The Impact of Property Taxation on Business Investment in Alberta

When considering an increase in their non-residential property tax rates, Alberta municipalities must also take into account the adverse effects such an increase will likely have on business investment in their communities. Based on data on commercial and industrial permit values for 17 Alberta cities from 1998 to 2017, this paper shows that increasing the non-residential property tax rate corresponds to a drop in businesses investment in buildings and structures. Raising the non-residential property tax rate by, for example, 10 per cent results in a seven per cent drop in business investment. Businesses have long expressed concerns about municipal government’s excessive reliance on taxing commercial and industrial property. The issue has become particularly salient in Alberta since the City of Calgary increased its non-residential property tax rate, not only to replace its business tax, but also to offset the decline in the property tax base from the reduction in the assessed value of downtown office buildings. Calgary rationalized that eliminating the business tax and shifting the tax burden to the non-residential property tax would boost the city’s competitiveness and attractiveness, besides contributing to improved administrative efficiency in the tax system. The business tax that the city eliminated was responsible for almost a quarter of non-residential and business tax revenues. However, the city envisioned that eliminating this tax and transferring its onus to the non-residential property tax would generate the same amount of revenue. This study finds that if the non-residential property tax rate is increased by one mill — the tax rate per $1,000 of property value — there is a concordant drop in annual real per capita commercial and industrial building permits by about $39.37. This then creates a boomerang effect – a decline in investment results in a lower stock of capital and a corresponding reduction in property and income tax bases in the future. With higher tax rates eroding tax bases, revenues thus cannot keep pace proportionately. Taxes on residential and non-residential property in Alberta make up about half of the total revenues for the province’s municipalities. Property taxes are vital for financing local public services. While this study shows that spending more on municipal services does not significantly affect business investment, or business decisions on where to locate, increasing non-residential property taxes has a negative impact on such decisions and investments. Policy-makers in other Alberta municipalities observing the effects of the City of Calgary’s recent hike in non-residential property taxes in the midst of an economic downturn should take into account the potential adverse effects on local economic growth and their municipal revenue bases. This study will contribute to informed policy-making in the province’s municipalities.