Thursday, April 25, 2013

On regressive choices

Yesterday, I offered a quick, off-the-cuff response to the Sask Party's decision to restrict municipalities in applying property taxes to commercial and industrial land. But let's look in a bit more detail at the warped economic theory Jim Reiter is spouting in defence of the move:
"A very, very small minority of municipalities have been using mill rate factors to, in my view, excessively charge commercial and industrial properties," Government Relations Minister Jim Reiter told reporters at the legislature this week.
He noted that in some cases, such as with a pipeline, it would not be possible for a commercial or industrial property owner "to pick up and move" in response to high taxes.
"In rare instances - we prefer not to have to deal with this - but we need to ensure that there's equity out there," he remarked.
In a media release, the minister noted that most commercial and industrial property owners in the province pay higher municipal property taxes than those paid on agricultural and residential properties for delivery of many of the same municipal services.
"Setting this interim limit will be a first step toward fairer taxation among all municipal property tax classes going forward and focuses on the most extreme occurrences," Reiter said in the release.
Now, those of us who see some value in being able to collect taxes might see the fact that property taxes are easily enforced as a feature, not a bug. See for example Josh Barro:
Everybody hates property taxes because they are hard to avoid. But that's a good thing -- it means property taxes are relatively non-distorting. In fact, taxes on land are completely non-distorting: Raising them won't cause any reduction in the amount of land. Taxes on improvements do distort the economy (they discourage the construction of buildings) but not as much as some other taxes. After all, once a house exists, you can't easily move it in response to tax changes.
Local government can't be financed solely with property tax, but the choice of many states (especially California) to back away from property tax over the last four decades has been a mistake. Property taxes are an efficient and effective way to finance government, and we should learn to love them. 
But consistent with his party's anti-social philosophy, Reiter is actually making the argument that municipal property taxes should be limited through provincial intervention precisely because they're relatively difficult to avoid. (And never mind that in the case of, say, a pipeline, a property tax is probably the only way of recouping any social benefit whatsoever from land which mostly sits idle, fails to provide any local economic activity and creates a significant risk of environmental damage.)

Let's take Reiter's argument another step toward its logical conclusion though - applying the converse of his argument that barriers to tax avoidance are supposed to be a sign of a bad tax regime. By implication, that would suggest that taxes are to be paid by the suckers who can't shuffle assets across borders and corporate entities to avoid them - and that the Sask Party disapproves of any tax which doesn't allow for easy avoidance on the part of those who can afford it (while favouring only those taxes which can be evaded).

That in turn raises ample reason for concern about Reiter's declaration that the new limit on mill rates is only a "first step". The Sask Party has no qualms about giving more favourable treatment to (selected) businesses than it does to mere citizens. But Reiter is effectively threatening any municipality which applies the mirror image of that principle and looks to the businesses who see ongoing profits from a municipality's development to pay a dime more than the lowest mill rate charged to, say, a senior with a modest home and a fixed income.

In sum, Reiter is telling us that we may be in for some combination of provincially-mandated hikes to residential property taxes, cuts to business property taxes and/or cuts to municipal services, all in the interest of handing even more to the corporate sector at the hands of citizens. And we should be careful not to let the Sask Party drag the province down that road without a fight.

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