Saturday, April 5, 2014

Should Apartments Be Taxed at a Higher Rate?

Council will decide on Monday night whether we are going to lower the "Other Residential" (ie. mainly apartments) Property Tax rate to be the same as "Low Density Residential". 

How did we get here?

Across North America, apartment buildings  have traditionally been taxed at a higher rate than low density residential (meaning single family houses mainly).  The historical rationale for this is best explained this way:

"Apartments are often classified as commercial real estate, because they are income generating, rather than as housing, and commercial property is taxed at a higher rate than residential real estate in many locales"

            -Jack Goodman

Grande Prairie is no exception.

Currently our mill rate for "Other Residential" sits at 13.8 (per $1000 of assessed value) while our "Low Density Residential" is at 9.9 giving us a ratio of 1.39:1.  So currently apartments are taxed almost directly in between our residential and business tax rates. 

Is this good tax policy?

There are a number of arguments that can be made as to why apartments should be taxed the same as low density residential.

First and foremost, it is in the City's interest to encourage more multi-family dwellings.  If anyone's looked for affordable rental accommodations in the last while, there's not much available.  Apartments are the best way to get large volumes of accommodations into the market.

Apartments also play a key role in smart growth principles.  We can make better use of our land when we increase our population densities.  Distances between commercial and population centres are lessened, reducing travel times.  Transit also becomes more viable with dense population centres.

Also, apartment buildings can be crucial in revitalizing areas such as downtown.  As you get more people living there, the vibrancy of the area increases, encouraging more commercial activity.

By lowering the annual costs of running apartment buildings, it becomes more attractive for builders to invest in this type of housing.  I've heard from a number of builders who note that the higher tax rate is one of the main barriers to investing in apartments over other income properties.

Second, the cost of delivering municipal services to apartment buildings is significantly less than single family residential, mainly in regards to road maintenance costs.  For example, you may have a block of roadway in a low density residential area with 20 houses along it.  Across town you may have an apartment building with 200 units that sits along the same length of roadway.  The maintenance costs of the  roads are the same, yet the City receives a great deal more revenue from the apartment than from the houses.

By equalizing the tax rates, you would more closely align the amount of property taxes paid with level of services received.

Third, apartments are no longer the only income generating housing in the game.  We have scores of single family housing that is being used to generate rental income nowadays.  Thus, we have hundreds of people and companies who are enjoying the lower residential rate for profit.  Shouldn't everyone in the rental market pay the same rate?

Equalizing the tax rates would level the playing field so to speak.

What about other municipalities?

In Alberta, most large towns and cities have moved to equalize their residential tax rates.  Of the 15 largest municipalities in the province, 10 have equalized rates.

So there's the arguments for equalization.  Now the real question:

What's it Going to Cost?

Okay Rory, lowering taxes is great and all, but what's it going to cost us?

Aye, there's the rub. 

If we were to equalize the tax rates immediately, there would roughly be an additional 1% tax increase added to our low density residential and business tax rates bringing 2014's tax increase from 2.4% to 3.4%...


We had a piece of fortunate news come to us this year.  The Province, who sets the education portion of the property tax rate, reduced the amount they required this year leaving us with an additional $1.2 million if we collect at the already decided upon 2.4% increase.  Coincidently, this amount is roughly equivalent to what would be lost by lowering the apartment rate.

In other words, we could get away with equalizing rates this year without an additional tax increase.

So now I turn it to you.  Are the arguments in favour of equalization enough to justify the change? 


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