A New Approach to Industrial Taxes in B.C.?

The days of home­owner tax breaks paid for by industry may be numbered.

Up the river: Castlegar mayor Lawrence Chernoff is pushing for a new approach to industrial taxes.

The days of home­owner tax breaks paid for by industry may be numbered.

The City of Castlegar’s 2009 property taxes were due at 4:30 p.m. on July 2. At 2:30 p.m., Mayor Lawrence Chernoff got a call from his chief financial officer, saying he’d just received a letter from Zellstoff Celgar, the pulp mill that brings in roughly 45 per cent of the small city’s revenue. Celgar declared it was suing the city for unjust taxation and refusing to pay the $3.2 million the company owed that year. “You couldn’t get more last-minute than that,” Chernoff says. “It was definitely not a great situation to be in.” 

Similar scenes were taking place in other B.C. resource towns that summer, including Powell River, Campbell River and Port Alberni, as major industry owners staged a dramatic tax revolt. It was a nightmare for Chernoff and his staff. Castlegar had its own bills to pay, Chernoff says: to the regional district, the province, schools and others. The regional district at one point threatened to shut down all its services – including the rec centre and bus system – if it didn’t get paid, Chernoff says.

And yet, despite the tough spot Chernoff found himself in, he has a lot of sympathy for companies such as Celgar. “For many years, these industries have paid a fair hunk of money,” he says. “And finally, as the economy turned, they turned, and they’re saying, ‘This is no longer fair.’”

Robert Bish is not surprised by industry’s show of defiance. The professor emeritus of economics and public policy at the University of Victoria first looked into the problem of industrial property taxation in the late ’90s, when forestry companies started getting into trouble. “I was shocked,” he says. “I didn’t realize it had 
got that far out of line.” 

In a 2004 report, Bish shows that the median property tax for a major industry in B.C. is about four times higher than for a resident. He compares this to provinces such as Saskatchewan and Manitoba, where the difference is less than two to one, and to U.S. states where industrial taxes are actually lower than those for residents. There’s no single explanation for how B.C. got to this state, Bish says, but rather a series of conditions have compounded the problem over decades. One major difference between B.C. and other regions is that in 1983 the provincial government decided to allow municipalities to set their own tax rates, whereas other regions have legislated limits.

B.C. also uses more categories of properties than most (nine, compared to three in Alberta, for instance). This gives municipalities the opportunity to overtax groups with a lot of income (such as industry) and subsidize groups with a lot of votes (such as residents). It’s hard to argue that B.C. residents can’t afford to pay more property tax than they do now, he adds. When he looks at the rest of North America, where cities don’t have such high industrial taxes, “they’re doing just fine,” he says.

Of course, the tax discrepancy isn’t a problem when industries are awash in profits, Bish says. But these taxes make capital investments, such as buying new machinery, more expensive, leading to inefficient facilities that will be the first to fall in a tough, competitive market. “It’s a Greek tragedy,” he says. “You sit back and you watch it, you know the results aren’t going to be good but nobody seems to have the ability to do anything about it.” 

In 2006 the provincially appointed B.C. Competition Council advised the province to put in limits on the taxation powers of cities – a recommendation the government ignored. Dan Miller, the former NDP premier and cabinet minister who co-chaired the council, says there’s a strong culture in B.C. of empowering municipalities, but he’s convinced it’s going to take provincial action to get any real change. “Municipal governments aren’t the same as provincial governments; they’re really administrative,” he says. “They’re not really equipped to change in any dramatic fashion to world economic conditions.” 
And besides, Miller adds, 
municipal leaders are elected by residents, and it’s going to be hard for any city councillor to get elected on a platform of raising residential taxes.

After almost a full year of tense negotiation, Castlegar eventually got out of its predicament, with the Celgar mill paying its entire tax bill plus late penalties in April. But Lawrence Chernoff isn’t done with tax issues yet. In April he joined the province’s newly formed Major Industrial Property Taxation Steering Committee, which will study the issue and propose possible solutions this summer. But any conclusions the committee arrives at will almost certainly be controversial.

“To be competitive in the market, there’s probably not a lot of choices here, and communities are going to have to try and pick that up,” Chernoff says. “But you know how it is with taxation and people: it goes right off the deep end.”