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As well as the stratified market value approach, government officials and academics closely examined three other options: (1) the simple market value approach (2) the real value approach, and (3) the income approach.
This approach was advocated by some provincial governments. Under this approach, property values are
aggregated in each province to obtain the base for Equalization purposes. Multiplying the base by a single
national average rate of tax (the average rate applied on all property) would give each province’s fiscal capacity.
While fairly straightforward, the simple market value proposal came under criticism for a number of reasons, most importantly because it fails to reflect differences in actual taxing practices. Municipalities with higher average market values will typically levy a lower mill rate. Failing to take that into account would be inconsistent with the RTS, just as it would be inconsistent with the RTS to not reflect the progressive nature of income tax rates. The Panel agreed that, wherever feasible, the RTS should reflect actual taxing practices.
Experts also argued that a simple market approach fails to distinguish between pure price differences in
market values (caused by relative scarcity) and differences arising from the size or quality of the property. This is explained more fully below.
A number of academics, supported by some provincial officials, argued that simple market value overestimates fiscal capacity. They argued that it overestimates fiscal capacity because market values reflect three main
factors: housing size, quality of natural amenities (e.g., beauty of a setting), and pure scarcity (the premium that is paid for land because it is a fixed factor that cannot be reproduced). Only the first two factors actually generate fiscal capacity. Price differentials due to pure scarcity do not reflect higher real housing benefits. Consistent with this theory, a municipality that has higher property values due only to scarcity (e.g., high prices in a crowded city) does not have a greater ability to tax property owners than another municipality with less expensive property that, on average, is the same size and has the same amenities.
If the pure scarcity component could be stripped out of market value, the residual or real value of property prices could be used as an Equalization base to measure underlying fiscal capacity.
Academics at the 2003 conferences on Equalization did not provide data to test the practicality of this approach. However, federal officials did subsequently examine a quality-adjusted price index for shelter costs (essentially a very basic attempt at measuring the real value of property).
Although the results were far from conclusive given the practical difficulty of measuring scarcity, this data indicated that a model based on real value using the quality adjusted price index would generate Equalization entitlements in line with the stratified market approach. The studies also showed that there was a significant correlation between high real values and scarcity.
While it is worth emphasizing again that the studies used only an indirect way of measuring scarcity, the fact that the empirical results of a real value approach were consistent with the stratified approach bolstered the Panel’s confidence that the stratified market value approach would be a significant improvement over the
multiconcept approach.
A third alternative to the stratified approach, the income approach, was also raised in numerous discussions leading up to the 2004 Renewal. True to its name, this approach measures fiscal capacity on the basis of the underlying income of property holders (e.g., personal disposable income). Advocates of this approach argue that, while local governments appear to tax property wealth, they are ultimately attempting to tax the underlying incomes of property holders. All property taxes can only be paid out of incomes. Therefore, it is their incomes that are the best measure of property holders’ capacity to pay and of a government’s ability to tax.
Like the simplified market value approach, the income approach was viewed by many, including the Panel, as being inconsistent with the RTS approach. The RTS relies on actual tax practices and seeks to measure what a province could raise if it adopted average taxing practices. In contrast, the income approach measures what provinces could theoretically tax. While a macro approach such as this can be conceptually legitimate (see Annex 4), mixing the RTS and macro concepts should be avoided where feasible.
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