Tax interest cut: Who benefits?

It is with the very best of motives that Iqaluit City Council has decided to cut the interest rate it charges on overdue property tax bills.

City councillors, at least the ones who voted for the idea, did so because they honestly believe they’re protecting small, struggling homeowners from falling too far behind on property tax payments.

They’re thinking especially about three Iqaluit families whose tax bills were allowed to go unpaid for many, many years. Not surprisingly, the city’s old monthly interest rate for unpaid taxes — which amounts to 22 per cent per annum — helped push those debts to staggering levels.

When the city threatened to seize the three properties, a highly uninformed controversy broke out, dominated by far too much emotion, and not nearly enough thinking.

In reaction, the city has been looking at ways of cutting the interest rate. They did that this week, reducing it from 22 per cent per annum to 12.8 per cent.

But in the long run, is it small, struggling homeowners who will benefit the most from the lower rates?

Probably not. The city’s latest list of overdue taxpayers shows it’s companies, not individuals, who carry the biggest unpaid tax bills.

For example, a company called Iqaluit Arctic Ltd. owes $59,000. Navigator Inn 2000 Ltd. owes $46,000, Nova Construction Ltd. owes $38,000 and Coman Arctic Ltd. owes $37,000.

As of last month, Iqaluit’s unpaid property tax bills totalled $641,381. That’s down considerably from the $1.3 million figure of a couple of years ago, but it’s still too much.

These and other unpaid debts represent cash that should be sitting in the city’s bank account. If the city can’t get its hands on that cash because others won’t pay their bills, then the city is forced to borrow money from the bank to pay its own bills.

And the city must pay interest on those short-term borrowings. That’s why the City of Iqaluit, and all other businesses and organizations, add a penalty to overdue bills. It’s to compensate them for their own interest charges.

Will the City of Iqaluit now end up subsidizing the many companies who owe the lion’s share of its overdue taxes? Only an accountant can say for sure. Will big developers — some of whom own tens of millions of dollars worth of rental property in Iqaluit — start witholding tax payments to take advantage of the lower interest rates? Only time will tell.

But it’s ironic that an action intended to help small, struggling homeowners may end up delivering its greatest benefit to affluent businesses.

In any event, there’s a better way to prevent compound interest from piling up on unpaid tax bills — and that’s to take early action. In the past, the municipality’s greatest act of cruelty was to sit and do nothing as a few unpaid tax bills were driven sky-high by compound interest, year after year after year.

If a bill is paid in the first place, the interest rate can’t be applied. Besides, even at 12.8 per cent a year, a tax bill will still double in size after six or seven years. Just do the arithmetic.

The answer is simple. If any tax bill goes unpaid for more than 12 months, that’s when the city should take aggressive action to collect. And there’s no reason why that can’t be done in a flexible and compassionate manner — as long as the debtor is willing to co-operate and to pay at least something. JB