions have been grouped into five broad themes: 1. The process of deciding on tax rates and setting taxation goals; The following comments about interviews are based on Yin,.84-86. 71 2. Political considerations; 3. Economic considerations (including competition, building a tax base, economic efficiency, equity); 4. Input fiom business, industry, die media and the public; 5. The respective roles o f the elected officials and staff. The following paragraphs elaborate on the five themes. Process This area of questioning is intended to elicit information about the sequence of events in the decision-making process, and about the types of information that is provided to the decision-makers. This includes ascertaining the extent to which various types of background information is available to the decision-makers and the use that is made of that information. The following line of questioning was contemplated: 1. Can you describe, in very general terms, the process that you use to set tax rates? 2, Which statement best describes the overall nature of the process: a. The budget is established, and the total tax levy is determined by the amount of revenue needed to balance the budget; or b. The amount of the permissible increase in taxes is determined, and the budget is prepared on that basis; or c. Some other process. 72 3. During the process, is a linkage made between the cost of the service and the level of taxation? If so: a. Is there a formal calculation of the cost of the service and the amount of taxes that would be required to pay for the service? b. Is that calculation done by property class, or for the municipality as a whole? 4. During the process, is a linkage made between benefits received and the level of taxation? 5. Are data concerning changes in assessment compiled? Does the data: a. Show changes in market value separately from changes resulting from new construction or reclassification of property? b. Provide separate sets of data for each property class? 6. Is there a process to establish goals and priorities with respect to property taxation? a. If so, is this done during the course of the budget cycle, at the beginning, at the end, or at some other time during the year? b. If so, is the preparation of the tax rates and the bylaws seen generally as an administrative formality, working within the established framework, or is their substantive debate by Council or a Committee after the goals and priorities are set? 7. Is the decision-making process best characterized as: a. Highly analytical? 73 b. Subjective? c. Largely consisting of polidcal bargaining? 8. Does the process involve the articulation of values (social, political, administrative, and personal)? 9. Does the process involve an examination of cost/benefits of possible alternatives? Political Considerations This area of questioning was intended to obtain information on the extent to which consideration is given to the effect that decisions may have on the ability to retain elective office, or on public opinion in general. Issues raised in the interview included the following: 1. Is the ability of business/industry to ‘export’ the taxes to non-residents a factor in decision-making? 2. Does the municipality monitor the experience of other municipalities in setting tax rates? If so: a. Is the information used in the course of setting tax rates? b. Did it result in a change in policy or approach? 3. Was consideration given, during the course of tax rate decision-making, to reducing (or increasing) municipal tax rates to offset changes in the provincial education property tax rates, or the tax rates of the regional district? 74 4. Is there a policy that tax increases will be limited? If so, is this expressed by: a. A limit in the change in the tax rate? b. A limit in the change in the total amount of taxes raised? c. A limit in the change in the total amount of taxes imposed on a typical property? d. Some other factor? 5. Is there a conscious effort to avoid uncertainty about changes in levels of taxation? If so, does it involve: a. ‘Telegraphing” possible tax increases in advance of a decision? b. Establishing and publicizing some type of policy about tax increases? c. Some other form of public information? 6. Is there any organized effort to make the public aware of the equation “assessed value x tax rate = taxes” and the fact that if market values rise, tax rates could fall? 7. Does the municipality seek to gain a “windfall” from rising assessed values (by “freezing” tax rates)? 8. Is there a formal or informal policy that governs the distribution of the tax burden among the property classes? 9. Is there a formal or informal effort to publicly link changes in tax levels with the level of services provided by the municipality? 75 10. Is the “fairness” of the municipality’s tax structure considered during the course of decision-making? 11. Is the process driven by pre-determined policy objectives, or is it largely determined by response to current economic and political issues? 12. Would you describe the tax rate setting process as “high profile?” Economic This area of questioning was intended to obtain information on the degree to which various economic aspects of tax rates are taken into consideration in the course of decision-making, in order to identify municipal efforts to “compete” with other municipalities for new residents, business, or industry, and with any efforts that the municipalities may take to avoid adverse economic consequences of their tax rate structures. Issues raised in the interview included the following: 1. Has the municipality commissioned any studies (internal or external) to evaluate the impact of their property tax structure on the local economy? 2. Has the municipality commissioned any studies (internal or external) with respect to non-residential tax multiples? If so, what was the purpose of the study? 3. Is there a general consensus that high taxes discourage new development? 76 4. Has the municipality commissioned any studies, or considered material from other sources, that attempt to determine who actually pays the tax burden? 5. Does the municipality compare its level of taxation and services, and/or its tax structure, with that found in other municipalities? If so: a. Why? b. How is the comparison done? c. Who does it? d. Are the results publicized? e. Is the information used in the course of decision-making? 6. Were tax rates adjusted during the course of the decision-making process so that they would be more competitive with those imposed in some other municipality or municipalities? 7. Have levels of service being adjusted during the course of the decision-making process so that they would be more competitive with those imposed in some other municipality or municipalities? 8. In setting tax rates, is the objective: a. Stability in the amount of tax levied? b. Stability in tax rates? c. Stability in the apportionment of taxes among property classes? d. Stability in the amount of taxes paid by a typical taxpayer? 77 9. Has the tax rate been adjusted as apart of a program to make the municipality more attractive to business or residents? a. If so: i. How was it done? ii. What was the major motivation for the adjustment? b. If not: i. Was the possibility discussed (formally or informally)? ii. Was there a reason why nothing was done? Input The following group of questions deals with the type of input that is received in the decision-making process from members of the community. The questions were intended to provide information on the degree to vdiich the municipality interacts with the community in the course of setting tax rates, as well as the degree to which the community (or portions thereof) try to influence the municipality’s decision­ making process. Issues raised in the interview included the following: 1. Is there any procedure to obtain public participation in the tax rate setting process? 2. Is the public involved in any way in considering the policy objectives concerning the distribution of the tax burden? 78 3. What role do the media play? (monitor, critic, advocate of the views of some part of the community, straight-up reporting)? 4. Is the media coverage: a. Prominent or casual? b. Largely focussed on the size of the tax increase, or not? c. Balanced? d. Largely critical, in an attempt to create “news? 5. Is there an organized effort to determine public opinion on possible tax increases? a. If so, does it involve: i. Public opinion surveys? ii. Focus groups? iii. Consultation with key groups (such as the Chamber of Commerce, or ratepayers groups)? b. If so, who is responsible for the process —staff or council? 6. Does the Council make any particular effort to take “soundings” of public opinion during the decision-making process? 7. Is Council lobbied by groups in the community with respect to taxation matters? If so, who lobbies (ratepayer groups, businesses, industrial associations, business associations, individuals)? 79 8. Is staff lobbied by groups in the community with respect to taxation matters? If so, who lobbies (ratepayer groups, businesses, industrial associations, business associations, individuals)? 9. Does the public follow tax rate debates closely? 10. Is there much correspondence from the public concerning tax rates? Roles The following questions deal with the role played by the elected officials and by staff. Issues raised in the interview included the following; 1. What is the role of Council? For example: a. Does Council set a specific tax guideline (in terms of percentage increase in tax levy, total permissible levy, or some other target) which staff are expected to work within? b. Does Council actively participate in determining how the tax load is to be shared among property classes? c. Is Council’s participation in the tax rate setting process largely formal? 2. What is the role of Staff? For example: a. Is staffs role primarily to provide statistics and administrative advice? b. Does staff participate by proposing tax increase limitations, or policies for the allocation of the burden of taxation? 80 c. Is staff largely responsible for the calculation of the required tax rates for submission to and approval by Council? d. Who plays the leadership role in determining the total tax levy? e. Who plays the leadership role in determining the policy for the apportionment of the tax burden? f. Is there any attempt to keep elected officials to considering matters of policy only? g. Is there any attempt to keep staff from commenting on policy matters? h. Is the tax rate setting process (and the apportionment of the burden of taxation) regarded as: i. Primarily a technical exercise, which is the realm o f administration? ii. Primarily a political exercise, which is the realm of the elected officials? iii. Some combination of the two approaches? Data Analysis Plan The results of the interviews were analyzed to determine whether the hypothesis has been proved or disproved. In undertaking this analysis, open-ended answers were prepared for each of the suggested questions listed above, for each of the subject municipalities, with references to the source of the information for the answers 81 (which in most cases will be the interview n o t e s ) . T h e answers (patterns or explanations for each case) were compared across the three cases to determine whether the pattern or explanation is replicated, and were used to prepare the case study report, and also to ensure that tracking of sources is accurate. The case study report does not present the results of the individual cases. The cases are to be regarded as the evidentiary base for the report. The report attempts to synthesize the results of the case study. Permissions and Human Subject’s Approval Since this research involves human participants, approval was obtained pursuant to the University’s Research Regulations. to This section is adapted from Yin, pp. 102 -152 82 C hapter Three Determining Tax Rates in British Columbia —Possible Explanatory Factors This chapter draws on the literature review and other sources to enumerate a set of Actors that may be considered in the course of choosing tax rates and tax policy objectives, as well as expectations for the decision-making process and the roles o f the various participants. This information guided the development of the line of questioning for the case studies. This chapter consists of two sections. The first outlines factors that may be considered in the course of choosing tax rates and tax policy objectives. It includes reference to a wide range of issues, including political factors, competition for new development, stability, and benefits and costs. The second discusses possible decision-making processes and participants in the process. It includes reference to the sequence or phases of the decision-making process, and the nature of the relationship between elected officials and staff. Factors Considered in Decision-Making There are a number of factors that may be considered when municipalities engage in setting tax rates (including determining how the burden of taxation is to be shared in the community). No enumeration of these factors can be exhaustive, as some communities will have factors that are unique to their setting (such as local traditions or financial or social conditions) that have not been discussed in the literature. In addition, it is highly unlikely that any community would, in any one year, consider all of the factors that might be enumerated in this section. Some 83 factors may be applicable to one community and not to another, or they may be applicable only once in a while. Thus, this enumeration of factors cannot be used as a definitive statement of what is, or what should be, considered in the course of establishing local property taxation policies. It is merely suggestive of factors that might be considered. priority. The following factors are not presented in any order of They include political factors, taxation of business, municipal tax competition, land use, and revenue requirements. Political Factors Since municipalities are governed by elected officials it is not surprising that political issues are considered in the course of setting tax rates. Indeed, it would be very surprising if elected officials did not take the preferences of the electorate into account in the course of determining tax rates and taxation policies and reflect upon how their political fortunes might be affected by doing or not doing certain things. The literature as described in Chapter One does not reveal a definitive picture of the nature of the political considerations. There are, nevertheless, some broad themes. Five have been identified. The first theme is that the property tax is unpopular, and should therefore be avoided or minimized (perhaps by minimizing the impact on the majority of voters by shifting the incidence of the tax to non-residents or business and industry). 84 Scholars identifying this theme include Brunori\ Higgins^ and Hicks/ The concept of visibility of the property tax is related, in that it makes its rates contentious and encourages municipal councils to avoid increases/ Slack wrote that the fact that tax rates have not increased significantly is a consequence of the visibility of the tax / The second theme suggests that elected officials, with the hope of increasing their chances of electoral success, are biased to “favour” homeowners (who constitute the majority of the electorate in many municipalities) by shifting the burden of taxation from residential to non-residential property owners. Hicks^ is a proponent of this view. Both Bird^ and Slack* have written along similar lines. The third theme involves the need for stability and predictability in the tax levy. In writing of this issue Reeves noted that taxpayers revolts have been attributed to the rapid rise of taxes which are accompanied by a perception of lack of control over taxes and uncertainty about what will happen next, and that surprises in taxation should be avoided.^ The fourth theme suggests that the property tax may be ’ David Bnmori, “Metropolitan taxation in the 21®* century,” National Tax Journal, Vol. 53, Issue 3, 541-551. 2 Donald J. H. Higgins, Local and Urban Politics in Canada, (Toronto: Gage Educational Publishing C o^any, 1986), 93. ^Hicks, Donald A., “The Property Tax in a New Industrial Era” in The property Tax and Local Finance, ed. C. Lowell Harriss, (New York: The Academy o f Political Science, 1983), 213. * Kenneth Woodside, “An approach to studying local government autonomy: the Ontario experience,” Canadian Public Administration, Vol. 33, No. 2 (Summer), 211. * Enid Slack, “Intergovernmental Fiscal Relations and Canadian Municipalities: Current Situation and Prospects,” report fffepared for the Federation of Canadian Municipalities, 2002, at www.fcm.ca/newfcm/Java/slack.htm Hides. ’ Richard M. Bird, “Local Business Taxes”, report prepared for the World Bank Institute, 2002 at http://www.worldbank.org/wbi/publicfinance/documents/fiscalfederalism Russia/Bird tax.ndf. 5-6. * Slack, “Intergovernmental Fiscal Relations and Canadian Municipalities.” ’ Clyde H. Reeves, “Leadership ft» Change” in The Property Tax and Local Finance, ed C. Lowell Harriss, (New York: the Academy o f Political Science, 1983), 3. 