Tax Shifts - Effect of Changes to Transition Ratios

 The Strategic Policies and Priorities Committee recommends the adoption of the recommendations in the following transmittal letter (July 13, 1998) from the Assessment and Tax Policy Task Force:

 Recommendations:

 The Assessment and Tax Policy Task Force on July, 6, 7, 11, and 13, 1998, recommended to the Strategic Policies and Priorities Committee and City Council that:

(1)the report (June 29, 1998) from the Chief Financial Officer and Treasurer respecting tax shifts, be received;

 (2)Council not consider any tax shifts in 1998;

 (3)the Chief Financial Officer and Treasurer be requested to report to the Strategic Policies and Priorities Committee:

 (i)once the 905 municipalities have set their final tax rates with an analysis of the difference in tax burdens with Toronto and that the Strategic Policies and Priorities Committee then recommend whether or not Council should consider a long-term plan to possibly reallocate property tax class burdens; and

 (ii)on the advantages and disadvantages of different tax rates for the residential, multi-residential, commercial and industrial tax groups, such report to be submitted at the same as the previously requested report in Recommendation (3)(i) above; and

 (4)Council reiterate its request to the Province to develop a multi-year strategy to reduce the burden on property taxes caused by education and social service costs.

 The Task Force reports having requested the Chief Financial Officer and Treasurer to provide to Council on July 21, 1998, a copy of the Ontario Tax Credit form.

 Background:

 The Assessment and Tax Policy Task Force had before it a report (June 30, 1998) from the Chief Financial Officer and Treasurer providing information regarding the effects of using preliminary transition ratios from the other GTA regions, the provincial "range of fairness" and the Board of Trade's alternative tax burden options.

 The Task Force also had before it a communication (July 7, 1998) from Mr. Sam Lewkowicz

respecting the current value assessment and tax shifts -- effect of changes to transition ratios.

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 (Report dated June 29, 1998, addressed to the

Assessment and Tax Policy Task Force

from the Chief Financial Officer and Treasurer)

 Purposes:

 To provide information regarding the effects of using preliminary transition ratios from the other GTA regions, the provincial "range of fairness" and the Board of Trade's alternative tax burden options.

 Funding Source, Financial Implications and Impact Statement:

 There is no direct funding impact on the City of Toronto associated with this report.

 Recommendations:

 It is recommended that:

 (1)staff develop detailed options as part of a long-term plan to reallocate property class tax burdens for Council's consideration in advance of the next reassessment that includes input from stakeholders representing all property classes;

 (2)the guiding principles contained in this report be adopted as a basis for determining the reallocation of taxes among property classes to be implemented in the next reassessment; and

 (3)should Council consider any tax shifts in 1998, then the following priority be established:

 (i)in order to reduce the property tax difference with the surrounding municipalities and improve the competitiveness of business in Toronto, Council should:

 (a)reduce the transition ratio for the industrial property class or

(b)reduce the transition ratio for the commercial property class or

(c)reduce the transition ratio for both the industrial and commercial property classes;

 (ii)in order to provide relief to multi-residential properties, Council should reduce the transition ratio for the multi-residential property class; and

(iii)in order to lessen the relatively higher tax burden of all property classes apart from the residential/farm class, Council should reduce the transition ratios for the multi-residential, commercial and industrial classes of property.

 Reference/Background:

 Section 364 of the Municipal Act, as amended by Bill 106, the Fair Municipal Finance Act, 1997, provides for the single-tier municipality, by by-law, to set tax ratios for the different property classes. Tax ratios are used to determine property class tax burdens. Transition ratios are tax ratios that reflect the relative tax burden of each property class based on 1997 tax levels and 1998 assessed values. The municipality may adopt a tax ratio for each property class which is either the same as the transition ratio, or a tax ratio which is in the provincial "range of fairness", or a tax ratio which is closer to the "range of fairness."

 The legislation does not permit increasing the tax burden on any property class except on to the residential/farm class (in the case of Toronto). This report provides information pertaining to the tax shifts on to the residential/farm property class that would result from adopting different tax ratios.

 The Minister of Finance announced in the recent 1998 Ontario budget that the Province would be providing funding to those communities, like Toronto, with business education taxes above the provincial average in order to reduce education tax rates for commercial and industrial properties. This equalization plan will be phased-in over the 1998 - 2005 period. When complete, the plan will reduce business education taxes in Toronto by an estimated $400 million. Once completed, the education tax rate reduction plan in Toronto will have reduced the preliminary estimated total commercial and industrial tax rates as follows:

 These are preliminary estimates. For 1998, the details of this tax cut will be set out in regulation. Legislation for the balance of the eight-year plan will be introduced in the fall.

 Comments:

 The impact of the provincial plan to reduce business education taxes in communities with education taxes above the provincial average, is not included in this report. The estimated tax impacts presented in this report are based on municipal taxes only and are unaffected by the provincial announcement to reduce education taxes.

Analysis of the estimated preliminary tax impact study based on the final assessment roll indicates a significant discrepancy in tax burden among the property classes. The preliminary provincial transition ratios show that multi-residential, commercial and industrial properties are taxed much higher than residential properties. This is primarily the result of the assessment base not being regularly updated and kept current. The updated assessment base and separate property class tax rates allow for a comparison between each property class's share of the assessment base and total taxes. Without changes to existing tax burdens, the share of taxes raised from the multi-residential, commercial and industrial classes will continue to be much higher than their respective shares of the assessment base as shown in Table 1 below.

