Property tax assessments detached from reality
Values based on notional wealth
THOMAS WALKOM
Toronto Star
October 22, 2005
Ontario's property assessment system is a nightmare. In execution, it is arbitrary and capricious. In concept, it is fatally flawed.
It purports to be a fair system on which to base property taxes. It is anything but.
Across the province, assessment notices are going out to homeowners, assessments upon which next year's property taxes will be based.
Across the province, the irritation is palpable. People grumble to their neighbours. The letters pour into the newspapers.
Problems are so widespread that provincial ombudsman AndrŽ Marin has begun an inquiry.
It's no wonder that assessment is on so many minds. Everyone pays property taxes. Even renters pay — in fact, they pay proportionally more (although, since they do so through rent increases, they do not always realize this).
On paper, the theory of so-called market value assessment sounds good. And when it was introduced to Ontario in 1998, it was supposed to solve all the problems created by the previous system, one that was equally incomprehensible and almost as arbitrary.
The idea behind market value is that every dwelling is assessed at the price it could command if it were sold.
So, a house that could sell for $500,000 is assessed at $500,000. One on the next block that could sell for $100,000 is assessed at that value. Once the municipality set its tax rate, the owner of the half-million dollar home will end up paying five times more in property taxes than the owner of the $100,000 dwelling.
The notion here is that anyone who can afford to buy an expensive home can afford to pay higher taxes.
In a world where the well-to-do clustered together in identifiable enclaves, this might indeed be fair. But this is not the world we inhabit. Rather, we live in a world in which neighbourhoods suddenly, and for no apparent reason, come into fashion.
In practice, this means that the home of a modest-income family can suddenly skyrocket in value simply because other houses on the same street are selling at high prices.
True, the modest-income family's home is technically worth more. But this additional wealth is not real; it is purely notional. The family has no more money in its bank account; its income has not risen a whit. The additional wealth embodied in their home becomes real only if they sell it and move somewhere cheaper.
In short, market value assessment is based on the fiction that those who live in homes that are worth a lot of money have a lot of money. That this is a fiction has been well demonstrated. One study undertaken the last time Queen's Park seriously investigated the way municipalities raise money, in 1993, concluded that market value assessment was no fairer than a system in which every Ontario resident — from pauper to millionaire — paid exactly the same amount of property tax.
This is the conceptual problem of market value assessment. It is supposed to fair. It is not.
Indeed, if Ontarians want to tax homeowners according to their means, it would be far more equitable to replace the property tax with a municipal income tax. Toronto did something like this in the late 19th century. It would not be difficult to do again.
The second problem has to do with the actual calculation. The assumption behind market value assessment is that every property in the province is sold every year. But, of course, this does not happen. So, the province's municipal property assessment corporation uses proxies instead. It looks at the sale prices of similar homes.
The results are often insanely unrealistic — particularly in rural areas and small towns where there is little real estate turnover. That's because the assessment corporation uses computer models to compensate for a lack of real data.
Were there no house sales in your neighbourhood? Then the computer will throw in prices from somewhere else, perhaps from a completely different community that is miles away. It will make a series of mathematical adjustments to this information and, presto, come up a number that may or may not bear any relationship to reality.
Last year, there were more than 210,000 complaints to the assessment corporation, about 30 per cent more than the year previous.
Critics talk of reforming the way in which the assessors do their job. That by itself would achieve little. The real problem lies with the very idea of market value assessment. It does not do what it is meant to do. It should be junked.