Overtaxing Peter to Subsidize Paul Business Property Tax Unfairness in Ontario

Transcription

1 Overtaxing Peter to Subsidize Paul Property Tax Unfairness in Ontario Judith Andrew, VP, Ontario m Charette, Senior Policy Analyst October 2006 Contents: Peter and Paul...1 Measuring Fairness in Property Tax Rates...2 Education Property Tax Ratios...2 Caution: Don t Restore Property Taxation Powers to School Boards...4 Municipal Property Tax Ratios...4 Another Way of Looking At Municipal Property Taxes...5 ronto Extremely Unfair... 6 Aylmer Quite Unfair... 6 South Frontenac Perfectly Fair... 6 The Unfairness of Property Taxation...7 Overstatement #1: Education Benefits es... 7 Overstatement #2: es Receive More Municipal Services... 7 Overstatement #3: The Extra Property Taxes Are on the es Not on the s of the es... 7 Overstatement #4: Property Taxes Are Tax Deductible... 7 Overstatement 5: Large es Have to Pay the Same Property Tax Rates as Well... 8 Property Tax Unfairness: A Summary... 8 Ontario s Over-Dependence on Property Tax as a Source of Government Revenue...8 Education Funding: A Special Example of Ontario s Overdependence on Property Taxes... 9 Over-Taxation of es... 9 Perceived Property Assessment System Problems Unending Pressure on Elected Officials and MPAC Property Taxes: Bad for s and Bad for the Economy...11 Conclusions...11 Recommendations...11 Immediate: Promises to Keep Budget Measures Medium Term Peter and Paul Peter and Paul are neighbours. 1 They and their families live in identical homes. Each home has an assessed value of $100,000. Each family pays $296 a year in provincial education taxes and $1,500 a year in municipal property tax a total of $1,796. Peter s property taxes don t end there however. Each year he and his family pay an additional $7,521 in property taxes. The reason: Peter earns his living as a cabinet-maker and needs a workshop. It is in the industrial property class, and it too has an assessed value of $100,000. Table 1 below recaps the property taxes paid by Peter and Paul. Table 1 Overtaxing Peter to Subsidize Paul Assessed Value Municipal Taxes Education Taxes tal Paul s $100,000 $1,500 $296 $1,796 Peter s $100,000 $1,500 $296 $1,796 Peter s Shop $100,000 $4,471 $3.050 $7,521 Peter s tal Tax $5,971 $3,346 $9,317 Peter doesn t take issue with having to pay some additional taxes on the workshop. And, he has no quarrel with the building being classified as 1 Peter and Paul are mythical. The 2005 property tax rates used are real - those of Wainfleet, Ontario - located in the Niagara Peninsula. Canadian Federation of Independent 1 of 23

2 . Nor does he dispute the assessed value of $100,000. On the other hand, Peter and his family do contribute almost four times more toward the cost of municipal services than does Paul and his family. And, Peter s family contributes in excess of 11 times more to the cost of education! Peter feels that he is being treated extremely unfairly that his municipality and the Province are, in effect, overtaxing his family to subsidize services provided to Paul s. This report examines the state of fairness or more appropriately, unfairness, in business property tax rates. We begin by looking at the 2005 business property taxes in a 142 of Ontario s municipalities. 2 First, a note about measuring fairness in property tax rates. Measuring Fairness in Property Tax Rates Property taxes consist of two elements: (1) the taxes for municipal services; and, (2) education taxes. Municipal councils set the tax rates for municipal services and the Ontario Ministry of Finance sets the rates for education. The ratio of business tax rates to residential tax rates is the best available method for measuring property tax fairness. illustrate this, consider the commercial and residential tax rates for municipal services in ronto and Hamilton in Table 2 below. Hamilton s rates for both are higher than ronto s. However, Hamilton s rate structure is fairer because its commercial to residential ratio is lower. Hamilton s commercial property tax rate is 1.98 times its residential rate. ronto s is This report follows two prior CFIB studies - The Property Tax Overdraft: A Review of Municipal Taxation Practices in Ontario 1998 to 2000, October, 2002 (23 cities) and Paying Down the Property Tax Overdraft: A Progress Report on Municipal Taxation Practices in 66 Ontario Municipalities, 2000 to 2002, August times higher. ronto s rate structure is far less fair. 3 Table 2 Using Property Tax Ratios to Measure Fairness ronto Hamilton Tax Rate % % Tax Rate % % Annual Taxes on a $100K Property Annual Taxes on a $100K Property $611 $1,454 $2,293 $2,877 Comm. to Ratio The same measure can be used to compare education property tax rates across the province. Using ratios as our method of measuring, let s look at the property tax ratios in the 142 cities studied first education ratios, then municipal ratios. Education Property Tax Ratios NOTE: Unless otherwise noted, all the property tax rates herein and all of the ratios calculated using these rates are based on the 2005 property tax rates. When the Province assumed responsibility for education finance in 1998, it "uploaded" much of the residential education portion as part of the "who does what" realignment of services and costs between the two levels of government. This 3 Hamilton s tax rates are higher than ronto s both residential and commercial. Is this evidence that there is something wrong in Hamilton? Not necessarily. Differences in average assessment values, differences in service levels, and differences in value for money from spending are among the many things that could serve as explanations. In any case, this issue is beyond the scope of this study. 4 This ratio can be calculated in one of two ways with identical results. Using ronto as an example, one can: (1) divide the commercial rate ( %) by the residential rate ( %); or, (2) divide the amount of tax paid on residential and commercial properties identical assessed value (in our example, divide $2,293 by $611). Using either method results in a ratio of Canadian Federation of Independent 2 of 23

