Calgary faces the consequences of overreliance on business taxes

The City of Calgary recently released its 2019-2022 budget proposal for public review. Notably, residential property taxes will rise with “typical” Calgary households seeing a $60 increase (on average) each year.

Understandably, many residents won’t be pleased by the prospect of tax hikes, but what this issue also lays bare are the risks associated with overreliance on businesses for municipal revenue.

Calgary, like most other large municipalities, levies higher property tax rates on businesses (commercial and industrial properties) relative to residential properties. In 2018 Calgary’s non-residential tax rates are almost four times as high as residential rates. Other large cities such as Vancouver and Montreal have similarly high ratios (both roughly between 4 to 1 and 5 to 1), indicating disproportionate reliance on businesses for local government revenue.

Regardless of whether there’s a rationale for differential rates between commercial and residential property, the experience of other large Canadian cities underscores Calgary’s unusually large split. For instance, in both Edmonton and Toronto the ratio is approximately 2.8 to 1. Moreover, few cities (if any) provide readily available information on how tax rates—and the number of dollars they ultimately represent for municipal coffers—reflect the level of service residents and businesses need and use.

One possible reason for this phenomenon could be that city councils favour homeowners—who consistently represent the largest voting bloc in municipal elections—over businesses, making businesses an easier target for tax increases. This effective subsidy from businesses to homeowners is well-documented, and can cause problems.

For example, it can render city finances particularly vulnerable to downturns in business cycles. When times are good, it’s easier to tax booming industries to provide more local services for residents. When times are bad, however, many businesses either can’t shoulder the burden any longer or see their land values plummet—in either case resulting in reduced revenue for city hall. This is certainly visible in Calgary where the estimated assessed value of downtown offices has dropped by roughly 50 per cent over the past five years.

So due to past choices at city hall, Calgary faces some tough decisions. Either taxes rise for residents (as is currently proposed) or Calgarians might have to make do with fewer local services and amenities such as parks and athletic facilities, or fewer municipal staff.

In any case, Calgary’s current unfortunate scenario underscores why municipalities should think long and hard about the extent their tax rates are fair and efficient. If municipalities are overly reliant on businesses to pay for services enjoyed primarily by residents, they should consider the risks of such reliance.