We Don't Want Tax Rates Indexed to Inflation

In the run-up to next year's budgeting at the municipal level in Saskatchewan, a strange trend has emerged. Apparently at least one city is comparing tax rate trends over the past quarter-century to inflation in an attempt to make the case that tax rates themselves have not risen as fast as the consumer price index -- and ergo, we need higher taxes.

Wrong. Very wrong. First off, I applaud municipal officials for reaching out to the public via the media and engaging the debate over local tax increases -- which have been astronomical around the province over the past few years. But the discussion has to be founded on rational principles, and at the very least, the media needs to be critical of the claims cities are making, rather than acting just like publicists and cheerleaders. The graph that start the ball rolling appeared recently in a Moose Jaw media outlet, and was also apparently presented by city staff to city council. It shows something vaguely defined as the "property tax increase" on the y-axis for each year between 1991 and 2014. Also shown is the annual consumer price index. For the city, the property tax increase over this period was 44.7 percent, whereas the rate of inflation increased 62.2 percent. When I asked a city official what exactly the property tax increase data represented, I was told "that is the increase in the mill rate in percentage terms for that year. The starting base utilized for each is 100 with the applicable increase for the year applied to that base and so on." Sure enough, when I checked the increases shown in the graph and compared them to prior media reports in the city about mill rate increases, they appeared to match. But here is how the mill rate for municipal property tax is defined:

"The amount of tax payable per dollar of the assessed value of a property. The mill rate is based on 'mills'; as each mill is one-thousandth of a currency unit, one mill is equivalent to one-tenth of a cent or $0.001. Property tax in dollar terms is calculated by multiplying the assessed property value and the mill rate and dividing by 1,000."

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Thus, the mill rate itself is a percentage tax, and as such, comparing it to the rate of inflation is not a valid approach. Imagine if we compared, and worse yet -- pegged, other percentage taxes to the rate of inflation. When it was introduced in 1991, the GST was 7 percent. If the GST rate was increased with inflation, the GST would have increased to 10.4 percent by now. What about income taxes? Imagine if income tax rates increased at the rate of inflation. Since inflation goes up over time, so would tax rates. A physical impossibility would inevitably occur: eventually a tax rate pegged to inflation will exceed 100 percent. For something like a mill rate pegged to inflation, it would -- if allowed to continue forever -- reach a value of infinity per dollar of the assessed value of a property. Simple examples and extrapolations of relating tax rates to inflation shows the fundamental errors in the approach. The rate of inflation is already embedded within a tax rate via the increase in value or cost of the item being taxed over time. Indexing both the value of the taxed item, and the tax itself, to inflation is double-counting inflation in your taxation method. Even basic raw data doesn't support the need for property tax increases in Moose Jaw. According to city officials, total property tax revenues today are $22.8 million, whereas in 1991 they were $13.7 million. The city claims the CPI (inflation) increased over this timeframe by 62 percent. According to the Canadian census, the population of the city actually declined by one percent between 1991 and 2011. There has been no census since 2011, but if the rate of increase from 2006 to 2011 has continued, the current population is within a couple percent of 1991 -- or about the same. Consequently, it appears per capita property tax revenues in Moose Jaw increased in nominal terms by more than 66 percent between 1991 and the present, while the rate of inflation was only 62 percent. It certainly looks like per capita property tax revenues have increased at the same rate as inflation -- perhaps even modestly higher -- during the past quarter-century. This doesn't seem to support conclusions by city officials that property tax increases have been below the rate of inflation over the same time frame. To its credit, the city has an online public consultation tool ("citizen budget") that allows residents to let the city know how they would like their tax dollars spent in the future. But in the meantime, we also need to make sure that the public and city council is being correctly educated as to the real rate of tax increases in recent decades.