Last week's commentary on the challenges facing cities generated some great feedback and we will continue our look at municipal financing in the New Year, but this week we zero in on property taxes.

But before we go any further, please note, understanding our Byzantine property tax system is similar to advanced science; for each new revelation or level of understanding attained, two more questions present themselves. With this warning, let's march ahead.

Residential property taxes in Ontario are calculated using a system called "current value assessment." Simply put, a variety of factors including historical selling prices, model property portfolios, the location, size (inside and lot) and quality of your house, any upgrades/improvements, and a host of other factors determine the assessed value of your home.

Then this assessed value is multiplied against your municipality's tax rate and voila, you arrive at the value of your municipal property tax bill.

And we're not talking about any small undertaking. The Ontario Property Assessment Corporation (OPAC) employs some 1,500 assessors and the 1996 assessment for all properties in Ontario came in at a whopping $756 billion.

While Ernie Eves and Paul Martin are both bringing welcome income tax relief to Ontario paycheques, and even more of this in the New Year, these gains are being clawed back by local municipalities. Assessed property values are up province-wide. And in several communities property tax rates are also rising. This double whammy for homeowners is sometimes reaching well above $1,000 … say goodbye federal and provincial income tax cuts.

This is the downside to economic growth. Yes incomes and consumer spending are increasing, so both the feds and the province increase their haul of income and sales taxes. But municipalities, especially the larger ones don't share in this revenue growth. As a recent Toronto Star editorial noted, new construction in boom times does expand the property tax base, but not in large quantities compared to this total tax base.

Moreover, the cost to service new residential or industrial development quickly eclipses any incremental gains from the growth of the assessment base in the first place. Add to all this the new demands placed on cities in Ontario with provincial downloading (with little or no matching funds) of welfare, ambulance services, public transit, housing and roadway improvements and it is understandable why local tax rates are going up.

On the other side of this debate, some MPPs at Queen's Park say the cities are just whining and need to get their fiscal houses in order. There is some merit to this argument and cities could do better with innovative alternate service delivery measures or zero-based budgeting initiatives, but these savings will not solve all problems. Indeed, some cities are already contracting out garbage collection, public transit, information technology support and recreation services.

But recent surveys by the City of Edmonton and the Canadian Federation of Independent Business (CFIB) point to larger problems. For comparable properties across 18 cities in Canada, Ottawa ranked 2nd and Toronto ranked 4th in terms of the highest property taxes. And the CFIB noted in an October study that Ottawa had the highest residential property tax burden in Ontario followed closely by Hamilton, Windsor, London and then Toronto.

Faced with mounting infrastructure bills along with increased demands for services, the question now becomes, how much higher can property taxes go It brings us back to the fact that there is just one taxpayer. So on the property tax file, Ontario does not rate well … and it is a question that elected officials at all three levels of government should address sooner rather than later before they themselves get "rated" out of office.