Watch out for the tax creeps. They may be coming after you.
Just because last week’s provincial budget had “no tax increases” does not mean that your provincial taxes won’t be higher this year.
With tax rates unchanged (in some cases lower) in 2003, you may still pay more tax than you did in 2002 on exactly the same income and expenses. Does that sound strange? It’s possible. There are ways to increase taxes while keeping rates steady.
I call these methods the tax “creeps”.
And one such creep was on display in Finance Minister Pat Nelson’s budget, presented last week.
I am not against tax increases. Sometimes it’s necessary to create new taxes, to increase some while decreasing others. But this government has boasted of having “no new taxes” and “no tax increases.” This is foolish. The promise creates a dangerous expectation.
Starting in the 1980s, federal and provincial governments employed a vicious tax-creep technique known as “bracket creep.” By failing to index the basic tax exemption to inflation, more low-income Canadians were added to the tax rolls every year, and those who paid surrendered an increasing percentage of their income.
This happened because pay raises that were at or below the rate of inflation were considered “increases” in income, even though this is nonsense in real terms.
Both levels of government finally halted this notorious practice in 2000. Bracket creep remains the classic example of how “no tax increases” can still mean less money for taxpayers.
But there is a less sinister, but equally subtle way for taxes to rise – by tying them to property values. This creep infects both our municipal and provincial tax bases, but I am going to blame the Klein government because provincial legislation forces cities to collect taxes by this method.
Also, the provincial budget speech implied that Albertans will have at least as much take-home pay as they had last year, so Klein and his crew deserve a hard time.
Property taxes are based on a mill rate, or amount per $1,000 of assessed value. As long as the mill rate remains constant, as Nelson said it would, and as long as your property value increases for some reason, you will have to pay more tax based on no realized – or possibly even ultimately realizable – gain.
As Larry Presiloski, senior director of professional services for the Certified General Accountants Association of Alberta, told me, these extra costs feel like a tax increase because you have “less take-home pay. At the end of the day, you have fewer coins in your jeans.”
Whether or not this is the case ultimately depends on whether somebody’s house or business property has increased in value. Most city-dwelling businesses and citizens have seen such increases. For these Albertans, they will face a dramatic property-tax increase.
Presiloski pointed out that there is some justification for property taxes being based on a mill rate. If someone has difficulty with the tax, he or she can sell the property, realize the gain, and buy something more reasonable. Property is not easily bought and sold, however, which is one of the two problems I have with the idea of any tax being based on property “fair market value.”
A caller to Dave Taylor’s QR77 radio show the other day complained that his house in Glengarry – a 25-ft. by 120-ft. lot – was assessed at $140,000. He figured his tiny home was essentially a write-off, and his lot was worth no more than $80,000. Since I live in that same neighbourhood, I can confidently say that this man was wrong.
Property values in Calgary, especially the Glengarry neighbourhood, have gone up dramatically. Just last month, my next-door neighbour sold his house for 60 per cent more than he paid for it six or seven years ago.
I would say that an empty, 25-ft.-wide, residential lot on a busy street would fetch at least $100,000 in Glengarry. But the man, who sounded elderly, has a point. It is unfair to force him to sell his house to pay his ever-increasing taxes. He may be on a fixed income.
Moving and selling is costly, even excluding the realtor and legal fees. For people in older, low-value houses, realizing property gains means moving to a less expensive neighbourhood, losing relationships with neighbours and community supports that take a lifetime to build. Houses are not liquid assets, in other words. So like all tax creeps, the mill-rate creep is harshest on the poor.
Equally important, mill rate-based taxes do not make economic sense for a province and municipalities that do not want to encourage citizens to move to the outskirts of cities or to less expensive towns. Inner cities are efficient places to live, allowing for easy access to established transit, water and electricity systems.
The property-tax creep effectively forces inner-city residents and businesses to subsidize the infrastructure that is needed elsewhere.
The province has many ways to raise money for schools, for example, but one of the least efficient is a property tax based on market-value assessments. As valuations go up, the people most likely to need schools – families struggling with child-rearing expenses – will move to newer areas where there is none.
In the end, property-tax rates need to be based on something such as square footage, to stop these creepy side-effects. Justice will eventually prevail.
Down the road, mill-rate creep will come back to haunt the governments that use it, because it forces them to increase the rate when valuations stop their upward march ahead of inflation (as has been the case in Edmonton, Calgary and Red Deer).
When that finally happens, it will likely be a harsh economic climate, when tax increases will be least palatable. And when that happens, let’s not blame our municipal governments, whose hands are tied, but the provincial leaders who forced the situation.
In the short-term thinking of politics, tax creeps are a long-term problem, often plaguing the successor to governments that institute them, since they work their nasty business in so subtle a fashion.
In the stagnant waters of Alberta politics, however, the creeps might be the thing we need to bring some fresh faces into the Alberta legislature.
