Why Calgary businesses have the lowest property tax rate but not the lowest tax burden

Originally published June 24.

Calgary's property taxes are too high. Calgary's property taxes are among the lowest in the country.

Business taxes are going up. Business taxes are going down.

If you've been following the discussion at city hall in the past few weeks, you've probably heard all of these seemingly contradictory statements.

• City council ponders chopping next year's tax hike to 3.2%
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You're likely to hear them again Monday, as city council mulls its tax rate for 2017, and in the coming days, as local businesses continue to press for tax relief at a time when so many are struggling.

So which of these claims are true?

The answers are complicated, but not that complicated. Follow along and we'll break it down for you as best we can.

How does Calgary's tax rate compare to other cities?

Quite well, if you're looking at the tax rate, which is a common way to compare one city to another, but doesn't tell the whole story.

Each year, the Real Property Association of Canada does that comparison, and usually finds the same thing.

"Calgary looks good," said Brooks Barnett, manager of government relations and policy for group, which advocates for the property investment industry.

"Compared to the other nine major Canadian municipalities we study, it has consistently looked pretty good."

What the above graph depicts is the amount of tax paid per $1,000 in assessed value of a property, commonly known as a mill rate (a term that tends to be used more often in other cities than in Calgary when discussing taxes.)

Of course, as local arms of the Canadian Federation of Independent Business and the Canadian Taxpayers Federation have repeatedly pointed out, having a lower mill rate doesn't necessarily mean you pay lower taxes.

Your tax bill is a function of the mill rate multiplied by your property assessment, so the latter matters a lot — especially since it can fluctuate wildly from year to year.

Numerous business owners have complained about eye-popping, double-digit increases on their property-tax bills this year. That's mainly due to sudden increases in the assessed value of their properties.

But there is another factor, too.

Business tax consolidation

Calgary is one of the few remaining cities that still has a business occupancy tax.

But it's getting rid of it. Slowly.

This is different from the non-residential property tax, which goes to the owner of a commercial building (and then is usually portioned out and passed along to commercial tenants under most lease agreements).

The business tax bill, by contrast, goes straight to the business owner.

It's determined by the typical annual rent a business in a particular area would pay for the space it occupies.

City assessor Nelson Karpa said the business tax bill is almost always lower than what a business pays for its portion of the property tax on a building, and the bills are getting progressively lower.

That's because, since 2014, the city has been phasing out the business tax by consolidating it into the non-residential property tax. It will be completely consolidated in 2019.

This year, another 20 per cent was moved over, bring the total shift, so far, to 40 per cent.

That meant lower business tax bills for most people in 2016, but it's something Mayor Naheed Nenshi said many seem to have forgotten.

While business tax bills are mailed out in February, property tax bills are mailed in May.

"So when people get their non-residential property tax bill, nobody remembers that they had a decline in their business tax as we're going through the consolidation," the mayor said.

"And we didn't do anything in the tax bills to remind them of that, so people got a big shock."

So, are businesses really getting a raw deal in Calgary?

To hear some business owners tell it, property taxes are killing them.

Several have come forward publicly in recent weeks to link their decision to close up shop, or consider closing up shop, to massive hikes in their tax bills.

At the June 20 council meeting, city manager Jeff Fielding acknowledged a lot of businesses are hurting these days and urged councillors to be "empathetic towards that," but also took issue with what he described as "misinformation" in the public discourse surrounding Calgary's actual level of taxation.

As we've seen, objectively evaluating the impact of property tax on commercial enterprise is tricky, but the C.D. Howe Institute, a non-profit research group that specializes in economic policy, has come up with a way to cut through the fog.

For the past three years, it has published a report called Business Tax Burdens in Canada's Major Cities (PDF link), which looks at the wide variety of commercial taxes that exist and boils them down through a complex calculation into a more apples-to-apples measure.

And Calgary doesn't fare as well in this comparison.

Calgary behind Saskatoon, Toronto, Vancouver

The C.D. Howe method examines how taxes impact business investment.

"Whether they're looking at creating a new building, buying some machinery, it doesn't matter," said Ben Dachis, one of the report's authors. "All these taxes add onto one another and add to the cost of doing business."

Specifically, the report calculates a marginal effective tax rate (METR) it defines as "the increase in the rate of return an investor would need to cover the cost of taxes."

So, if an acceptable rate of return is four per cent, but an investor needs to get six per cent to both pay the relevant taxes and deliver that return to shareholders, the METR is calculated at 50 per cent. (Six is 50 per cent more than four.)

This measure includes the provincial sales tax in Saskatchewan, but not the harmonized sales tax in Ontario, since the latter does not "increase the cost of capital inputs that businesses purchase."

It also includes land-transfer taxes, which Alberta is unique in not having.

But even with those advantages, Calgary still slipped to second place in the 2015 report, falling behind Saskatoon in the total tax burden.

Click on this interactive graph to find more information:

The main culprit? Property tax (including the business tax) — most of it coming from the city's end. You can see that in the green bar at the bottom of the stacked columns in the above graph.

The METR associated with Calgary's municipal business property tax (22 per cent) in 2015 was more than double Saskatoon's (10.5 per cent), according to the report.

It was also higher than Toronto's (20.7 per cent) and Vancouver's (15.9 per cent.)

"Although Alberta has a real tax advantage … a lot of that advantage gets eroded when you look at the Saskatchewan equivalent of their property taxes," Dachis said.

Coun. Ward Sutherland has been making a similar case, also noting that Calgary's rising utility rates are hitting many businesses at a time when few can afford it, impacting the city's tax competitiveness.

"When you start combining in the things we have, our taxes aren't so low," he said.

City staff will present council with options Monday on reducing the 2017 tax increase even below a recent target of 3.2 per cent, down from a previously budgeted level of 4.7 per cent. They also plan to return in September with a plan to delay utility rates, in response to the downturn.