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A Conversation on Common Tax Issues

This section provides an overview on common issues that municipalities face with regards to property assessment and taxation. While this list could be extensive, the purpose is to satisfy the basic needs of individuals that are new to the municipal environment. If you have suggestions for other topics to be included on this page, please email AUMA Advocacy.

Municipal control over property taxes

Raising taxes routinely carries a level of political risk. Municipal elected officials face this challenge every year as the municipal property assessment base is relatively fixed and, therefore, municipalities are routinely forced to increase property taxes to cover rising costs. When considering any increase in property taxes, municipal elected officials must be cognizant that any increase they approve will also be combined with any increase that the province makes to education property taxes.

To explain, a property tax bill generally consists of two taxes: a property tax set by the municipal council to fund local services in the community and a property tax set by the province to fund the K-12 education system. The municipality does not control the education tax amount, but they are responsible to collect it on behalf of the province. As such, if property taxes increase, taxpayers may place the blame on their municipal council despite the fact that a portion, or all, of the tax increase may have been implemented by the provincial government through education taxes.

‘Tax room’ is a term that is common in the municipal sector. The term suggests there is a limited amount of room for a municipality to increase property taxes in any particular year without drawing negative political attention. The ‘tax room’ will vary depending on the local political climate but common increases may range from one to five per cent. If the province approves a large increase to education tax, a municipality may view that the province has used the municipality’s available ‘tax room’ and, therefore, has impacted its ability to increase property taxes as much as it would have planned.

One of the contributing factors to this issue is that municipalities must make budget decisions without knowledge of what the province plans for education taxes as each level of government operates with a different budget cycle. Municipalities use the calendar year and the province uses a fiscal year-end of March 31; therefore, municipalities tend to conduct their budget deliberations in the fall of each year and may approve their upcoming year’s spending based on a targeted percentage increase in taxes. In February, the province releases its budget which includes its education tax requirements. If the education tax has increased, municipalities may face the dilemma of choosing to proceed with their current budget or cut their spending to lower the combined tax increase which, in turn, causes them to reduce their planned service levels to the community.

The balance of control over property taxes and the political challenges it creates is a key factor in why AUMA members have passed several resolutions over the years that call upon the provincial government to eliminate education property taxes. 

Example

In fall 2015, the City of Calgary approved its 2016 interim budget based on a 4.7 per cent increase to municipal property taxes. In April 2016, the province released its 2016-17 budget which included a 10.2 per cent increase in the amount of education taxes to be collected from Calgary property owners. Recognizing the political challenge of proceeding with such a large combined increase in tax rates, City Council opted to reduce its municipal budget to a 3.5 per cent increase in property taxes. Combined, the increases in municipal and education taxes resulted in a 6.1 per cent tax increase for Calgary property owners and thereby produced a significant amount of negative media attention.

Municipal fees versus taxes

Municipal revenue is generally made up of three sources: property taxes, user fees, and transfers from the federal and provincial governments in the form of grants. Municipalities use fees as a method to fund the cost of services that are not considered a benefit to the overall community or can be easily allocated based on the use of a service. Common examples of municipal fees may include water, wastewater, and solid waste utility fees, permits to construct buildings, purchase of a cemetery plot, animal licenses, business licenses, or entry fees to access to a recreation facility such as a pool.

Depending on the service, municipalities may choose to set fees at a level that is designed to recover the full cost to deliver the service or only a portion. For example, a municipality may determine that the administration of new development should pay for itself and, in turn, set development permit fees at a level that will recoup the cost for the municipality to process building permits and inspect the work of each builder.

In other cases, the municipality may choose to keep a fee low so that it does not present a barrier for residents or businesses to use the service. In those cases, the overall tax base will subsidize the cost of that service. The most common example would be recreation services which are typically cost intensive, but municipalities want to ensure that all residents, despite income levels, are able to use recreation programs and facilities.

Each municipality will approach the use of fees from a different perspective depending on how it wants to support or incent different individuals and organizations in the community. To understand a municipality’s fee structure, one should refer to what is commonly known as a ‘rate and fee bylaw’.

Budget deficits and taxation as it applies to each level of government

One of the key differences between Alberta municipalities and the provincial and federal governments is the approach to budget deficits and taxation.

Municipal governments rely on a property-based tax system where the tax base is relatively fixed. The Municipal Government Act prohibits a municipality from approving a budget with a deficit. Therefore, as costs increase a municipality will typically need to increase its level of taxation each year unless there has been a sufficient amount of new development that can be taxed instead of increasing taxes on all other property.

Alternatively, federal and provincial governments rely on an income-based tax system. As income levels rise and fall, federal and provincial governments have the ability to approve a budget with a deficit, which is a key reason why income tax rates remain relatively consistent year over year.