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 Table 1

Distribution of Assessment and City Taxes by Property Class

A tax ratio expresses the relationship that the tax rate for each class of property bears to the residential/farm class tax rate. For example, if the commercial tax rate is 3.0 percent, and the residential/farm tax rate is 1.0 percent, then the commercial tax ratio is 3.0. The transition ratios are calculated like tax ratios, but they are based on 1997 municipal taxes and 1998 assessed values. In effect, they represent the status quo at the time of reassessment and can be adopted as tax ratios to avoid tax shifts between property classes. Once transition ratios are adopted by Council, they are referred to as tax ratios in subsequent years.

 It should be noted that based on the transition ratios provided by the Province, there is an initial tax shift of $15.3 million on to the residential/farm class.

 The setting of tax ratios determines the tax burden for each property class. When the tax ratios are set for classes that are less than the transition ratios, there will be a shift to other property classes. The magnitude of the tax shifts is dependent on the amount of change to the tax ratio(s). This report shows a few examples of tax shifts that have been reviewed to help understand the order of magnitude involved with changes in class tax burdens.

 Option 1: Shift to Provincial Ranges of Fairness

The Province has introduced "ranges or bands of fairness" for each class of property to identify what it considers as a reasonable level of variance in tax burden among property classes. The application of the highest tax ratio within each range of fairness (see Appendix 1), results in taxes on the residential/farm property class increasing by $861.1 million or 92.43 percent (see Column E in Appendix 2) on municipal taxes or 58.4 percent of the overall tax bill. Table 2 below shows that the other classes would enjoy a tax reduction while the residential/farm property class experiences an increase. This scenario would increase the preliminary residential/farm tax rate of 1.25 percent to 1.98 percent. The decrease in the other property classes' tax rates is shown in Table 2.

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 The ranges of fairness serve to guide changes in class tax burdens across Ontario municipalities. The timeframe in which each municipality chooses to either move towards, if at all, or in fact achieve the ranges, is determined locally. In the case of Toronto, whose preliminary transition ratios lay significantly outside of the provincial ranges, any change in tax burden will require a long-term timeframe in order to minimize the impact on the residential/farm class.

 Option 2: Shift to GTA Preliminary Transition Ratios

 The result of using transition ratios similar to the GTA regions (see Appendix 1), shows increases or tax shifts between $581.8 million to $724.1 million (Appendix 2) or 39.4 percent to 49.1 percent on to the residential/farm property class. This change is attributed to municipal taxes and not education taxes, which are not affected by transition ratios. Generally, taxes will be reduced for the other property classes by an equivalent amount. The greatest shift on to residential would result from applying the York Region transition ratio - a 49.1 percent increase as shown in Table 3 below. The revised tax rates for Toronto in Table 3 show an increase in the residential/farm class and corresponding decreases in the other classes.

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 Table 3

Impact of Applying GTA Transition Ratios on Toronto's Residential Taxes

 Movement towards the GTA transition ratios would make commercial and industrial taxes more competitive in Toronto by bringing them closer to the rest of the GTA. This would be in addition to the reduced education tax rate plan announced by the Province.

 Option 3: Applying commercial transition ratio to the industrial property class

 The results of setting the transition ratio in the industrial property class equivalent to that of the commercial property class with no tax increase to the multi-residential property class is shown in Appendix 3. This analysis indicates an increase or shift of $20.7 million or 1.4 percent to the residential class making the tax rate equal to 1.26 from 1.25 percent (see Table 4 below). In addition, there is an increase of $20.0 million or less than 1.0 percent to the commercial property class (tax rate increases to 7.82 from 7.75 percent) and a reduction of $40.8 million or 11.5 percent on the industrial property class (tax rate decreases to 9.73 from 11.00 percent).

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 Table 4

Impact of Reducing Industrial Transition Ratio

 The reduction in the industrial class transition ratio will enhance the competitiveness of industrial properties in Toronto. The industrial class is effectively taxed at the highest level as evident by its high transition ratio and tax rate. The improvement in the competitive tax level for industry will also create a more level playing field industrial and commercial property.

 Option 4: Reductions in multi-residential, commercial and industrial taxes

 4A)Reduction of $100 million of municipal taxes from commercial and industrial classes

 In the analysis shown in Appendix 3, the reduction of $100 million pro-rated between commercial and industrial property classes which increases residential/farm taxes by $100 million or 6.8 percent. The multi-residential tax ratio was adjusted to permit no increase in taxes. This results in a decrease of $86.0 million or 4.2 percent in commercial taxes and a $14.0 million or 3.9 percent decrease for industrial taxes. The dollar impact and change in tax rates for each property class is shown in Table 5.

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 Table 5

Commercial and Industrial Taxes Reduced by $100 Million

The $100 million reduction in the commercial and industrial class tax burdens improves the tax competitiveness of these two classes while minimizing the impact on the residential/farm class.

 4B)Reduced multi-residential tax scenarios

 Alternatively, if $100 million were shifted from the multi-residential class (instead of the commercial and industrial classes) on to the residential/farm class, there would be a 17.64 percent decrease on the multi-residential class. The impacts on the multi-residential class using a number of different tax ratios are illustrated in Appendix 4 and summarized in Table 6. The analysis assumes that the tax ratios for the commercial and industrial classes would be adjusted so that there would be no tax shift on to these classes. Tax increases on the residential/farm property class as summarized in Table 6 below, vary from $85.4 million to $376.7 million or from 5.79 percent to 25.55 percent. The residential and multi-residential tax rates converge at 1.57 when the same transition ratio is applied.

