There’s been a lot of talk recently about property taxes, now that the property value assessments are out. Property taxes are based, kind of, on property value, so when people see their property assessment go up by 40%, they flip out because they think that their property taxes are going up 40%. They won’t, but people are confused because they don’t fully understand the link between property values and property taxes. Hopefully this blog post will help make things simple to understand.
Keep in mind that this is only for New Westminster. I’m pretty sure other jurisdictions around work the same way (especially those in BC) but I’m not 100% certain, so keep that in mind. And it only looks at residential property taxes; commercial and industrial taxes might work differently, but given people are confused about their residential property taxes, that’s what I’m focusing on.
Suppose you have a city. In one year, that city requires $1,000,000 to keep running — potholes need filling, roads need to be cleared of snow, police officers need to be paid, that sort of thing. Now suppose there is only one person living in that city and the entire city is made up of one plot of land. That landowner needs to give the city $1,000,000 in taxes. Easy.
Now suppose there are two properties in the city. Each property is the same size, and each is worth the same amount of money. Each landowner owes half of the city income, or $500,000 each. (This is an expensive city to live in, but what do you expect when you own half a city?)
Now suppose that there are still two properties in the city, but one is mostly swamp and the other isn’t. Both properties are the same size, but the swamp property is worth 10% of the other one (let’s say the swamp is worth $100,000 and the other one is worth $1,000,000). There are two ways we can split up the amount owed to the city: by property size or by property value. In this case one could argue either way, but maybe the swamp property receives fewer city services (maybe swamps don’t need much policing or sidewalks, for example), so if we split the amount owed by property value, one property owes $90,909.09 and the other owes $909,090.91. The total property value across the city is $1,100,000, so the swamp property owes $100,000/$1,100,000 = 9.1% and the “good” property owes the rest.
Now suppose there are still two properties in the city. One swamp, one not swamp. It’s been discovered that swamps actually contain gold, so the property value of the swamp property has skyrocketed from $100,000 up to $2,000,000. That’s an increase of 1,900%! The other property’s value goes up as well, but not that much — only by 100% to $2,000,000. The total property value across the city is now $4,000,000, and the city still needs $1,000,000 to operate, and because each property is worth the same amount of money, each property owner owes $500,000.
This is where the disconnect between property value and property tax comes in. The swamp property’s value went up 1,900%, but their tax bill “only” went up 450%. The “good” property’s value went up 100%, but their property tax actually went down by 45%!
There’s obviously a wrinkle in this in that the city doesn’t need a fixed amount of money each year. The amount they need typically goes up, because of inflation, rising salaries, and extra projects that the city wants (or needs) to take on. That’s why every year you see a news story stating that “property taxes are going up by 2.73%“. Well, they’re not. Well, they are. On average property taxes are going up, but not everybody’s taxes go up. What the 2.73% refers to is the amount of money the city needs to take in from property taxes is going up.
Let’s take our example again. The city needs $1,000,000 one year and $1,100,000 the next. 10% property tax increase for everybody, right? Wrong. The swamp property paid $90,909.10 in year one, and will pay $550,000 the next, for an increase of 505%. The “good” property paid $909,090.90 the first year and will pay $550,000 the next, for a decrease of 39.5%.
What matters is the difference between a specific property’s value and the total value of all of the property in the city. And that’s why you can’t look at a news report about property taxes going up and think “oh great my property taxes are going up”, and it’s also why you can’t look at a news report about property values going up and think “oh great my property taxes are going up”, because the “property taxes” (the amount of money the city needs to take in via taxation) can go up AND your property value can go up BUT the actual taxes you pay can go down.
In New Westminster, “property taxes” are going up 2.73% (or maybe 2.98%, I don’t know exactly). The average change in property value for 2016 is 28.5%, so if your property’s value has gone up by 28.5% then your property tax bill will go up by about 2.73% (or 2.98%). If your property value “only” went up 20%, the amount you pay in property taxes will go down.
And that’s how residential property taxes work.