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Robert Murray Haig.

The exemption of improvements from taxation in Canada and the United States [electronic resource] : a report prepared for the Committee on Taxation of the City of New York online

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action of the assessor and the fact not extensively advertised because of
its illegality. The municipalities of Ontario undervalue improvements
greatly. (2) In the cities of Manitoba improvements are illegally assessed
as follows: Brandon, fifty per cent.; Saint Boniface, fifty per cent.; and
Portage la Prairie, sixty per cent. (3)

In Portland, Oregon, improvements are assessed at fifty per cent, of
their value and land at seventy-five per cent., which means a net reduction
of the tax on buildings of thirty-three and one-third per cent. (4)

The most interesting case of unauthorized and illegal undervaluation
of buildings is Houston, Texas, where they are assessed at only twenty-
five per cent, of their value, land being somewhat under assessed also. The
remarkable feature of the Houston situation is the publicity which is given
the illegal undervaluation. The constitution and statutes of the state are
openly flouted and the fact advertised. (5)

Super-taxes on vacant land are imposed by both municipalities and
provinces in Canada. Lethbridge, Alberta (6), and a number of the smaller
municipalities of British Columbia (7) place an extra burden upon un-
occupied land. In Calgary a discrimination is made in water rates
against vacant property. (8) The provinces of Saskatchewan, Alberta and
British Columbia levy wild land taxes on various types aimed at the
speculative holdings of land. (9)

(1) Cf. supra, p. 255 et seq. (7) Cf. supra, p. 170.

(2) Cf. supra, p. 14 et seq. (8) The frontage charge is

(3) Cf. supra, p. 19 et seq. . doubled in the case of unoccupied

(4) Cf. Financial "Statement, Aug. 12, 1914. real estate.

(5) Cf. supra, p. 241 et seq. (9) Cf. supra, pp. 34-35, 75-76,

(6) Cf. supra, pp. 77, 78. 164.



282



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263

Finally there should be mentioned the new unearned increment tax of
Alberta which appropriates for provincial purposes five per cent, of the
increases in land values. (1)

It has been pointed out by many that, in spite of the various measures
adopted exempting improvements and imposing special land taxes, the result
has nowhere been that all revenues are collected from land. This is true
even in cities like Edmonton, where all buildings are exempt and where
practically all' other sources of municipal revenue have been abandoned.
^ The single tax is, therefore, not really in existence, for there are still
\ provincial and Dominion taxes levied upon the inhabitants. These are
usually indirect taxes and therefore cannot be accurately distributed accord-
ing to the source of payment. But Mr. Archibald Stalker has made a rough
calculation by apportioning the provincial and Dominion revenues on the
basis of population, assuming that each individual pays the same proportion
of the provincial and Dominion taxes. Using the figures for 1911, he finds
that in Edmonton the largest proportion of taxes is drawn from the land,
but that even here only fifty per cent, comes from this source. (2)

It would be a mistake, however, to use these facts as a basis for dis-
missing the Canadian experiments as being without value. Several large
cities have gone as far as they can toward the single tax, with the result that
all direct taxes fall exclusively upon land. The movement has been of
sufficient magnitude to deserve serious consideration and study. Moreover,
the immediate proposal under consideration in New York does not con-
template action so radical as that which has been taken in the cities of
Canada. So far as the nature of the change made is concerned, therefore,
the experience of the Canadian cities might be expected to be of significance
for New York City.

II.

The Effects of the Exemption of Improvements From

Taxation

In analyzing the statistical data presented in the first part of this report
in order to ascertain what have been the effects of the single tax experi-
ments, two general lines of procedure are open. First, the statistics of a
given city may be examined for the years preceding and following a change
in the tax system and an attempt made to judge how far the alteration in
the tax system may be held responsible for the changes noted in the statistics.
This method inevitably involves an assumption as to what would have
occurred had the change in the tax system not been made. It is not an
entirely satisfactory method in the case of the problem in hand, for the

(1) Cf. supra, p. 7Z et seq.

