Education is the bedrock of any successful, flourishing, and innovative society. A well-educated populace is healthier, more engaged, and productive. As a government, there is no better return than that of investments in education. In discussing and critiquing education taxes by no means am I suggesting that we reduce education funding. Instead, I will make the case that it is the source of the funding that needs to change.
Education tax makes up 25-30 percent of the residential property tax bill and just under 20 percent of non-residential taxation. These percentages matter, particularly when times are tight for households and businesses, and every dollar counts.
The pros of education tax being tacked onto property tax make sense for the provincial government; it gains another revenue source, falling disproportionately on urban centres, that most people don’t realize is being collected by the province and not by the City.
Taxes and Farmland
The reason education taxes fall disproportionately on cities reflects another fly in the ointment of city financing: provincially regulated assessment. This may sound just dull enough to not be important, but it matters a lot. While households and businesses are assessed using internationally recognized market value approaches, farmland is not.
The province regulates the assessment of farmland, fixing it at a fraction of its value. This means that farmland owners pay dramatically less than those in urban centres, but it doesn’t mean that Albertans are paying less, simply that the burden is shifted.
For example, the province sets its education tax budget first, much like how the city sets its budget and then divides that by the total assessment base in the province to determine the tax rate. Since farmland is assessed at a fraction of its worth, the tax rate increases and the tax burden is shifted to cities.
Another issue with fixed farmland assessment is not only that it increases the education tax burden but that it also encourages inefficient growth. While an acre of land downtown would cost in the millions, our surrounding undeveloped land sells for $35,000-375,000 per acre.
However, if a developer were to maintain farming operations on this land they would only be assessed at about $318 per acre, a tiny fraction of its value otherwise. This means that farmland has much lower holding costs for developers, who can buy land and sit on it for much less cost as opposed to land downtown which is much more costly to sit on, leading to faster building rates. Developers who own farmland may also have more of an incentive to develop on that land rather than pay millions for land in the core, which can push development outwards.
What’s perhaps most interesting in all of this is that the province actually collects more in education taxes from Edmonton than it gives us grants. Yes, you read that right. In a way, you can consider us a net loser of revenue when it comes to the province, not a net gainer, if we believe that a city’s assessment base is its core source of revenue. If the province used another form of taxation to fund education and stopped all grants to municipalities, we would actually be in better financial shape, though more reliant on property taxes than before. This indicates both how high education taxes have become and the relatively limited amount of fiscal support the province provides.
The lingering issue with education taxes speaks to a larger issue that cities face not only in Alberta but across Canada; the need for more trust from other orders of government. Trust comes in the form of increased powers to go along with our increased responsibilities, a journey embarked upon with the city charters. The province can’t have it both ways; they can’t download costs to municipalities without increasing our capacity. To suggest otherwise is to ignore the facts.
The Solution is Clear and Difficult
Education taxes tacked onto property taxes, put cities at a distinct disadvantage by increasing the burden of our primary revenue tool. The province is not nearly as constrained as cities are in raising tax dollars given that they can tax income, consumption, corporations, and capital gains. The province should not be in the business of funding education from property tax. Corporate tax is a far better and more appropriate funding source.
Businesses benefit directly from education. A more educated population is a more productive population, particularly as our economy becomes more technology and knowledge-based. So, businesses have a strong stake in education. Funding education from corporate tax makes intuitive sense. There is also some room to tax corporations in Alberta while also maintaining our province’s tax advantage as having the lowest corporate tax in Canada. Alberta’s significant tax advantage wouldn’t be lost. We would still maintain lower personal income taxes.
Education taxes account for about 32 percent of the forecasted provincial education budget or $2.6 billion. Edmonton alone contributes just over $500 million. For reference, Alberta’s corporate income tax rate, 12 percent in 2019, generated $4.9 billion and will be shifting to 8 percent over the next four years. The provincial government believes this will net a greater amount of corporate tax revenue collected in addition to signalling that Alberta is “open for business.”
It is important to note that each point of corporate tax generates approximately $400 million today. We’d need to raise corporate tax by about 6 points to cancel out education tax, which is too much. The truth is there would have to be other sources in addition to increased corporate tax, such as a sales tax that could be focused directly on education to ensure our students are the most prepared for our changing world. Or at the very least the province should significantly reduce the amount of education taxes collected from municipalities.
There is much bigger conversation needed about how school boards, cities and the province function together to build schools, use land associated with schools and eventually to modernize or transform older schools- but that’s for another day.
If the province assessed farmland at its full value, or better yet, got out of or reduced funding education through property taxes, this would significantly lower the property tax burden for households and businesses in Edmonton. From there, some of that property tax room could be used to focus strategically on investments that aid economic growth. Additionally, much of that tax room could go unfilled to provide tax relief for Edmontonians, something sorely needed these days for many seniors and business owners.
Next week, tune in as I delve into the property tax crisis that hit Calgary’s business community this past spring, how we can learn from it, and whose fault it really is.
Written with support from Sam Goertz.