Getting the property tax right

       A lot of places struggle to get the property tax -- the lifeblood of metropolitan areas -- just right. This was unquestionably the case in the Canadian province of Ontario. Reformers there sought to introduce a full market value assessment, establish a property tax system that would be widely accepted, and remove property tax reform from the provincial political agenda. But although the reform effort was lauded by experts at the time, its overall objectives were not achieved. In fact, the new assessment system may have ultimately weakened the role of the local property tax.
     The Ontario experience is the subject of a new book, A Tale of Two Taxes: Property Tax Reform in Ontario by Richard M. Bird, Enid Slack, and Almos Tassonyi, which examines the broad reform measures in 1998. Getting the property tax “right” in Ontario has been difficult. One reason is that its property tax is not one tax, but two: a tax on residential property and a tax on business. These two taxes differ in their political dimension and economic impact, and in how they are administered. Tax reform has been a particular challenge because the local governments—municipalities, regions, and school boards—depend heavily on property tax revenues compared to other local funding sources.
      Revenue from the property tax alone is not sufficient for large urban areas to pay for the range and level of public services for which they are responsible. The paths to improving the property tax—for example, abolishing the heavily discriminatory taxation of business property—would leave a major revenue hole in local budgets. The question is how to make up for this gap. The authors consider two approaches to the problem: restructuring education finance and introducing a new form of business taxation, at both the provincial and local levels. 
     Over the past decade Ontario was able to successfully adopt a uniform, province-wide market value assessment system. However, its experience suggests that when reforms in property tax administration are combined with sound reforms in both property tax policy and some aspects of local governance and finance, they are more likely to bring about the desired benefits.
     Many jurisdictions around the world have been advised to implement major reforms in property taxation to resolve local government finance problems. A detailed evaluation of Ontario’s reform in both property tax policy and full market value assessment shows that, while such reforms are possible, they require very careful design, implementation, and sustained follow-up if they are to succeed.
     Richard M. Bird is professor emeritus at the Rotman School of Management and senior fellow at the Institute on Municipal Finance and Governance at the Munk School of Global Affairs, University of Toronto. Enid Slack is director of the Institute on Municipal Finance and Governance at the Munk School of Global Affairs, University of Toronto, and Almos Tassonyi is adjunct professor in the Department of Economics at Ryerson University in Toronto.