(2) Stalker, op. cit., p. 49. In assessing land values, it is universally the custom
in Canada to make no allowances for that part of the land value which is due to the
expenditure of capital in the land or upon improvements directly benefiting the land.



264

cities of western Canada are, in their nature, exceedingly dynamic and
addicted to sudden spurts of growth and decline? To assume for them a
steady regular development and to make comparisons upon that assumption
would be to invite all sorts of statistical disasters. The cities are normally
irregular because of conditions other than those connected with their tax
systems. A change in taxation may coincide with the beginning of a new
upward or downward movement, but to impute a causal connection between
the two would in most cases be very reckless.

The second method consists of comparing cities or groups of cities of
substantially the same economic characteristics, some of which have made
the change in the tax system while others have not. At the beginning of
the investigation high hopes were entertained for the second method. It
was thought that by correlating the data a statistical demonstration might
be made of the success or failure of the single tax. A visit to the cities of
the Canadian West, however, is not conducive to faith in this method of
treatment. One becomes very skeptical of the soundness of comparisons
between cities. No two cities visited were strikingly similar. Nowhere
were economic conditions even approximately identical. Each had peculiari-
ties great enough to make it substantially different from the others. Med-
icine Hat's gas supply, Winnipeg's water power, Edmonton's Peace River
Valley, Vancouver's harbor, Victoria's climate are exclusive characteristics
of greater importance than their tax systems. They are elements which
cannot be ignored. It is true that these elements might cancel each other
if a large group of cities were used for comparative purposes. But here
another difficulty presents itself. Every large city in the Canadian West
has taken long steps toward the single tax. There is consequently a lack
of material for one group. The smaller places offer no relief, for the neces-
sary data are not collected in such municipalities as towns and villages. In
this case, then, a purely inductive study would mean nothing more than an
abuse of statistics. The results attributed to the tax system could be ex-
plained on a half dozen grounds, equally plausible — transportation facilities,
fuel supplies, relationship to hinderlands, bonusing and advertising, or even
the energy of particular real estate and development companies.

It is not intended to imply that statistics may not be used to good
advantage in forming judgments and drawing conclusions about the opera-
tion of the taxation systems in these cities. It is merely pointed out that
they cannot be used as the sole basis for forming judgments and drawing
conclusions. For the reasons enumerated they cannot be depended upon in
this case to carry too large a share of the burden. Because of the compli-
cated conditions it is impossible to make a statistical study of great definite-
ness and conclusiveness. Reliance therefore must still be made upon more
or less theoretical reasoning, facts and figures being used to confirm or deny,
which might be expected on the ground of fundamental principles. ( 1 )

(1) Fortunately practically all of the general principles of economics and finance
involved in the situation are universally accepted.



265

A. Municipal Revenues

The exemption of improvements has had a variety of effects upon
municipal revenues. Until recently in the larger municipalities there have
been no fiscal difficulties traceable to the exemption policy. In the past two
years, however, there have been indications in Regina, Saskatoon, Edmon-
ton and Vancouver that, without resort to tax rates unattractively high,
sufficient revenue may not be obtained from the restricted base furnished
by the land — plus, in the case of the first two cities, a small fraction of the
value of improvements. ( 1 ) A reason given in Regina for the failure further
to reduce the tax on buildings was that speculative land was an undepend-
able source of revenue and that as a measure of caution it was wise to
retain in the tax base the item of improvements which were on a income
producing basis.

