Nov 3, 2009

Property taxes: are major industries suffering?


Businesses across Canada have been complaining about what they pay in property taxes, well, since there were property taxes. 

But the issue in BC came into sharper definition in July when Catalyst Paper hand-delivered cheques to four municipalities that only covered 25% of their property tax bill.  Timberwest, Celgar and West Fraser Timber joined Catalyst and all four took their respective communities to court saying they were paying too much.  The companies argued they should only have to pay for the cost of the services they received.

The communities were hit hard by the unexpected refusal of the companies to pay their taxes.  Castlegar Mayor Lawrence Chernoff told the Union of BC Municipalities convention in September that the company gave them no notice of their intentions leaving Castlegar in a very difficult situation.  The city was required to pay money that had been levied for the regional district.  The City was forced to cut $700,000 in external requisitions.

In BC property taxes are based on several classes of property.  The base rate is for Class 1 – residential properties.  Class 4 is Major Industrial and companies like Catalyst do pay much more than residential owners based on the value of their property.

On October 16th Supreme Court Justice Peter Voith ruled on the issue.  The Judge rejected the companies’ argument saying, among other things,

The weight or significance given to such consumption data is a matter for Council alone. It is up to Council to fit and weigh such information, together with other categories of relevant information, into its decision-making matrix in the way that it considers appropriate.

What other categories of information might we look at in assessing property taxes?

Paul Willcocks in his usually thoughtful way identified an historical reason.  He points out that resource companies in the past were all highly profitable and operated in one industry towns.

They needed a stable workforce. Rather than building an old-style company town, they opted to pay high taxes to fund the services and infrastructure that allowed them to attract workers and their families.

Things have changed now, of course, but the Director of Finance for North Cowichan offered another reason before the court:

In adopting the annual tax rates bylaw, and establishing the tax rates to be imposed by North Cowichan in respect of each of the classes of property located within its boundaries for that year, the North Cowichan Council considers, among other things, the relative ability of each of the classes of property to meet the overall property tax burden.

This ability to pay question has not been examined too closely.  One of the few people to look at the issue is Kitimat Municipal Manager Trafford Hall.  Examining Kitimat’s aluminum industry he concluded that Kitimat’s property taxes came to about 1.6% of their operating costs.  Hall points out that property taxes are fully deductible from other levels of taxes reducing the actual cost to about one percent of operating costs.  Cutting their property taxes by 20% then would save one fifth of one percent.

What about Catalyst Paper?  In 2008 Catalyst reported operating expenses of $2,006.8 million.  In its 2009 Management’s Discussion and Analysis Catalyst said they had five mills, four in BC and one in Snowflake AZ.  They continued,

Major industry property taxes in the Company’s four mill operating communities in B.C. are well above other North American jurisdictions.  Property tax payments in 2008 in these four municipalities were approximately $23 million.  The Company has identified municipal property tax reduction as a priority in 2009. 

All told, that $23 million comes to about 1.15% of their operating costs.  And as Hall points out, property taxes are deductible bringing the real cost over good times and bad well under 1.0%.

How does that compare with residential property taxes?  Hall quotes Ontario’s 1990 Fair Tax Commission as saying property taxes comprised from 3 to 5.7% of residential household income.  And residential property taxes are not deductible from other taxes.

What can we conclude?  Times are tough for paper companies, but property taxes are a negligible part of the problem.  A significant cut in industrial taxes will make a very small reduction in their expenses but will lead to a dramatic increase in taxes for residential taxpayers. 

We hear a lot of talk about the need for big changes in revenue sources for municipalities and that talk is justified.  But until real changes are made and new revenue sources added, big cuts in industrial taxes will just lead to more tax unfairness.

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