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 Table 6 provides a range of scenarios that indicate the amount of tax shifts on to the residential/farm class required to achieve selected levels of tax burden equity between residential/farm and multi-residential classes of property.

 4C)Same transition ratio for multi-residential, commercial and industrial

 Council can adjust the transition ratios of the multi-residential and industrial property classes simultaneously so that multi-residential, commercial and industrial property classes are subject to the same relative tax burden (i.e. at the current commercial tax ratio). As shown in Appendix 5 and summarized in Table 7 below, this change results in decreases of $32.9 million or 9.3 percent for the industrial class and $54.96 million or 9.6 percent for the multi-residential class and increases of $87.5 million or 5.9 percent in residential/farm taxes. In addition, the commercial transition ratio was adjusted from 4.18 to 3.87 in order to offset a $54.7 million or 2.68 percent increase that would otherwise have occurred.

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 Table 7

Same Tax Burden for Multi-Residential, Commercial and Industrial Classes

 *$337,000 would also shift on to pipelines.

 This scenario permits Council to reduce the tax burdens of the three non-residential/farm classes at the same time. It also would result in the creation of only two classes - residential and multi-residential/commercial/industrial.

 Option 5: Board of Trade's proposals

 5A)All future tax increases are passed only on to the residential/farm property class:

 Currently there is the desire to hold the line on tax rate increases. Over time, however, tax changes in expenditure levels and tax rates are expected. Appendix 6 (see Option 5A) shows the effects on the property class tax rates when a future annual increase of 2 percent is placed solely on to the residential property class. This chart assumes no new construction and that market values rise at the same 2 percent annual inflation rate as municipal expenditures. This analysis indicates a steady increase to the residential tax rate and steady decreases in the other property classes' tax rates. Appendix 7 which presents tax dollar changes (see Option 5A) shows the increases to taxes in the residential/farm property class, whereas the taxes in the other property classes remain the same. If this option was adopted, it should be noted that every 1.0 percent increase in the budget would result in a 1.8 percent increase to the total taxes (or 2.8 percent increase to the municipal taxes) in the residential/farm property class. Although Appendices 6 and 7 were prepared using preliminary tax rates (from February), using the revised tax rates would show the same general results.

 In effect, the Board of Trade option is equivalent to the impact of the capping provisions in the new legislation - Bill 16, "Small Business and Charities Protection Act, 1998". If multi-residential, commercial and industrial classes are capped, then any budgetary increase could only be financed by increasing taxes on uncapped properties (i.e. residential/farm class) over the 1998-2000 period.

 5B)All future tax increases are shared among all property classes in proportion to market value:

 When the assumed annual increase of 2 percent is shared proportionately based on each property class's share of total market value, the effects on the property class tax rates are shown on Appendix 6 (see Option 5B). Again, this chart assumes no new construction and that market value increases at the same 2 percent annual inflation rate as municipal expenditures. This analysis suggests a slower steady increase to the residential/farm tax rate and slower steady decreases to the tax rates in the other property classes. Expressed in terms of tax dollar changes, Appendix 7 shows the proportionate increases in taxes to all property classes (see Option 5B).

 Approaches to Tax Change:

 Perhaps the most challenging and contentious tax policy question for Council to address as part of tax reform is whether to shift any tax burden away from the other property classes and on to the residential/farm class. This is the only type of tax shift permitted under the new legislation in the case of Toronto. A number of options to alter class tax burdens have been discussed above. Some are very specific in terms of their outcomes (i.e. options 1 through 4 involve specific ratios or pre-determined amounts of tax shifts), while the Board of Trade options (5A and 5B) can be considered as more gradual, long-term solutions. The Board of Trade options do not require an actual shift in tax burden until tax increases occur, that is, no amount of taxes is shifted from one class to another until the City's spending level rises and results in a tax rate increase. This provides for a change in tax burden by class that is open and accountable because Council would control the amount of tax increase through the annual budget process. As mentioned above, model 5A is very much similar to the provision in the new legislation that limits the funding of budgetary increases from only uncapped property classes, if capping is adopted.

 Should Council decide to adjust the class tax burdens in a more deliberate and structured way than suggested by the Board of Trade options, then it is important to determine which class(es) should benefit and by how much. Based on a review of the tax ratios and tax rates by property class, tax relief for the industrial property class should be considered as Council's first priority. The uncompetitiveness of Toronto's industrial tax rates has a long-term effect on the local employment base and economy. As a second priority, the negative consequences of Toronto's relatively higher commercial tax rates on the economy should be addressed. It has been well documented that, for example, Toronto's taxes on office buildings are the highest in North America. Higher education taxes have been a major factor attributable to higher business taxes between Toronto and the 905. The Province's education tax rate reduction plan over the next eight years will help make business property tax levels in Toronto more competitive. However, these changes relate to education taxes and do not affect the municipal portion of the tax bill. As such, the tax ratios remain unaffected, leaving the discrepancy in tax burdens among classes clearly as a matter for the City to address.

 Council could remedy the higher tax rates on commercial and industrial properties through a tax policy that adjusts the preliminary provincial transition ratios and reduces the tax burden on either one or both of these two classes of property. Following an adjustment of the industrial and commercial class tax burdens, Council could then address the higher tax burden on multi-residential properties. Alternatively, Council could provide tax burden relief to all three non-residential property classes simultaneously as identified in scenario 4C or any other scenarios.