3 allowed the province to equalize the residential education tax rate across the province at a dramatically lower level. This created tax room for the municipalities which were expected to pay for the services they assumed in the realignment "downloaded" service. By contrast, business education taxes were not equalized. They continued to reflect the rates that existed in each municipality while local school boards were setting the rates. A 1998 Ontario Budget measure commenced a phase-in of modest business education tax relief in a handful of especially high education tax municipalities. Of the 142 municipalities in this study, the worst (highest) 10 commercial to residential education tax ratios are shown in Table 3. Table 3 10 Worst Education -to- Tax Ratios and Taxes on a $200,000 Property Ratio Education Taxes ($) Kirkland Lake ,926 Thunder Bay ,283 London ,222 Blind River ,215 Elliot Lake ,157 Temiskaming Shores ,993 Cornwall ,942 Fort Frances ,931 Stratford ,808 Smith Falls ,761 In Kirkland Lake commercial property owners pay an education tax rate that is slightly over 10 times higher than that on residential property. In 2005, a residential property assessed at $200,000 paid $ a year while a $200,000 commercial property owner paid $5,926! The 10 lowest commercial to residential education tax ratios in the study are shown in Table 4. Table 4 10 Best Education -to- Tax Ratios, and Taxes on a $200,000 Property Ratio Education Taxes ($) Bracebridge ,829 Gravenhurst ,829 Huntsville ,829 Muskoka Lakes - Port Carling ,829 Parry Sound ,986 Prince Edward County ,031 Hearst ,306 Centre Wellington - Fergus ,827 Wellington North ,827 West Nippising ,904 Even in the best municipalities, education tax rates are from three to almost five times higher for commercial properties than for residential. For a complete list of the commercial education ratios in all 142 municipalities see Table A1 in the Appendix. to residential education tax ratios are generally even higher than commercial ratios. The worst 10 are shown in Table 5. Table 5 10 Worst Education -to- Tax Ratios and Taxes on a $200,000 Property Ratio Education Taxes ($) Thunder Bay ,750 Cobourg ,725 Port Hope ,725 Ingersoll ,416 Tillsonburg ,416 Woodstock ,416 Brantford ,346 Niagara-on-the-Lake (ot) ,284 London ,270 Stratford ,230 A $200,000 residential property in Thunder Bay paid $ in education taxes. A $200,000 industrial property owner paid $6,750 reflecting a tax rate that is more than 11 times higher! The 10 lowest industrial to residential education ratios are in shown in Table 6. Canadian Federation of Independent 3 of 23

4 Table 6 10 Best Education -to- Tax Ratios, and Taxes on a $200,000 Property Ratio Education Taxes ($) Parry Sound ,685 Gravenhurst ,205 Huntsville ,205 Muskoka Lakes - Port Carling ,205 Bracebridge ,205 Fort Frances ,699 Cochrane ,800 Hearst ,993 Barrie ,490 Michipicoten ,636 Even in Parry Sound, the municipality with the best industrial education tax ratio in the province (2.85%), the owner of an industrial property valued at $200,000 paid $1,685 a year while a residential property owner paid only $. For a complete list of the industrial education ratios in all 142 municipalities see Table A2 in the Appendix. Caution: Don t Restore Property Taxation Powers to School Boards Many of Ontario s school boards continue to have difficulty staying within budget. They continue to press the provincial government for action on what they characterize as under funding. There is little question that some of these school boards would like a return of at least some power to levy education taxes. Whether they want a full return to the pre-1998 situation or simply the power to levy property taxes in addition to the property taxes collected by the current provincially set rates is not clear. It is absolutely essential for the province to resist these pressures for a number of reasons. First, as the above education tax ratios clearly show, school boards have historically been outrageously unfair in terms of over taxing businesses. Second, despite the name, there is no direct linkage between education property taxes (really the provincial property tax) and the level of education funding. Education funding is determined by the province based on its established province-wide education funding formula that includes a per pupil amount, plus additional monies for school buildings, special needs, etc. The mechanics of it work this way: the municipality collects the education portion of property tax for the province and then transfers the money to the school board; then the province uses the education funding formula to figure out how much to top up the amount transferred from the province s general revenue. Third, as we shall see in a later section, Ontario is already far too dependent on property taxes as a source of government revenue (local and provincial combined). Municipal Property Tax Ratios The municipal portion of property tax funds local services. Some of these are services to property for example, roads, police and fire protection and some are services to people such as social assistance and social housing. In general, municipal business property tax ratios are lower than the education ratios. The commercial tax ratio in ronto is the Worst of the Worst with a ratio in the stratosphere. Its rate is 375% higher than its residential rate. It is far higher than the next worst Kirkland Lake. Table 7 shows the municipalities with the worst (highest) ratios. Table 7 10 Worst Municipal -to- Tax Ratios, and Taxes on a $200,000 Property Ratio Municipal Taxes ($) ronto ,221 4,587 Kirkland Lake ,739 14,990 Halton Hills - Georgetown ,587 3,907 Kitchener ,288 5,310 Belleville ,078 6,878 Stratford ,325 5,107 Owen Sound ,681 5,767 Brantford ,766 5,882 Fort Frances ,999 6,369 Ottawa ,053 4,333 Canadian Federation of Independent 4 of 23

