Administration. October 2, 2015 CL , October 1, 2015 CSC , September 23, 2015 Report CSD

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1 Niagara Administration Sub-item 4 Office of the Regional Clerk 2201 St. David's Road W, PO Box 1042, Thorold, ON L2V 4T7 Telephone: Toll-free: Fax: October 2, 2015 CL , October 1, 2015 CSC , Report CSD Area Municipalities SENT ELECTRON/CALLY Regional Council, at its meeting of October 1, 2015, approved the following recommendations of its Corporate Services Committee: That Report CSD , dated, respecting 2016 Property Tax Policy BE RECEIVED and the following recommendations BE APPROVED: 1. That this report BE CIRCULATED to local area municipal Councils for input regarding the 2016 property tax policy and that their response BE REQUESTED by November 30, A copy of Reports CSD JS enclosed for your. information. Yours truly, Ralph Walton Regional Clerk :Im cc: M. Lewis, Commissioner, Corporate Services/Treasurer Adam Smith, Financial Analyst - Tax & Revenue Margaret Murphy, Associate Director, Budget, Planning & Strategy H.elen Chamberlain, Director, Financial Management & Planning/Deputy Treasurer B. Dewar, Executive Assistant to the Commissioner of Corporate Services

2 Page 1 REPORT TO: Corporate Services Committee MEETING DATE: Wednesday, SUBJECT: 2016 Property Tax Policy RECOMMENDATIONS 1. That this report BE CIRCULATED to local area municipal Councils for input regarding the 2016 property tax policy and that their response BE REQUESTED by November 30, KEY FACTS Regional Council adopts and approves tax policy which impact and apply to all local area municipalities (LAMs). Tax policy decisions include tax ratios and sub-class rate reductions. Tax ratios and sub-class rate reductions impact the distribution of taxes among the various property classes. The existing property tax ratios, reductions and optional tax capping tools have been in place since CONSIDERATIONS Financial This report makes no recommendations regarding changes to the current tax policy regime. Changes to the tax policy would not directly impact on the Region s budget; however it would impact the distribution of those tax dollars among property classes. Calculations in this report are based on the assessment phase-in information provided with the 2015 tax roll, and therefore are based on estimates and may not be exactly reflective of the tax shifts resulting from the delivered tax roll for Corporate If changes are proposed to the tax policy, some additional analysis will be required using the returned tax roll received in December, to illustrate the impacts of the proposed changes both at the Regional level and at the local area municipality level.

3 Page 2 Governmental Partners Any changes to tax policy will directly impact the distribution of taxes for local municipalities, and between property classes and the proportion of employment related tax revenue. Niagara taxation is derived primarily from the residential property class (80%). Area Treasurers (AT) express caution regarding tax policy changes that shift taxes from the business classes and onto the other property classes as they may pose a burden for local residential taxpayers. Public and/or Service Users Overall, changes to tax policy are revenue neutral to the Region. However, changes to tax policy, such as ratio reductions, would shift taxes to the residential class from any of the other property classes. Changes to tax policy will positively impact some property owners; while negatively impact others as it is a redistribution of the tax burden. ANALYSIS Impact of Re-Assessment & Phase-in Province-wide property re-assessments occur every four years, with the last occurring in 2012 (property values based on January 1, 2012), and the next in Increases to assessment value are phased-in over a four year period ( ), while any decreases were fully implemented in With 2016 being the fourth year of the phase-in, properties will be at their full 2012 Current Value Assessment (CVA) values, and the impacts of tax shifts should be similar to those experienced in Re-assessment and the phase-ins do not result in additional taxes revenue or alter the amount of taxes collected. Reassessment and phase-ins do however redistribute the tax burden between property classes and property owners. Shifts between classes occur when the total assessed value for property classes increase or decrease at different rates. The impact of shifts on tax payers within a property class depends on the change of the assessed value of each tax payer s property relative to the average for the class. If the assessed value of the property increases more than the average for the class, that property will see a greater increase in taxes. On the other hand, if the property increases less than the average for the class, it would see a lower increase in taxes. Table 1 provides the assessed value changes for each of the property classes for 2015, as well as the 2015 tax shift that occurred due to reassessment phase-in.