85 a viable tool to encourage investment and development. A number of scholars have identified the tendency of municipalities to engage in tax competition to attract inward investment, including Brunori,*® Wilson," and Hicks. There are doubts about the actual viability of this approach. Brunori suggests that incentives may be offered because officials think they will work, or because they are unwilling to take the chance that they do not work." While there may be doubt about the value of using taxation as a tool to encourage investment, it has been included as one of the themes because it appears that many people believe it is so, as evidenced by the number of scholars studying various aspects of its use, such Chen," Hoyt," Wilson" and Brett and Pinkse." The final theme is that the property tax represents the “price” for the provision of municipal services, implying the existence of a relationship between the amount of property tax paid and the cost of the services provided, and an accountability mechanism that informs the politicians about the electorate’s acceptance or rejection of that price. This theme is developed in part fi-om Fischel’s suggestion that service and taxation levels are set by elected officials to meet the ""Brunwi, 541-551 " John Douglas Wilson, “Theories o f Tax Competition,” National Tax JournalJVol. 52(2) (June 1999), 269 " Hicks,. 216-7 " Brunori, 541-551. Xiao Chen, “Essays on Local Taxation and Urban Development,” (Ph.D. diss., Tulane University, 1996). William H. Hoyt, “Tax Competition, Nash Equilibria, and Residential Mobility,” Journal o f Urban EcoMoWa, 34 (1993), 358-379. Wilson. ” Craig Brett, and Joris Pinkse, “The determinants o f municipal tax rates in British Columbia,” Canadian Journal of Economics, Vol. 33, No. 3, (August 2000). 86 demands of the owner of the median value home.*® It is also suggested by Vojnovic’s suggestion that the tax structure should establish a close relationship between service benefits and costs, which also provides information to municipal officials about the standards of service desired by residents.*^ Tindal has also indicated that this may be the case where the municipality is following a “business model More than one of these themes may be “in play” at any one time. Tax rates are arrived at by a municipal council so that a majority of members of council will support the ultimate decision. Individual members of council may have different motives for supporting essentially the same outcome, and the reasons for doing so are usually not recorded. In addition, the importance of political considerations relative to other factors discussed below may vary between individual members of council, and between municipalities. There are suggestions in the literature (Woodside^* and Fischel^) that political factors may be more important in smaller jurisdictions, which are presumably more responsive to the electorate. The foregoing does not necessarily mean that political considerations can only result in attempts to minimize property taxation. Public demands for service William A. Fischel, The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies, (Cambridge, Mass.: Harvard University Press, 2001) Igor Vojnovic, “Municipal consolidation, regional planning and fiscal accountability: the recent experience in two Maritime provinces,” Canadian Journal o f Regional Science, vol. 23, no. 1 (spring 2000), 49 - 72. ^ Richard C. Tindal, A Citizen’s Guide to Government. 2“' edition (Tmonto/Montreal: McGraw-Hill Ryerson Limited, 2000). Woodside. ^FiscbeL 87-88. 87 improvements (such as the construction of new recreation facilities, or expanded police services) are sometimes accompanied by a willingness to pay higher taxes. There may be a "political" element to the other factors enumerated below. For example, advocating a reduction in tax rates in order to compete for new investment in the community may be an attractive element in a political platform. Taxation o f Business The literature identifies three main themes that may inform the approach to taxation of business. First, there is a perception that business can pass property taxes on to others (such as tenants or customers), as noted by Reeves^ and Kitchen.^ Secondly, according to Bird, there is a belief that an area that is a “host” to a business or industrial activity is entitled to a part of the proceeds.^ Finally, there is a perception that property taxes imposed on business may be exported beyond the municipal boundaries (for example, to customers or to the investors in the business). Scholars putting forward this view include Slack,^^ Bird,^’Kitchen,^ and Ballentine and Thirsk,^^ These three themes appear to lead to a belief that there is a “benefit” to a municipality (or more properly, to the municipality’s residential property owners) Reeves. Harry Kitchen, “Municipal Finance in a New Fiscal Environment,” C.D. Howe Institute Commentary, No. 147 (November 2000). ^ Bird, Local Business Taxes, 5-6. ^ Slack, “Intergovernmental Fiscal Relations.” ^ Bird, Local Business Taxes, 5-6. ^ Kitchen, “Municipal Finance in a New Fiscal Environment,” 11. ” J. Gregory Ballentine and Wayne R. Thirsk, Taxation without Representation: The Consequences o f Taxing Non-residential Property, (Ottawa; Canada Mortgage and Housing Corporation, 1982), 2. 88 from the taxation of non-residential property. Whether there is, in fact, such a “benefif’ is another matter, and it is beyond the scope of this work to explore the accuracy of this belief. For the purposes at hand, it must suffice to say that one of the factors that may be considered in the course of setting tax rates is the belief that there is a benefit to the taxation of business, for one of the reasons cited above. Municipal Tax Competition As discussed in Chapter One, there is a significant body of literature that discusses the desire of municipalities to compete to attract mobile investment and/or mobile residents. Scholars addressing this topic include Wilson,^® Hoyt,^* Hicks,^^ Spry,^ Chen,^ Brunori,^^ Woodside,^® and Brett and Pinkse.^ Competition may be a significant factor in the establishment of tax rates, particularly in metropolitan areas. This competition can take one of two major forms: 1. the use of low tax rates to attract mobile businesses or residents who are motivated by low costs; or 2. the use of high levels of service, and higher tax rates, to attract businesses or residents who want and are prepared to pay for higher levels of service. There may also be competition between governments for tax dollars. ^ Wilsfm, 269. Hoyt, 358-379. ^ Hicks, 216-217. John Arthur Spry, The Political Economy o f Local Taxation: The Effects ofTiebout Mobility and Referenda on Local Taxes, (Ph.D. diss.. University of Rochester, 2000). ^Oien. ^Bnmon, 541-551. ^Woodside. Brett and Pinkse. 89 In competing through the use of low tax rates or high service levels, municipalities are attempting to market their particular combination of taxes and service levels to potential customers. In British Columbia, the potential for this type of competition is limited, as the Local Government Act restricts the ability of municipalities to offer subsidies or special tax rates to individual businesses. Competition can only occur by establishing tax rates applicable to all properties (both new and old) within a given tax class. If a municipality wishes to compete through low tax rates it must consider the cost of foregone revenue from taxation of existing investment compared to additional revenue that might be gained from increased or sustained investment. Wilson suggests that competition between governments exists where governments share a tax base.^* Such a situation exists in British Columbia, as the province, regional and special purpose bodies and municipalities all levy property taxes. There may also be a degree of competition between municipal property taxes and federal and provincial coiporate income taxes. Property taxes on business properties are deductible from taxable business income. Since corporate income tax is a percentage of taxable business income, federal and provincial revenues are reduced by a percentage of the property tax paid. Municipalities, therefore, may be tempted to increase taxes on business properties in the belief that a portion of such taxes will ultimately be paid by federal and provincial governments (by reducing the 38 Wlhon, 289-291. 90 amount of corporate tax that might otherwise have been paid by the business pmperty owner). As we have seen in the foregoing section on “Competition,” municipalities generally seek to expand their tax base through additional development. This implies that municipalities will want to consider the effect that levels of taxation may have on development, regardless of the competition issue. According to Zak and Skidmore, the common assertion is that high property taxes threaten development. They suggest that this is not necessarily true.^ It is beyond the scope of this study to determine whether the belief is or is not correct. The existence of the belief is of interest, however, because it may be a factor that is considered when setting tax rates. Revenue Requirements As we have seen, property taxes make up approximately fifty percent of municipal revenue.'*® Thus, it is to be expected that a municipality’s need for revenue will be a major factor in determining tax rates. One common approach is to assume that the amount to be raised from taxation is simply tiie difference between desired spending ^ Jeffrey S. Zak and Mark Skidmore, “Property Tax Rate Changes and Rates of Development,” Journal o f Urban Economics, 36, (1994), 314-332. ^ Karin TrefF and David B. Perry, Finances of the Nation 1988, (Toronto: Canadian Tax Foundation, 1998), 6 2 91 and non-tax revenue. Approaches along this line have been described by Hicks'*’ and Masson and Lessage However, others, such as Graham, Phillips and Maslove*^ and Dahlberg and Lindstrom** suggest that the matter is not that simple. Other factors (such as those enumerated above) are also taken into consideration. Consideration of these factors may result in adjustments to spending plans, so that revenue requirements are reduced. This process will be discussed in more detail below. Process and Participants There is no clearly identified universal process used in determining tax rates or the tax structure. It appears probable that processes may depend on the nature of the relationship between councils and administration, the structure of the organization, and other local factors. There are, however, some characteristics of process that the literature suggests may be present. These deal with the sequence or phases of the decision-making process, and the nature of the relationship between elected officials and staff. Hicks, 219. Jack Masson with Edward C. LeSage Jr., Alberta’s Local Governments: Politics and Democracy, (Edmonton: University of Alberta Press, 1994), 326. Katherine A, Graham, Susan D. Phillips with Allan M. Maslove, Urban Governance in Canada: Representation, Resources, and Restructuring,, (Toronto: Harcourt Brace & Company, Canada, 1998), 222. ^ Matz Dahlberg and Tomas Lindstrüm, “Are Local Governments Governed by Forward Looking Decision Makers?” Journal o f Urban Economics, 44 (1998), 254-271. 92 Turning first to the relationship between elected officials and staff, Feldman and Khademian'*^ and Svara"*® suggest a dynamic relationship between the elected officials and staff. While each has a defined role, the relationships are dynamic and reciprocal, Murphy describes a fluid, decentralized and political system, where political leadership is important and where outcomes depend on the skill with which participants use the resources at their disposal."*’ This is contrary to the popular conception of a distinct separation between policy-making and administration and suggests that, in examining actual practices, we should be looking critically at the inter-relationship between the elected officials and staff, seeking evidence of inter­ dependence and interaction. Siegel suggests a three-part process, involving the development of policy, the adoption of policy, and the implementation of policy.'** Gould and Baker identify three phases of tax policy-making, similar to Siegel’s construct.*^ For the purposes of this work, the interest lies in the first two phases, which can be described as the design or policy development phase and the policy adoption or law­ making phase, Siegel also identifies ways in which the policy development occurs Martha S. Feldman and Anne M. Khademian, “To Mæiage is to Govern,” Public Administration Review, Vol. 62, No. 5 (September/October 2002), 541 - 554. ^ James H. Svara, “The Myth o f the Dichotomy: Complementarity o f Politics and Administration in the Past and Future o f Public Administration,” Public Administration Review, Vol. 61, No. 2 (March/April 2001), 176-183 Russell D. Murphy, “Politics, Political Science, and Urban Governance: A Literature and a Legacy,” Annual Reviews Political Science, 2002.5:63-85 David Siegel, “Politics, politicians, and public servants in non-partisan local governments,” Canadian Public Administration, Vol. 37, Issue 1 (spring, 1994), 14-15. Andrew C. Gould and Peter J. Baker, “Democracy and Taxation,” Annual Reviews Political 2002.5, 87-110. 93 (that is, where do the policy initiatives come from).^® This is an important consideration for a discussion of the determination of tax rates and taxation policies. Based on work by Kemaghan and Langford^* consideration should be given to whether (and how) relevant values are articulated and reconciled, how the interests of those not directly involved in the decision-making process are considered and reconciled, whether the process is open, and whether there is an examination of the costs and benefits of possible alternatives. We should also be considering the nature of the role played by the participants, and in particular whether senior staff appear to play a dominant role (based on work by Tindal and Tindal^^). In doing so we should keep in mind the Tindals’ observation that municipal issues often do not require analytical solutions as much as “subjective assessments and political bargaining.”^^ In addition, consideration should be given to whether the process is one which deals primarily with policy issues or one which is primarily an administrative exercise. The nature of the policy-making process should also be considered. In Chapter One, reference was made to Tindal and Tindal’s outline of three theories or models of policy making: the rational model, the incremental model and the penny arcade model.^ Lindblom described the system of successive comparison, which “ Siegel, 15-16. Kenneth Kemaghan and John W. Langford, The Responsible Public Servant (Toronto; the Institute for Research on Public Policy, 1991), 49-50. C. Richard Tindal and Susan Nobes Tindal, Local Government in Canada, 4* ed. (Toronto/Montreal: McGraw-Hill Ryerson Limited, 1995), 281-321. 301. 292 - 301 94 involves a series of incremental c h an g es,w h ich is the basis of the incremental model described by Tindal and Tindal. It is this method that appears most likely to be applicable to decision-making on taxation issues. It is doubtful that municipalities have the capacity, or the desire, to practice the rationalcomprehensive method partly because to do so would be an overwhelming task, but also because democracies “change their policies almost entirely through incremental adjustments.”^^ The penny arcade model as outlined by Tindal and Tindal, with its attention to the random, unpredictable nature of policy making, appears more suited to a description of the general decision making process in a municipality rather than to a description of one component of the broader process. Participants in the process will obviously include elected officials and staff. There is no suggestion in the literature that the electorate play a significant role in the decision-making process. Nevertheless, Siegel^’ does suggest that attention should be given to whether policy initiatives come from the electorate (either as individuals or through community groups such as Chambers of Commerce or Ratepayers Associations) during the policy development phase. The source of such influence (where it exists) should also be identified. The media is thought to have an influence on the discussion agenda, if only because of the prominent and generally negative attention given to taxation matters Charles E. Lindblom, “The Science o f ‘Muddling Through’,” in Democracy and Market System, (Oslo: Norwegian University Press, 1988), 171-190 182 ^ Siegel, 15-16. 95 suggested by Tindal and Tindal/^ According to Bl a c k , m e d i a influence may be influenced by the division of interests in the community and the media’s relationship to other institutional actors. Where the media has an impact, it tends toward emphasizing the importance of the tax rate and minimizing the importance of the priorities that are being set It is well beyond the scope of this study to attempt to evaluate the impact of the media in these matters. However, attention should be paid to the perceptions of media influence. Conclusions The foregoing suggests a number of factors that might be considered in the course of determining tax rates. They include five broad themes concerning political considerations, including the avoidance or minimization of property tax due to the unpopularity of the tax, the suggestion that elected officials are biased to “favour” homeowners by shifting the burden of taxation to non-residential property in order to increase their chances of electoral success, the need for stability and predictability in the tax levy, the use of the property tax as a viable tool to encourage investment and development, and the use of the property tax as the “price” for the provision of municipal services. A belief that there is a “benefit” to a municipality from the taxation of nonresidential property may also be one of the factors considered in the course of setting tax rates. Additional factors may include the desire to use tax rates to compete to 58 Tindal and Tindal, 290. ^ Black, Edwin R., Politics and the News, (Toronto: Butterworth & Co., 1982), 250. 