5 The best commercial ratios in the municipalities studied are shown in Table 8. It is possible to be fair! Table 8 10 Best Municipal -to- Tax Ratios 5, and Taxes on a $200,000 Property Ratio Municipal Taxes ($) South Frontenac ,941 1,941 LaSalle ,249 2,405 Amherstburg ,050 2,192 Leamington ,402 2,570 Kingsville ,748 1,870 Lakeshore ,643 1,758 Tecumseh ,711 1,830 Blind River ,195 4,490 Smith-Ennismore- Lakefield ,967 2,161 Muskoka Lakes - Port Carling ,540 1,694 Hearst ,563 2,819 Table 9 shows the 10 municipalities with the worst industrial to residential municipal tax ratios. ronto and Pembroke are the worst by far. Table 9 10 Worst Municipal -to- Tax Ratios, and Taxes on a $200,000 Property Ratio Municipal Taxes ($) Pembroke ,140 13,276 ronto ,221 5,147 Smith Falls ,041 10,903 Brantford ,766 9,713 Gananoque ,161 7,512 Stratford ,325 7,817 Belleville ,078 10,050 Hamilton ,908 9,372 Kitchener ,288 7,107 Lincoln ,544 7,900 Table 10 shows the municipalities with the best industrial to residential municipal tax ratios. Table Best Municipal -to- Tax Ratios 6, Taxes on a $200,000 Property Ratio Municipal Taxes ($) South Frontenac ,941 1,941 Bracebridge ,344 2,579 Muskoka Lakes - Port Carling ,540 1,694 Huntsville ,168 2,385 Blind River ,195 4,838 Cochrane ,676 3,208 Gravenhurst ,142 2,739 Parry Sound ,314 3,147 Georgina ,221 3,050 East Gwillimbury ,777 2,441 Aurora ,740 2,390 Newmarket ,765 2,424 King ,684 2,313 Richmond Hill ,550 2,129 Markham ,544 2,121 Whitchurch-Stouffville ,596 2,193 Vaughan ,553 2,133 Tables A3 and A4 in the Appendix furnish a complete list of the commercial and industrial municipal ratios for all 142 municipalities. Tables A5 through A12 show the residential, commercial and industrial municipal ratios by region. Tables A14 through A16 show the residential, commercial and industrial municipal ratios by population size of the municipalities. Another Way of Looking At Municipal Property Taxes Another way to assess municipal property tax fairness is to compare the share of property taxes contributed by a class of property to its share of the assessed value all properties in the municipality. For example, if a particular property class represents 35% of the total value of assessed property in the municipality and contributes 35% 5 And ties. 6 And ties. Canadian Federation of Independent 5 of 23

6 of the property tax revenues, then that class can be said to have been treated fairly. 7 For our purposes we limit this view to the major property classes residential, multi residential, commercial and industrial. The following are three examples all based on 2005 assessment values and municipal property tax rates. ronto Extremely Unfair ronto s business taxes are incredibly unfair. As Figure 1 shows, commercial properties, which represent only 17.6% of the assessment base, pay an eye-popping 36.6% of the property taxes almost double their fair share. properties represent only 1.9% of the assessment base but contribute a whopping 4.5% of the property taxes far above their share of total assessment. According to the city s own analysis 8, this disproportion and the much lower and fairer business property taxation in the rest of the GTA account for stagnation of growth in ronto s commercial assessment, the actual decline of its industrial assessment base, and a net loss of over 100,000 jobs over the last decade. Figure 1 ronto 2005 Shares of Assessment and Shares of Property Tax Revenues tal Property Values 71.3% tal City Tax Revenues 40.1% Aylmer Quite Unfair Figure 2 shows that Aylmer s commercial properties are 12.3% of the assessment base but contribute almost 17.9% of the property tax revenues. properties are even worse off. They represent 1.1% of the assessment base but contribute 2.2% of the property taxes double their share of total assessment. Figure 2 Aylmer 2005 Shares of Assessment and Shares of Property Tax Revenues tal Property Values 83.7% 1.1% 12.3% Multi- 2.9% South Frontenac Perfectly Fair tal City Tax Revenues 74.0% South Frontenac is the very model of fairness. Each property class share of property tax dollars is exactly the same as its share of total assessment dollars. It has property tax ratios of 1.0 for both commercial and industrial properties. A $200,000 property in South Frontenac pays $1,941 a year in municipal property taxes whether the property is in the residential, commercial or industrial class. 2.2% 17.9% Multi- 5.9% 1.9% Multi- 18.8% 4.4% 17.6% 36.6% Multi- 9.2% Figure 3 South Frontenac 2005 Shares of Assessment and Shares of Property Tax Revenues tal Property Values tal City Tax Revenues 7 Assuming that the class in question does not receive a disproportionate share of services (either more services or less) from the municipality. 8 See: City of ronto s Final Recommendations Enhancing ronto s Climate It s Everybody s, October 26, % 0.0% Multi- 0.2% 1.2% 98.4% 0.2% Multi-Residen 1.2% Canadian Federation of Independent 6 of 23