The fact is that the municipalities of western Canada have been collect-
ing toll from land owners willing to pay in the hope of future recoupment.
The land values are predominantly speculative, in that they are a capitaliza-
tion of an expected income rather than of a succession of incomes already
being realized. The present depression has had the effect of jarring to some
extent the faith of investors in these future returns. If this jarring con-
tinues they will be unwilling to pay out money upon the assumption that the
expected returns will be realized. This means a very serious fiscal problem
for the municipalities. There are some indications that the practicability
of remaining on a predominantly land-tax basis has already become a very
acute question. The large amounts of unpaid taxes would seem to show that
there is good basis for at least part of the lack of confidence in the land tax
as a source of revenue in regions where the speculative holdings are promi-
nent. In Edmonton the 1914 taxes were payable in September. Less than
one-half had been paid by the middle of March. At the end of 1913, the
unpaid taxes in Saskatoon amounted to $576,933.97, and in Vancouver, at
the same time, they were $689,969.19. The reluctance of the authorities to
sell land for taxes may be significant in this connection. Calgary has not
had a tax sale of land since 1911, Vancouver since 1909 and Edmonton
never ! There is some talk in Edmonton and much talk in Vancouver about
the necessity of abandoning the policy of entirely exempting improvements
because of the difficulty of obtaining revenue at rates which will not result
in the confiscation of existing land values.

Reliance upon land taxes only in some of the smaller municipalities
has had the most disastrous fiscal consequences. Not only was it impossible
under this scheme to carry out contemplated improvements, but it was also
difficult to meet financial responsibilities already assumed. (2)

The experience of the Canadian municipalities shows conclusively that
land values cannot under all circumstances be depended upon to supply in
a satisfactory manner the necessary public revenue. In the large municipali-

(1) Cf. supra, p. 40 et seq., p. 55 et seq., p 85 et seq. and p. 174 et sea.

(2) Cf. supra, pp. 78-81. 129-154.




266

ties the fiscal question resolves itself into a question of willingness to endure
a high tax rate. In the small municipalities there are cases where the land
values seem to constitute an insufficient base, no matter what the rate.

B. Costs of Administration

Unless improvements are entirely exempted, no saving is effected
^"^ through a reduction in the expenses of administration. In Vancouver,
indeed, buildings are assessed each year in spite of the fact that they have
not been taxed for several years past. The saving in Edmonton, on the
other hand, has been considerable. Here, it will be recalled, the building
tax, the business tax, the poll tax and the income tax have all beeii
abandoned, leaving only the land tax.

C. Tax Rates

The Canadian municipalities have shown a decided reluctance to reduce
the assessment of improvements where such action involved an increase in
the tax rate. <^ Remarkable as it may seem, the reduction in the assessment
of buildings in the cities was accompanied in almost every instance by an
actual decrease in the rate of taxation. So far as it has been possible to
discover, the only cases where rates were increased were in the small towns
of Alberta, where the citizens had no real voice in determining what was
done, in Calgary in 1909 (3.5 mills), in Vancouver in 1906 (2.22 mills), in
Edmonton in 1905 (1 mill in Catholic rate), in Regina in 1911 (.1 mill)
and Saskatoon in 1912 (1.5 mills in separate school rate). It will be noticed
that the increases in the cities, when they occurred, were slight. Evidently
practical considerations are given full weight. The city officials in several
instances frankly stated that one of the reasons why further reductions
were not made was because the step would cause an increase in the tax
! rate. Their keen appreciation of the advertising value of low rates prevents
i increases in the rates whenever they can possibly be avoided.
[ The statements made in the preceding paragraph contemplate those

\ increases only which resulted immediately in the year when the change was
made in the tax base. With the present slump in land values, tax rates show
a tendency to increase. Under such circumstances rates might be expected
to increase more rapidly, of course, and to a higher point than would be the
case were buildings fully taxed. It is also obvious that lower tax rates
would have been possible had buildings not been exempted.

The effect of exempting improvements in the towns of Alberta had a
striking effect upon rates, the increase being very general and in many cases
enormous. In Castor the rate reached the unheard of level of 85 mills,
extended against property assessed at a high percentage of its value.(l)

Under certain conditions, therefore, the imposition of the land tax may
cause serious increases in the tax rates. The transition to the land tax in
the more important municipalities of western Canada was made, however,
(1) Cf. supra, pp. 142-143.