96 attract mobile investment and/or mobile residents, and the possibility that high property taxes threaten develo;mient. Municipal levenne lequiiements are, o f course, a major factor in determining tax rates. There is no clearly identified universal process used in determining tax rates or the tax structure. There are, however, some characteristics of process that may be present. They concern the sequence or phases of the decision-making process, and the nature of the relationship between elected officials and staff. The case study, which is discussed in the following chapter, was designed to compare the factors and processes identified above with the factors considered and processes followed in the subject municipalities. The factors and processes identified above were used to formulate the line of questioning outlined in Chapter Two. 97 Chapter Four A Caae Study of Three MnnlcinaHtie* As indicated in Chapter Two, three municipalities were examined using a multiple case study design. The intention was to compare the identified theory with the empirical results and to generalize the results to a broader theory (if possible). In this instance, the general question was: What is the basis for the setting of municipal tax rates, and who makes the decision? The proposition as stated in the hypothesis is that the choice of tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision­ making process with municipal staff playing a supporting role in terms of providing technical assistance. Through a review of literature, possible theories to illustrate the basis for the choice of tax rates were identified, along with theories ahout the respective political roles played by local elected officials and municipal staff. This material was used as the basis for questioning respondents in the case studies. The methodology and the nature of the questions have been described in detail in Chapter Two. This chapter presents the findings of the case study. It is divided into two major sections. The first reviews assessment and taxation data from the three municipalities, with selected comparisons to a group of similarly-sized municipalities, in order to provide background and context for the case study. The second section presents the findings of the case study, organized around five major themes addressed in the methodology section (the process of deciding on tax rates 98 and setting taxation goals, political considerations, economic considerations, input into the process and the respective roles of elected officials and staff). Background and Context for the Case Study The three selected municipalities (the City of Quesnel, the District of Mackenzie and the Town of Smithers) are members of a group of twenty-one British Columbia municipalities that range in population from 6,000 to 31,000 (see Table 2). The twenty-one municipalities are all located outside of the major urban or metropolitan areas of British Columbia (specifically, they are not located on Southern Vancouver Island, the Lower Mainland, or in the central and southern Okanagan). Mackenzie is located 186 km north of Prince George. Quesnel is located 122 km south of Prince George, and Smithers is located 372 km west of Prince George. Assessment and taxation data for Mackenzie, Quesnel and Smithers is shown in Appendices 1, 2 and 3. The population of all three municipalities has been stagnant since 1999, and assessed values have tended to decline. Only Quesnel experienced significant growth in assessed values, much of which occurred in 2001/2 as a result of new development. In Mackenzie and Smithers, residential assessed values have declined as a percentage of total assessment since 1998. In Mackenzie, major industry makes up a larger percentage of total assessed value than it did in 1998, while in Smithers the percentage of assessment in the Business/Other class has increased. In Quesnel, the proportion of assessment in the business class has increased, while the proportion of assessment in the major industrial class declined. 99 Growth in tax revenues has been modest. Total tax revenue in Mackenzie increased by 4.6% between 1998 and 2002. Smithers, and 20.8% for Quesnel. Comparable figures are 12% for Despite the change in the proportion o f assessment in the various assessment classes, both Mackenzie and Smithers have maintained the proportion of taxes paid by each property class, with only minor changes. Quesnel, on the other hand, has gradually increased the proportion o f taxation paid by residential and business properties, and reduced the proportion paid by the major industrial class. This has resulted in a shift in the incidence of taxation to residential properties. To a modest degree the shift was reversed in 2002 (an election year). The trends in total assessment and taxation for the three selected municipalities are similar to the trends for the group of twenty-one medium-sized municipalities cited above, and for the northern members* of that group. The trends are illustrated in Figures 9 and 10 (below). *The “northern members” are nine o f tiie twenty-one non-metropolitan municipalities which belong to the North Central Municipal Association. They include Dawson Creek, Fort St. John, Kitimat, Mackenzie, Prince Rupert, Quesnel, Smithers, Terrace and Williams Lake. 100 F ig u re 9 Total A ssessed Values $800 t p $600 o $400 Z m $200 1 m ag...... ' Sf----- 1 $0 1998 ------ A----- ...... # A 1999 - ' "m----- —.-I ■ 2000 Average Mackenzie Smithers 2001 2002 -«—Average Northern Quesnel Figure 10 Total Taxation $10,000 $8,000 § $6,000 K $4,000 -4 K - $2,000 $0 1998 1999 2000 2001 —♦ —Average Average Northern —A— Mackenzie Quesnel 2002 —*(—Smithers Mackenzie and Quesnel have a much lower proportion of their assessed values in the residential property class, in comparison to the average of all twenty- 101 one municipalities in the comparison group, and in comparison to the northern municipalities (see Table 7). Table 7 shows that percentage of total assessment in the residential class has been declining slightly, which (assuming little or no growth in either the residential or non-residential sectors) indicates that residaitial properties have been losing value at a faster rate than non-residential properties. Municipalities generally structure their tax rates so that the proportion of taxation paid by residential properties is significantly less than the proportion of assessment in the residential class. In the case of northern municipalities, the difference in proportions is much greater than it is for the larger group of municipalities. In addition, northern municipalities have held the percentage of total taxes paid by the residential sector relatively constant, while the group of twenty-one municipalities has increased the percentage of property tax paid by the residential class. Table? Residential Proportions Percentage of Assessment in Residential Class All Northern Mackenzie Quesnel Smithers 1998 1999 73.73% 67.06% 54.95% 53.54% 70.99% 73.60% 67.94% 54.52% 59.72% 70.89% Percentage of Tax Levy from Residential Class 1998 1999 2000 73.00% 66.91% 53.90% 58.68% 70.85% 2001 2002 72.48% 66.33% 52.33% 56.64% 69.15% 72.13% 65.76% 51.09% 54.97% 68.17% 2000 2002 2001 39.45% 38.67% 39.70% 39.82% 40.36% 31.84% 31.81% 31.55% 31.96% 30.91% 24.67% 24.64% 24.53% 24.55% Mackenzie 24.50% 17.32% 17.04% 16.47% 13.59% 16.07% Quesnel 34.33% 34.33% 33.83% 34.33% 34.33% Smithers Source: B.C. Municipal Statistics. Schedule 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions o f Taxes and Assessments, for the relevant year, published by the Ministry of Communities, Aboriginal and Women’s Services, accessed at httD://www.mcaws.gov.bc.ca/lgd/srvs infra/munfin/index.htm during February, 2003 All Northern 102 Overall, the taxes on a representative house^ do not seem to be afkcted by this dif&rence. In 1992, the average o f the taxes on a represoitative house in the nine northern municipalities was only $11 less than the average taxes on a representative house in the group of twenty-one municipalities (see Table 8). Taxes on the representative houses in Mackenzie, Quesnel and Smithers are considerably lower than the average. Table 8 Taxes on Representative Houses - 2002 Representative Tax Representative House Tax Rate House Value $803 6.719 Average - All $117,653 Average - Northern $114,779 $792 7.239 Mackenzie $81,192 $689 8.492 Quesnel 4.247 $94,500 $401 Smithers 5.731 $118,620 $680 Source: Ministry o f Community, Aboriginal and Women’s Services, Tax Rates and Assessments 2002. Tax Analysis, accessed at http://www.mcaws.gov.bc.ca/igd/srvs infra/munfin/tax2002/index.htm (February 28,2003) It should be stressed that it is very difficult to make meaningful comparisons between municipalities with respect to the taxation of “typical” or “average” properties. There are substantial differences between communities in levels of market values, the potential for future gains in value, and in the type and quality of construction. Any statistics offering comparisons should therefore be approached with some caution. Given that the proportion of municipal taxes paid by residential properties is less than the proportion of assessment in the residential property class, it is ^ Each m unicipality selects an assessed value w hich, in their view, is representative o f tiieir ccHnmunity. The value is used by the Ministry to compile the data referred to in Table 8. 103 inevitable that the reverse is true 6)r non-residential properties. The proportion o f assessment in the business/other class in the group of twenty-one ihunicipalities (and in the northern municipalities in that group) has grown at a slightly faster rate than the percentage of the tax revenue derived from that class (suggesting that there has been a very slight shift in the burden of taxation away from the business/other class). It is important to note that the taxation of the business/other class in Quesnel and Mackenzie is different than the average. In both cases, the proportion of the total tax levy paid by the business/other class is lower than the proportion of total assessment in that class (although the difference is much greater in Quesnel). The data in Table 9 indicates that Mackenzie and Smithers have followed a policy of keeping the proportion of taxes paid by the business/other class relatively stable. Table 9 Business/Other Class Proportions Percentage of Assessment in Business/Other Class All 1998 14.68% 1999 15.15% 2000 15.72% 2001 15.96% 2002 16.34% 16.78% 7.12% 17.92% 18.35% 19.02% 7.10% 16.97% 7.03% 19.42% 21.64% 25.%% 27.08% 28.06% 2000 2001 2002 23.39% 26.14% 23.47% 23.94% 26.15% 6.47% 26.18% Northern 16.55% Mackenzie Quesnel 7.63% 17.76% Smithers 24.95% 16.19% 25.55% Percentage of Tax Levy from Business/Other Class 1998 1999 All 22.49% 22.93% Northern 25.14% 25.33% Mackenzie Quesnel Smithers 6.47% 6.56% 12.24% 12.02% 46.35% 48.23% 6.48% 11.90% 48.23% 13.66% 48.23% 7.21% 6.48% 15.31% 48.23% Source: B.C. Municipal Statistics. Schedule 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions of Taxes and Assessments, for the relevant year, published by the Ministry of Communities, Aboriginal and Women’s Services, accessed at httD://wwM'.mcaws.gov.bc.ca/lgd/srvs infra/munfin/index.htm during February, 2003 104 The situation is slightly different in the case of the major industrial class. The northern municipalities have, on average, a greater proportion of their assessment base in the major industrial class than the group of twenty-one. Mackenzie and Quesnel have much more major industrial assessment than average, and Smithers has much less. In general, the proportion of the assessment base in the major industrial class has been declining. Mackenzie is the exception, perhaps because the decline in major industrial assessment is less rapid than the decline in other assessed values. Mackenzie and Smithers have stabilized the proportion of the municipal tax levy raised from the major industrial class, while Quesnel has allowed the proportion to decrease in line with the decline in the proportion of assessed value in that class, shifting the burden of taxation to the residential and business/other classes. Table 10 Major Industrial Class Proportions Percentage of Assessment in Major Industrial Class 1998 1999 All 9.77% 10.13% Northern 14.77% 13.72% Mackenzie Quesnel Smithers 36.99% 2000 2001 9.79% 13.75% 2002 9.69% 13.62% 9.63% 13.63% 36.21% 27.88% 22.82% .37.39% 23.11% 38.96% 22.66% 39.90% 22.09% 2.30% 2.09% 2 .06% 2.32% 2.31% 2002 31.67% Percentage ofTax Levy from Major Industrial Class 1998 All Northern 35.28% 39.13% 1999 34.10% 38.65% 2000 33.46% 38.23% 20)1 33.10% 38.21% Mackenzie 66.65% 66.46% 66.06% 66.05% 39.15% 66.00% Quesnel Smithers 72.90% 13.38% 68.20% 12.36% 68.76% 12.36% 67,50% 12.44% 66.19% 12.56% Source: B.C. Municipal Statistics. Schedule 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions o f Taxes and Assessments, for the relevant year, published by the Ministry of Communities, Aboriginal and Women’s Services, accessed at http://www.mcaws.gov.bc.ca/igd/srvs infra/munfin/index.htm during February, 2003 105 A review of tax rates and multiples 6)r the three subject municipalities (Table 11) shows that tax rates for business/other and major industrial properties have been increasing steadily. However, in Mackenzie and Smithers, they have been increasing less rapidly than the residential tax rates. That is because these two municipalities have tended to provide stability in the proportion of the property tax paid by these two property classes. Quesnel, on the other hand, has chosen to stabilize the relationship between the business/other and major industrial tax rates and the residential tax rates. Table 11 Tax Rates and Multiples^ 1998 1999 2000 2001 2002 Tax Rates - Business/Other 11.829 9.266 13.471 14.365 9.1353 9.2485 15.287 9.89632 16.83 17.5971 19.0642 19.2994 10.27658 19.5558 1.92 2.01 2.56 2.01 2.42 1.96 1.87 2.71 2.42 2.42 Smithers Tax Rates - Major Industrial 3.9 3.9 3.88 3.59 3.41 Mackenzie 25.29 35.1561 Mackenzie Quesnel Smithers Tax Multiples - Business/Other Mackenzie Quesnel 15.913 26.647 27.783 28.141 39.2373 41.91625 29.288 43.52683 52.6549 36.7775 55.0562 60.8695 57.9908 61.773 Mackenzie Quesnel 4.1 10.3 10.31 3.88 10.25 3.61 10.25 3.45 10.25 Smithers 12.2 12.2 12.39 10.78 10.78 Quesnel Smithers Tax Multiples - Major Industrial 4.1 Source; B.C. Municipal Statistics. Schedule 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions o f Taxes and Assessments, for the relevant year, published by the Ministry of Communities, Aboriginal and Women’s Services, accessed at httD://www'.mcaws.gov.bc.ca/lgd/srvs infra/munfin/index.htm during February, 2003 ^The tax multiple is calculated by dividing the tax rate for the class by the residential tax rate. A tax multiple o f 2.5 indicates that the tax rate for a class is 2.5 times the residential tax rate. 106 In summary, the three subject municipalities do not appear to be following policies that are dramatically dif&rent than those followed by other municipalities in that they tend to tax non-residential properties to a greater extent than residential properties. There are, however, some differences in approach. For example, Mackenzie and Smithers apparently seek stability in the proportion of the tax burden borne by the business/other and major industrial properties, while Quesnel seeks stability in the relationship between the tax rates. The following section will explore the processes used to determine the tax rates and the tax structure, the role played by staff and elected officials, and the factors considered. Findings of the Case Study Officials at three northern municipalities were interviewed in the manner set out in Chapter Two - Methodology.^ The results of the interviews are reported in this section, and conclusions and inferences are drawn with respect to the processes used to determine the tax rates and the tax structure, the role played by staff and elected officials, and the factors considered. This section begins with a description of the processes used by the three municipalities to arrive at decisions on tax rates and tax structures. A review of factors considered (or not considered) follows. The section concludes with a discussion of the roles played by the elected officials and staff. * Interviews were conducted with the Mayor, Administrator and chief financial officer of the City o f Quesnel, District o f Mackenzie and the Town of Smithers between February 25 and March 4,2003. 107 The Decision-making Process This section reviews the processes used by the three municipalities to determine the amount of money to be raised through taxation, and the way in which the tax burden is distributed. While there are many common factors, there are significant differences, mainly involving the sequence of events. Each of the municipalities follows a different process. In Mackenzie^, the council sets a target for tax increases at the beginning of the budget cycle. The target is detennined after discussions between council and staff relating to the community’s expectations of the municipality, the state of the economy, the rate o f inflation, assessment trends and local economic circumstances (including the prospects for employment). The council tries to “develop an understanding of where the community wants to go” and to “get a feel for what is important.”^ In short, they talk about “how the town is doing.”’ In recent years, due to the local economic conditions the target has called for a “0%” increase in taxation. As a result, the only additional tax revenue has been the result of new development in the community. The Administrator indicates that, as the council does not want to pass tax increases on to residents, there is “an inflation reduction adjustment in the budget.”* Staff prepare a budget that meets the guideline through “service cuts, use of reserves. ’ Mayor Tom Briggs, telephone interview by author, March 3,2003. Brian Ritchie, Administrator, telephone interview by author, February 27,2003, Warren Waycheshen, Director of Finance, telephone interview by author, February 27,2003 ®Briggs, interview. ’ Waycheshen, interview. * Ritchie, interview. 