7 It is worth reflecting how this came about. It is simply the result of successive municipal councils being fair when they made their annual tax rate decisions over the years. It is no more complicated than that! The Unfairness of Property Taxation Let s return to Peter and Paul for a moment. Recall that Peter and Paul each pay $1,796 annually on property taxes on their $100,000 homes. Also, recall that Peter, a cabinet-maker, pays another $7,521 annually on his $100,000 workshop. Are the municipality and the Province being fair to Peter and his family? Let s examine some of the commonly cited justifications. Overstatement #1: Education Benefits es The existence of a small business adds nothing to school enrolment. Certainly, an educated workforce benefits businesses. But it also benefits the individuals who obtain the education as well as other institutions such as governments and hospitals that employ them. Education is a benefit to society generally. It is certainly very unfair to single Peter and his family out to pay such a highly disproportionate share of its costs. Overstatement #2: es Receive More Municipal Services In most municipalities, business properties receive less service than residences do. Moreover, they pay a variety of fees and user charges that residences do not pay. The disproportionately high municipal business property tax rates force Peter and his family to subsidize services to all residents. This is obviously unfair. Overstatement #3: The Extra Property Taxes Are on the es Not on the s of the es Any attempt to consider Peter and his family as one entity and Peter s business as a separate entity is a completely notional or fictional distinction. The excess property taxes directly reduce the income of Peter and his family. Using this justification is simply an attempt to dodge the reality of the unfairness inflicted on Peter and his family. Overstatement #4: Property Taxes Are Tax Deductible Like any other business expense incurred in order to earn business income, business property taxes are deducted from business revenues before taxable income is determined. This deductibility is often used to justify higher property taxes for businesses. This deductibility, however, is a valid justification only if it enables business owners to recover the full amount of the excess business property taxes they are required to pay. Can Peter, in our example, do this? The short answer is that neither Peter nor any other business owner is able to do this. In the first place, every year thousands of small businesses have losses! They have no taxable income against which to deduct the excess property taxes. The tax deductibility justification goes up in smoke right here. These are the years in which small business owners have to obtain loans from friends and family, cash in RRSPs, and/or liquidate other assets in order to keep their businesses going. Nevertheless, even in those years, they still have to pay the excess business property taxes. What about years in which the business does make money? What is the impact of the deduction in those years? Based on the combined 2006 federal Canadian Federation of Independent 7 of 23

8 and provincial corporate income tax rates 9, Table 11 shows the reduction in corporate income taxes that results from Peter s $7,521 property tax expense (deduction). Table 11 Reduction in Corporate Income Tax Caused by Excess Property Tax Expense of $7,521 Corporate Income Reduction in Corporate Income Taxes Up to $300,000 $1,316 $300,001 to $399,999 $1,993 $400,000 or Over $2,632 As Table 11 shows, even at corporate income levels exceeding $400,000 the reduction in corporate income tax $2,632 is a fraction of Peter s excess property taxes $7,521. And few small businesses enjoy this level of corporate income. Now one might be tempted to think that anyone with income in the hundreds of thousands ought to be willing to pay a little extra towards education and municipal services. One needs to resist that temptation unless one is also willing to apply that same thinking to executives of publicly traded companies, senior civil servants, executives working in extensions of government such as schools, universities and hospitals and executives at institutions such as the OEB, OPG, WSIB and MPAC. Overstatement 5: Large es Have to Pay the Same Property Tax Rates as Well There is a material difference between small, independently owned businesses and large publicly traded businesses as far as the impact of business property taxes is concerned. In the case of the small business owner the impact is direct and in the hundreds to thousands of dollars annually. In the case of publicly traded firms the impact is on the shareholders and is therefore diffuse and % on the first $300,000; 26.5% between $300,001 and $399,999; 35% on $400,000 and over. small. Besides, small business owners give at this venue as well through their RRSPs and other investments. Property Tax Unfairness: A Summary None of the commonly advanced justifications for higher business property tax rates withstand scrutiny. There is simply no justification for the excess amount of property taxes paid by small businesses. These rates are simply and utterly unfair. They have been permitted to develop only because it is in the selfish electoral interest of provincial and municipal politicians to set them in this manner. Ontario s Over-Dependence on Property Tax as a Source of Government Revenue Property tax, as a form of taxation, has several attractions as far as governments are concerned. They are a relatively reliable and stable source of government revenue. They don t go up and down with the economy to the extent that income tax and sales tax receipts do. Cheating is almost impossible. And, the threat of losing one s home or business is a powerful incentive to pay one s property taxes. Collection problems are minimal compared to other forms of taxation. But these very characteristics virtues from government s point of view make property tax a very dangerous form of taxation. Since property tax is income and profit-insensitive, it can lead to the loss of one s home. In the case of small business owners, many have lost their homes, business properties and livelihoods simultaneously. Given this circumstance, governments must be very judicious as to the extent of their dependency on property tax as a source of revenue. How does Ontario fare in this regard? As the following OECD chart shows, Canada has the second highest reliance on property taxes among the OECD countries. And, Ontario, as a jurisdiction, has the highest dependency of all! Canadian Federation of Independent 8 of 23

9 Figure 4 Property Taxes as a Share of GDP Ontario UK Canada USA France Japan New Zealand Australia* Iceland Poland Denmark Sweden Netherlands Italy Spain Korea Ireland Portugal Finland Germany Slovak Rep. Austria Hungary Norway Turkey Switzerland Czech Rep. Greece Belgium Luxembourg Mexico 2.1% 2.0% 1.7% 1.4% 1.3% 1.2% 1.2% 1.0% 0.9% 0.9% 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.0% 0.0% 3.7% 3.3% 2.9% 2.8% 0% 1% 2% 3% 4% * 2003 % of GDP Sources: OECD Revenue Statistics , Statistics Canada Financia l Management System Education Funding: A Special Example of Ontario s Over-dependence on Property Taxes Figure 5 10 Percentage of Education Funded by Property Taxes General Revenue NB 100 PEI NL NS QC BC AB ON MB SK Property 20 Tax % r esponse Source: Compiled for Saskatchewan's Commission on Financing K-12 Education -Jan. 2004, Manitoba data from the Minister's Working Group on Education Finance Final Report - May 2004 As Figure 5 shows, Ontario is one of the provinces most heavily dependent on property taxes to fund K-12 education. Three provinces fund K-12 entirely out of general revenue. Four others are less reliant on property taxes to fund education than is Ontario. At least three major problems flow from this over dependency on property taxes. Over-Taxation of es The over-dependency has made all property owners very sensitive to increases in property taxes. Quite naturally, elected officials both provincial and local are very sensitive to this resistance to property tax increases on the part of all property owners. The data we have gathered about property tax rates in this report make it quite clear that governments have had a long established pattern of behaviour 10 In 2005 & 2006 the Saskatchewan Government introduced an 8% education property tax credit that reduced property taxes 55 million dollars in each year. Canadian Federation of Independent 9 of 23

