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Heavy equipment can be seen working on the Kitimat Liquified Natural Gas project at Bish Cove, Douglas Channel, south of Kitimat, B.C., on Wednesday, June 27, 2012.Robin Rowland/The Canadian Press

The B.C. government should keep its hands off municipal tax powers as it finalizes its own liquefied natural gas regime, the Union of B.C. Municipalities is warning.

After years of successfully fending off provincial interference in property tax rates, municipal leaders say they were blindsided this week to learn the province is looking at limiting local tax powers as part of the package designed to entice investment in a B.C. LNG industry.

The minister responsible for developing an LNG industry, Rich Coleman, said this week his government is looking at capping the industrial property tax rate to provide certainty to investors. The province is working on a tax package that aims to make B.C. more competitive than Australia or some U.S. jurisdictions. That package incorporates a range of taxes from the federal to the municipal level, from the upstream production of natural gas to the LNG export terminals.

However, a senior UBCM official, Burnaby Councillor Sav Dhaliwal, said Tuesday the province hasn't consulted with local government about curbing property-tax authority.

"We are quite surprised to hear cabinet is even considering this," Mr. Dhaliwal said in an interview.

For the past four years, the provincial government has been lobbied to cap industrial property taxes on behalf of major industry. But the UBCM fought back, arguing that local government needs to be left to make those decisions on behalf of their ratepayers.

"It was clear to us that the property taxes do not make a heck of a lot of difference to the investor decisions. When you think of the billions of dollars it would take to build an LNG facility, the property taxes would be a fraction of a per cent of the investment," Mr. Dhaliwal said.

"But it has a big impact on the ability of democratically elected local officials to manage their affairs. Let the local government find that balance."

Finance Minister Mike de Jong, who is responsible for the tax package, said no final decision has been made about how municipalities will fit into the final LNG framework, which is expected to be tabled as legislation in the fall.

"I would be cautious about concluding prematurely until you see legislation, what the overall approach to taxation is," he said.

However his government is concerned that the threat of local property tax hikes – which are largely outside of the province's control – could be a risk to the investment climate on LNG. The high-profile tax battle by Catalyst Paper to contest its property taxes in four B.C. communities has put a spotlight on the concern that industries, once they have set down roots, are at the mercy of local councillors who may find it easier to raise taxes on corporations than on their voting residents.

But the minister in charge of municipal affairs, Coralee Oakes, said she has not brought up the tax issue with the UBCM.

"I would defer to the minister of finance who is putting together the taxation package," she said. "My job is ensure that those communities are ready [for LNG development]. … For us, the most important thing is, let's identify what the infrastructure needs are."

The province is negotiating with northern communities on "fair share" packages that would allow local communities to benefit from LNG development, if it happens. That may be rolled into a compensation package that could be offered up in exchange for ceding control over LNG property tax rates.

On Monday, Mr. Coleman said he is prepared to set a ceiling for industrial property tax rate hikes so that the issues raised by Catalyst Paper are not repeated if LNG plants are built in B.C.

"We did it with the ports, and that's what we are looking at doing here," he said in an interview.

In 2003, the B.C. government faced a tax revolt from port operators who complained that their host municipalities were taxing them out of competitiveness. In response, the province capped property tax rates for tenants of port terminals.