4 Page 3 Table 1 Assessment value change and tax shifts for 2015 Property Class Assessed Value Shift in Taxation Change for 2015 for 2015 Residential 1.84% -0.32% New Multi-Residential 5.72% 3.47% Multi-Residential 4.77% 2.55% Commercial 2.49% 0.24% Industrial 3.39% 1.12% Farmland 5.50% 3.26% Pipeline 1.67% -0.48% Managed Forests 6.79% 4.53% Total 2.14% 0.00% Table 2 provides an illustration of the tax shifts that may be expected for This is based on the 2014 year-end tax roll, and therefore excludes all 2015 assessment changes and assessment growth. All changes to the roll would impact the tax shifts, however the impact of assessment changes and growth on the tax shifts is not expected to be significant. The lower than average assessed value changes in the residential and pipeline classes means that taxes will be shifted off of those classes, and onto the other tax classes which are higher than the average. Table 2 Illustration of 2016 tax shifts (excluding 2015 assessment growth) Tax Shifts using Roll Return Values only (excluding 2015 assessment growth) Regional General Levy Interclass Tax Shifts Realty Tax Class Roll 2016 Notional Tax $ % Residential New Multi-Residential Multi-Residential Farmland Managed Forests Commercial Industrial Pipeline 229,331, ,350 15,537,942 2,283,798 13,355 60,612,141 11,567,985 2,163, ,648, ,714 15,904,376 2,352,271 13,906 60,737,332 11,688,172 2,153,150 (682,616) 12, ,434 68, , ,186 (10,583) -0.30% 3.19% 2.36% 3.00% 4.13% 0.21% 1.04% -0.49% Total 321,897, ,897, % Assessment Growth Assessment growth is generated through physical changes to properties that lead to an increased assessment and phase-in value. What we typically refer to as assessment

5 Page 4 growth is actually a net figure, as it also takes into consideration the impact of decreases to property values, which could be a result of a physical change to the property (i.e. demolition of a building), or the settlement of a request for reconsideration or an ARB appeal. A much higher proportion of CVA has been lost from the commercial and industrial classes than the residential class (negative CVA growth of -3.15% and -5.60% for commercial and industrial, respectively in 2014, versus -0.47% for residential). The annualized revenue coming from the net assessment growth, along with the previous year s budget provides the tax levy that can be raised without increasing the tax burden on the existing tax base. As of July 17, 2015, the taxable assessment growth recorded by MPAC was 0.43%; the MPAC estimated assessment growth for the year is 0.8%. The estimate of assessment growth for 2016 was 1.0%, which is lower than what has actually been recognized in the past several years; however it looks unlikely to be achieved in If assessment growth does come in at 0.8%, it would result in a differential of approximately $640,000. Assessment at Risk If a properties assessment is challenged through either a request for reconsideration (RfR) or an appeal to the Assessment Review Board (ARB), it is considered to be assessment at risk. If the settlement results in a decrease in assessment value or changes the property class to one with a lower tax rate, the resulting refund to the property owner is a tax write-off for the LAM and the Region. A number of large appeals have been, or are expected to be settled in 2015, and MPAC has set its targets on settling remaining assessment appeals by the end of The Ontario Property Tax Analysis (OPTA) system indicates that there are 617 RfR s and 1,777 ARB appeals outstanding as of July 29, The total assessment identified as at risk is $13 billion, and the related tax dollars are $156 million. It should be noted that of the approximately $33 billion in appeals and RfR s that has either been settled or withdrawn from 2006 to 2015, the total assessment decrease from settlements has been just over $1.8 billion, or just over 5%. At this same rate of settlement the taxation at risk is approximately $8 million. The Region s annual budget for write-offs is $5 million; however it is unlikely that all outstanding appeals would be settled in Assessment Mix The Niagara Region s assessment mix is heavily weighted to residential, accounting for about 80% of the regions assessment. At the LAM level, the proportion of assessment

6 Page 5 coming from the residential property class ranges from 71% (Niagara Falls) to 90% (Pelham). The business classes (commercial and industrial property classes) account for 13.8% of assessment at the regional level. The tax revenue mix differs from the assessment mix as each property class has its own weighting relative to the residential class (tax ratio). At the regional level, the residential property class accounts for 71.2% of tax revenue, and the business classes account for 22.4% of tax revenue (see Table Roll for dollar values). The following charts provide the 2015 assessment mix and 2015 tax revenue mix for the Region, by property class. 3.2% 2.8% 2015 Assessment Mix 12.2% 1.6% 0.4% 18.8% 0.7% 4.9% 2015 Tax Revenue Mix 3.6% 0.7% Residential Multi-Residential Farm/Managed Forest Commercial 79.8% 71.2% Industrial Pipeline Tax Competitiveness Niagara Region Tax Competitiveness BMA Management Consulting Inc. prepares an annual municipal study, comparing numerous performance metrics among 95 municipalities across Ontario. Table 3 summarizes the tax burden results included in the most recent study (2014).