108 etc.”^ The process for developing the capital budget is somewhat less constrained by current considerations than the process 6*r developing the operating budgeL The operating budget is more affected by political choices, whereas the administration makes more independoit recommendations on capital matters (involving sources o f funding, etc.).*® The budget as prepared by staff is reviewed by council. One of the challenges is reported to be “clarifying the difference between an increase in the budget and an increase in taxes."" The amount of taxation is finally determined when that discussion is complete. When the discussion is complete, staff then prepare the bylaws that are required to enact the tax rates, and submit them to council for enactment. In Quesnel*^, the staff prepares a budget using a “base line” approach (a status quo budget plus an allowance for changes that have been approved by council). They use as their point of departure the tax revenue that was provided for in the previous budget. Council reviews the budget and the taxation requirement, and decides whether or not to increase taxation. This is done in March, when they adopt the budget in principle. After the rate of tax increase is determined, council determines whether the tax increase is to be “across the board” or whether the incidence of taxation will be shifted by having different rates of increase for ^Ritchie, interview Ritchie, interview. " Waycheshen, interview. Mayor Nate Bello, telephone interview by author, March 3,2003. Charles Hamilton, Administrator, telephone interview by author, February 26,2003. Jerry Reglin, Treasurer, telephone interview by author, March 4,2003. 109 diOerent types of property. The staff then prepares the required bylaws for submission to council for adoption. In Smithers’^, the administration prepares a budget for consideration by council. The council does not set a target before the budget development process begins. Administration provides council with a budget that includes the tax levy that is required to provide for the services that are needed. This budget involves consideration of the overall need of the public for services, with attention given to safety, health and essential services. Cost increases (such as inflation and increases in the taxes that the municipality pays) are factored in. The budget submission includes the “must do and wish list” as identified by administration.*'' A goal for taxation is set by council when it has had an opportunity to review the budget that has been prepared by administration. Through a process of budget discussions, the council reviews their financial resources and trims the budget as required to meet their taxation goal. Once the budget is established and the tax levy figures are known, staff prepare the tax rate bylaws for submission to council for enactment. None of the municipalities has established a formal link between the cost of service to the various property classes and the level of taxation, or between the benefits received and the level of taxation. This is not to say that these issues are not considered. Responses indicate that they are considered in an informal and subjective way during the course of decision-making. Similarly, the articulation of " Mayor James Davidson, telephone interview by author, February 25,2003. Wallace Mah, Administrator, telephone interview by author, February 25,2003. Leslie Ford, Financial Administrator/Collector, telephone interview by author, February 25,2003. Davidson, interview. 110 values applicable to property taxation does not seem to occur, unless there are some external stimuli (such as has occurred in Quesnel with respect to the level of taxation of major industry). Changes in assessed value are tracked annually, and the increase in the tax base arising from new development is identified. These data are accumulated as part of the process of identifying the revenue that is available to finance municipal operations for the budget year, and as part of the process of calculating the tax rates. The setting of goals and priorities for property taxation is an annual exercise. All municipalities are required to prepare financial plans that look forward five years. As a result, some forecasting of tax revenues is required. Forecasts seem to be limited to projecting total tax requirements, and not to projecting the way in which the taxes might be raised, although some officials in Quesnel are now thinking of the advisability of developing a taxation plan.*’ The preparation of forecasts and the drafting of the tax rate bylaws are seen as an administrative responsibility, with administration working with the guidelines or policy decisions established by council during the budget process. In most years, the tax rate bylaws are not subject to much debate as they generally follow along on past practice. However, debate arose in Quesnel over the 2003 distribution of the tax burden, due to concerns about the taxation of major industry in that community. Quesnel is " Mah, Ford, Ritchie, Waycheshen, Hamilton and Reglin, interviews. Local Government A ct R.S.B.C., Chapter 323,1996, Section 327 Bello, interview. Ill examining the possibility of shifting the incidence of taxation as there is some concern that their taxation policy is "somewhat heavy on industry."^* That is not, however, an uncontested view of the situation as some members of council “have conflicting views” on the issue. The decision-making process is largely subjective. None of the municipalities appear to do any extensive research or analysis on tax policies aside from estimates of the new tax revenue that will be derived from new construction, estimates of the impact of tax changes on average or typical properties, and limited comparisons of tax rates with other municipalities. Decisions about the targets or goals for taxation are the result of council discussions, and are based on council’s view of the state of the local economy, the needs of the community, and the amount of taxation that local property owners will accept. Council’s view includes consideration of many factors which can be considered “political.” They are reviewed in the next section. Political Considerations This section focuses on the question of whether consideration is given to the effect that decision may have on the ability to retain elective office, or on public opinion in general. This involves factors such as comparisons with other municipalities, moderating the impact of tax decisions made by other governments, predictability of ** Hamilton, interview. Hamilton, interview. 112 changes in taxation, policies governing the distribution of the tax burden, and the extent to which decisions are detennined by established policy objectives. As discussed in Chapter Three, scholars^ suggest that municipalities may seek to “export” taxes by imposing higher taxes on business or industrial properties, thereby giving tax relief to residents. While all three municipalities tax business and industrial properties at higher rates than residential properties, none of the municipalities has given consideration in recent years to the issue of who actually pays municipal taxes. While it may be that a portion of the municipal tax burden is effectively exported to persons who are resident outside the municipal boundaries (customers or shareholders, for example), there is no evidence to suggest that it is the result of a deliberate policy. All of the municipalities monitor tax rates in other municipalities. They do this by conducting their own surveys using municipalities that they consider appropriate for comparison, or by using the statistics prepared by the Ministry of Community, Aboriginal and Women’s Services. It seems that the comparisons are used as guideposts, and as a way of justifying the municipality’s tax position. In Smithers, the comparisons are used to assure civic officials that they are not getting out of line with other municipalities. Since Smithers’ tax rates tend to fall in the low ^ Richard M. Bird, “Local Business Taxes,” report prepared for the World Bank Institute, 2002 at httD://www.worldbank.org/wbi/publicfmance/documents/fiscaifederalism Russia/Bird tax.pdf. Enid Slack, “Intergovernmental Fiscal Relations and Canadian Municipalities; Current Situation and Prospects,” report prepared for the Federation o f Canadian Municipalities, 2002, at www.fcm.ca/newfcm/Java/slack.htm. Harry Kitchen, “Municipal Finance in a New Fiscal Environment,” C.D. Howe Institute Commentary, No. 147, November 2000. J. Gregory Ballentine and Wayne R. Thirsk, Taxation without Representation: The Consequenses o f Taxing Non-residential Property, (Ottawa: Canada Mortgage and Housing Corporation, 1982), 2. 113 end in the comparisons, they have not used the comparisons as a basis for decisionmaking. However, if the (xmipaiisons showed that they were high in relation to others, they might take corrective action?* Mackenzie uses the comparisons during the budget setting process, giving consideration to how their tax rates compare to the tax rates of other municipalities. They try to make sure that their rates are “in the ball park”^^ (i.e. not extremely high or low in comparison to the rates at other municipalities) although they do try to keep their residential rates at the high end of the range of other municipalities. This means that their residential taxes are based on comparative data “as well as an ability to pay more."^ Mackenzie would like to keep their industrial tax rates at competitive levels in order to obtain primary employment, and they have a desire to moderate tax rates for business properties because of the current economic difficulties.^ In the past (1997), Mackenzie raised business tax rates because their surveys showed that they were low in comparison to the rates charged in other municipalities.^^ In recent years, the comparisons seem not to have been influential as they have tended to follow past practice in setting tax rates, rather than making adjustments to reflect their competitive position. Quesnel has undertaken the comparisons in the past to illustrate to taxpayers how the Quesnel rates compare (which has been particularly advantageous given the relatively low residential tax rates in Quesnel). The comparisons, which until 2003 Ford, interview. “ Waycheshen, interview. ^ Ritchie, interview. ^ Ritchie, interview. ^ Waycheshen, interview. 114 focussed only (w residential taxation, have not been used to drive the decision­ making process, although that may change in reqxinse to the desire to have more competitive industrial tax rates?^ There is no indication that the municipalities seek to adjust their tax rates to compensate for changes in property tax rates imposed by other organizations (such as the provincial education tax). None of the municipalities have established tax rate policies that would provide-on going guidance with respect to limits for changes in the tax rate, in the total amount of taxes raised, or some other factor relating to tax rates. These types of decisions are taken on an annual basis. They do, however, recognize the desirability of avoiding uncertainty by making information about potential tax increases available during the budget preparation cycle. Mackenzie makes its target known at the beginning of the budget cycle. Quesnel also makes their intentions known during the budget cycle, by releasing information about the tax implications of the budget. Smithers also makes information available in advance of the final decision, through the media and through public meetings, various advisory committees and newsletters. While the municipalities have not established taxation policies, they do have traditions or precedents that serve much the same purpose. Smithers tends to base their tax rates on historical relationships between the property tax classes, with some adjustment of the incidence of taxation to meet external requirements (such as the 26 Bello, Hamilton and Reglin, interviews. 115 limitation on the tax multiples and tax rates for the utility property class). They try to achieve stability in the share of taxation paid by each property classes. There is reportedly “no political will to charge business more.”^’ If change is necessary they try to implement it incrementally.^® The Mayor indicated that it was his opinion that “it is generally a bad thing not to keep up with actual costs."^ He takes the position that it is better to have a slow, steady, and modest increase, than to have to make major changes in taxation every few years to overcome serious financial pressures. Mackenzie takes the position that the tax contribution from the major industries “gives industry the community that it needs to provide for its employees.”^® They feel that the mills have a need for the community (for without it they would not have productive employees) and the community has a need for the mills (for without them there would be no need for employees). Traditionally, they have regarded the tax base as having three components (divided roughly one-third for each of the two mills, and one-third for the residential and business properties). This division has been in place for a long time, and is well accepted.^* They have had to adjust tax rates to keep the proportion of tax burden assigned to the various classes stable, due to “huge swings in assessments.”^^ They recognize the need for stability, and that “they can’t rape and pillage in one area to save in another area.”^^ Ford, interview. Ford, interview. Davidson, interview. ^ Ritchie, interview. Briggs and Ritchie, interviews. Waycheshen, interview. ^ Briggs,interview. 116 In Quesnel, for many years the guiding principle was that residential taxes should average $1 per day per household.^ Inflationary pressures led to a slight increase in average household taxation in recent years (it was $401 in 2002, as shown in Table 8). This approach shifted the tax burden to major industrial pmperdea. It is now under review, for reasons that will be discussed below. In (he Mayor’s opinion, “the tax rate for residential is artificially low,” a factor that has impacted on QuesneTs ability to provide municipal inftastructure/^ All three municipalities have had stagnant or declining assessed values. Therefore, they have not been faced with the difficulties that often accompany rapid increases in assessed values, especially when municipalities gain a “windfall” in tax revenue by maintaining tax rates in the presence of increasing property values. Where tax increases have occurred, Quesnel and Mackenzie have attempted to establish a Link between changes in tax levels and changes in levels of service.^^ “Fairness” of the tax structure “hasn’t been discussed much in recent years” in Mackenzie.^’ There appears to be a relatively high degree of acceptance of current taxation practices.^* The situation is similar in Smithers, although there is reported to be a feeling in the business community that residential properties should shoulder more of the tax burden.^^ Quesnel is now actively discussing the fairness of the system, although they have not developed a definition of what is “fair.” It Bello, interview. ” Bello, interview. ^ Hamilton and Bellow, interviews. Briggs, interview ” Briggs, Ritchie and Waycheshen, interviews. Mah, interview. 117 appears that comparisons with other municipalities will be a significant factor in determining wiiat is *y&if" in Quesnel.^ Location, and the role of the media, seems to determine whether the process of setting tax rates is regarded as “high profile.” From an administrative point o f view, the process is not seen as being high profile, providing that an acceptable balance between taxation and service levels can be found. There are, however, indications that the process can be “driven by the political weight of the homeowners.”'*^ Media attention can raise the profile of the process, particularly in the minds of the elected officials. The Mayor of Quesnel indicated that the process was a high profile exercise, as the “papers play it up.”'*^ On the other hand, the media can be helpful in getting information to the public so that they can provide meaningful input.'*^ Econome Aspects o f Tax Rates This section deals with the extent to which economic aspects of tax rates are taken into consideration, with specific reference to efforts to “compete” with other municipalities for new residents, business or industry, and with any efforts that municipalities may take to avoid adverse economic consequences of their tax rate structures. In practice, the municipalities do not give much, if any, formal consideration to the economic aspects of tax rates. ^ Reglin, interview. Waycheshen, interview 42 Bello, interview. Mah, interview. 118 They have not undertaken studies to determine the economic impact of property taxation in their jurisdictions, nor have they undertaken studies to determine iwiio actually pays their tax levies. They are, however, concerned about the impact of taxation. Another respondent indicated that they “are worried about the level of prosperity, and don’t want to make the situation worse” by changes in the tax structure.^ One respondent indicated that they “are worried about the level of prosperity, and don’t want to make the situation worse” by changes in the tax structure.'*^ As discussed above, a certain amount of comparison is done to determine how local tax rates compare with those of other jurisdictions, but these are done for “justification” or “comfort”, and not as data that could inform a policy for tax competition. Only two examples of adjusting rates because of competitive factors could be found, and they are contradictory. In 1997 Mackenzie determined that surveys indicated that their rates on business/other properties were low in comparison to other municipalities, and adjustments were made to increase the rates.