Annex 5: Property Tax

Testing the stratified market value approach

The stratified market value approach underwent a significant amount of testing in the lead-up to the 2004 Renewal. The approach was tested for stratification bias (evidence that changes in the parameters defining each price category might bias measurements of fiscal capacity) and found to be robust. The stratified market value approach in its elasticity form generated similar results.

The federal government also considered the real value approach. In its view, the stratified base, while designed to measure capacity based on actual taxing practices, was not inconsistent with a real value approach given the high correlation between real values and scarcity. Given this high correlation, the federal government argued that the real value approach would predict that municipalities with high market values (and by correlation, high scarcity components) would tend to have lower average tax rates (since municipalities would not tax scarcity under this theory). Indeed, the stratification approach, based on actual taxing practices, recognizes the fact that municipalities with high market values tend to have lower tax rates.

Federal officials also suggested that, given the correlation of scarcity and real values, the stratification process would have a natural tendency to group together municipalities displaying high scarcity prices as well as high average market values. This means that real price differences between two provinces for property in the same bracket are likely to be quite small, ensuring that each bracket contains apples, and not apples and oranges.

The federal government concluded that the stratified market value approach, either in its original or elasticity form, could measure capacity based on taxing practices and was not inconsistent with one that would measure differences in real value. Also, it was more consistent with the philosophy and logic of the RTS system than the multiconcept base.

The 2004 Renewal adopted the stratified market value approach

After extensive testing, discussions and debates over the stratified market value approach and other approaches, as part of the 2004 Renewal, the federal government decided to phase in a variant of the stratified market value approach for residential properties calculated by using elasticities.

A special adjustment was made to reflect the high average market values of the British Columbia real estate market. In other provinces, 70 percent of market value differentials (relative to the national average) would be used to determine fiscal capacity; in British Columbia a lower rate of 50 percent would apply.² It was argued that this adjustment was necessary to recognize the special circumstances of the British Columbia property market.

Given the significant distributional impacts across provinces, a decision was also made to allow a phase-in period of the new stratified approach, and give the new base a 50 percent weight, with the old multiconcept approach continuing to receive the other 50 percent weighting. This phase-in also provided a period of further testing and study of the new methodology.

However, the New Framework announced by the federal government in October 2004 superseded the 2004 Renewal, and the new stratified market value approach was never implemented in legislation.

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