10 that involves deflecting the unhappiness of residential property owners by overtaxing businesses. Perceived Property Assessment System Problems The most recent property reassessment led to a huge outcry from property owners in areas with rising property values. They were stunned by the resulting huge increases in their property taxes. No assessment system is perfect either in design or in execution. And CFIB has certainly made its views known as far as needed design improvements, i.e. legislative changes, are concerned. 11 As for execution, we continue to press for quality in valuations and service. However, we are convinced that the job MPAC does at assessing 4.5 million properties is improving. People generally say they would ask more for their property than the MPAC assessed value. So the locus of the problem does not seem to be systemic errors in property assessment. Moreover, all other things being equal, people are generally happy when the values of their properties increase. Certainly this is much preferred to the opposite. But all other things are not equal. When property values increase, the municipality and the province have three choices. They can lower tax rates and collect the same amount of money, they can keep tax rates the same and collect the additional revenue, or they can actually raise tax rates and collect additional taxes from both ends of the equation! It all depends on what is happening with local budget spending. Unfortunately, this is not well understood, and MPAC becomes a convenient scapegoat for the spending and resulting tax increases. The over dependency on property taxes has increased the sensitivity to assessments. As a result the Ontario Ombudsman was able to tap into a huge vein of discontent with taxes and focused 11 See CFIB Response to the Property Assessment and Classification Review, Final Report of Reviewer Marcel Beaubien, MPP Lambton-Kent-Middlesex, his attention (we believe mistakenly) on the property assessment system. Not surprisingly, he was able to find some areas that could be improved. The Ontario Government then decided to declare a 2-year moratorium on reassessments. The purpose, as Finance Minister Sorbara said at the time, was to (to give) MPAC the time it needs to consult on and implement important changes to the system. The moratorium was a mistake. Prior to 1998, the lack of regular province-wide property reassessment led to huge distortions in assessments and gross inequities in the amount of property tax paid. It was easy to find examples of owners of modest properties in newer areas who were paying more than owners of high-end properties in older areas. With a freeze on reassessments these disparities will begin to grow once again. This will also fuel the cases of interest groups who are seeking special assessment treatment (e.g. caps) for their properties. The longer a moratorium exists the more painful the ultimate adjustment will be. There is a great danger that future Ontario Governments will fear making that adjustment and the province will be back on a path that will lead to our, eventually intolerable, pre-1998 condition. It is our view that the root of the perceived assessment system problems is the over dependency on property taxes as a source of government revenue. Property tax rates are the problem not the changes in property values that occur naturally over time. Unending Pressure on Elected Officials and MPAC Ontario s over dependence on property taxes has resulted in unceasing dissatisfaction directed at municipal Mayors, Reeves, Wardens, Councillors, Members of the Provincial Parliament and MPAC. This pressure simply will not go away until the over dependency is reduced. All of the above are caught on the horns of a dilemma. Continuing with the status quo, that is, Canadian Federation of Independent 10 of 23

11 ongoing taxpayer confusion over what is driving up their taxes assessments or too-high tax rates will continue to cause an outcry in most municipalities. Freezing the current assessments in place will lead to the pre-1998 very high level of dissatisfaction with inequitable assessments. Reducing the over dependency on property taxes is the only way to fix the problems and alleviate the pressures. Property Taxes: Bad for s and Bad for the Economy The onerous and unbalanced municipal service and provincial education tax rates are both unfair to small business owners and harmful to Ontario s economy. These profit-insensitive taxes accelerate business failures in tough economic times. Even in good times, thousands of money-losing small businesses draw down capital to pay these taxes and stave off business closure. It has been an unusually long time since Ontario has experienced a sharp economic recession such as those of the early 1980s and 1990s. Nevertheless, it appears that Northern Ontario is on the verge of, or actually in, such a condition right now. If indeed it is, mass business closures could well be the result. Many businesses will be caught between the rock of disappearing cash flows and the hard place of profit-insensitive business property taxes. In situations in which occupying a business property is an absolute necessity, these rates are a significant barrier to business formation. In situations in which a business can be home-based, these onerous taxes prevent many fledgling businesses from growing into commercial or industrial properties. These rates are unfair to the business owners and their families. As our data shows, individual small and medium-sized business owners contribute hundreds to thousands of dollars a year more to cost of primary and secondary education and municipal services than do their fellow citizens. This unfairness which comes directly out of their family incomes is the result of thousands of decisions made over the years by school boards, municipal councils and the province. Our data does demonstrate that it is possible to be fair and, at least in the case of municipal taxes, a handful of municipalities are fair or close to it. Conclusions The taxation of business properties in Ontario, with rare exceptions, is grossly unfair. In our view, it rises to the level of being unethical. As far as independently owned businesses are concerned these business property taxes directly reduce the family incomes of their owners. On average, small- and medium-size business owners, make less than paid employees, so it is hardly fair that these entrepreneurs are called upon to shoulder a disproportionate tax load. Within the business property tax envelope, education property taxes are by far the greater offender in terms of both their ratios and their dollar impact. All of this, ultimately, is the responsibility of the province. As far as municipal property taxes are concerned, the province sets the rules by which municipal councils operate. As far as education property taxes are concerned, the province itself now sets the tax rates. The province must address this overload of property tax on businesses with urgency. Failure to do so gives lie to any general claim to governing with fairness. Recommendations Our recommendations fall into three categories. The first is for the Ontario Government to immediately implement two promises it has made in connection with property taxation of small businesses. Canadian Federation of Independent 11 of 23

