exceptions are not solutions: creating a special property tax class

In the social swirl of the holiday season, I’ve been caught in conversations with people who are enthusiastic about the creation of a special property tax class for creative enterprise hubs (announced earlier this year and covered recently by Murray Whyte in The Star, an article which includes our friends at Akin Collective - whose Dufferin Studios appear in this post's photo).  I’ve had to disappoint them.

It’s too bad, because I care about creative enterprise and recognize the malady they’re hoping to remedy with this property tax class.  But their vague, jargoniferous descriptions of this emergent policy is little more than a palliative response to a misdiagnosed epidemic.

It treats an effect as a cause, and once the initial flush of relief is felt, by a tiny fraction of those who suffer, the symptoms will flare up again.  The more bandaids and balm we apply, the harder it is to see the underlying problem, and the more severe it will have to become before serious cures are considered.

To be specific, the symptom is that property taxes are increasing faster than tenants can tolerate in older, low rise, commercial buildings like Margie Zeidler’s property at 401 Richmond Street.  This effectively prices out a variety of commercial and non-profit uses that make our City more liveable and prosperous (as I have discussed here).  It is contrary to the intentions of City planning, detrimental to the general good, benefiting only property owners and developers.

This doesn’t affect only the charitable arts groups, nobly labouring in upper story Victorian buildings.  It also affects life on the streets, as the restaurants and specialty shops that give our downtown its character get taxed out of the downtown core, to be replaced by more profitable and space efficient business, like fast food and pharmacy chains.

This is obviously bad, but it’s not new, and, just as obviously, the cause of the escalating property taxes is not the tax itself.  Nothing is the cause of itself.  That’s an absurdity.

Therefore, the special property tax class cannot be a satisfactory remedy just to lift the tax burden with a special rule for special groups.  The problem is widespread, to varying degrees, and relief for a few is a distraction from the needs of many.

The cause of the property tax escalations is in part due to an authority conflict between the City and the Province (more on the City, the Province and development here).  The Province bases property tax assessments on land values, estimated loosely according to neighbourhood sale prices and an assumption of the land’s “highest and best use,” whereas the City seeks to protect the character of certain neighbourhoods, in accordance with its own master plan, using its zoning and by-laws to limit building heights and densities.  The conflict arises because the Province disregards the City’s planning intentions, inviting real estate developers to appeal restrictive zoning, and by the merciless application of a tax assessment formula that favours ever greater heights and densities.

It comes down to this:  Who gets to decide what is the highest and best use for a property?  Is it the local government, with a fine-grained knowledge of the issues at the community level and accountability for the outcome?  Or is it a higher level of government, at one remove from consequences of its interference in local planning?

In many cases, the City would say that the highest and best use of a building, as part of a larger precinct or neighbourhood plan, is the current use, or possibly another use that benefits citizens without necessarily optimizing land value.  The provincial tax assessment system is insensitive to non-financial considerations such as quality of life, community cohesion, and aesthetics in the application of its formula, but is sensitive to the successful outcomes of developers’ appeals for greater building heights and densities, and reflects these inflated values in property tax assessments of places like 401 Richmond.

To oversimplify the effects of this authority conflict, an old four-story factory building can have its taxes inflated by the higher, denser developments around it.  That is to say that a four-story structure like 401 Richmond can be taxed like a much larger and more lucrative building than it actually is because of developments around it.

Until these questions are answered, aging, low rise, low density buildings like 401 Richmond will see taxes rise in lock step with the redeveloped properties around them, according to assessment principles that tax them like the future high rises that they will inevitably become, under the current system.

What’s more galling still is that some of those new neighbourhood towers, deemed to be “highest and best use,” by provincial agencies, were built in defiance of municipal zoning and by-laws meant to defend against this kind of development.  Thus, every time the province overrides municipal limits on heights and densities, the resulting land price and tax escalations across the neighbourhood create favourable conditions for the next appeal to the OMB and the next provincial override of the City’s plan.

There is also subtler upward pressure on land values and tax assessments resulting from this situation.  If developers have a reasonable expectation of winning an appeal against municipal zoning restrictions on building heights and densities, they are willing to pay a higher price than the existing building and land, under the existing City plan, zoning, and by-laws would justify.  That is to say, prices vary in relation to the limits on development that buyers are led to expect.  If, in cases of this conflict, the City’s limits were respected, a four-story building would be priced and taxed as such.  If instead, as is often the case, the buyer expects to win an appeal to the province, the price floats higher, and as a result, the provincial property tax assessment formula reflects rising land values in higher taxes.

So, we have low-rise buildings being valued and taxed by the province as if they were much larger and more lucrative developments than they really are.  It’s a small business killer, inflicted on the City by the Province.

By now, anyone reading this blog knows that I have two objections in cases like this.  First, I am pained by the needless suffering of people who depend on sound policies, practices, and priorities from government.  And second, I am professionally offended by instances of blithe, self-interested, or amateurish decision-making by those in a position to make a difference.

The creation of a tiny, exclusive tax exemption, in response to systemic dysfunction, offends me on both levels.  It is misguided, inadequate, and likely short lived.

Despite excitement about this measure, no one knows its precise terms yet.  But rumour has it that 17 Toronto buildings are going to qualify for some degree of tax abatement.  Many more, with a variety of valued commercial and nonprofit tenants, will seek this status, and if the number is allowed to grow, the foregone tax revenue will become big enough for detractors to target.  While this contained measure looks palatable to the current Mayor and Premier, and it diverts attention from the authority conflict they should be solving, it’s easy pickings for a future government running on an austerity platform.

Finally, I have to wonder whether or not this is ultimately good for the cultural or social enterprises that it’s meant to protect.  Just as the tenants of 401 Richmond can’t tolerate the shock of property tax increases now, so too, they won't be able to deal with it, if their landlord’s special tax status ends in the future.  How will they be any better off?  Or, if they become even more vulnerable over time, might they be in a worse predicament?

I know some of those tenants.  Indeed, some of them are past clients and colleagues.  If they failed to take notice of property values and taxes rising around them for decades, were caught off guard by the recent increases, and truly need the City and Province to subsidize the landlord on their behalf, I’d have questions about the quality of their management.  If government is using foregone tax revenue to supplement the subsidies most are already getting, would these groups be the most worthy and effective recipients of this extra help in each of their service areas?

To be clear, I’m not blaming government funded non-profits for inadequate incomes relative to a runaway real estate market.  Rather, I’m skeptical about a targeted subsidy, being funded by foregone tax revenue and awarded to landlords and buildings, without regard for the specific merits of the individual groups – the intended beneficiaries – inside the four walls of each building.

This is not how we award funding for cultural groups anywhere else.  Funding agencies at all levels of government examine the history, program intentions, and effectiveness of every organization and project receiving public money.  They don’t pick a place and apply money like wall paint for the benefit of anyone inside.

Means tested residential subsidies might be a better model.  Rent-geared-to income is a measure based on the proportion of pre-tax household income consumed by rent.  Rather than attach the funding to the landlord, it is attached to the tenant.  Even though the property tax class may only be available in designated buildings, at least the money reaches the right recipient in more or less the right amount.

I know it’s Christmas and this sounds a bit Grinchy.  I really want to congratulate people who feel like they’ve struck a blow for starving artists by keeping them safe in their damp garrets, if only for a short while longer.

But the blow was only glancing and fell well wide of the mark.  The peril remains and is, if anything, more menacing than before.  Now, amidst all the backslapping and high fives, the causal problem grows, undiagnosed and unremedied.

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