^ Quesnel is currently evaluating their rates for major industry as comparisons indicate that they are too high."*’ Input Into the Decision-Making Process One area of interest is the degree to which the municipality interacts with the community in the course of setting tax rates, as well as the degree to which the ** Bello, interview. Bello, interview. ^ Waycheshen interview. Hamilton, interview.. 119 community (or portions of the community) try to influence the municipality’s decision-making process. Community approaches to public input into the budget process (which includes the process of determining taxation) vary. Smithers makes extensive provisions for public input, providing opportunities for the public to comment on budget matters after the budget is created, but before tax rates are finalized. Matters of taxation are not the primary focus, but discussion of tax issues is not precluded.'** Quesnel also has a process for public participation through the budget process, but no specific process for public input into the tax rate setting process.'*® Mackenzie’s provisions for input are intended to meet the basic requirements of the Local Government Act for public consultation on the financial plan. They “advertise the budget and put together a simple public information package.”^® Staff members indicated that a small group of people follow budget issues, and perhaps fifteen members of the public attended the required public meeting.^* None of the municipalities had a process that involved the public directly in discussions of taxation policy. Formal processes are not the only way of obtaining input. Mackenzie obtains input from organizations that receive funding fi’om the municipality. A committee of council members meets with the organizations to discuss their grant applications. They feel that this process provides an opportunity for public input.^^ Smithers uses community surveys to obtain input, and a quarterly newsletter to ^ Davidson, Mah and Ford, interviews. ^ Hamilton, interview. ^ Waycheshen, interview. Waycheshen, interview. “ Briggs, interview. 120 convey information to their residents. Quesnel is considering the use of public opinion surveys. Lobbying on tax issues is not a major factor. All of the municipalities report considerable lobbying on budget issues such as grants and specific services. Lobbying with respect to taxes is much less common. Smithers reports some lobbying by the Chamber of Commerce and downtown merchants, and some behind the scenes lobbying by major businesses. Such lobbying is, however, rather low key.^^ In Quesnel, industrial taxpayers did ix)t eiqness concerns for many years. They now meet periodically with the municipality, asking for a review of the City’s practices regarding taxation of industry (their position being that the share of the property tax paid by major industry is too high in relation to the share paid by residential properties).^ QuesneTs industries have been “lobbying quite a bit” but in a “private and quiet” way.^^ In Mackenzie, there is some lobbying from business, mainly to seek information on the basis of taxation. The municipality meets with major industry periodically. Representatives of industry have pointed out the efforts that they have made to control costs in a very difficult market environment, and have sought information on what the municipality has done in that regard.^ In Mackenzie, staff are “conscious of the impact of change on business,” and “stability is given a high value.”^^ ” Ford, interview ^ Bello, Hamilton and Reglin, interviews. ^ Bello, interview. ^ Briggs and Waycheshen, interviews. Waycheshen, interview. 121 The role played by the media varies from community to community. In Mackenzie, the local media consists o f a weekly newqxg)er, vvticdh generally limits its coverage to straightforward reporting. The media coverage is not extensive.^® In Smithers, the media provides extensive coverage of the budget process. They are said to provide a balanced presentation, emphasizing the provision of information.^^ The situation in Quesnel seems to be different. The media tends to focus on the tax increase, and the coverage tends to be controversial.^ The public does not seem to follow tax rate issues very closely, regardless of media coverage. The municipalities report that they receive very little correspondence on taxation matters, and very few personal complaints. On the whole, it appears that there is essentially no public dialogue about municipal taxation, except that which may occur if there is an exceptional increase in the level of taxation. Quesnel may be an exception, given that they are just commencing a review of their tax structure. Clearly, there is a separation between the role of the elected and appointed officials at each municipality. In most cases, in the policy development stage, there is a high degree of interaction between the municipality’s appointed officers and council members. The appointed officers are looked to for information, and for ** Waycheshen, interview ” Davidson, Mah and Ford, interviews. Bello and Reglin, interviews. 122 recommending options for council to consider. The policy enactment stage is clearly the domain of the elected officials. As one respondent indicated: “staff advises - Council endorses." Insofar as taawatwoiitlecisicHis are concerned, the key dbecisioiifqpENsars to be the establishment of Ae taxation target or gnideliae. In all cases, there is a degree of interaction between senior staff and council prior to the setting of the taxation target or guideline for the budget year. In Mackenzie, that consists of discussions between the Mayor and Administrator about the advisability of impacting the taxpayer with property tax increases. Staff may also be involved in bringing forward information for consideration by council during the course of their deliberations about the taxation target. In Smithers and Quesnel staff prepare more extensive budget materials for consideration by council. In all cases, the council makes a determination about the allowable tax increase, and administration seeks to implement the decision by bringing forward budgets and taxation bylaws that comply with the guideline. The process of preparing the tax bylaws is largely an administrative one. In Mackenzie, it is described as being “largely technical, working with the guidelines set by council.”^ That process involves analysis of assessment data, and calculation of tax rates. A certain amount of discretion and judgement is involved as there are certain adjustments that must be made to provide, for example, for the impact of new construction (an addition to the tax base), reclassifications from one assessment class to another, assessment appeals and changes in market values. It appears that. ** Mah, interview. 62 Ritchie, interview. 123 so long as past practice is being followed, this is largely the realm o f the appointed ofGcials. It appears that the setting of tax rates is a relatively routine matter, and is not one w tddiis tbeieanikcyfisxteiuMife analysis. Rather, decisions seem to be made on the basis of subjective evaluation of a number of factors in an incremental manner. Indeed, one respondent noted that “the overriding concern is the increase over last year - not other f a c t o r s . T h e process can, in many ways, be regarded as an example of “muddling through.” The reasons for this, and the implications, will be explored in the next chapter. 63 Ford, interview. 124 Chapter Five Analysis of Findings and Conclusions As stated in Chapter Four, three municipalities have been examined with the intention of using analytical generalization to compare the identified theory with empirical results, and to generalize the results to a broader theory (wherever possible). In this instance, the general question was: What is the basis for the setting of municipal tax rates, and who makes the decision? The proposition as stated in the hypothesis is that the choice of tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision-making process with municipal staff playing a supporting role in terms of providing technical assistance. A set of possible explanatory factors was developed in Chapter Three. The practices of three municipalities (Mackenzie, Quesnel and Smithers) have been discussed in Chapter Four. This Chapter discusses the findings of the case studies in the context of the explanatory factors. Conclusions are offered about the applicability of the explanatory factors, implications for municipal finance are identified, and a broader theory of the basis for the setting of municipal tax rates is suggested. Finally, the proposition as stated in the hypothesis is discussed. Explanatory Factors and Process - Conclusions and Implications Chapter Three is divided into two sections. The first outlines factors that may be considered in the course of choosing tax rates and tax policy objectives. The second discusses possible decision-making processes and participants in the process. This 125 division has also been adopted in this section. Before embarking on a discussion of the Actors and processes, and the findings o f Ac case study, it is necessary to acknowledge the limitations inherent in this work. Firstly, the case study involves three non-metropolitan, resource-oriented, northern municipalities. A case study involving other types of municipalities (such as municipalities in large metropolitan areas, or very much larger municipalities) may not yield the same results. Secondly, this study may not have identified all of the factors that are considered. Since it deals only with one type of municipality, it is not known if there are factors, such as isolation from major centers, the degree of mobility of residents, or levels of education or income, that may have an influence on decisions relating to taxation levels and policies. Finally, this study was written during a time of considerable economic uncertainty in the three communities referred to in this study. They are all impacted by the forest industry, which in turn has been impacted by the trade dispute over softwood lumber and by the uncertainty over the future of Skeena Cellulose. As noted in Chapter Four, growth in the three communities has been stagnant over the past five years. Therefore, there is no evidence relating to decision-making in growing municipalities. It is possible that communities with vibrant, growing, economies may approach taxation decisions differently. Factors Considered in Decision Making A number of factors were identified in Chapter Three, dealing with political considerations, the taxation of business, competition between municipalities, land 126 use, and revenue requirements. These categories were created for organizational purposes. While it might be argued that everything related to the setting of tax rates has a political connotation or connection, for the purposes of this w oit the "political" category is concerned with Actors that are primarily related to increasing the chances for electoral success. The category dealing with the taxation of business is concerned with factors that lead to the perceived “benefit” to the municipality’s residential property owners fiom taxing non-residential property. Competition among municipalities for new investment is thought to be important. The extent to which tax rates are used for this purpose is discussed under the category o f “competition with other municipalities.” The use of tax rates to influence land use decisions is discussed in the “land use” category, while the influence of the municipality’s revenue requirements on tax rates is discussed in the “revenue requirements category.” Political Five broad themes concerning factors that might be considered political in nature have been identified. They are: 1. The property tax is unpopular, and should therefore be avoided or minimized (perhaps by minimizing the impact on the majority o f voters by shifting the incidence of the tax to non-residents or business and industry); 2. Elected officials, with the hope of increasing their chances of electoral success, are biased to "Avouf" homeowna-s (who consfihite Ae m^oiity of 127 the electorate in many municipalities) by shifting the burden of taxation fi’om residkaotHdto rwar^itawtLgnjialjproixarty owners; 3. There is a need for stability and predictability in the tax levy (based on the premise that uncertainty is a primary cause of discontent about property taxation); 4. The property tax may be a viable tool to encourage investment and development; 5. The property tax represents the “price” for the provision of municipal services, implying the existence of a relationship between the amount of property tax paid and the cost of the services provided, and an accoimtability mechanism that informs the politicians about the electorate’s acceptance or rejection of that price. Tummg first to the proposition that the property tax is unpopular, and should be avoided or minimized (perhaps by minimizing the impact on the majority of voters by shifting the incidence of the tax to non-residents or business and industry), evidence from the case study is, at first glance, supportive of the proposition. The municipalities (and in particular Quesnel) have tended to minimize residential taxation by raising a disproportionate share of the tax levy from non-residential properties. In 2002 (which was an election year), Mackenzie and Smithers had no increase in general taxation. However, if the property tax is truly unpopular, pressure to minimize the property tax and to avoid increases in residential taxation would be expected. The fact is that the municipalities report relatively little interest 128 in property tax issues and very little correspondence complaining about the property tax. The municipalities have also increased per capita residaitial taxes and total per capita taxes over the last five years (see Appendices 1,2 and 3). In fact, in Quesnel, percaphareadenfiaiüDudKMihashMaeasedrnudhfaüerfiMüiüüalpercaphataxaüon (see Appendix 2). This suggests that either the taxpayers have come to regard protest as a lost cause, or they are at least accepting of the need for a reasonable amount of taxation. In addition, no respondent in the case study raised the issue of opposition to the property tax, per se. It is concluded that, at least at this moment in time, the unpopularity of the property tax is not a consideration in the setting of tax rates. The second broad theme is that elected officials are biased to “favour” homeowners, with the hope of increasing their chances of electoral success. The data support this proposition. In the three selected municipalities the tax rates are structured so that non-residential properties pay a disproportionate share of the tax burden. However, it is not clear that this is due to attempts to increase electoral success. In all three municipalities there has been a pattern of following “tradition” in setting the tax rates. Figure 11 illustrates the distribution of the tax burden in Mackenzie over the past 10 years. The proportion of taxes paid by non-residential properties has declined slightly in that period, while the proportion of taxation paid by residential properties has increased slightly. Similar patterns are to be found in Smithers and Quesnel, as shown in Figures 12 and 13. 129 I^gprell % of Taxaëon - Mackenzie 80.00% 60.00% 40.00% 20 .00% 1=$= 0.00% Residential -X—Light Industry -Utility ■Business Major Industry Figure 12 % ofTaxadon - Queanel 80.00% 4. J, 60.00% A — ér" —A 40.00% 20 . 00% — #_ :4 l- z $ . — 0 . 00% — H»T = # = i »M...f= # = f = * = T - * R^identia! -X—Light Industry Utility ■Business 130 =* 1 1* -Major Industry Figure 13 of Taxation - Smlthem 60.00% 50.00% 40.00% 30.00% 20 . 00% 10. 00% ♦ At'" -A ' a ’ À ^ '" A r " "A A ..... -A "" A" 0 . 00% Residential —*—Utility Light Industry Business -A—Major Industry The origins of the current distribution of the tax burden may be rooted in the system of taxation which existed before the current variable tax rate system was established. Current decision-making appears to be oriented toward maintaining the status quo, or at best making incremental changes. If that approach has persisted for some time, it may be that current patterns simply reflect a tax structure that was mandated by the province decades ago. Support for this position may be found in the lack of discussion of the principles underlying the tax distribution policy. The case study indicated that councils did not engage in a detailed policy debate about such matters. The exception is Quesnel where, as a result of representations by major industry, consideration is being given to the "fairness" of their policy. In that instance, it appears that the policy changes may in fact result in increasing the 131 burden of taxation on residential properties^ which is contrary to the proposition of a bias toward homeowners. As a result, it is concluded that the validity of this proposition has not been established. The third theme concerns the need for stability and predictability in the tax levy (based on the premise that uncertainty is a primary cause of discontent about property taxation). A review of figures 11,12 and 13 above indicates that, at least in terms of the distribution of taxation, stability is a significant factor. Total taxation, as shown in Figure 10, has also been stable (although there have been slight increases from year to year). Although the municipalities have no official policies that call for stability, their adherence to traditional practices probably provides for a high degree of stability. Care should be taken not to place too much significance on the stability that has been observed. As noted earlier the three subject municipalities have been in a period of stagnation. It is possible that it is stagnation, and not stability, that is being observed. Strong practices for financial planning with respect to tax rates might be a means of providing predictability in taxation matters. Unfortunately, according to the municipal financial officers, the municipalities do not engage in such planning.