12 The second is for the Ontario Government to include a collection of measures in its 2007 budget that will (1) put Ontario on a multi-year path of restoring fundamental fairness to business property taxation and (2) increase the transparency of property taxation for all Ontarians. The third category is a collection of medium term measures that represents (1) a significant reduction on government dependency on property taxes and, (2) a fundamental reform of provincial/municipal responsibilities and finances. It is our view that, unless these reforms occur, the imperative of staying on a multi-year path of restoring fundamental fairness to business property taxation will not be sustainable. Immediate: Promises to Keep The Premier made a pre-election commitment to CFIB to maintain the Bill 140 hard cap. The province must immediately reinstate the suspended legislation that protected businesses in high tax municipalities from having to pay for municipal budgetary increases. The province should bolster the legislation by extending its reach to other high ratio municipalities. The 2004 Ontario budget promised: The government will continue to consult with representatives from the municipal and business sectors to discuss further options for targeting reductions to the small business community. This consultation should begin immediately Budget Measures Begin a multi-year program of reducing business education property taxes, starting with municipalities having the highest rates and covering the amount from the provincial treasury. As a strategy to rebalance property tax loads, mandate a small business property tax threshold, such that the first slice of property assessment attracts tax at the lower residential tax rate for both the municipal and the education portions. 12 Avoid such solutions as a Neighbourhood property class with a lower rate. Such half-measure solutions present no end of annoyance and aggravation to elected officials from businesses located just outside the perimeter of such zones. Simplify the cap-claw back regime by ending municipal claw backs of assessment-related decreases, which unfairly ask those who have been overpaying to subsidize the capped businesses. Link the phase-out of caps to progress on rebalancing the tax rates. Require municipalities to redirect assessment increases into business and multi-residential property tax rate reductions (instead of spending the extra revenue) until the business to residential tax ratios reach 1:1. Under no circumstances give property taxation powers to school boards. Re-activate the assessment system. Improve transparency to property taxpayers by specifying the information to be conveyed on tax bills (e.g. budgetary increases, revenue from assessment growth, etc.) Make available, in one public repository, current and comparable taxation data and ratios for all Ontario municipalities. Medium Term In order to make the above 2007 budget measures sustainable, the province must reorganize municipal/provincial responsibilities and finances in a manner that: Reduces Ontario s total provincial and municipal dependency on property taxes as a source of revenue to under 1.5% of GDP. (See chart on page 9) 12 See CFIB s On the Threshold of a Cure, May 2005 for a detailed explanation of the threshold approach to rebalancing property tax rates. Canadian Federation of Independent 12 of 23

13 Provides clear lines of demarcation between provincial and municipal spending responsibilities. Supports the principle that municipalities should provide services to property and the province should provide services to people. Aligns with appropriate existing revenue sources, that is, no additional revenue extraction. Ultimately yields rebalanced property tax rates that are the same for all classes of property. Canadian Federation of Independent 13 of 23

14 Appendix Table A1 - Education Property Tax Ratios Most Unfair to Least Unfair and Taxes Based on a Property with an Assessed Value of $200,000 Ratio Education Taxes Kirkland Lake ,926 Thunder Bay ,283 London ,222 Blind River ,215 Elliot Lake ,157 Temiskaming Shores ,993 Cornwall ,942 Fort Frances ,931 Stratford ,808 Smith Falls ,761 North Bay ,733 Timmins ,665 Gananoque ,630 Brockville ,618 Pembroke ,537 Michipicoten ,519 Belleville ,475 ronto ,431 Brantford ,403 Waterloo ,328 Wilmot ,328 Woolwich wnship ,328 Cambridge ,328 Kitchener ,328 Ingersoll ,326 Tillsonburg ,326 Woodstock ,326 Cochrane ,322 St. Thomas ,307 Norfolk ,307 Brant County ,304 Kapuskasing ,294 Peterborough ,285 Cobourg ,254 Port Hope ,254 Kingston Central ,248 South Frontenac ,188 Loyalist wnship ,174 Greater Napanee ,174 Sault Ste Marie ,116 Guelph ,109 Chatham-Kent ,102 Ratio Education Taxes Greater Sudbury ,100 Haldimand County ,021 Lambton Shores ,975 Petrolia ,975 Sarnia ,975 St. Clair wnship Sombra ,975 Hanover ,974 Meaford ,974 Quinte West ,948 Espanola ,890 Owen Sound ,881 Deep River ,856 Armprior ,852 Petawawa ,852 Renfrew ,852 Prescott ,835 Hamilton ,833 Windsor ,825 Ottawa ,788 Carleton Place ,704 Perth ,704 Kenora ,627 Kawartha Lakes ,580 Midland ,566 Bradford West Gwillimbury ,565 Clearview wnship ,565 Collingwood ,565 Essa wnship ,565 Innisfil ,565 New Tecumseth ,565 Oro-Medonte ,565 Penetanguishene ,565 Wasaga Beach ,565 Springwater ,565 North Grenville ,542 Orillia - Low Band ,525 Fort Erie ,484 Grimsby ,484 Lincoln ,484 Niagara Falls ,484 Niagara-on-the-Lake Old wn ,484 Pelham ,484 Port Colborne ,484 St. Catharines ,484 Thorold ,484 Canadian Federation of Independent 14 of 23

