Don't tax property

With the next provincial election less than 16 months away, the premier of Ontario, Dalton McGuinty, is stealing a march on his rivals. Time was when the McGuinty Liberals would issue any number of solemn promises before an election, only to break them afterward. But that’s so 2003. In a bold new approach to campaigning, Mr. McGuinty is now breaking his promises before the election.

Scant weeks ago, the premier was vowing to reform the property tax system, in the wake of a scathing report from the provincial ombudsman on the antics of the Municipal Property Assessment Corporation -- the agency charged with assessing property values across the province, on which municipal property taxes are levied. “I don't think anyone argues that there is not a problem,” Mr. McGuinty told the Ottawa Citizen’s editorial board, “and the Minister of Finance has now become seized with this. As a government, we've become seized with this issue.”

Seized? Seized up is more like it: the government has just announced a two-year freeze on property tax assessments, meaning no changes until, well, until after the election. And what then? Some Ontario voters may recall the Liberals’ promise to maintain an electricity price freeze -- a commitment whose shelf life turned out to be just long enough to get them through the last election.

But let’s assume, just for entertainment’s sake, that the premier meant something like what he said -- that his government is indeed “seized” with the necessity of property tax reform … eventually. What sort of reform is in order? I have a simple suggestion: get rid of it. Don’t reform the property tax. Abolish it.

Over the years, Ontario has adopted or considered nearly every conceivable method of assessing property taxes. We’ve had market value assessment, unit value assessment, and actual value assessment, among others. Each one has tried to address the inequities of the one before, only to throw up even worse injustices of its own. At some point the thought may occur to someone: This is not accidental.

Property tax reform inevitably fails because the property tax is, at bottom, unreformable. It isn’t the method of assessing property values that is the problem: it’s the whole concept of property as a base of taxation that’s flawed. However it may be constructed, the property tax conforms to no known principles of sound taxation, being neither fair, nor efficient, nor simple.

The simplicity part we may take as read: the complexities of assessing the value of every property in the province, every year, inevitably lead to disputes and anomalies, even without the help of multiple competing theories of valuation. But it’s with regard to the other two principles that the tax really falls to the ground.

Sometimes justified as a proxy for ability to pay, or as an index of the cost of services used, in fact it is neither. The value of a property may fluctuate dramatically from year to year for all sorts of reasons, none of which have any bearing on the owner’s ability to pay. The story of the elderly widow in possession of a large house, but with little in the way of disposable income, is far from apocryphal.

Likewise, there is no particular reason why the value of a house should bear any relation to the amount of municipal services it consumes. To the contrary: that cute little semi-detached in downtown Toronto may sell for twice as much as a four-bedroom suburban monster, yet cost a fraction to supply with water, garbage pickup and so on.

There are models of property tax reform, such as unit value assessment, that attempt to bring the assessed value of a house more in line with the cost of servicing it. But why resort to such elaborate indirections? Why not just charge homeowners directly for the services they consume? That is, why not get out of the property tax game altogether?

Real reform of municipal finance would start by charging user fees wherever it was feasible to do so. A beneficial side effect of this would be to open up possibilities for privatization and contracting out: if it is possible to make users pay for a given service, it is ipso facto not a “public good.”

Some services, of course, like fire and police protection, cannot be financed in this way. At any other level of government, these would be paid for out of income or (better yet) sales taxes -- taxes that, whatever their faults, are manifestly simpler, fairer and more efficient than the property tax. So why shouldn’t cities do likewise?

A combination of user fees and a municipal sales tax -- or a dedicated share of the provincial sales tax -- in exchange for an end to the property tax, and with it decades of confusion, unfairness and acrimony: If the Liberals aren’t willing to run on this, perhaps the opposition might.