^ They do, however, provide for predictability in two ways. Firstly, they follow essentially the same tax distribution policies from year to year. In this regard, they are undoubtedly aided by the stable (or stagnant) state of their local economies. ' A final decision had not been taken at the time o f writing. ^Warren Waycheshen, Director of Finance, District o f Mackenzie, telephone interview by author, February 27,2003. Jerry Reglin, Treasurer, City of Quesnel, telephone interview by author, March 4, 2003. Leslie Ford, Financial Administrator/Collector, Town o f Smithers, telephone interview by author, February 25,2003. 132 Secondly, they take steps to avoid surprising property owners with une^qiected tax increases. All of the municipalities take steps to publicize their budget situation and their taxation objectives dunng their budget processes. On the basis of the foregoing, it is concluded Aat the municipalities do recognize the need for stability and predictability in taxation, and that it is one of the factors that they consider in setting their tax rates. As pointed out in Chapter Three, the literature suggests that the property tax may be a viable tool to encourage investment and development.^ The case study shows no evidence that this use of the property tax is considered. While the three municipalities do compare their tax rates with those of other municipalities, there is no evidence that this is done for the purpose o f setting rates to “undercut” other municipalities, for the purpose of attracting investment. Their major concern in comparing tax rates is to make sure that their municipality is not “out of line” with the others (i.e. that they are neither too high nor too low). About the best that can be said is that they want to be sure that their tax rates are not so high as to discourage investment. The final theme is that the property tax represents the “price” for the provision of municipal services, implying the existence of a relationship between the amount of tax paid and the cost of the services provided, and an accountability mechanism that informs the politicians about the electorate’s acceptance or rejection of the price. The case study revealed that none of the municipalities has established ' See Chapter Three, pp. 80 -81 133 a formal link between the cost of service to the various property classes and the level of taxation, or between the beneGts received and the level of taxation. There were few attempts to determine the electorate’s view of the “price” of the services. Smithers was an exception in that regard, in that they undertook a survey in 2002 that asked respondents to indicate whether the expenditures should be increased, maintained or decreased (the survey form included information about the amount of property tax allocated to each service). The respondents chose stability, 70% seeking to have expenditures maintained, 11% seeking an increase, and 19% seeking a decrease.^ It is tempting to argue that the municipalities do, in fact, regard the taxes as the price that property owners pay for a basket of municipal services. Each of the municipalities has a mechanism which allows council to weigh community aspirations and needs against the cost of providing services and the impact on taxpayers. They have various arrangements to provide them with input from the community. Finally, the size of the communities probably allows members of council and staff to be familiar with the views of a range of community members. The budget process, in effect, becomes a process in which trade-offs are made between the desire for constraint in taxation and the desire for an acceptable range of municipal services. Through this process the councils determine, on the basis of their subjective opinions, how much taxation the residents are prepared pay. The result may range from no increase in taxation (which would likely require reductions * Town o f Smithers, Service Survey Results, 2002 134 in selected services or activities) through to an increase in taxation (which would likely result in expanded or inqiroved municipal services). This is, however, not the same as establishing a “price” as there is really no linkage between the services provided and the taxes levied. No attempts are made to calculate either the cost o f servicing certain types of property, or of the benefits that are received by those properties. In conclusion, of the five themes identified, only one appears to be major factor in the determination of tax rates, as evidenced by the case study. That is the premise that stability and predictability in the tax levy is a requirement. The evidence is, however, insufficient to allow outright rejection of the first two themes referred to above (minimizing residential taxation because of the unpopularity of the property tax and favouring homeowners to enhance electoral success). There is no indication that tax rates are used in a political way as a tool to encourage investment and development. Taxation of non-residential properties is, nevertheless, thought to be an important issue, as will be seen in the following paragraphs. Taxation of Business Chapter Three identified three main themes that may inform the approach to taxation of business. They are: 1. a perception that business can pass property taxes on to others (such as tenants or customers); 135 2. a belief that an area that is a “host” to a business or industrial activity is entitled to a part of the proceeds; 3. a perception that property taxes imposed on business may be exported beyond the municipal boundaries (for example, to customers or investors in the business who live outside the municipality). These three themes are thought to lead to a belief that there is a “benefit” to the municipality’s residential property owners from taxing non-residential property. The case study indicates that these are issues that are not explicitly addressed during the decision-making process. None of the respondents identified any of the three themes as factors that they considered when determining how the burden of property taxation is to be shared. It may be that the belief that there is a “benefit” to be gained from taxing business/industry disproportionately is so much part of the system of local government values that it inhibits consideration of any tax structure other than the traditional. Determining whether that is the case is beyond the scope of this study. Competition With Other Municipalities As noted in Chapter Three, a significant body of literature suggests that municipalities compete against other municipalities to attract mobile investment and/or mobile residents.* This may take the form of competition through the use of low tax rates, or the use of high levels of service. In each case, the objective is to * See Chapter Three, 84 - 85 136 increase investment in the community. The case study indicates that the municipalities regularly compare their tax rates with those of other municipalities.^ However, there was no evidence that tax rates are deliberately man^ulated to improve their competitive position vis-à-vis other municipalities. The purpose of monitoring the tax rates of other municipalities is to make sure that the municipality’s taxation is “in line” with the practices of other municipalities.’ It appears that adjustments are made if taxes are either too high or too low in relation to other municipalities. For example, Mackenzie increased the tax rates for business/other properties in 1997 because they were considered to be too low in comparison with rates charged by others.* Quesnel is considering adjustments to their rates for major industry because they are comparatively high.^ However, these are exceptions. In general, the comparisons do not result in corrective action being taken on an annual basis, as would be expected if the municipalities were using tax rates for competitive purposes. None of the municipalities indicated that competition with other municipalities was a consideration in setting their tax rates. The major concern was to ensure that their rates were not “out of line.” Presumably, being too high (or too low) would be make it more difficult to justify their taxation levels to those few who might inquire or complain about property taxation. Being too high would likely be * See Chapter Four, 106. ’ Ford, interview. Waycheshen, interview. * Waycheshen, interview. ^Mayor Nate Bello, telephone interview by author, March 3,2003 137 seen as discouraging new investment in the community. Being too low would likely be seen as giving an unfair break to a property class. Competition between governments for access to the same tax base also occurs. In British Columbia municipalities, regional districts, the Assessment and Finance Authorities, and the provincial government all impose property taxes on the same properties that are subject to municipal taxation. There is no indication that there is active competition on the part of the municipalities for the property tax base. Interviews with the municipal officials indicate that the tax rates levied by other agencies are not a factor in their decision-making. They do not make adjustments to their tax rates to compensate for changes in the rates imposed by other governments. While competition for the tax base may be played out at other levels (for example, between the Union of British Columbia Municipalities and the provincial government), it is not, under existing circumstances, a factor that is taken into consideration when determining tax rates at the municipal level. Land Use The effect of taxation on development is thought to be a factor for consideration in setting tax rates, as suggested in Chapter Three*®. Respondents in the case study recognized that high tax rates might be a deterrent to development. There was, however, no indication that this was a factor that was specifically taken into account in determining rates. See Chapter Three, 85-86 138 Revenue Requirements As suggested in Chapter Three, revenue requirements are a major factor in determining the tax rate requirements/^ Each of the municipalities had a process to reconcile the needs of the community with the community’s ability (or willingness) to pay (as determined subjectively by the municipal council). While some may suggest that the amount to be raised from taxation is simply the difference between non-tax revenue and spending, the matter is not that simple in actual practice. There are other factors that have to be taken into account, as discussed above. Consideration o f other factors often leads to adjustments to both spending plans and taxation objectives. The balancing of the various competing considerations takes place within the process of determining tax rates, which is discussed in the following section. The Process o f Determining Tax Rates In Chapter Three it was determined that the characteristics of the decision-making process would include; 1. A dynamic relationship between elected officials and staff. While each has a defined role, the relationships are dynamic and reciprocal. 2. A three-part process, involving the development of policy, the adoption of policy, and the implementation of policy. " See Chuter Three, 86-87 139 Insofar as the process is concerned, it was suggested that the following points should be considered: 1. The origin of policy initiatives; 2. Whether (and how) relevant values are articulated and reconciled; 3. How the interests of those not directly involved in the decision-making process are considered and reconciled; 4. Whether the process is open, and whether there is an examination of the costs and benefits of possible alternatives; 5. The nature of the role played by the participants, and whether senior staff appear to play a dominant role; 6. Whether the process is one which deals primarily with policy issues or is one which is primarily an administrative exercise; 7. Whether policy initiatives come from the electorate (either as individuals or through community groups such as Chambers of Commerce or Ratepayers Associations), and the source(s) of influence; 8. The role played by the media. A review of the processes used by the three municipalities shows that there is, indeed, a dynamic relationship between elected officials and staff. Staff are looked to for input into the development of policy in a variety of ways, yet the adoption of policy clearly remains the prerogative of the elected officials. The process of setting tax rates can be broken down into three stages. While the sequence of events varies, in each municipality there is a process of reviewing 140 community requirements and constraints, leading to the setting of policy with respect to the budget and/or the taxation objectives for the year.^^ This is the policy development stage, which involves an exchange of information and views between elected and appointed officials. It leads to the preparation of budget and taxation bylaws that are ultimately enacted by the council (adoption of policy). Municipal staff proceed with the implementation stage, which for the present purposes is the levying and collection of taxes. In each of the municipalities, staff play a key role in providing policy initiatives for spending (either capital or operational) and for the financing of spending (which may involve borrowing, leasing, the use of fees and charges, or appropriations fi-om surplus or reserves as well as taxation matters). Policy initiatives also come fiom council, in particular with respect to their subjective evaluation of the community’s willingness or ability to pay increased taxes. All of the municipalities have a public input process, but it is not clear that these processes are the origin of policy initiatives. They appear to be, in the main, opportunities for the public to critique municipal financial plans and to lobby for their particular interests. The decision-making processes used in the municipalities are not elaborate. The processes are relatively open (accessible to the press and the public). Insofar as taxation is concerned, there seems to be little discussion of principles and values. ^ In Mackenzie this occurs at the beginning o f the budget cycle, in Quesnel and Smithers it occurs after council has reviewed the proposed budget. See Chapter Four, 101-103 " See Chapter Four, 101-103 " See Chapter Four, 112-113 141 For the most part the decisions are incremental and follow past practice. The major issue (insofar as property taxation is concerned) is the determination of the amount of tax increase (if any). This a^iears to Ibe tbKsnssult of "sRibgeK;thre aaawBssmaits and political bargaining" as suggested by Undal.^^ Those twiw) are not directly involved in the decision-making process must rely on the participants to consider and reconcile their interest. It is possible, of course, for interested citizens to follow the course of discussions and to seek an audience with council, or lobby council members or staff, or appear at a consultation meeting. The media appear not to be a significant factor in Mackenzie and Smithers, at least in terms of influencing taxation decisions. Respondents in Mackenzie and Smithers indicated that the media restrict themselves to informational reporting. Their influence, if any, may lie in the provision of information to those members of the community who wish to use it. The indications are that the media in Quesnel may have more impact. According to one source the Quesnel newspaper likes to generate controversy, and tends to put things in a negative light. However, as noted in Chapter Three, it is beyond the scope of this study to attempt to evaluate the impact of the media in these matters. C. Richard Tindal and Susan Nobes Tindal, Local Government in Canada;^ 4* ed. (Toronto/Montreal: McGraw-Hill Ryerson, 1995), 301 Waycheshen, interview. Mayor James Davidson, telephone interview by author, February 25, 2003. Ford, interview. 142 Setting Municipal Taxes - A Theoretical Explanation The foregoing analysis suggests that there are six components to the basis for setting municipal tax rates: 1. Local economic conditions, especially as they affect the ability and willingness of property owners to pay for municipal services; 2. Community desires for services and facilities; 3. The financial requirements of the municipality, as identified by civic administrators; 4. The past taxation practices o f the local government; 5. The need for stability and predictability in the tax levy 6. The taxation practices of other local governments. These components are brought together in a three-stage decision-making process that has, as a principal characteristic, a relationship between elected officials and staff where roles are defined and where the relationship between the two is dynamic and reciprocal. The process, it is suggested, is highly incremental in nature. This suggestion will be explored in more detail below. The case study suggests that local economic conditions are an important consideration in setting tax guidelines to be followed by municipal staff. In Mackenzie, it is reported that discussions about setting the target for taxation involves consideration of the community’s expectations of the municipality, the state of the economy, the rate of inflation, assessment trends and local economic 143 circumstances.*’ Similar considerations are encountered in Smithers and Quesnel.