15 Ratio Education Taxes Wainfleet ,484 Welland ,484 Brampton ,475 Caledon ,475 Mississauga ,475 Middlesex Centre ,431 Strathroy-Caradoc ,431 Barrie ,424 Clarence-Rockland ,381 East Hawkesbury ,381 Hawkesbury ,381 Aurora ,366 East Gwillimbury ,366 Georgina ,366 King ,366 Markham ,366 Newmarket ,366 Richmond Hill ,366 Vaughan ,366 Whitchurch-Stouffville ,366 Dryden ,366 Brock ,290 Ajax ,290 Clarington ,290 Oshawa ,290 Pickering ,290 Scugog ,290 Uxbridge ,290 Whitby ,290 Smith-Ennismore- Lakefield ,229 Amherstburg ,142 Essex ,142 Kingsville ,142 LaSalle ,142 Leamington ,142 Lakeshore ,142 Tecumseh ,142 Aylmer ,115 Burlington ,057 Halton Hills - Georgetown ,057 Milton ,057 Oakville ,057 St. Marys ,991 Orangeville ,964 Shelburne ,964 West Nippising ,904 Centre Wellington - Fergus ,827 Wellington North ,827 Hearst ,306 Ratio Education Taxes Prince Edward County ,031 Parry Sound ,986 Gravenhurst ,829 Huntsville ,829 Muskoka Lakes - Port Carling ,829 Bracebridge ,829 Table A2 - Education Property Tax Ratios Most Unfair to Least Unfair and Taxes Based on a Property with an Assessed Value of $200,000 Ratio Education Taxes Thunder Bay ,750 Cobourg ,725 Port Hope ,725 Ingersoll ,416 Tillsonburg ,416 Woodstock ,416 Brantford ,346 Niagara-on-the-Lake Old wn ,284 London ,270 Stratford ,230 Peterborough ,225 Smith Falls ,143 Fort Erie ,099 Grimsby ,099 Lincoln ,099 Niagara Falls ,099 Pelham ,099 Port Colborne ,099 St. Catharines ,099 Thorold ,099 Wainfleet ,099 Welland ,099 Pembroke ,091 Kingston Central ,018 Prescott ,935 Chatham-Kent ,907 Cornwall ,898 Aylmer ,864 St. Thomas ,782 Brant County ,777 Norfolk ,771 Carleton Place ,696 Perth ,696 Hanover ,674 Meaford ,674 Canadian Federation of Independent 15 of 23

16 Ratio Education Taxes Elliot Lake ,655 Cambridge ,654 Kitchener ,654 Waterloo ,654 Wilmot ,654 Woolwich wnship ,654 Guelph ,635 Gananoque ,630 St. Marys ,624 Haldimand County ,624 Greater Napanee ,609 Loyalist wnship ,609 Deep River ,600 Midland ,498 Bradford West Gwillimbury ,498 Clearview wnship ,498 Collingwood ,498 Essa wnship ,498 Innisfil ,498 New Tecumseth ,498 Oro-Medonte ,498 Penetanguishene ,498 Springwater ,498 Wasaga Beach ,498 Kirkland Lake ,313 Greater Sudbury ,307 Windsor ,245 Armprior ,200 Petawawa ,200 Renfrew ,200 Centre Wellington - Fergus ,144 Wellington North ,144 North Grenville ,133 Timmins ,090 Quinte West ,075 Smith-Ennismore- Lakefield ,004 Kawartha Lakes ,966 Kenora ,884 Middlesex Centre ,883 Strathroy-Caradoc ,883 Orangeville ,882 Shelburne ,882 Amherstburg ,852 Essex ,852 Kingsville ,852 LaSalle ,852 Leamington ,852 Lakeshore ,852 Tecumseh ,852 Ratio Education Taxes Ottawa ,845 Belleville ,792 Clarence-Rockland ,676 East Hawkesbury ,676 Hawkesbury ,676 ronto ,627 Orillia - Low Band , Brockville ,573 Lambton Shores ,570 Petrolia ,570 Sarnia ,570 St. Clair wnship Sombra ,570 South Frontenac ,545 Temiskaming Shores ,496 Blind River ,475 Sault Ste Marie ,365 Dryden ,334 Espanola ,304 Burlington ,237 Halton Hills - Georgetown ,237 Milton ,237 Oakville ,237 Prince Edward County ,134 Ajax ,075 Clarington ,075 Oshawa ,075 Pickering ,075 Scugog ,075 Uxbridge ,075 Whitby ,075 Brock ,060 Kapuskasing ,005 Brampton ,969 Caledon ,969 Mississauga ,969 Owen Sound ,865 Hamilton ,833 North Bay ,782 Aurora ,744 East Gwillimbury ,744 Georgina ,744 King ,744 Markham ,744 Newmarket ,744 Richmond Hill ,744 Vaughan ,744 Whitchurch-Stouffville ,744 West Nippising ,733 Michipicoten ,636 Barrie ,490 Canadian Federation of Independent 16 of 23

