Property Taxes: Why NS Needs to Doff Its CAP

Nova Scotia’s Capped Assessment Program (CAP) is a hot mess.

The motivation behind it is laudable: no one should lose their house because its assessed value has skyrocketed and they can no longer afford the taxes.

If you own a modest home along the Mira River, for example, and Ritchie McRitchface buys the lot next door and builds a 40-room mansion, complete with helipad and home cinema (or home dry cleaners or home abattoir or whatever the latest “home” craze is), which he then flips for $1.2 million, it will affect the assessed value of your property and therefore, your taxes and that’s clearly not fair.

Redressing that unfairness was what the CAP was originally intended to do but that’s not what it’s doing today.

 

Slack + Kitchen

In their 2014 report on municipal taxation for the Union of Nova Scotia Municipalities (UNSM), Professors Harry Kitchen and Enid Slack explain the CAP this way:

Nova Scotia introduced a capped assessment program in 2005, retroactive to 2001. Capping limits the increase in taxable assessments on eligible owner-occupied residential properties and resource properties, but not commercial properties.

To be eligible for the CAP, the property must be at least 50 percent owned by a Nova Scotia resident; have less than four dwelling units or be a vacant resource property; have ownership remain in the family, if sold; be an owner-occupied condominium; be a mobile home; or be a mobile home park, co-operative housing, residential or resource portion of a commercial farm.

Initially, the CAP was to apply to property owners whose assessments had jumped more than 15% — in other words, to property owners who had experienced a significant jump in their assessment value (and therefore their taxes).

As of 2003, the threshold dropped to 10%, which still constituted a spike in assessment value. But as of 2008, the province tied the CAP to the Consumer Price Index (CPI) or inflation and this is when the CAP ceased to be a mechanism for protecting property owners from sharp increases in their assessments and became simply a way of reducing property taxes.

Look at this chart:

YearCAP (%)
20171.4
20160.3
20152.1
20140.9
20131.4
20123.9
20112.9
20100.0
20093.4
20082.3
200710.0
200610.0
200510.0
200410.0
200310.0
200215.0
200115.0

 

Note the difference between 2007, when the limit is 10%, and 2008, when the CAP is tied to CPI and drops to 2.3%. Note 2010, when CPI was 0.0%. See the problem?

As Slack and Kitchen conclude:

Although a case can be made to mitigate tax increases on those who cannot afford them, this mitigation is best done by targeting assistance to those who need it most rather than tampering with the assessment base.

Now, I understand, if you’re a property owner who is paying less tax, you’re no doubt happy with the CAP. But is your street pockmarked by potholes? Is the streetlight on your corner on the fritz? Does your sewer line back up? Does your backyard flood? Do you avoid public transit because the routes and schedules are inconvenient?

If the answer to any of those questions is, “yes,” then you are not really happy with the CAP because the CAP is reducing the amount of revenue the CBRM has to fix streets and streetlights and sewer lines and water infrastructure and provide transit services.

 

Bizarre & unfair

Like so many bad policy ideas, capped assessment plans seem to have been introduced in the United States long before they made their way to outposts like the province of Nova Scotia.

Here’s what a primer from the US-based Institute on Taxation and Economic Policy (ITEP), a non-profit liberal think-tank, had to say about the American experiment with capped assessments:

In response to what anti-tax advocates have branded as “out of control” property taxes, a number of states have decided to make use of tax “caps” to restrict the growth of local property taxes. California’s Proposition 13 tax cap, approved in 1978, inspired numerous other states to enact similarly ill-conceived property tax caps. These caps can come in many forms, but all are poorly-targeted and costly. In most cases, these caps amount to a state-mandated restriction on the ability of local governments to raise revenue. While state lawmakers get to take credit for cutting taxes, local lawmakers are the ones forced to make difficult decisions regarding which services to cut.

Sound familiar?

Caps are most valuable to people whose properties are appreciating most rapidly. This has the effect of shifting the tax burden onto people whose properties are experiencing “slow or negative growth in value,” people who generally tend to be low-income. (It also, in Nova Scotia, has the effect of shifting the tax burden to commercial properties, which are not eligible for the CAP.)

But perhaps most egregiously, the CAP results in:

…bizarre and unfair differences in the tax bills paid by neighbors with similarly valued homes. Since a home’s taxable assessed value is usually reset upon changing ownership to reflect its actual value, residents who have recently moved into a home are required to pay significantly more in property taxes than their long-term neighbors who have seen increases in their home’s taxable value capped for many years. This phenomenon has also resulted in some homeowners feeling trapped in their current homes, due to the fact that they would have to pay much higher taxes if they were to change residences. Analysts refer to this as the “lock-in effect.”

Nova Scotia’s capped system throws in an added wrinkle, in that the CAP does not apply to additions or renovations, thus discouraging people from improving their properties.

As Laurie Murley, deputy mayor of the Town of Windsor and president of the UNSM, told the Spectator in email:

Municipalities are hearing about young people buying their first home not being able to afford the uncapped property taxes, and seniors looking to downsize, and possibly paying more in property taxes for a smaller home. We are concerned with the unintended consequences.

 

Phase-out

In a presentation to CBRM council in March, representatives of the Property Valuation Services Corporation (PVSC, the “arm’s length” body that undertakes property assessments in Nova Scotia) told councilors that a full 85.12% of residential dwellings in the CBRM (32,487) were eligible for the CAP in 2017.