 GTA Tax Competitiveness

 The development of any long-term plan to adjust class tax burdens must take into account how much Toronto business taxes vary from those in neighbouring communities. It is important to review the tax rates established in the rest of the GTA to gauge the gap or the tax rate competitiveness for commercial and industrial properties between Toronto and the surrounding municipalities. The 1998 tax rates in the 905 communities are unknown at this time. However, the preliminary Toronto transition ratios compared to those in the rest of the GTA range between 2.9 to 3.8 times higher for commercial property and 2.0 to 4.5 times higher for industrial properties. Many of the scenarios presented in this report would reduce the level of tax rate difference between Toronto and the 905 municipalities and as a result, enhance Toronto's tax rate competitiveness. The development of any class tax shift plan should await the final tax rates of the 905 municipalities and an analysis of the difference in tax burdens with Toronto.

 Principles to Manage Tax Changes:

 Should Council decide to apply the caps on tax increases of the eligible property classes, as provided for in Bill 16, then this initial reassessment should be viewed as an interim tax reform. A more detailed reform package would be considered at the time of the next reassessment in 2001. The changes to tax burdens may also await the next reassessment. However, the study of changes in tax burdens among property classes should not be delayed until the next reassessment. This matter should be reviewed and a plan developed prior to the implementation of the next reassessment. The following set of initial principles can provide some guidance in Council's consideration of tax changes between property classes. These principles include:

 Certainty - The plan must provide taxpayers with a clear sense of what to expect over the next several years so that they can plan their finances accordingly. For example, it should be made clear how any change in a particular class's tax burden will be implemented (i.e. period of time over which changes will be phased-in).

 Simplicity - The plan should not be complicated so as to minimize any risk of making it unworkable. Taxpayers' understanding increases when few conditions are imposed.

 Fairness - Fairness relates to the degree of acceptance of the difference that results from the different treatment of taxpayers. Fairness does not necessarily mean taxing all property owners at the same rate of tax. For example, as part of determining new class tax burdens, consideration should be given to the benefits arising from other forms of taxation (e.g. businesses deductibility of property taxes), that affect a property's overall effective taxes and which are available to some properties, but not to all. At a minimum, the plan should address inequities within each property class first before dealing with inequities between property classes.

 Stability - Any shift in tax burdens should be phased-in over a period of time whose length is commensurate to the degree of change deemed to be acceptable. In other words, a significant tax shift should be achieved over a long phase-in period. The differential tax burden between property classes did not occur overnight and any attempt to resolve the problem must consider an appropriate timeframe to minimize serious negative effects.

 The reforms to the taxation system have enhanced the system's transparency. The tax ratios allow for a clear comparison of tax burdens between property classes. This comparison reveals that the residential/farm class has a lower tax burden relative to other classes. How much the residential/farm class tax burden should be increased and how much other classes should be reduced, is a complex matter. The change in class tax burdens should be reviewed as part of an implementation plan for the next reassessment and should involve input from stakeholders representing all property classes. In the meantime, should Council adopt the capping provisions for the commercial, industrial and multi-residential property classes, then any budgetary-related tax increase would be raised from the residential/farm class. If there were any budget increases in 1999 and 2000, which is a matter for Council to consider, this could begin reforming the class tax burden issue in Toronto.

 Conclusion:

 This report indicates that there are many methods of shifting tax burdens with varying results on the residential/farm property class. The outcomes of the various options are either very specific with well defined, pre-determined tax shifts or they can achieve gradual changes in tax burdens as proposed in the Board of Trade's options.

 This issue of shifting the tax burden off the multi-residential, commercial and industrial classes should be subjected to a major review by staff after the final assessment roll has been returned for 1998 taxation. This analysis should include other methods of shifting tax burdens not included in this report. A detailed plan to establish any changes in property class tax burdens should be developed in time for the next reassessment scheduled in 2001.

 If Council decides to shift taxes in a structured or pre-defined way, then it should consider as a priority, providing relief to the business community first to improve its tax competitiveness before providing relief to the multi-residential class. Alternatively, multi-residential, commercial and industrial properties should all receive tax relief simultaneously.

 Contacts:

 Bill Wong 392-9148

Ed Zamparo392-8641

 The Strategic Policies and Priorities Committee also submits the following joint report (June 29, 1998) from the Chief Financial Officer and Treasurer and Chief Administrative Officer:

 Subject: Overview of Tax Policy Reports

 Purpose:

 To provide a context for the comprehensive tax policy reports submitted to the Assessment and Tax Policy Task Force which collectively make-up the recommended tax implementation plan for the Task Force to consider.

 Funding Sources, Financial Implications and Impact Statement:

 There are no direct financial impacts on the Corporation in this report.

 Recommendation:

 It is recommended that this report be received as information.

 Background/History:

 The Assessment and Tax Policy Task Force was established by Toronto Council to review the property assessment and tax system reforms and develop a tax implementation plan for Council to consider. The tax policies that support the proposed tax plan are contained in the adjoining reports and address the following subjects:

 (1)Residential property class (1-6 units)

(2)Multi-residential property class

(3)Tax relief for low-income seniors and disabled

(4)Commercial and industrial property

(5)Charities and similar organizations

(6)Tax shifts - effects of changes to transition ratios.

