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Sprawl and Business Competitiveness in the GTA

There were several news items this week about a report issued by the Canadian Urban Institute. The report was about business competitiveness in the Greater Toronto Area, although the media outlets reported on it in different ways.

The report itself is available online (link PDF). The report tells us that most GTA office development these days is in the 905 region, and they talk about "employment sprawl, with poor prospects for reversal or recovery". Here's an exerpt from the cover letter that provides a good summary:

We conclude that [current property tax inequities between Toronto and the surrounding jurisdictions] make it more difficult for Toronto offices to retain or compete for new tenants. Interviews carried out for this study indicate that the combination of high occupancy costs and increasing concerns about congestion represent a major deterrent for companies renewing leases in Toronto. There are also concerns about congestion in the 905, fueled in part by a pattern of dispersed office development in locations that require commuters to rely on their cars for access.

In my analysis, these problems are all connected and are driven by provincial policies, particularly in the last decade. It's unfortunate that the CUI didn't make this point more clearly. There seems to be no political pressure, even from the affected businesses, on the Ontario government. That's too bad, because Queen's Park is the only government that can really address any of these problems.

Provincial rules are a major reason that per-square-foot business property taxes are high in Toronto:

  • The Province of Ontario charges a special, higher, rate for the education property tax for Toronto businesses, just because they can. (A year or so ago, the rate was 2.3% for Toronto, 1.76% for Vaughan -- 31% more.) Just for perspective, this difference is estimated to produce $120-million more in taxes than would an equal rate. Compare this to $500-million, which is the total amount of commercial property tax revenue collected by the City of Toronto (i.e., excluding provincial education taxes).
  • The Province of Ontario collects education property taxes across the province on the basis of current value assessment. This means that if a building in downtown Toronto is worth double what the same building would be worth in Pickering, it would pay double the education property taxes. (Except, it would actually pay more, because of the reason mentioned in the point above.)
  • The province has downloaded social assistance costs onto the municipalities. Social service costs represent more than 20% of the City of Toronto's property tax bill. In the GTA, there is some sharing of these costs across city boundaries. Again, because of current value assessment, a building in the city that is worth double the value of a suburban building will pay double the amount of property tax for these social service costs.

Provincial property tax rules also drive sprawl in other ways:

  • Provincially-imposed current value assessment means that property tax is by definition a sprawl-pusher. Within Toronto, properties values generally decline the further you travel from the centre of the city. The same building on the same amount of land will therefore pay less tax the further away it is. Municipalities are prevented from using any other system to define their tax rates.
  • As with businesses, the province-wide education tax means that urban residents pay notably more tax for the same amount of house when compared to their suburban neighbours, regardless of municipal boundaries. The farther out, and more sprawled you are, the less your tax will be. The same system applies for social service costs
  • When new construction takes place on the fringes -- capitalizing on cheap land and lower taxes -- municipalities have no way of building in the externalized costs that this development causes. When car-dependent developments (residential or commercial) are built on the edge of nowhere, they increase traffic, worsen congestion for everyone else and therefore dilute the transportation infrastructure. The provincial property tax rules mean that municipalities must reward these developments with low property taxes.

Other factors driving sprawl... that are at least being address by McGuinty:

  • Until recently the provincial government has been notably absent from transit investment.
  • Until recently the provincial government had no policies in place to determine how or where growth could take place, leaving developers the easy and logical solution of just building on the cheapest fringe-land they could find.
  • Municipalities have almost no real control over land use since the Ontario Municipal Board has near-absolute power and a development-friendly attitude. (Actually, there are no signs McGuinty is doing much about this.)

Efficient land use is a collective-action problem that we've simply been failing.

As I said, different media outlets covered this report in different ways. The Sun's Sue-Ann Levy, for example, took this situation as an opportunity to criticize Mayor Miller -- surprisingly, without mentioning his "socialist trained seals" -- for raising commercial property taxes by 3% over the past two years. Keep in mind, that's half the rate of inflation; Toronto commercial property taxes therefore have been declining in constant-dollar terms since 1998. None of the media coverage that I saw really connected these problems back to Queen's Park, where they belong.

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