Tax stabilization

Year to year a municipality’s budget can vary in size as the cost of services change or major infrastructure comes due for replacement. If municipalities were to adjust tax rates upwards or downwards in response to each year’s budget, they may create confusion among taxpayers and lead to challenges in public communication and possible distrust of council.

In response, some municipalities choose to create a tax stabilization reserve as a means to add consistency to the level of taxation. The reserve represents a pool of funds or a ‘savings account’ that can be drawn upon in years when the budget would require a significant increase in taxation. The monies in a tax stabilization reserve can fund extra expenses which allows the level of taxation to remain consistent with the previous year. In years where the budget is lower than past levels of taxation, the additional tax revenue can be saved in the tax stabilization reserve for future use.

Tax stabilization practices can be an effective tool, but the practice also creates risk for a municipality. If a municipality draws from a reserve instead of increasing taxes, the difference in revenue will need to be recovered at some point unless the municipality reduces its spending in the future. If spending is not reduced, the municipality will be forced to implement a significant tax increase in the future.

Example

A municipality’s 2019 budget involved the collection of $800,000 in property taxes. In 2020, the budget has increased such that the municipality requires $880,000 in taxes, representing a 10 per cent increase in tax levels. Council is only willing to approve a 3 per cent increase in taxes, which would bring in tax revenue of $824,000. In order to achieve its planned spending of $880,000, the municipality chooses to draw the difference of $56,000 from its tax stabilization reserve.

Changes in market values and tax rates

A common misunderstanding of municipal taxation is the assumption that when the market value of property increases, a municipality will collect more tax dollars. In reality, market values are not a factor in how much a municipality collects in taxes. Municipalities determine the amount of taxes to be collected during the budget process, and if there has been any change in market values since the prior year, then that change is reflected by adjusting the tax rate.

For example, if a municipality has budgeted to collect the same amount of property taxes as the previous year and property values have increased by 10 per cent, then the tax rate will be reduced by a corresponding amount so that the municipality’s total tax revenue remains the same. This example demonstrates why it is a flawed practice to compare tax rates from year-to-year as tax rates will change depending on changes in assessment. The accurate approach is to compare year-to-year changes in the total tax dollars collected, excluding any increase in tax revenue as a result of new development.

While changes in market value will not impact a municipality’s tax revenue, it can impact an individual’s property tax bill. For example, if an individual property’s value increases by five per cent, but the average property value in the municipality increases by seven per cent, the property owner would see a lower than average tax increase. In contrast, if an individual property’s value increases by five per cent, but the average property value increases only two per cent, the property owner would see a higher than average tax increase.

Cost recovery of utility services

The cost to deliver water and wastewater services can often represent one of the largest expenditures for an urban municipality. Due to this high cost, a municipality’s approach to utility fees can have a significant impact on its taxation levels. For instance, some municipalities have adopted a full cost pricing model so that 100 per cent of utility costs are funded by utility rates. In turn, those municipalities have the potential to offer lower property tax rates. In other cases, municipalities may choose to subsidize a portion of water and wastewater service costs through property taxes, and in turn, may have lower water rates but may have higher taxes.

This distinction between full and partial cost pricing of utilities is worth noting because municipalities are often compared in terms of their tax rates. However, one must consider the extent to which each municipality uses fees versus taxes to fund expenses. This issue is more noteworthy when comparing rural and urban tax rates where rural municipalities are typically not responsible for water and wastewater services. In those comparisons, one must consider how much of the urban municipality’s taxes are used to fund utility services as well as other unique costs. 

While the cost of water is influenced by regional factors, the extent to which municipalities fund their water and wastewater services through property taxes is also a key factor in why municipal water rates in Alberta can range from less than $1 per m3 and others are over $5 per m3.

AUMA has resources on how to plan and fund municipal water and wastewater systems as part of an overall focus on water conservation. Studies have shown that households will reduce their water consumption if municipalities install metering systems and bill users based on the volume of water used. Furthermore, if municipalities use a full cost pricing model, then residents and businesses will know the true cost of water instead of hiding a portion of that cost within property taxes. That knowledge can influence usage patterns such that users and municipalities can reduce their overall costs.

Tax implications of an annexation

When a municipality annexes land from another municipality, the terms of the annexation will generally include an agreement on how properties within the annexation area are to be taxed for a defined period of time. Each annexation agreement will be different, but agreements generally involve a restriction on tax rates unless a landowner chooses to subdivide or rezone their property, or the time limit of the agreement expires. One should refer to their local agreement for an understanding of the terms of the arrangement.