January 18, 2011

Leading Expert in Municipal Taxations Finds No Merit in City of Ottawa Claims that Lansdowne Redevelopment will be Revenue Neutral

Professor Harry Kitchen, a leading expert on Canadian municipal taxation, has concluded that there is no legitimate basis to the City of Ottawa’s claim that nearly one-third of the cost of the Lansdowne proposed redevelopment will be covered by property tax revenues.

Under the Lansdowne Partnership Plan (LPP), the City of Ottawa plans to borrow $162.6 million to refurbish Frank Clair Stadium and other facilities. This will cost the City approximately $10 million a year in borrowing costs.

The City of Ottawa has claimed that an estimated $2.6 million (or 75%) in yearly commercial and retail property taxes will help to “cover” the City’s debt servicing costs. The City justifies this claim on the grounds that 75% of these new taxes are “incremental” i.e., they “would not be created through annual growth in commercial or retail activity in the city”. That claim is at the very centre of the argument that the redevelopment will be “revenue neutral”.

Professor Kitchen points out that the City has stated it will not in fact dedicate municipal taxes from Lansdowne to repay its LPP debt. Rather, like taxes from any other property, municipal taxes from Lansdowne will be paid into the City’s general revenues. Similarly, like any other city expense, the debt incurred under the LPP will be paid from the City’s general revenues.

However, the City has continued to tell taxpayers that incremental taxes make the LPP revenue neutral. Offering his expert opinion on these issues, Professor Kitchen has concluded there is no valid basis for the City’s claims, stating:

The notion of regarding the tax revenue in question as incremental ignores a basic principle of municipal taxation; which is that municipal property taxes generated from the general municipal tax rate imposed city-wide should be used to fund a range of services that benefit the entire city.

There is no support for the City’s implicit claim that tax revenues from a redeveloped Lansdowne will somehow be surplus to the City’s needs. Municipalities are required to strike a balanced budget. A surplus only arises if municipal revenues collected exceed budgeted revenues or actual expenditures are less than budgeted expenditures or a combination of both. Given that the City’s taxes have increased by 14 percent over the past four years and that the current mayor promised that tax increases would be no more than 2.5 percent a year during his term of office, it is very clear that taxes from LPP will not be surplus to Ottawa’s needs.

Taxes on the newly developed property are based on the assessed property value and these should be the same as the tax rate on comparable properties in other parts of the City. If these revenues are in fact treated as surplus in some fashion, the LPP commercial property will not be paying its fair share of the costs of municipal services. The direction that the City has suggested it should follow leads to a basic inequity and unfairness in the treatment of comparable properties.

Ottawa City Council has little experience with incremental taxation or revenue neutrality. It did instruct the city manager to commission an independent study to evaluate the various consequences of dedicating property taxes to a single expenditure in the City’s budget, and to have the Auditor General verify the methodology.

Remarkably, no such study was commissioned and consequently no review by the Auditor General was carried out. Despite the absence of this critical information, Council forged ahead and approved the LPP deal.

Confronted with the lack of an independent review, Friends of Lansdowne Inc. (FoL), retained Dr. Kitchen to prepare a reply to the City’s contentions concerning the use of municipal taxes from the Lansdowne site. His expert opinion will now be introduced as evidence in the Superior Court Application by FOL, Ward and Sealey in relation to its application to have the deal set aside on the grounds that the City’s approval process was unlawful.

As Professor Kitchen concludes:

In my opinion, the City’s proposal on incremental taxation, surplus revenue and dedicated tax revenue is not supported by any principle of sound municipal finance or best practice. LPP commercial development is not being taxed at a higher rate than other comparable properties in the City, so there is no valid basis for considering any LPP tax revenue as incremental or surplus to the City’s needs.

Dr. Kitchen is an Emeritus Professor of Economics at Trent University. He has served as a consultant or advisor for federal, provincial and municipal governments and for private sector organizations. He has authored or co-authored some 9 books and more than 100 articles, reports and studies relating to taxation, governance and other financial issues in Canada. He has also served on at least a dozen related task forces and commissions.

Professor Kitchen’s affidavit can be viewed here on the Friends of Lansdowne website: www.letsgetitright.ca.