267

at extremely propitious times, with the result that there were slight imme-
diate effects or none at all in the direction of increased rates. The cities
with land only as a tax base, however, seem to be more susceptible to
increases in periods of depression. The recent increases in the rates in
Vancouver, Calgary and Edmonton are cases in point.

D. Assessed Values and Tax Bases

The reason why it has usually been found unnecessary to increase tax
rates in the cities when steps were taken toward the land tax is not that
expenditures have been reduced but that the tax base has expanded. (1)
Almost invariably decreases in the tax on buildings in the cities have been
accompanied by large increases in the tax base. In Saskatoon, Edmonton
and Calgary there has never been a decrease in the assessment of buildings
in a year when the tax base would be diminished thereby. In Victoria, in

1894, it is true, a reduction in the percentage of improvements and the
depression which was present resulted in a decrease in the tax base from
approximately $18,500,000 to $15,500,000. This shrinkage continued to
some extent in 1895. But instead of increasing the tax rate, the council
increased the tax base by restoring the tax on buildings. The percentage
assessed was increased from twenty-five to fifty per cent. The only other
instance encountered in the cities visited was the Vancouver reduction in

1895. Here the decrease in the building assessment entailed a diminution
of the tax base from $18,301,084 to $15,988,554. But in this case an increase
in the tax rate was made unnecessary by a reduction in the tax levy.

On the whole, it is evident that the cities have shown themselves very
unwilling to take steps voluntarily toward the single tax where such action
meant a diminished tax base.

In the towns of Alberta, on the other hand, the introduction of the
land tax caused, in many cases, great decreases in the tax base. In an
effort to keep the tax rates within legal bounds, many towns resorted to
over-assessment, the provisions of the law then in force seeming to encour-
age this practice. (2)

It will be seen, then, that in general the transition to the land tax was
made under the most favorable circumstances — during eras of expansion
when the elimination of certain items in the tax base was more than made
good by the expansion of other items. Where this was not true either
disaster was the result, as in the Alberta towns, a return to the old system
soon followed, as in Victoria, or a decrease in the tax levy lightened the
burden, as in Vancouver.

E. Land Values

In the case of land values the effects have varied greatly in degree
from place to place. The point is sometimes made that the tax system
itself serves as an attraction to settlers, stimulates building and is therefore

(1) It is true that an increase in the tax rate was avoided in Vancouver in 1895
by decreasing the tax levy. But such instances are exceedingly rare.

(2) Cf. supra, pp. 78-81, 129-154.



268

the cause of increased land values. The publicity commissioners of the

jc various cities state that the inquiries from prospective settlers seldom refer

I to the tax system in vogue. But what is much more important, perhaps,

fis that business men considering the possibility of locating factories in a

i city do make careful inquiry and are sometimes encouraged by the type of

tax system in force. If the land tax encourages building it may have some

- such effect as that indicated, but whether it has or not depends largely

upon whether the energy devoted to building is newly created or merely

diverted from some other channel.(l) Aside from these considerations,

J no one will deny that a heavier land tax tends to depress land values.

In the cities of Canada, as has been seen, the values have not been
prevented from expanding by the tax system. The real question here is,
would they not have expanded more had the burden on land been lighter.
It would be difficult to find any thoughtful man in western Canada who
would answer this question negatively.

The rates of taxation levied in the cities have not been great, and, as
has been seen, it has been unnecessary in the larger places to increase rates
when buildings were exempted. In other words, new land values have
developed with sufficient rapidity to carry the additional taxes. An owner
of a piece of city real estate has not been called upon to assume a heavier
burden. The transition could not have been so easily made had the situation
^ obtained in western Canada which obtains in New York City, where land
values on the whole are increasing somewhat but where values in some
great zones are increasing at the expense of values in other zones. The
assessors of the western cities are unanimous in their testimony that the
increases in land values have been general throughout their cities. De-
creases in the real estate values in any section have, until recently, been
almost unheard of.