7 Page 6 Table 3 Tax competitiveness comparison from 2014 BMA Study Property Class Property Type Comparison Metric Niagara Average* ($) Study Average ($) Comparison of Study Residential Bungalow Tax/Unit 3,186 3,091 Above 3.06% Executive Tax/Unit 5,651 5,854 Below -3.47% Multi-Res Walk-Up** Tax/Unit 1,613 1,383 Above 16.62% Mid/High-Rise Tax/Unit 1,739 1,664 Above 4.53% Commercial Office Buildings Tax/Sq. Ft Below % Shopping Tax/Sq. Ft Above 2.06% Hotels Tax/Unit 1,735 1,591 Above 9.05% Motels Tax/Unit 1,042 1,179 Below % Industrial Industrial Vacant Land Tax/Acre 2,529 3,367 Below % Residual Industrial Tax/Sq. Ft Below -1.58% Large Industrial Tax/Sq. Ft Below % *Calculated using a simple average (total value of the study divided by the number of LAM's in the study) **Classified to be in the High-range tax burden by BMA Source: BMA Consulting Inc Municipal Study These results indicate that the tax burden for the most commonly incentivized development/employment uses (office and industrial) is already below the average for municipalities that participate in the study. It should be noted that this supports Council s strategic priorities, specifically the taxation, growth and employment dials. A comparison of 2014 tax ratios against a selection of single-tier and regional municipalities is included as Appendix I. Economic Development is undertaking a competitiveness study that will look at the Region s business competitiveness across a number of facets, and against communities both in Ontario and the United States. The results of this study will be considered in the 2016 tax policy that is ultimately recommended, as well as alternative scenarios analyzed by staff. Existing Incentives There are a number of incentives available to assist with attracting new businesses, and growing existing businesses within the Niagara Region. The Niagara Gateway Economic Zone, composed of Fort Erie, Niagara Falls, Port Colborne, Thorold and Welland, provides tax increment grant (TIG) incentives of varying levels, depending on the level of investment, job creation and retention, and environmental performance. Most LAM s also have Community Improvement Plan areas. While the incentives vary from one LAM to the next, some of the incentive programs the Region participates in

8 Page 7 include: Brownfield TIGs, new development TIGs, façade improvements, and heritage restoration and improvement grants. Through existing TIG programs, many new and expanded employment uses are eligible for reductions to their incremental taxes which directly support Regional Council s strategic priorities of fostering an environment for economic prosperity and the growth and employment dials. Additionally, capping was introduced by the Province in 1998 as a mandatory program for the protection of properties in the commercial, industrial and multi-residential against significant increases caused by reassessment. Tax Policy Options Changing Tax Ratios Tax Ratios determine the distribution of taxes among the property classes. Tax ratios can be adjusted in order to adjust the tax burden/redistribute taxes amongst the property classes. In accordance with Provincial legislation, tax ratios can only be moved towards the range of fairness, meaning a reduction in ratio s needs to be a long term decision since reductions cannot be reversed at a later date. Threshold ratios also exist; if a property class ratios are in excess of the threshold ratio that property class is restricted and municipalities become restricted from passing on tax increases to the restricted property class. Table 4 provides the Region s ratios and provincially set ranges of fairness and threshold ratios. Table 4 Regional Ratios, Provincial Ranges of Fairness and Thresholds Property Class Region's Threshold Ranges of Fairness Ratios Ratios Residential Farm Managed Forests Multi-Residential Commercial Industrial Pipelines Any reductions to the multi-residential, commercial, industrial, or pipeline property classes would shift taxation onto the residential class. Using tax ratios to redistribute taxes does not change the total amount of taxes collected. Any changes to tax ratios should be evaluated with consideration for the impact of the shifts as well as the impact

9 Page 8 on the relative tax burden as compared to other jurisdictions (see BMA study data located in Table 3). Table 5 illustrates the impact of reducing the industrial and commercial ratios to Please note that the taxes collected from the commercial class would be reduced by 36%, and the reduction from the industrial class would be 57%. The reduction in taxes would be distributed amongst the other property classes, with the majority of the tax burden being shifted to the residential class. It should also be noted that Multi- Residential would be the second most burdened property class, as multi-residential taxes is where the Region has the most room for improvement based on the 2014 BMA Study. Reductions to the multi-residential ratio have not been recommended in the past, in part because lower ratios haven t been found to result in lower rents based on past studies undertaken by Municipal Tax Equity Consultants. Table 5 Tax shift impacts if Commercial and Industrial Ratio s reduced to Upper Tier General Levy Realty Tax Class Tax Ratio Roll 2016 Tax 2016 Interclass Tax Shifts Ratio Notional Tax $ % Residential ,331, ,155,737 25,824, % New Multi-Residential , ,052 58, % Multi-Residential ,537, ,748,152 2,210, % Farm ,283, ,624, , % Managed Forests , ,518 2, % Commercial ,612, ,544,913 (22,067,228) -36.4% Industrial ,567, ,959,379 (6,608,606) -57.1% Pipeline ,163, ,402, , % Total 321,897, ,897, % As an alternative, Table 6 provides the impact of reducing the commercial and industrial ratios by 5% each. In this scenario, the commercial and industrial classes see a reduction in the tax burden of 3.7% and 2.9%, respectively. The reduction is offset through the other classes with the majority still shifted to the residential class, resulting in a 0.8% increase to the tax burden in addition to any impact associated with budgetary increases.