17 Ratio Education Taxes Hearst ,993 Cochrane ,800 Fort Frances ,699 Bracebridge ,205 Gravenhurst ,205 Huntsville ,205 Muskoka Lakes - Port Carling ,205 Parry Sound ,685 Table A3 Municipal Property Tax Ratios Worst to Best and Taxes Based on a Property with an Assessed Value of $200,000 Ratio Municipal Taxes ronto ,221 4,587 Kirkland Lake ,739 14,990 Halton Hills - Georgetown ,587 3,907 Kitchener ,288 5,310 Belleville ,078 6,878 Stratford ,325 5,107 Owen Sound ,681 5,767 Brantford ,766 5,882 Fort Frances ,999 6,369 Ottawa ,053 4,333 Ingersoll ,612 5,388 Gananoque ,161 4,427 Windsor ,876 5,748 Tillsonburg ,893 5,733 Thunder Bay ,306 6,545 Prescott ,974 5,889 Timmins ,514 6,958 Hamilton ,908 5,758 St. Thomas ,741 5,428 Brockville ,689 5,321 Chatham-Kent ,098 6,094 Smith Falls ,041 5,979 Cornwall ,495 6,869 Pembroke ,140 6,159 North Bay ,934 5,722 Cambridge ,295 4,476 Waterloo ,209 4,307 Woolwich wnship ,688 3,291 Wilmot ,901 3,706 London ,722 5,305 Kenora ,464 4,763 Michipicoten ,193 8,031 Brant County ,750 3,351 Woodstock ,001 5,707 Peterborough ,657 5,026 Ratio Municipal Taxes Kingston Central ,643 4,933 Guelph ,077 3,822 West Nippising ,594 4,715 Petawawa ,561 2,833 Renfrew ,822 5,121 Armprior ,713 4,923 Deep River ,353 6,085 Dryden ,215 3,993 Lincoln ,544 4,393 Norfolk ,382 4,033 Haldimand County ,416 4,089 Orillia - Low Band ,331 3,930 Elliot Lake ,870 11,535 Lambton Shores ,005 3,358 Sarnia ,688 4,504 St. Clair wnship Sombra ,821 3,051 Petrolia ,487 4,166 Sault Ste Marie ,476 5,815 Niagara Falls ,799 4,652 St. Catharines ,989 4,968 Niagara-on-the-Lake Old wn ,992 3,311 Thorold ,899 4,819 Port Colborne ,246 5,395 Wainfleet ,000 4,986 Grimsby ,655 4,412 Fort Erie ,686 4,464 Welland ,324 5,525 Pelham ,685 4,457 Greater Sudbury ,389 5,617 Huntsville ,168 3,564 Aylmer ,759 4,519 St. Marys ,293 3,545 Quinte West ,906 4,471 Cobourg ,008 4,558 Port Hope ,268 4,952 Perth ,966 4,469 Carleton Place ,759 4,158 Espanola ,023 6,044 Temiskaming Shores ,031 4,540 Parry Sound ,314 3,459 Milton ,377 2,006 Oakville ,594 2,322 Burlington ,649 2,402 Brock ,646 3,836 Scugog ,232 3,236 Ajax ,259 3,275 Clarington ,156 3,126 Oshawa ,864 4,153 Whitby ,270 3,292 Canadian Federation of Independent 17 of 23

18 Ratio Municipal Taxes Uxbridge ,987 2,881 Pickering ,169 3,145 Cochrane ,676 3,833 Kapuskasing ,739 5,353 Greater Napanee ,321 3,311 Loyalist wnship ,350 3,333 Mississauga ,509 2,134 Bracebridge ,344 3,306 Barrie ,259 3,148 Centre Wellington - Fergus ,146 2,918 Wellington North ,509 3,412 North Grenville ,097 2,823 Essa wnship ,342 1,804 Caledon ,454 1,886 Brampton ,888 2,449 Gravenhurst ,142 2,739 Kawartha Lakes ,448 3,129 East Hawkesbury ,174 2,751 Clarence-Rockland ,179 2,757 Hawkesbury ,296 4,170 Springwater ,458 1,826 Penetanguishene ,666 3,339 Clearview wnship ,673 2,095 Oro-Medonte ,271 1, Innisfil ,825 2,285 New Tecumseth ,782 2,231 Collingwood ,265 2,836 Bradford West Gwillimbury ,099 2,628 Midland ,694 3,372 Hanover ,720 3,332 Meaford ,436 2,984 Orangeville ,387 2,913 Shelburne ,662 3,247 Markham ,544 1,864 Newmarket ,765 2,130 Whitchurch-Stouffville ,596 1,927 King ,684 2,032 East Gwillimbury ,777 2,145 Richmond Hill ,550 1,871 Georgina ,221 2,680 Aurora ,740 2,100 Vaughan ,553 1,874 Essex ,293 2,718 Prince Edward County ,062 2,425 Strathroy-Caradoc ,867 3,282 Middlesex Centre ,789 2,048 Wasaga Beach ,820 2,067 Hearst ,563 2,819 Muskoka Lakes - Port Carling ,540 1,694 Ratio Municipal Taxes Smith-Ennismore- Lakefield ,967 2,161 Blind River ,195 4,490 Tecumseh ,711 1,830 Lakeshore ,643 1,758 Kingsville ,748 1,870 Leamington ,402 2,570 Amherstburg ,050 2,192 LaSalle ,249 2,405 South Frontenac ,941 1,941 Table A4 Municipal Property Tax Ratios Worst to Best and Taxes Based on a Property with an Assessed Value of $200,000 Ratio Municipal Taxes Pembroke ,140 13,276 ronto ,221 5,147 Smith Falls ,041 10,903 Brantford ,766 9,713 Gananoque ,161 7,512 Stratford ,325 7,817 Belleville ,078 10,050 Hamilton ,908 9,372 Kitchener ,288 7,107 Lincoln ,544 7,900 Deep River ,353 10,353 Renfrew ,822 8,585 Welland ,324 10,054 Fort Erie ,686 8,109 Armprior ,713 8,181 Port Colborne ,246 9,766 Thorold ,899 8,710 St. Catharines ,989 8,976 Grimsby ,655 7,953 Niagara Falls ,799 8,363 Wainfleet ,000 8,942 Petawawa ,561 4,612 Niagara-on-the-Lake Old wn ,992 5,875 Carleton Place ,759 8,101 Ingersoll ,612 7,452 Perth ,966 8,196 Peterborough ,657 7,120 Prescott ,974 7,822 Guelph ,077 5,463 Woodstock ,001 7,893 London ,722 7,160 Cornwall ,495 9,193 Brant County ,750 4,603 Canadian Federation of Independent 18 of 23