Concerns about property tax assessment inequities in Toronto have recently been raised, highlighting a lack of transparency about how houses are valued for taxation purposes.
To put it simply, the concern is that lower-priced homes are more likely to be assessed higher than their market values, while higher-priced homes are more likely to be assessed lower than their market value, thereby requiring owners of lower-priced homes to shoulder a relatively higher tax burden than owners of expensive homes.
Olivia Chow, recently elected mayor of the City of Toronto, has weighed in on the issue and asked the Municipal Property Assessment Corp. (MPAC) “to upgrade” its data and assessment tools so that “everybody pays their fair share and does it in a just and fair way.”
The mayor and some city councillors see a lack of transparency, but MPAC said its processes are transparent, fair and meet international standards for property assessments. Toronto’s taxpayers, meanwhile, are confused since they do not know who is responsible for putting a blanket of secrecy over assessment roles and property tax calculations.
The academic and professional literature is rife with evidence of property taxation inequities. Statistical methods such as regression analysis and machine learning models are widely used to estimate assessed values. These tools are known to often overpredict lower prices and underpredict higher prices. Property tax is deemed regressive when the ratio of assessed to market value declines as market values increase.
Over the years, numerous methods, including spline regression, instrumental variable estimators and geostatistical eigenvector spatial filters, have been proposed to improve the accuracy of mass appraisal models. How extensively MPAC deploys the latest estimation techniques to address inequities is unknown.
Many urban economists specializing in property tax believe MPAC could be more transparent, but they are satisfied with its residential assessment record, noting it is internationally regarded for the quality of the tools it has developed. Property tax experts also believe that annual assessments can help mitigate inequities. In Ontario, the assessments were last done in 2016.
Jerry Grad, chief executive of the International Property Tax Institute, considers MPAC “one of the leaders in mass appraisal methodology.” MPAC is also assisting the Valuation Office of Ireland with its assessments.
The choice of statistical tools for assessment is not as crucial as other substantive concerns, such as having officers do the assessment rather than computer algorithms.
Dogan Tirtiroglu, a professor of real estate finance at Toronto Metropolitan University, warned that “cognitive psychology and behavioural finance research suggests that human decision-making is also prone to biases, known as heuristics, and sways sufficiently away from rationality.” He said real estate asset valuations by human assessors may not be as robust as that of econometric methods.
Another underlying assumption in assessment inequity is that the sale price is the most appropriate proxy for market value. This leads some to try to close the gap between the assessed and sale values, a practice known in the assessment industry as “sales chasing.”
But a 1990 article in the Journal of Real Estate Finance and Economics by John Clapp, emeritus professor of real estate at the University of Connecticut, argued that when a buyer overpays for a property, as many later did during the pandemic, the sale price will be greater than the market value. In such instances, the assessed value will be less than the sale price, erroneously signalling vertical inequity.
Conversely, he said, “if the sales price is randomly less than market value, then the tax assessor will appear to overassess the property,” which is the primary concern people have about Toronto.
Chow is advocating for more assessment transparency, but the city is responsible for devising property tax rates and amounts. Since assessment inequities are widely known, the city should devise taxation policies to account for these discrepancies.
The city should also find ways to better disseminate data. For example, Winnipeg’s Assessment and Taxation Department has made assessment valuations and property data available online. If Winnipeg can be transparent about assessments, so should Toronto.
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As for the lack of transparency, the primary responsibility lies with the provincial government since it licensed the assessment data to a private firm, Teranet Inc., which also operates Ontario’s Electronic Land Registration System. Teranet falls under the purview of the Ministry of Public and Business Service Delivery and Minister Kaleed Rasheed.
Transparency is the cornerstone of good governance. Rasheed has an opportunity to advocate for Ontarians to restore their ready access to assessment data. Algorithms and their outputs hidden behind paywalls or administrative facades will prevent the development of a property tax regime that Ontarians may deem fair.
Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.