By Jeff Nutting, MSc (Financial Economics) AACI, P.App, AMAA
Are property taxes reflected in a residential building’s market price?
Obrien Lake
Property taxes in most Canadian municipalities now constitute a significant part of home ownership costs. Normally, in assessment or appraisal theory, it is stated that home values or sales prices drive assessment values, which, in turn, drives the level of property taxes to be paid given various mill rates. But, is it possible that the inverse may exist and property taxes can affect the market prices paid on residential real estate? Logically, purchasers take property taxes into account when making offers on a home, much as they consider other factors such as age and size of the home, location, maintenance and/or number of bathrooms. Property taxes may reduce the value of a property if the real or imputed net rental on the property would be reduced, or, as indicated by Oates in the The Effects of Property Taxes, they may increase real estate values if it is perceived that they pay for beneficial local public improvements. In economic theory, this effect on value is supported by what is known as the Tiebout Hypothesis, which is a theory for local government expenditure. In the Tiebout Hypothesis, home buyers in urban areas with multi-jurisdictional governments choose to live in neighbourhoods that not only give them the house they desire, but also the property tax level with which they are comfortable in order to have the local public services they desire. In effect, home purchasers are choosing to buy goods (municipal government services) with various prices (property taxes) from different vendors (local governments) as in any market. Local governments compete with each other by offering different services and property taxes to attract different home purchasers. Buyers maximize their utility or satisfaction by moving to the municipality that gives them the right mix of taxes and services. The Tiebout Hypothesis has a number of assumptions such as mobile consumers, buyers having complete information on taxes and public services, the buyer’s ability to choose between different communities, reasonable commuting costs, an inability of public services to be offered in different municipalities and that there are economies of scale at an optimal level in local government service provision. Grande Prairie, Alberta has an urbanized area of approximately 80,000 people divided into two municipalities:
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Whispering Ridge
• The City of Grande Prairie makes up the central core area with a central business district, highway commercial areas, industrial areas and adjacent residential areas. §§ The City can be considered a high service/high tax jurisdiction. • The County of Grande Prairie surrounds the City with rural lands, country residential and residential areas as well as industrial subdivisions. §§ The County can be considered a high service/low tax jurisdiction. The following table shows local government expenditures, as a measure of service provision, in the two jurisdictions on a per capita basis over the last few years. The expenditures include both capital and operational expenditures. Note that education expenditures are not shown, which, in Alberta, are equalized between municipalities. In 2016, capital expenditures in the County were at 35% of all spending, while in the City they were at 30%. Local Government Expenditures Per Capita Grande Prairie Year County City 2014 $5,368 $3,393 2015 $6,176 $2,831 2016 $6,242 $4,089 Even though the County spends over 50% more per capita than the City, its residential tax rates are approximately half the City’s. The County residential mill rate, including the education levy, is at 6.4884, versus the City equivalent residential mill rate at 12.6588 in 2017.
Arbor Hills
Volume 62 | Book 1 / Tome 1 | 2018
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