Local tax shocks

July 3, 2007

Just this morning I opened the envelope from my local school board and discovered to my disgust that the local authorities have increased the school tax rate by 8.8 %. Since this levy is applied per $100 of evaluation and property prices have been rising in my neck of the woods- a suburb of Montreal- the overall increase will be substantially more than 9 % perhaps as much as 15 %.
The increased evaluation is phased in over four years so it will continue to rise for the next three years. To add insult to injury the bill stipulates that overdue accounts are charged 15 % interest. Since teachers' salaries have been frozen and prime rates are based on a 5.25 % overnight rate at the central bank, and the core inflation rate is about 2 % one has to wonder how can such an inflationary increase in local school tax rates be justified.

As a good Keynesian I am in favour of investing heavily in education. Perhaps that is what is happening here.But the   Federal   government is earmarking billions   for debt reduction as opposed to investment in education through increased transfers to the provinces. It could if it wanted to do both. So long as it doesn't I will continue to regard my increased school tax bill with less than perfect enthusiasm.

Many years ago John Hotson and Bill Krehm argued that tax rises contributed to inflation in an administered price fashion. They were right. Of course, such `"inflation" was justified if it implied greater quality services.Increasing quality imples that real prices have not actually risen since the services being offered are not equivalent.

Central banks however seem to have trouble understanding the nature of modern economies and the role that administered prices and taxes play in the inflation process.                                                                                    


Obviously if and when one sells the property and there is a considerable capital gain much of the pain will dissipate. But that may not happen, if it happens at all, for many years.

The entire relationship between school taxation, local property taxes   and the taxing powers and fiscal balances of the other more senior levels of government needs to be re-evaluated because there is clearly some unnecessary irrationality in the process.