 The reports are comprehensive and summarize the findings of staff in each specific subject area as well as the direction provided by the Task Force during its deliberations. This report refers to the broader issues pertaining to the reform of the assessment and taxation system that Council must be mindful of as it considers the proposed tax plan at its special meeting on July 21 and 23, 1998. Also attached for information is a revised executive summary of the tax policy reports.

 Comments:

 New Taxation System

 It is important to remember why the significant changes in the property taxation system are occurring. There was general acceptance that the assessment and taxation system was out of date and needed to be reformed. The tax system was rigid and provided municipalities with little flexibility. Many taxpayers in Toronto lost confidence in the assessed values and appealed their assessments, which contributed to the erosion of the assessment base across the city. The tax burden among property classes was inequitable as a result of the failure to keep the assessment base current. The class tax burden issue is particularly problematic for Toronto businesses which have been paying at uncompetitive property tax rates compared to other municipalities in the GTA and elsewhere.

 The new assessment and taxation system - Current Value Assessment (CVA), provides Council with the ability to resolve these problems. However, because the Toronto assessment base has not been reassessed in over 45 years there are significant tax shifts among taxpayers and potentially between classes of property. Accordingly, tax reform should occur over a period of time to ensure that changes are manageable and sustainable. Therefore Council must determine its priorities in terms of what CVA is to achieve over time in order to make certain that taxpayers know what to expect from reform.

 In time, CVA should resolve the shortcomings of the former taxation system and produce an assessment base that is fair, understandable and stable, resulting in reduced appeal activity. Most importantly, CVA provides Council with the flexibility to address the class tax burden problem and the uncompetitive business tax rates in Toronto. In the case of Toronto, the Fair Municipal Finance Act requires that any change in tax burdens between classes result in a tax shift on to the residential/farm class, which is taxed at a relatively lower rate as the new estimated tax rates (based on the final assessment roll) clearly show:

*Province is responsible for education taxes.

 New Vision

 Changes to class tax burdens is the most challenging tax policy issue for Council to address. However, Council must consider the importance of the long-term viability of the business sector to the Toronto economy. The Province has introduced an education tax rate reduction plan which will reduce school taxes on Toronto businesses by $400 million over the next eight years. However, even with these changes Toronto's commercial and industrial taxes are comparatively higher rates than surrounding municipalities. As a result, tax competitiveness is still a matter that Council must address. Relieving the tax burden on Toronto's businesses and making property tax rates more competitive should be a priority for Council to consider as part of tax reform. Improved competitiveness will help retain existing business and attract new investment and employment. The continuation of the current tax discrepancy with other municipalities will only undermine Toronto's competitive position. For example, Toronto is noted as having the highest taxes on commercial office buildings in North America. High business taxation impairs Toronto's ability to compete with world cities for investment. Council's movement towards reduced business taxation should occur over a period of time commensurate with the amount of tax shifted away from commercial and industrial property in order to minimize the impacts this will create and to make this change sustainable.

 Proposed Tax Policies

 An analysis of the CVA impacts clearly indicates that the immediate implementation of these tax changes is not possible without seriously affecting many taxpayers. The tax policies proposed in the adjoining reports suggest that tax reform should proceed on an interim basis over the next couple of years while important concerns are addressed. With the 2.5 percent cap on tax increases in the commercial, industrial and multi-residential classes, 1998-2000 should be viewed as a transition period for the market to adjust to the new 1996 assessed values and for the following issues to be addressed. The large tax decreases that would occur in the office building sector under CVA are not expected to repeat in the next reassessment in 2001. The upcoming 1999 assessed values are expected to be more reflective of the current rental activity in the office building sector. Tax policies must be sensitive to the office building sector because it generates half the employment base and constitutes half the commercial tax base in Toronto. The interim period also allows time to develop an optional small/strip retail property class, which will help address the substantial tax increases that would have been faced by this group of businesses under CVA. In addition, the 2.5 percent cap will provide protection for tenants in commercial and industrial properties, including charities and similar organizations. In the interim the Province and the City can develop an alternative approach that prevents these organizations from being seriously impacted in future reassessments.

 The interim period will provide adequate stability, which Council should consider as another priority throughout tax reform, while these issues are resolved. At the same time, the capping provisions allow for any budgetary tax increases, if any, to be funded from uncapped property classes (i.e., residential/farm). The Toronto Board of Trade made a similar proposal to the Task Force during its deliberations. If budget increases did occur in 1999 and 2000, this would begin to provide some relief to business and make their tax rates more competitive which is consistent with the proposed Council priority discussed previously. This tax shift would also be achieved in an accountable manner through the annual budget process. Alternatively, the potential tax shift to the residential/farm class could act as an incentive to Council to continue with no budget-related tax increases.

 The proposed tax policies also affect the residential and multi-residential classes. A tax deferral program is recommended for low-income seniors and low-income persons with disabilities to protect those eligible taxpayers who are less able to cope with the tax changes. The proposed tax deferral should not financially impact the City. It is recommended that both tax increases and decreases be phased-in to make the tax increases more manageable. The tax increases in the multi-residential class should also be capped at 2.5 percent so that this class could also begin to benefit from tax relief, much like commercial and industrial property, in the event of budgetary tax increases. The capping of commercial and industrial property provides adequate protection and makes a tax rebate program for charities and similar organizations unnecessary.