10 Page 9 Table 6 Tax shift impacts if Commercial and Industrial Ratio s reduced by 5% Upper Tier General Levy Realty Tax Class Tax Ratio Roll 2016 Tax 2016 Interclass Tax Shifts Ratio Notional Tax $ % Residential ,331, ,249,086 1,917, % New Multi-Residential , ,260 16, % Multi-Residential ,537, ,085, , % Farm ,283, ,379,022 95, % Managed Forests , , % Commercial ,612, ,358,116 (2,254,025) -3.7% Industrial ,567, ,230,043 (337,942) -2.9% Pipeline ,163, ,177,637 13, % Total 321,897, ,897,480 (0) 0.00% Changing Sub-Class Rate Reductions The Municipal Act (Act) provides sub-classes for both vacant and excess land in the commercial and industrial classes, with rate reductions provided for both. The Act establishes these rate reductions at 30% for the commercial class, and 35% for the industrial class, but also permits a single rate of 30% or 35% to be used for both classes. Excess land is land which has not been developed, except for servicing, and which is in excess of any municipal requirements for any existing developments elsewhere on the parcel. Table 7 shows the impact if the sub-class rate reductions was changed to a single rate of 35% (maintaining the industrial rate reduction, and increasing the commercial). This would provide an additional 5% reduction for vacant and excess commercial properties. Similar to other changes to the tax policy, the majority of the reduction from the commercial class would be added to the residential tax class burden. Table 7 Tax shift impacts if Commercial excess/vacant rate reduction set at 35% Upper Tier General Levy Realty Tax Class Rate Rate 2016 Interclass Tax Shifts Roll Reduction Reduction Notional Tax $ % Residential 228,648, ,768, , % New Multi-Residential 399, , % Multi-Residential 15,904,376 15,912,719 8, % Farm 2,352,271 2,353,505 1, % Managed Forests 13,906 13, % Commercial 30% 60,737,332 35% 60,600,215 (137,117) -0.2% Industrial 35% 11,688,172 35% 11,694,303 6, % Pipeline 2,153,150 2,154,280 1, % Total 321,897, ,897,482 (0) 0.00%

11 Page 10 Other Tax Tools/Options Other tax tools that exist include the use of optional classes, such as new construction classes (unique classes for industrial, commercial, office buildings). Using optional classes could levy unique tax ratios and rates to encourage certain types of development. Given some of the existing tax incentive programs that exist, these tools should only be considered in the context of the Region s broader competitiveness study and development strategies. Next Steps The intention of this report is to inform, illustrate potential impacts, and generate discussion. Feedback from Regional Council and the LAM Council s will be used to develop a recommended tax policy for 2016, and identify alternatives to be analyzed. The results of Economic Development s competitiveness study will also be taken into consideration in the development of the 2016 recommended tax policy and alternatives. When the report is presented to Committee in 2016, it will include analysis based on the actual returned tax roll for 2016, including the final 2015 assessment growth. ALTERNATIVES REVIEWED A number of options are provided and explained in this report. The status quo policy will remain until changes are approved by Regional Council. Feedback from this report will be used to inform the next 2016 tax policy report, which will include analysis of alternative policy options. ORIGIN OF REPORT Council indicated an interest in beginning discussions on the 2016 property tax policy at, or near, the start of budget deliberations for the 2016 budget. OTHER PERTINENT REPORTS CSD Tax Policy, Ratios and Rates

12 Page 11 SUBMITTED & SIGNED BY: Maurice (Mo) Lewis Commissioner of Corporate Services/ Treasurer APPROVED & SIGNED BY: Harry Schlange Chief Administrative Officer This report was prepared by Adam Smith, Financial Analyst Tax & Revenue and reviewed by Margaret Murphy, Associate Director, Budget, Planning & Strategy, and Helen Chamberlain, Director, Financial Management & Planning/Deputy Treasurer. APPENDICES Appendix I Comparison of 2014 Tax Ratios Page 12

13 Appendix I Page 12 Comparison of 2014 Tax Ratios Municipality Multi-Residential Commercial Industrial Niagara Region Waterloo Region London Windsor Halton Region Hamilton Toronto York Region Durham Region Guelph Average BMA Study Average