** Rates of unemployment, prospects for growth and development, the health o f the business community, and the state of the supporting resource industries (if any) are important factors, as they affect the ability of property owners to bear the burden of increased taxation, and their willingness to pay. The local economic conditions are balanced against the community’s desire for service and facilities (and, in particular, their desire for improvements in quality or for additional facilities and services). The local economic conditions are also balanced against the municipality’s financial requirements, as identified by civic administrators. It is the civic administration that advises council on the expenditures required for the coming year to provide the services desired by the residents, in line with council policies and in compliance with a wide variety of regulations. It is also the civic administration that identifies various ways of financing for both operational and capital expenditures. In each of the municipalities, the councils left the task of preparing budget proposals to staff.*** It is the task of the municipal council, with input jfrom their senior staff, to arrive at a conclusion about the amount of taxation that is to be imposed to meet the municipality’s financial needs. When that decision is made, consideration must then be given to the way in which the burden is to be distributed among the property classes. Deciding on the distribution of the burden of taxation, it is clear, involves Briggs, Ritchie and Waycheshen, interviews. ** Bello and Mah, interviews. See Chapter Four, 101-103 144 three major components: past taxation practice, monitoring the taxation practices of other municipalities, and stability and predictabili^. In the absence of evidence of a need for change, the municipality will adopt the prior year's taxation policies in determining the distrikition of die tax burden. That is, they will opt for stability in the proportion of tax paid by the various property classes or they will opt to maintain the relationships between the residential tax rate and the non-residential tax rates. Figures 11,12 and 13 illustrate the stability in the distribution of the tax burden in the three municipalities. New construction or development, which results in new tax revenue, may be evidence of a need for change. For example, where past practice calls for stability in the allocation of the tax burden between classes, if an expansion of the retail sector adds five percent to the tax roll, a decision may be made to alter the traditional relationship to increase the proportion of taxes paid by the business/other property class (to reflect the larger size of that component of the community). Unfortunately, neither Mackenzie nor Smithers (the two municipalities which seek stability in the distribution of the tax burden) have enjoyed significant growth fi-om new development in the recent past, so this point could not be verified. None of the municipalities experienced a significant loss of investment (that is, the destruction of a major component of their tax base). Therefore, there is no indication of what approach might be taken in such an event. The tendency to incremental change and stability could be taken to suggest that expenditure levels would be reduced to offset all or part of the loss. That suggests that a change in the 145 distribution of the tax burden would occur. It should be noted that the closure of a business or industry does not result in the immediate loss of the tax base. Taxes continue to be collected from the owner until such time as the improvements are removed (unless, of course, the municipality becmnes the owner of thw; property because of non-payment of taxes). Unfavourable comparisons with the taxation practices of other municipalities may also be cause for change. The three municipalities report that they monitor the taxation practices of other municipalities. Such monitoring does not result in a change to past practices so long as taxation practices are “in line” with those of other municipalities. When the practices diverge too far (that is, the tax rates become too low or too high in comparison to other municipalities) the municipality will institute a change to past practice. Such a change will be undertaken in an incremental fashion, in order not to create instability and uncertainty about tax levels.^® Different classes of property owners may, from time to time, lobby for a change in taxation practices. For example, representatives of major industry may seek tax concessions when the business environment is challenging. They are unlikely to gain such concessions unless they can demonstrate that the municipality’s taxation policies are “out of line” with those of comparable municipalities. The third major component is stability and predictability. It is the need for stability and predictability in taxation matters that inhibits change unless there is a very good reason for change. The level of interest in municipal taxation matters is ^ Ford, Waycheshen, interviews. 146 generally low. Unexpected significant changes are likely to awaken interest. Therefore, it is in the interest of both elected and appointed officials to make sure that the taxpayers are not “surprised” by change, and to seek to undertake change in an incremental manner.^* All of these factors are brought together in a three-part decision making process. The first part involves the development of policy. This involves considerable interaction between the elected and appointed officials. The elected officials bring to the process their subjective views of the local economic conditions and community desires for services and facilities, and their evaluation of the way in which municipal operations are conducted. Staff bring the expert and intimate knowledge of the operation of the municipality (in short, their professional expertise), and specific proposals for revenues and expenditures and taxation (in the form of budget proposals). They also bring their own subjective views of the various issues up for discussion. Eventually, the second part of the process is reached, and the municipal council is in a position to adopt policy. Policy may, in fact, be adopted in stages; For example, the council may adopt a policy for the taxation targets for a given year (leading to the development of a budget document). Then die budget may be adopted, followed by the bylaws imposing property taxes. Finally, when policies have been adopted, the administration can begin implementation. This might be described as the “let sleeping dogs lie” approach. 147 According to the foregoing, the setting of tax rates does not involve consideration of economic factors of property taxation (such as economic inefficiency or disincentives for development), and consideration of issues of fairrwass and equity (except as they may arise as the result of un&vourable comparisons with other municipalities). That is, there is no evidence that the municipalities give consideration to the principles underlying their taxation policies. The primary concern is to find an acceptable balance between local economic conditions (especially as they affect the ability and willingness of property owners to pay for municipal services), community desires for services and facilities, and the financial requirements of the municipality. Having done that, the tax burden is distributed largely by taking into consideration the past taxation practices, the need for stability and predictability, and the taxation practices of other local governments. It is evident fi-om the case studies that changes in taxation structure occur infrequently, and generally incrementally. Indeed, changes in the level of taxation also tend to occur incrementally. For example, it is reported that Smithers tries to make changes that may be required in its tax distribution policy incrementally.^ Figures 11, 12 and 13 indicate that changes in the tax distribution policies are incremental. Figure 14 indicates that changes in the amount of property tax levied occur incrementally. In that figure, it is evident that taxation levels in Quesnel have increased substantially over the past ten years. However, they have done so in an 22 Ford, interview. 148 incremental fashion. Change has been rapid, but it has not taken the form of periodic "great le ^ ." Figure 14 Property Tax Revenue $10,000 $8,000 I $6,000 X A A $4,000 $2,000 -«—Average -A—Mackenzie Smithers Average of Northern Quesnel The emphasis on past practice and stability may lead to stagnation or nearstagnation in policy. It seems that policies governing the distribution of taxation change only when some kind of external stimulus is applied. Otherwise, past policies are continued. The implications for municipal finance are significant, and are discussed in the next section. Implications for Municipal Finance Property taxation is an important source of revenue for municipalities. In 1997, 52.8 per cent of municipal revenue in British Columbia came from property taxation and 149 grants in lieu of taxes.^ That does not include property taxes levied by other agencies but collected by municipalities for transmittal to the agencies. Therefore, it is in the interest of municipalities to maintain a system of taxation that has the support of the populace and that does not create any urmecessary economic harm. There is no evidence from the case study that would support a conclusion that the system is not generally accepted by property owners. However, the study does raise issues related to the lack of analysis and tax policy development, the potential for taxation practices that are economically inefficient, and the potential for erosion of municipal autonomy. When the current tax legislation was introduced the Ministry of Municipal Affairs, Recreation and Culture stated that “[tjhese changes address the fundamental belief that, although market values are generally accepted as a reasonable base for property taxation, there is a need for the property tax burden to change more gradually than would result from the response to rapid changes in market conditions."^ This implies that the government expects that property taxation will be based on assessed values, but that it accepts that rapid changes would not be acceptable. It expects that change will be implemented gradually. That is, if the assessed value of a particular class increased significantly relative to the values of the other classes (for reasons other than new construction), the associated shift of the tax burden would occur over time, and not all in one year. However, the ^ Robert L. Bish and Eric G. Clemens, Local Government in British Columbia, 3"* ed., (Richmond; Union o f British Columbia Municipalities, 1999), 150 Province of British Columbia, Ministry of Municipal Affairs, Recreation and Housing, Municipal Financial Services Branch, A User’s Guide to Local Property Taxation in British Columbia, (Victoria: January 1993), 3 150 government expects that there will, in the end, be a shift in the distribution of the burden of taxation to reflect the relative change in assessed values. Two of the three municipalities in the case study (Mackenzie and Smithers) have adopted the practice of stabilizing the distribution of the tax burden. As a result, while the proportion of assessment in the major industrial class increased from 36.2% in 1998 to 39.9% in 2002 in Mackenzie^, the percentage of the total tax levy paid by major industry declined from 66.7% to 66%. In Smithers, while the percentage of assessment in the business/other class increased from 25.6% in 1989 to 28.1% in 2002, the percentage of the tax levy paid by diat class remained constant at 48.23%.^ taxation. This approach upsets the relationship of assessments to property Stabilizing the proportion of the tax base paid by a property class, regardless of the change in assessed value in that class, means that market value is used only to determine the allocation of the property tax within the property class. It “freezes” the relationship between property classes, and eventually distorts the relationship between the amount of the tax paid and the value of the property. This is illustrated in Table 12, below. “ See Appendix 1 “ See Appendix 3 151 Table 12 Changing Relationship between Assessed Value and Taxation Assessed Value - House Assessed Value - Store Assessed Value - Major Industry Taxes to be levied each year % of Assessment Total - House % of Assessment Total - Store % of Assessment Total - Major Industry % of Tax Burden - House % of Tax Burden - Store % of Tax Burden - Major Industry Taxes - House Taxes-Store Taxes - Major Industry Tax Rate - House Tax Rate - Store Tax Rate - Major Industry Tax Multiple - Store Tax Multiple - Major Industry Year 1 $100,000 $200,000 $200,000 $10,000 20% 40% 40% 10% 30% 50% $1,000 $3,000 $5,000 $10 $15 $25 1.5 2.5 Year 2 $105,000 $210,000 $195,000 $10,000 20.6% 41.2% 38.2% 10% 30% 50% $1,000 $3,000 $5,000 $9.52 $14.29 $25.64 1.5 2.69 Year 3 $110,000 $220,000 $190,000 $10,000 22% 40% 38% 10% 30% 50% $1,000 $3,000 $5,000 $9.09 $13.64 26.32 1.5 2.9 This example assumes a very simple municipality with one house, one store, and one major industrial fecility. The Tax Rate is shown as $1 per $1,000 o f assessed value. The above example shows that as major industrial assessment declines the tax rate rises. While the amount of tax paid by major industry is unchanged, its relationship to the residential and business taxes changes, as indicated by the increase in the tax multiple. In the example, the taxes remain the same from year to year. However, if taxes were related to market value, the taxes on the major industrial property would have declined, while the taxes on the store increased. The property assessment would no longer be the basis for the allocation of taxes between 152 property classes. As these types of discrepancies grow, the system will become more difficult to explain. The difficulty in explanation is compounded by the fact that the municipalities do not have property taxation policies that explain the principles underlying their tax rate structures. The lack of explanation will, in the view of the author, make the system less understandable. That, in turn, could result in an erosion of confidence in the system. A review of the major industrial tax rates and tax multiples reveals that there is a trend to higher tax multiples for that class. As is shown in Table 13 the average major industrial tax rate in communities with significant major industrial assessment has climbed from $37.5 to $39.5/$1,000, and the multiple has risen from 6.1 to 7.0. The average, however, is influenced by very significant changes in Kimberly. If Kimberly is excluded, the average major industrial tax rate for the communities with significant major industrial assessment has increased firom $32.09 to $41.45/$1,000, and the multiple has risen from 4.7 to 7.1. The increases have been as significant in non-major industrial centers, where tax rates for the major industry class have increased from an average of $31 to $48.7/$l,000, and multiples have increased from an average of 3.5 to 7.2. (Municipalities were classed as major industrial centers if more than 10% of their assessment was in the major industry class in 1992. The data was drawn from the group of twenty-one municipalities referred to in Chapter Two.) Considerably more research would be required to determine 153 whether this is the result of following traditional patters of tax burden distribution, or some other factor. Table 13 Major Industrial Tax Rates and Multiples Municpality Campbell River** Castlegar** Cranbrook Dawson Creek* Fort St. John* Kimberly** Kitimat** Mackenzie** Merritt Nelson Port Alberni** Powell River** Prince Rupert** Quesnel** Reveistoke Salmon Arm Sechelt* Smithers Terrace Trail** Williams Lake Average Non-Major Industrial Centers Major Industrial Centers Tax Rate 1992 36.775 41.970 42.610 Tax Multiple 1992 7.5 5.7 3.7 17.2 50.2 2.3 4.2 2.0 5.2 6.7 3.0 4.1 3.9 3.5 Tax Rate 2002 51.595 27.926 59.069 31.500 12.500 24.008 50.717 29.288 45.240 15.522 75.891 48.000 39.997 43.527 45.558 42.347 Tax Multiple 2002 9.460 6.490 5.540 4.320 2.030 6.830 80.883 31.067 19.757 36.827 26.108 58.723 43.067 25.384 17.787 30.584 27.922 24.570 40.538 13.259 30.511 4.0 3.7 3.4 3.1 61.773 66.293 15.387 64.205 10.780 8.130 3.680 9.420 31.008 37.512 3.5 6.1 48.705 39.513 7.2 7.0 3.450 7.850 2.000 7.510 11.620 4.000 10.250 6.260 5.860 * denotes no major industrial tax rates in 1992 ** denotes a major industrial center (a community with more than 10% of its assessments in the major industrial property class in 1992 Note; The averages for the Major Industrial Centers does not include Kitimat. Kitimafs 2002 tax structure makes comparison with other municipalities difficult due to the lack of a residential tax rate. Note: The average for the non-major industrial centers excludes Sechelt, Dawson Creek, and Fort St. John, as they had no major industrial tax rates in 1992 154 There is a further hazard to simply increasing tax rates to offset assessment declines to maintain a certain tax distribution. Assessments on industrial properties tend to decline as time goes by, as the industrial plant decreases in value due to depreciation and obsolescence. While increasing tax rates on existing industrial plants may not cause any real hardship for existing plants (as their taxes would not increase to the same extent as the tax rate), it may result in a disincentive to new investment. New investment would be faced with a higher rate than would have been the case if tax distribution policy recognized the decline in the relative worth of the existing plants. As illustrated in the above table, there is significant variation in the tax rates for major industrial communities, and in the tax multiples. Assessment of major industrial properties involves the use of rates and/or costs prescribed by the Assessment Commissioner.