 Reassessment is revenue neutral across the City (i.e. raises the same amount of taxes), but each individual taxpayer's share may change. Although the ensuing tax changes are contentious, one should not lose sight of perhaps the bigger issue - too much is funded from the property tax base. Two prominent themes in municipal finance over the past twenty years stem from this issue. First, those services and responsibilities that represent income redistribution (e.g., welfare) should be funded from other revenue sources such as income taxes. Secondly, if municipalities are to provide existing responsibilities, access to alternative sources of revenue should be permitted to ensure that responsibilities are adequately funded. The changes resulting from the provincial Who Does What process increased municipalities' dependency on the property tax, making it by far the largest local revenue source. If the responsibilities now funded by the property tax are not reformed, then access to other revenue sources becomes ever more important as a strategy to reduce dependency on the property tax and, over the long-term, to help make property taxation matters, such as reassessment, less contentious.

 Conclusions:

 The recommended tax policies contained in the accompanying reports are proposed to make the implementation of CVA and the resulting tax changes manageable during the 1998-2000 period. Overall, the tax policies ensure stability during the interim period. The 2.5 percent capping provision can result in shifting part of the tax burden to the residential/farm class. However, this fundamental change is consistent with the goal that Council needs to consider as part of taxation reform of making business property tax levels more competitive in Toronto and to begin moving towards equity among property class tax burdens.

 Summary of Tax Policy Options Reports

 The Assessment and Tax Policy Task Force was established by Toronto Council to review the property assessment and tax system reforms - Current Value Assessment or CVA, and develop a tax implementation plan for Toronto Council to consider at its special meeting on July 21 and 23. This summary highlights the main points of the reports submitted to the Task Force by the Chief Financial Officer and Treasurer. These reports include:

 (1)Residential Class (1-6 units);

(2)Multi-Residential Class (7 units or more);

(3)Tax Relief for Low-Income Seniors and Disabled;

(4)Commercial and Industrial Property: Tax Policy Options;

(5)Tax Rebates for Charitable and Similar Organizations; and

(6)Tax Shifts - Effects of Changes to Transition Ratios.

 In addition there is a report which provides an overview of the reports. The Task Force will review the proposals in the reports and recommend a tax plan to Council.

 Overview Report

 This report highlights the key issues in the tax policy reports and identifies the need for Council to consider, as part of long-term tax reform, improving the competitveness of businesses in Toronto by reducing property tax rates for commercial and industrial property. The residential/farm class in Toronto has been taxed at relatively lower levels than business. The proposed 2.5 percent cap on commercial, industrial and multi-residential tax increases during the 1998-2000 period can result in budgetary tax increases funded exclusively from the residential/farm class. If there were any budget increases this shift in taxes would be consistent with providing relief to the business sector which should be Council's long-term goal, as well as ensuring the economic well being of Toronto. The proposed tax policies ensure that tax reform can be implemented in a way that makes the tax changes manageable. The report is provided to the Task Force as information.

 (1)Residential Class (1-6 units)

 Background:

Immediate implementation of CVA reassessment results in 56.1 percent or 300,866 assessment portions (properties) that decrease with an average decrease of $491 per portion while 43.9 percent or 235,521 assessment portions increase with an average increase of $692. The only option available to municipalities to provide tax relief is a phase-in program of up to eight years. Any phase-in program must be self-financing so that the amount of the phased-in increases must be offset by tax decreases within the class. The phase-in program must begin in 1998 and the annual amount to be phased-in must be the same or less than the amount phased-in the previous year.

 Issues:

Council may wish to phase-in the tax changes in order to minimize the financial hardship of those with tax increases. An eight year phase-in, which provides the maximum relief for those with increases, results in 88.2 percent of the total portions (both increases and decreases) experiencing annual impacts of less than $125 and 65.9 percent of total properties experiencing an impact of less than $62 annually. For a three-year phase-in, 88.2 percent will experience an impact of less than $333 annually and 65.9 percent will have an impact of less than $167 annually. Council could also choose to utilize a threshold for a phase-in based on a dollar amount.

 Recommendations:

It is proposed that Council implement a phase-in plan. The impact on taxpayers is minimized through the longest phase-in period of eight years. Alternatively, a period of three years would coincide with the next reassessment cycle and makes the phase-in program more easily understood by taxpayers.

 (2)Multi-Residential Class (7 units or more)

 Background:

With CVA, 36 percent or 1,463 properties (168,341 units) experience tax decreases with the average decrease of 12.9 percent or $278 per unit, while 64percent or 2,579 properties (121,987 units) will increase with an average increase of 19.7 percent or $347 per unit. To provide tax relief, Council can either cap increases at 2.5 percent each year for the 1998-2000 period or implement a phase-in program.

 Issues:

A capping program will provide greater protection for properties with increases than would a phase-in program. Since the multi-residential class differs from the residential class in that its properties can be considered business properties, as they generate income for owners for which expenses can be deducted from income, a capping program can be considered an appropriate mechanism for tax relief (and similar to the commercial and industrial classes) than a phase-in program. However, a cap is a short-term solution.

 Options to reduce the tax burden on the multi-residential class were reviewed, but it is recommended that any tax shifts be included as part of a comprehensive tax plan for the next reassessment in 2001. Some options include: a uniform tax rate on the residential and multi-residential class; a reduction of the multi-residential transition ratio to reflect a uniform education tax rate which shifts $102 million from the multi-residential class; a proposal whereby taxes are shifted from multi-residential to residential at the same rate as residential tax decreases are phased-in; and, the removal of education funding from the municipal tax base.

