Mea culpa, sort of
I’ve written elsewhere that municipalities are largely responsible for not reducing their tax rates to offset assessment increases. I still stand firmly behind that.
However, in doing some research and calculations of my own, I underestimated the extent to which legislation ties municipalities’ hands in terms of a restrictive connection between the residential and non-residential tax rates they may apply as per the Real Property Tax Act.
Mea culpa for that underestimation. They say that when you know better, do better, so that’s what I’m going to try to accomplish here. (note: thanks to CBC reporter< Robert Jones, for drawing my attention to this).
Here’s the rub: whether we average residential property owners realize it or not, that restrictive relationship between the two types of rates is costing us money and underscores how broken the system as a whole is in our province.
Why is this a problem?
Let me explain. According to Section 5 of the Real Property Tax Act (which is rife with all sorts of problems, in my opinion), a municipality is allowed to set whatever tax rate it wants on residential property. But legislation ties its hands on setting the non-residential rate, which can be no more than 170% of the residential one.
“So what?” you might say. Well the problem is twofold.
First, most municipalities have a great deal more residential than non-residential assessment on their books. In Moncton in 2024, for instance, 78% of the overall assessment is classed residential while the remainder is classed as non-residential.
Second, each classification experiences value increases to very different extents annually and this has been especially true in recent years. The value of the residential market in NB has skyrocketed (reflected in increased assessments, of course), while the non-residential market has not. Each is subject to different supply-demand pressures.
What this means is that municipalities much treat each classification very differently in terms of adjusting tax rates from year to year and this is where they are restricted in terms of what they’re allowed to do.
Lowering the residential tax rate to offset the entire residential assessment increase (which I have argued for) comes up against that 170% limitation, which means that a municipality cannot lower its res rate enough to offset a significant assessment increase.
How exactly does that work?
Here’s an example.
The City of Moncton budgeted for approximately $185 million from property tax revenues in 2024 ($126.6 million from residential assessment and approximately $58.6 million from non-residential assessment), based on a total assessment of $11.365 billion (lots of rounding here).
The expected revenue is based on a residential tax rate of $1.4287 (per $100 of assessed value) and a non-residential rate of $2.3374. Note that this non-residential rate is 164% of the residential rate.
Let’s assume for the example that the City will need the exact same amount of property tax revenue in 2025, namely $185 million. However, the 2025 total residential assessment increases by 10%, while the non-residential assessment increases by only 3%.
Let’s also assume that the municipality tries to be revenue neutral (i.e., decreases the tax rate to the same extent that the assessment increases) in each of the classes. In other words, the residential tax rate is reduced 10% to $1.2988 and the non-residential rate is reduced 3% to $2.2693. All of a sudden, the ratio between the two is 175%, which is outside of the 170% that the Real Property Tax Act allows.
This means that the most the City can reduce the residential tax rate without being offside is about 6.5% rather than the 10% of the assessment increase.
If the City didn’t have the 170% restriction, it could indeed be revenue neutral from year to year, if it so wished (which NB municipalities often don’t, unfortunately).
Clear as mud?
I may have simultaneously oversimplified (from a municipality’s perspective) and overcomplicated (from a citizen-taxpayer’s perspective) this whole rate differential problem – takes a special skill to do that, if I do say so myself. But I think it’s important to understand at least the basics of this aspect of our very broken assessment and tax system.
Bottom line is that, if the municipalities had more leeway in applying different residential and non-residential tax rates, municipalities would at least have the option of rendering assessment increases revenue neutral.
As it is, they do not have that full flexibility, which means that increased assessments are by mathematics alone going to result in increased tax revenues to municipal coffers. In the absence of something like direct tax rebates of some sort (which I’m uncertain would even be allowed), that money is not coming back to the beleaguered New Brunswick citizen-taxpayer in any direct way, who can only hope that the municipality is spending the unbudgeted windfall wisely.
Exemplars throughout Canada
Incidentally, “revenue neutral” assessment and tax systems exist throughout much of Canada (a future post on this topic itself forthcoming), whereas the rate-driven tax system of the type we have here in New Brunswick “fails to meet the test of open and transparent property taxation,” according to the International Association of Assessing Officers. But what could they possibly know?
As for the problem of the relationship between tax rates itself, I’m no expert on all jurisdictions, but I know that Alberta allows for the non-residential tax rate to be as much as 500% of the residential tax rate (a far cry from the 170% here in NB), all within a revenue neutral system.
What a pipe dream for NB: a revenue neutral assessment and taxation system that includes a flexible tax rate rate relationship.
Dare we hope that New Brunswick leaves its archaic system behind to create an assessment and tax system that is fairer to all concerned? Based on what political parties are offering up during the 2024 provincial election, I won’t hold my breath.
Want to understand our property assessment and taxation system better and make it work to your advantage?
See my new book:
Taxing New Brunswick: An Insider’s Guide to Successfully Challenging Your NB Property Assessment (available on Amazon)