^^ Thus, the assessed value of similar plants will be similar regardless of location (except for land values). However, rates vary by a factor of six between communities (the lowest rate being $12.5/$1,000 and the highest being $75.89/$!,000). No literature could be found on the point, but it seems reasonable to expect that such differences may have a distorting effect on decisions relating to investment and re-investment. As discussed in Chapter One, Bird and Ballentine and Thirsk have suggested that the taxation of business and industry at higher rates than residential properties is economically inefficient. ^ Val Drebet, Assessment Training, unpublished manuscript dated M ay 2001, 29 Richard M Bird, “Local Business Taxes,” report prepared for the W orld B ank Institute, 2002 at http://www.worldbank.org/wbi/Dublicfinance/documents/fiscalfederalism Russia/Bird tax.pdf. pp. 155 This aspect is not something that is regularly considered in setting municipal tax rates. Further research to determine what ef&ct, if any, this might be having on the economies in northern British Columbia may be warranted. British Columbia has already seen one instance where the provincial government intervened to curb what was deemed to be excessive municipal taxation of the utility property class.^® The province has now restricted utility taxation to the greater of $40/$ 1,000 or 2.5 the tax rate for business/other property (subject to certain exemptions for specific municipalities).^® That suggests that the multiple for utility taxation could be in the area of 6 (2.5 times the provincially-set business/other class multiple of 2.45). The average tax rates and tax multiples for the major industrial class are approaching the levels that the province found to be too high for the utility class (and some individual rates are considerably higher). Are those rates harming the province’s economy? Will that result in provincial action to restrict municipal autonomy to set industrial tax rates? Answers to these questions are beyond the scope of this study. They are, however, important to local government. Few other jurisdictions have given municipalities the degree of autonomy with respect to taxation structures that is found in British Columbia. It would be distressing if British Columbia’s municipalities stumbled into a situation 5-6. J. Gregory Ballentine and W ayne R. Thirsk, Taxation without Representation: The Consequences o f Taxing Non-residential Property, (Ottawa: Canada M ortgage and Housing Corporation, 1982), 2. Bish and Clemens, 155 Local Government Services and Infiastructure, M inistry o f Community, Aboriginal and W om en’s Services, Province o f B ritish Columbia. Property Taxation - Provincial Class Multiples for 2002 and Municipal Taxation Rate Cap for Class 2 Property for 2002. Circular No. 02:08, (Victoria: M arch 18,2002), accessed at http://www.mcaws.gov.bc.ca/lgd/srvs infra/cir/cir0208.html on M arch 9. 2003. 156 where the province compelled to deal with perceptions of over taxation of m ^or industry as it did with railway and utility taxation. It is, however, possible that the incremental nature of changes to tax rates and taxation policies, together with the fact that municipalities compare their tax rates to make sure that they are “in the ball park”, will act as a “corrective” device. As Lindblom observed, “every important interest or value has its watchdog. And these watchdogs can protect the interests in their jurisdiction in two quite different ways: First by redressing damages done by other agencies; and, second, by anticipating and heading off injury before it occurs.”^* In the hypothetical case cited above, it might be expected that the owner of the major industry would, if he felt aggrieved, make representations to have the tax distribution policy changed to reflect the changes in the assessed value of his plant. The municipality would respond if their review of the tax practices o f other municipalities indicated that they were no longer “in the ball park” in their taxation of major industry. Incremental changes to policy would be made until they were more in line with the practices of other municipalities. This, in fact, appears to be what is taking place. In Chapter One a policy change with respect to the allocation of the burden of taxation was identified. Table 1 indicated that municipal councils have been moderating the taxation of major industrial properties and utility properties, while shifting the tax burden slightly to business/other and residential properties. Charles E. Lindblom, “The Science o f ‘M uddling Through’,” in Democracy and Market System, (Oslo: Norwegian U niversity Press, 1988). First published in Public Administration Review, Vol. 19, No 2 (Spring 1959). 182 157 The process of “mutual adjustment” identified by Lindblom^^ may, in fact, be an argument for maintaining the autonomy that municipalities enjoy with respect to taxation distribution policies despite the trends noted in Table 13. A decentralized system may be more responsive than a highly centralized one, especially in a province as diversified as British Columbia. Municipalities where major industrial tax rates and tax distribution policies are problematic may be lead to change their policies, if they can be convinced of the need for change. The need for change is likely to be driven by local economic circumstances and the relationship between the municipality’s taxation policies and those of other municipalities. The change is likely to occur incrementally, so as not to create instability and unpredictability in taxation matters. The Hypothesis At the outset, this thesis addressed the hypothesis that the choice of tax rates is based primarily on short-term political considerations with local elected officials playing the dominant role in the ultimate decision-making process (although municipal staff is engaged in providing technical support). It is now time to consider whether the facts support the hypothesis or not. Much, of course, depends on what is meant by “short-term political considerations.” For the present purposes, this is taken to mean that the time horizon is limited to the current budget cycle, and Ibid., 183-185 158 that the principal consideration is the impact that taxation decisions may have on electoral success. The research that has been done supports a conclusion that the considerations are short-term. There is little, if any, evidence to suggest that Irmger term considerations are given a great deal of attention. There is less support for the proposition that the principal consideration is the impact that taxation decisions may have on electoral success. Electoral considerations, no doubt, are present whenever an elected official is asked to make a decision. However, the case study does not support a conclusion that electoral considerations are the principal factors. As discussed in this chapter, the case studies suggest that local economic conditions (especially as they affect the ability and willingness of property owners to pay for municipal services), community desires for services and facilities, the financial requirements of the municipality, and the need for stability and predictability receive the most consideration. Contrary to the expectations raised in the literature, the case studies did not support a conclusion that the unpopularity of the property tax, the desire to seek favour with residential taxpayers by shifting taxation to non-residential properties, or the desire to have competitive tax rates to attract new investment were considered in setting tax rates. Also, the case studies did not indicate that property taxes are regarded as the “price” for municipal services. Insofar as the second part of the hypothesis is concerned, there is no doubt that the elected officials play the dominant role in the decision-making process. 159 although municipal staff is engaged in providing technical support. The case studies indicate that, although staff are expected to provide a wide variety of information to council, and in fact prepare budget and taxation material for covmcil’s ratification, it is council that makes the final determination about the allowable tax increases. Therefore, it is concluded that the hypothesis is only partly true. Lessons for Municipalities A number of lessons can be drawn from the analysis of the case study and the literature. These lessons generally involve more attention to strategic planning for tax rate policy and the policies implicit in tax rate choices, and to monitoring the tax policies actually implemented by municipalities. Specifically: 1. Municipalities should be giving more attention to the linkage between assessment and taxation, with particular emphasis on equity between property classes, as well as within property classes. 2. Municipalities should document the assumptions and policies underlying their policies for property taxation and, in particular, for the distribution of the tax burden among the property classes. 3. There should be more explicit discussion of municipal tax distribution policies. 4. More comprehensive comparisons of municipal tax rates and tax rate policies should be undertaken. 160 5. Municipalities should include more detailed tax rate planning in their fiveyear financial plans. 6. Municipalities should be considering the economic implications of their tax rate policies. Municipalities in the case study tended toward stability in the apportionment of the burden of taxation among the property classes. Stability in the apportionment of the burden of taxation among property classes would, if carried on long enough, distort the relationship between the amount of tax paid and the value of property. Distortion of this relationship will make it more difficult to explain the principles underlying the property tax system. The difficulty of explanation will be compounded by the lack of documented property taxation policies. It is feared that the result could be an erosion of confidence in the system. In a time of increased emphasis on accountability and on the opportunity for the public to participate in the policy-making process, it seems inconsistent that policies affecting the single most important source of municipal revenue are not documented, publicized, and discussed. These policies should be documented as part of the five year financial plan. Allowances for additional revenue from new construction are commonly taken into account in the preparation of financial plans. Allowance for declining assessed values due to the depreciation or obsolescence o f major industrial plan is less common. It should be included in the financial planning. A wide variety of statistics on municipal finance, assessment and taxation are made available by the Ministry of Communities, Aboriginal and Women’s Services. 161 These are used for municipal comparisons. Despite the availability of data, there does not appear to be any centralized or commonly available analysis dealing with matters of property taxation policy. It is left to each municipality to undertake its own analysis, alone or in partnership with other municipalities. The discussion of municipal tax distribution policies would be facilitated by a comprehensive comparison of tax rates and tax rate policies. Finally, the way in which property taxes are imposed can have economic implications for a community. The case studies indicated that, aside from considering the ability of the community (or sectors of the community) to pay additional taxes, municipalities give little consideration to the economic impact of their taxation policy choices. Different tax distribution choices will affect the local economy (and indeed the provincial and national economies) in different ways. Consideration of the economic consequences of municipal tax policy might help municipalities avoid sub-optimal tax structures. 162 Appendix 1 Assessment and Taxation Data -Mackenzie 1998 1999 2000 2001 2002 $195,545,600 $182,143,000 $173,075,400 $161,117,800 $128,855,100 $3,689,600 $27,135,950 $647,600 $123,574,196 $4,060,100 $120,060,400 $4,678,500 $119,964,150 $4,686,700 $147,607,400 $115,278,100 $4,680,500 $23,795,650 $508,200 $22,783,250 $492,400 $21,633,700 $503,500 $20,838,050 $529,600 $355,873,850 $334,081,146 $321,089,950 $307,905,850 $288,933,650 Residential Major Industry 54.95% 36.21% 54.52% 36.99% 63.90% 37.39% Light Industry Business/Other 1.04% 1.22% 7.12% A ssessed Values Residential Major Industry Light Industry Business/Other Other Classes Total % of A ssessed Values 52.33% 51.09% 1.46% 7.10% 38.96% 1.52% 7.03% 39.90% 1.62% 7.21% 0.15% 0.15% 0.16% 0.18% $1,253,482 $3,376,265 Other Classes 7.63% 0.18% Tax Revenue Residential Major Industry $1,206,516 $3,258,745 $1,220,905 $1,238,354 $1,254,947 $3,292,882 $3,335,638 $3,375,911 $88,772 $104,816 $320,551 $15,354 $15,573 $133,501 $330,714 $16,074 $136,689 $320,991 $14,636 $132,182 $327,281 $4,889,660 $4,954,508 $5,049,028 $5,111,147 $5,115,911 % of Taxation Residential 24.67% 24.64% 24.53% Major Industry 66.65% 66.46% 66.06% 24.55% 66.05% 66.00% Light Industry Business/Other Other Classes 1.82% 2.12% 6.56% 0.30% 6.47% 0.31% 2.62% 6.48% 2.61% 6.47% 2.67% 6.48% 0.31% 0.31% 0.35% Population 6,264 6,250 $53,453 6,260 6,177 8,177 $51,374 $49,847 $29,143 $19,772 $3,807 $27,692 $19,210 $3,645 $26,084 $46,776 $23,896 $793 $195 $808 $198 $527 $51 $534 $52 Light Industry Business/Other Other Classes Total Assessment Per Capita $56,813 Residential $31,217 Major Industry Business/Other $20,571 Taxation Per Capita Residential Major Industry Business/Other $4,332 $781 $193 $520 $51 $331,596 $17,879 24.50% $19,421 $3,502 $827 $18,662 $3,373 $203 $547 $54 $203 $547 $54 $828 Source: B.C. M unicipal Statistics. Schedule 61, Assessments, Tax Rates, M unicipal Taxes and Class Proportions o fT ax es and Assessments, for the relevant year, published by the M inistry o f Communities, A boriginal and W om en’s Services, accessed at http://www.mcaws.gov.bc.ca/lgdysrvs infra/munfin/index.htm during February, 2003 163 Appendix 2 Assessment and Taxation Data - Quesnel 1998 1999 2000 2001 2002 $295,695,501 $153,992,500 $385,992,683 $360,859,283 $353,595,883 $339,387,379 $147,516,700 $4,584,100 $142,094,400 $141,420,500 $136,406,000 Total A ssessed Values Residential Major Industry Light Industry $4,120,500 Business/Other $3,630,700 $98,099,000 $104,668,100 $104,342,778 Other Classes $870,200 $3,615,700 $552,287,901 Total A ssessed Values $4,381,700 $133,620,295 $3,520,700 $4,309,000 $121,242,245 $3,666,900 $646,377,283 $614,937,661 $624,234,528 $617,454,474 53.54% 59.72% 58.68% 56.64% 54.97% 27.88% 22,82% 0.71% 23.11% 0.67% 22.09% 0.71% 16.19% 16.97% 0.57% 22.66% 0.69% 19.42% 21.64% 0.59% 0.59% $1,445,991 $5,927,817 $1,441,215 $5,937,321 $97,687 $3,659,100 % of A ssessed Values Residential Major Industry Light Industry Business/Other Other Classes 0.66% 17.76% 0.16% Total Taxation Residential Major Industry $5,413,776 $1,377,492 $5,425,295 Light Industry Business/Other $73,959 $908,985 $88,785 $956,174 $1,009,327 0.56% $1,381,369 $5,575,401 $82,750 $92,511 $20,758 $107,068 $964,805 $104,642 $7,426,805 $7,954,814 $8,108,967 $8,782,039 $8,969,468 17.32% 17.04% 16.47% 16.07% Major Industry 13.59% 72.90% 68.20% 66.19% 1.00% 12.24% 68.76% 1.02% 11.90% 67.50% Light Industry Business/Other 1.05% 1.09% 15.31% Other Classes 0.28% Other Classes Total Taxation % of Taxation Residential Population Assessment Per Capita Residential Major Industry Business/Other Taxation Per Capita Residential Major Industry Business/Other 9,031 $61,155 $32,742 $17,052 $10,862 1.12% 12.02% 1.35% 10,589 1.29% $61,042 $36,452 $13,931 10,589 $58,073 $34,079 $13,419 $1,199,852 $115,867 $1,373,160 13.66% 1.32% 10,920 $57,164 $32,381 $12,951 $11,103 $804 $120,085 1.34% 10,920 $56,543 $31,079 $12,491 $9,885 $9,854 $822 $751 $766 $112 $130 $512 $130 $527 $132 $543 $132 $544 $90 $91 $110 $126 $599 $101 $12,236 $821 Source: B.C. Municipal Statistics. Schedule 61, Assessments, Tax Rates, Municipal Taxes and Class Proportions ofTaxes and Assessments, for the relevant year, published by the Ministry o f Communities, Aboriginal and Women’s Services, accessed at httD://www.mcaws.gov.bc.ca/lgd/srvs inffa/munfin/mdex.htm during February, 2003 164 Appendix 3 Assessment and Taxation Data -Smithers 1998 1999 2000 2001 2002 Residential Major Industry Light Industry $246,790,900 $232,209,697 $225,163,397 $211,376,897 Business/Other $86,755,400 $4,861,170 $245,262,700 $7,239,400 $1,110,800 $88,386,500 Total /M e s s e d Values $6,746,400 $7,569,300 $7,173,500 $1,043,900 $88,179,300 $3,672,650 $1,010,600 $87,021,251 $3,974,000 $1,083,800 $84,056,450 $3,631,350 $347,663,770 $345,973,400 $327,727,697 $325,628,547 $310,088,898 Residential Major Industry 70.99% 70.89% 70.86% 69.15% 68.17% 2.30% 2.09% 2.06% 2.32% 2.31% Light Industry Business/Other 0.36% 24.95% 1.40% 0.33% 25.65% 1.11% 0.32% Other Classes 0.32% 25.55% 1.15% 27.08% 1.13% 0.33% 28.06% 1.13% $1,107,165 $1,140,707 $398,574 $410,650 Other Classes Total A ssessed V a lu ^ $8,003,000 $1,253,300 $3,506,650 % of A ssessed Values Total Taxation Residential Major Industry Light Industry Business/Other Other Classes Total Taxation % of Taxation Residential $1,065,495 $421,397 $71,088 $65,879 $1,555,346 $97,997 $70,009 $1,602,469 $98,844 $1,701,808 $102,141 $1,701,770 $98,000 $3,149,868 $3,224,^1 $3,322,679 $3,528,672 $3,528,670 33.83% 34.33% 34.33% 13.38% 12.36% 34.33% 12.44% 34.33% 12.56% 2.11% 48.23% 2.97% 2.11% 48.23% 2.89% 2.11% 48.23% 6,145 $52,991 6,145 $50,462 2.26% 46.35% 12.36% 2.04% 48.23% Other Classes 4.18% 3.04% 5,944 6,069 $57,007 Residential Major Industry $41,519 $1,346 $40,412 6,069 $54,000 $38,262 $1,193 $1,112 Business/Other $14,585 $14,564 Residential Major Industry $530 $179 $71 $531 $182 $66 $13,850 $547 $188 $68 Business/Other $246 $256 $264 Assessment Per Capita Tajation Per Capita $1,211,422 $443,129 $1,460,093 $131,795 Major Industry Light Industry Business/Other Population $1,211,424 $438,950 $74,349 $58,490 $36,642 $1,232 $14,350 $574 $74,349 2.78% $34,398 $1,167 $197 $14,161 $574 $197 $71 $277 $72 $277 Source: B.C. 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