 Automatic rent reductions under the Tenant Protection Act, 1998 will be severely limited with a capping program as tax decreases will be limited to fund the cap on increases.

 Recommendation:

Staff recommend that property tax increases due to reassessment be capped at 2.5 percent per year for 1998, 1999 and 2000 and be funded by reducing the tax decreases within the class by an adequate amount to finance the cap.

 (3)Tax Relief for Low-Income Seniors and Disabled

 Background:

Municipalities are required to pass a by-law to provide tax relief to homeowners or their spouses who are low-income seniors or low-income persons with disabilities to offset assessment-related tax increases. The program can be a tax deferral, tax cancellation or some other mechanism.

 Issues:

Council must decide on the type of program to offer. A cancellation plan would require that the amounts canceled would need to be funded from property tax revenues annually and would have the greatest financial impact on municipal taxpayers. This is estimated between $4.3 to $38.3 million depending on the eligibility criteria. Council must weigh these costs in an outright cancellation of taxes.

 A tax deferral plan with an interest charge would not impact the City financially. An interest-free tax deferral provides a small subsidy to recipients. A deferment plan would enable low-income seniors and disabled persons to remain in their homes and, although the deferment amount accrues against the property, it would not become repayable until a change in ownership or the estate is dissolved.

 Other forms of tax relief exist, including those provided by the former Cities of Toronto ($100 tax credit); Etobicoke and York (deferral up to $600) and elsewhere such as British Columbia (total tax bill). These programs provide relief from existing taxes and not only from assessment-related tax increases. The City would need special legislation to provide similar assistance across Toronto.

 Recommendations:

A number of alternatives with respect to age and income criteria were reviewed and analyzed. A tax deferral program is recommended with the following eligibility criteria: (1) Low-income senior: 65 years of age; owned the residential property for 3 years; and be in receipt of Guaranteed Income Supplement (GIS) or Spouse's Allowance under the Old Age Security Act and, for (2) Low-income disabled: owned the residential property for 3 years; and, be in receipt of disability benefits under Ontario Disability Support Program (ODSP) or Family Benefits Act (FBA) or Guaranteed Annual Income System (GAINS). A rate of interest equivalent to the City's imputed rate of return on investments should be applied to deferred taxes.

 The proposed tax deferral program provides a balance between meeting the needs of the low-income seniors and disabled without impacting the City's finances. It is estimated that the deferred amount of City taxes under the proposed program would level off at $1.7 to $2.4 million, based on anticipated participation rates and average term in the program. It is also recommended that Council request the Province for legislation that allows the City to defer existing residential taxes.

 (4)Commercial and Industrial Property: Tax Policy Options

 Background:

The Fair Municipal Finance Act and the Small Business and Charities Protection Act provide tax policy options for municipalities to help make the results of CVA manageable for commercial and industrial properties. It is estimated that under CVA 25 percent commercial assessment portions experience a tax decrease and 75 percent face tax increases, and of these tax increases 43percent are greater than 100percent. Industrial assessment portions with tax decreases amount to 30 percent and 70percent with tax increases.

 The Province provides several optional tax tools to lessen the impact of CVA. Council may use any one or all of these tools:

 Graduated Tax Rates - Council can create up to three bands of assessed value in increasing amounts and apply a separate tax rate to each band. For example, the lowest tax rate applies to the first $500,000.00 of assessed value and a higher rate applies to any value above $500,000.00.

 Separate Property Classes - Council may create optional classes: office buildings, shopping centres, vacant land and parking lots, and large industrial properties.

 Tax Rebates - Council may provide assistance to businesses with significantly high increases that need further protection after other tools have been applied.

 Phase-in - Council may phase-in tax increases by limiting decreases over a period of up to eight years. The phase-in must be funded from within the property class.

 2.5 percent Cap - Council may elect to cap tax increases on either multi-residential, commercial and industrial classes of property to 2.5 percent of their 1997 taxes each year during 1998 - 2000 (i.e., 2.5 percent in 1998, 5.0 percent in 1999, and 7.5 percent in 2000). A portion of the tax decreases would be clawed back in order to fund the cap.

 Issues:

The tax impact analysis shows that the office building sector experiences significant tax decreases (over $400 million) while other commercial properties, particularly small strip retail, face substantial increases. The optional tax tools help to reduce the tax impacts, but also create other concerns. Graduated tax rates alone do reduce the number of properties with big tax increases, but still result in many properties with increases greater than 100 percent. Separate classes lock-in properties at a tax rate, which for a class like office buildings, places them at a higher tax rate of 12.06 percent compared to 7.75 percent for the rest of the class. No strip retail class is permitted. Tax rebates would help properties with the greatest tax increases, but must be funded by increasing the overall commercial or industrial tax rate. The 2.5 percent cap provides the greatest protection, but Council would have to fund any future budgetary tax increases from uncapped properties like the residential/farm class.

 The application of the tax tools to industrial property did not result in significant reduction in the number of properties with tax increases. Council has to decide whether to adopt the new separate classes and the capping provisions within 30 days of the return of the final assessment roll (i.e., by July 15). The City has requested an extension which the Minister is permitted to provide.

 Recommendations:

Staff recommend an interim strategy for the 1998 - 2000 period which caps commercial and industrial property tax increases at 2.5 percent each year and withholds a sufficient amount of tax decreases to finance the capped increases. No other tax policy options are recommended at this time. This approach will provide the greatest possible protection to property owners and to their tenants. The cap also makes a tax rebate program to charities and similar organizations redundant. It is also recommended that the Province allow Council to fund budget-related tax increases from all classes, if it so chooses.