During the past two years, there has been a real estate depression in
western Canada. There is little disposition to blame the tax systems for
the depression. It is a reaction such as commonly occurs after a period
of activity like that experienced during the half dozen years before. Land
values have declined. The fact that taxes are apportioned largely on the
basis of land holdings certainly does not operate to increase the popularity
of land as an investment during a period of depression. That the owners
of unimproved real estate are now feeling the pressure is the universal
testimony. Many of the large owners of such property have few resources
other than their investments in land. They bought land in the expectation
of selling, not of holding over a period of depression. With them the pay-
ment of taxes is a serious matter. Their difficulties constitute a weakness
in the real estate situation which undoubtedly has a depressing effect upon
land values.

The most important testimony as to the effects of land taxes upon land
values comes from the Alberta towns. If doubt exists as to whether land
(1) Cf. infra, pp. 51, 67, 127.



269

values can be destroyed by taxation, it may be dispelled by an examination
of the situation there. The wholesale surrender of land in Castor is an
extreme illustration of the tendency.(l)

In most places in western Canada the change to the land tax had
slight perceptible effects upon land values. This was because the changes
were made at the time of enormous increases. In a few places the land
taxes have practically destroyed land values. It is a question, then, of the
circumstances under which the changes are made.

F. Building Operations

It is significant that practically every one in western Canada is convinced
that the exemption of improvements stimulates building. It is very seldom
indeed that a person is found who believes that the system does not have
this effect. Even some of the bitterest opponents of the single tax, concede
this and attack it on the ground that the stimulus is an artificial and
unhealthful one. (2)

The line of reasoning usually advanced in support of the opinion that
the system encourages building is that the reduction of the tax on buildings
means a reduced carrying charge and therefore the elimination of at least
part of an obstacle which causes prospective builders to hesitate. More-
over, if no tax, or even merely a low tax, is levied upon improvements,
builders, it is said, construct finer structures than otherwise because they
are assured that they will not be "penalized " through the imposition of
a heavier tax.

Many of the Canadians go even further than this and consider the
effect of shifting the burden formerly borne by the buildings to the other
part of the tax base, the land. The point is urged that the heavier land tax
makes more difficult the practice of holding lands for a rise in value. The
speculator, it is claimed, will be influenced to improve his land by the neces-
sity of securing a revenue with which to pay his carrying charges. This
propelling force is in addition to the attracting force of the lower tax on
buildings.

Most economists and business men are in entire accord with the Cana-
dians so far as they have carried the analysis. However, the point has been
raised by a number of economists, (3) although it is denied by others, (4)
that the effect of charging to the land the sums formerly raised by the tax
on buildings may be to discourage building operations. They insist that
this effect must be taken into account and compared with the stimulus
supplied by the reduction of the tax on buildings before a fair estimate can
be made of the net results- of the entire operation. It is pointed out that,
in some places at least, the prospective gains through the increased earning
power and value of the land are considered by builders in arriving at their

(1) Cf. supra, pp. 142-143.

(2) Cf. supra, p. 217.

(3) E. g., Alvin Johnson, "The Case Against the Single Tax," Atlantic Monthly,
Jan., 1914, p. 31 et seq.

(4) E. g., B. M. Anderson, Jr., "Unearned Increments," Land Taxes and the
Building Trade, Quart. Jour. Econ., Aug., 1914, pp. 811-814.



270

decision to build and that a piece of land that is increasing in value will be
built upon at an earlier date than the piece which is not expected to increase
in earning power or value. A tax which would impair the prospective
increase, it is argued, would therefore discourage building.

The fact that this argument is not encountered in western Canada
raises a presumption in favor of the position that the stimulus supplied by



Online LibraryRobert Murray HaigThe exemption of improvements from taxation in Canada and the United States [electronic resource] : a report prepared for the Committee on Taxation of the City of New York → online text (page 28 of 31)