In terms of taxable assessed value, properties eligible for the CAP in 2017 in the CBRM represented $2.8 billion of a total assessed residential value of $3.8 billion.

In their presentation to council, Diane Beaton and Lloyd MacLeod of PSVC showed the CBRM what a 10-year phase out of the CAP would look like (you can click on the image to enlarge it):

The chart is based on two assumptions: 1) that market value will increase by 1.0% annually (this is an arbitrary assumption on the part of the PVSC, although not one untethered from reality — the actual market value for residential properties in the CBRM rose 1.8% last year); 2) that the tax rate will increase 0.3% annually, in line with CPI.

Based on those assumptions, the chart on the left shows tax rates over the next 10 years if the CAP were removed at a rate of 10% per year (Projected Tax Rate), if the CAP were left in place (Projected Tax Rate Without Adjustment) and if the CAP were removed in one fell swoop (Projected Tax Rate Without CAP).

The graph on the right shows the same information with the purple line representing the status quo, the blue line representing the gradual removal of the CAP and the red line representing the immediate removal of the CAP.

As you can see, whether the CAP is removed quickly or gradually, the ultimate effect is a lower tax rate. This is why some observers refer to the “phantom relief” provided by capped assessment systems — because assessments are kept artificially low, municipalities raise taxes to ensure they have enough revenues to cover their costs. (The problem in the CBRM, however, is that we already pay the highest taxes in the province, so raising taxes further is not an option.)

Murley told the Spectator the UNSM agreed that any change in the CAP would have to be introduced gradually:

We do not want to impose unnecessary hardship on homeowners, and would like them to be able to plan for those changes. The business occupancy tax was phased out over 10 years, and that seemed to allow businesses to adjust.

The tax rate in the PVSC example is also “revenue neutral.” That means the CBRM is looking only to cover its costs — when assessments go up, the municipality lowers the rate rather than leaving it where it is and collecting more money. In their 2014 report on municipal taxation, Kitchen and Slack addressed this issue, recommending that:

The province should institute a system of fiscal disclosure that is used in other Canadian and American jurisdictions. Fiscal disclosure requires municipalities to put the revenue neutral municipal tax rate on the tax bill following a reassessment. Any tax rate above that amount would be noted as a tax levy increase for that year. In other words, an assessment increase has to be met with a concomitant tax decrease or be recorded on the municipal tax bill as a tax increase.

 

Circuit Breakers

TDM, 2-pole circuit breaker (Photo by By Dmitry G (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons)

Actual circuit breaker (Photo by By Dmitry G, own work, CC BY-SA 3.0, via Wikimedia Commons)

I know what you’re thinking — what if property values in the CBRM increase by more than 1%? What if there actually is a sudden spike in valuations, the kind that prompted the introduction of the CAP in the first place?

Well, first of all, the likelihood of such spikes was reduced somewhat when the PVSC moved to annual valuations, following another of Slack and Kitchen’s recommendations:

To reduce volatility, the assessment system should capture changes to property values on a timely basis. In particular, additions and renovations should be added to the assessment roll as soon as possible to avoid a surprise spike in taxes when the new assessment comes onto the roll. There may still be annual increases in assessments but they would be less of a surprise and not as large if they were put on the roll sooner.

Additionally, the CBRM does provide a low-income municipal tax exemption. According to the CBRM web site:

The Low Income Tax Exemption is available to residential property owners living in their own homes, whose taxes are not in arrears. The exemption is granted based on income guidelines as follows:

Single – Taxable Income less than $14,500
Double – Taxable Income less than $17,500
(Proof of income is required)

But perhaps a better method for ensuring people aren’t burdened by unduly  high taxes is the one explained in that ITEP report cited earlier, a method that focuses on property taxes as a percentage of income:

A less expensive and better-targeted approach is a “circuit breaker” tax credit, which provides targeted tax breaks to low-income and elderly taxpayers when property taxes exceed some percentage of their incomes above which they are deemed too be too costly. For these populations, circuit breakers are more inclusive, because they provide relief to all taxpayers for whom property taxes are most burdensome, and more exclusive, because they limit eligibility to taxpayers for whom “ability to pay” is clearly an issue.

 

Sober discussion

Like so many other aspects of our communal existence, phasing out the CAP system will require sober, fact-based discussion. (I know, I know, why can’t the best approach ever be a drunken brawl on the government wharf?)

It will require, for example, a recognition of the connection between taxes and services. No one who says, as I heard a woman-in-the-street say on CBC radio last week, “I want better healthcare, better services, lower taxes,” will be permitted to participate in this discussion.

But many people have actually already been talking — the Union of Nova Scotia Municipalities, for instance, has been pointing out the problems with the CAP system for years. The PVSC would clearly like to see the system abolished — why else would it provide the CBRM a roadmap for doing so? And CBU professor emeritus Jim Guy made the case against the CAP in the Cape Breton Post just last year.

Guy also made a second point that I think is worth repeating here because it leads into another, connected discussion I’ve warned you we have to have — and I can think of no better time than during a provincial election campaign to have it:

Being a property owner in Cape Breton is not equal to property ownership everywhere else in the province. We pay a lot more for the same or comparable services.

Much of this is a reflection of the province’s misappropriation of equalization transfers from the federal government. Until the public gets savvy and demands a full accounting of the province’s constitutional responsibilities with this money, get ready to pay even higher municipal taxes in a confusing property evaluation and municipal tax system.

Yes, the province’s “misappropriation of equalization transfers from the federal government.” That’s our next discussion.

 

 

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