 A number of notable concerns regarding commercial assessments and tax impacts have been expressed. In 1996 (the valuation year), many office buildings were not leased out to the same level as today's higher level. It is anticipated that office buildings, which constitute about half the commercial tax base in Toronto, will experience a different set of impacts in the next reassessment. There is no separate class created for strip retail uses. Currently, there is inadequate time to fully review the impacts of all the possible tax policy options. It is proposed that the appropriate course of action to address these and other concerns is to develop a comprehensive implementation strategy prior to the next reassessment in 2001 that would involve a reference group from the business community.

 (5)Tax Rebates for Charitable and Similar Organizations

 Background:

The main reason a rebate program is necessary is to provide assistance to registered charities and similar organizations in commercial and industrial properties which prior to 1998, were taxed at the lower residential tax rate and were not liable to the business occupancy tax. The elimination of the business tax in 1998 results in increased realty taxes that impact charitable and similar organizations.

 It is mandatory for municipalities to provide a rebate of a minimum of 40 percent up to 100 percent of taxes to registered charities in commercial and industrial properties if the municipality does not adopt the 2.5 percent capping option for those classes. Whether or not the capping option is adopted, it is optional for the municipality to rebate "similar organizations", as defined by the municipality, up to 100 percent for those organizations in commercial and industrial properties as well as in residential and multi-residential properties.

 Issues:

If a municipality adopts a 2.5 percent capping option, the need for a rebate program is severely diminished as the maximum exposure to a tax increase for these organizations is 2.5 percent annually for the 1998 - 2000 period. However, municipalities can elect to provide a rebate to both charities and similar organizations of up to 100 percent of taxes even if the capping provision is adopted.

 If a capping program is not adopted by Council, a rebate program must be implemented for registered charities. In that event, it is recommended that the City provide a rebate of 40 percent not only for registered but also for certain, but not all, similar organizations. The total cost of such a rebate program is estimated at $3.84 million annually to be funded through the City's budget. If all the organizations that received relief in 1997 were continued, the total cost of the 40 percent rebate would be $9.4 million (municipal portion).

 A registered charity is well defined by Revenue Canada. However, there is no clear definition of "similar organizations" and Council must determine their eligibility criteria. This may prove problematic in terms of a suitable definition. Many non-profit organizations benefit the community but the eligibility of some organizations is unclear.

 There is a financial impact to the City's budget should a rebate program be implemented.

 Recommendations:

It is recommended that if Council caps tax increases at 2.5 percent for the commercial and industrial property classes for the tax years 1998- 2000, no rebate program be instituted. However, should Council not adopt the capping provisions, then a 40 percent tax rebate program be implemented for registered charities and certain similar organizations. The preliminary criteria proposed in the report serve as a basis to determine the eligibility of similar organizations. The estimated cost of the program would at a minimum be $3.8 million (municipal portion) which would have to be provided in the 1998 budget.

 (6)Tax Shifts - Effects of Changes to Transition Ratios

 Background:

The Fair Municipal Finance Act allows municipalities to set separate tax rates for each class of property. Transition ratios provided by the Province are used to determine tax rates and the tax burden for each property class. These ratios express the relationship that each class's tax rate bears to the residential/farm tax rate based on 1997 taxes and 1998 assessed values. For example, if the City's commercial tax rate is 3.38 percent and the residential/farm tax rate is 0.79 percent, then the commercial transition ratio is 4.28.

 The provincial transition ratios indicate that multi-residential, commercial and industrial properties in Toronto are taxed much higher than residential properties. As a result of the revised provincial transition ratios there is a $15.3 million tax shift to the residential/farm class. If Council adopts the transition ratios, there will be no further tax shift between property classes and the share of taxes raised from the multi-residential, commercial and industrial classes will remain higher than their share of the assessment base:

 Share of Assessment and City Taxes by Property Class

 Council may adjust the transition ratios and shift taxes. In the case of Toronto, the Act does not permit increasing the tax burden on any property class except on the residential farm class.

 Issues:

Perhaps the most challenging tax policy question for Council to address is whether to shift any tax burden away from other property classes to the residential/farm class. There are basically two ways in which Council can adjust tax burdens - either shift a pre-determined amount from any class to the residential/farm class or fund budgetary tax increases through the residential/farm class over a period of time, as is required under the 2.5 percent capping option in the Small Business and Charities Protection Act.

 Any consideration of tax burden changes must involve a review of tax burdens in the GTA. Toronto's tax competitiveness and long-term financial and economic health can be improved if its business tax levels move towards those in the GTA.

 Recommendations:

It is proposed that any change in the class tax burdens should be reviewed as part of a comprehensive implementation plan to be developed prior to the next reassessment in 2001. In the meantime, should Council adopt the capping provisions for the multi-residential, commercial and industrial classes, then any budget-related tax increases during 1998 - 2000 would be raised from the residential/farm class. This could begin reforming the class tax burden issue in Toronto. Alternatively, the adoption of the capping provision could act as an incentive to Council in continuing no budget increases in 1999 and 2000.

 If Council decides to shift taxes in a pre-defined way, then it should consider as a priority, providing relief to the business community first to improve its tax competitiveness before providing relief to the multi-residential class. Alternatively, multi-residential, commercial and industrial properties should all receive tax relief simultaneously.