Trouble ahead with land tax shortfall
Mayors have ignored warnings about market slowdown
Reading Monday that the city is projecting revenue from the land transfer tax to come in a whopping $99.2 million short of what city council budget- ed for, an episode of history sprung to mind: the sinking of the Lusitania.
I recently read that for weeks before the British ship departed from New York in 1915, the German government ran advertisements in American newspapers warning that it would sink it and any other British ship that travelled across the ocean — these ads even appeared directly alongside the notices about the Lusitania’s departure, on the same page. Once the ship was on its way and approaching the passage between Ireland and England, the captain was warned that three British merchant ships had just been sunk in that area by German U-boats. The Lusitania sailed on. The captain was reportedly advised to sail far from shore, and to employ a zigzag course to evade torpedoes. The boat did neither, and cut its speed, too, reportedly because of fog. It was hit by a torpedo fired by a German U-boat, and sunk 18
minutes later. Some 1,195 passengers and crew lost their lives.
Why didn’t the captain heed the many warnings?
Robert D. Ballard and Rich Archbold, authors of the book Lost Liners, speculate: “(William) Turner was ignoring or at least bending every one of the Admiralty’s directives for evading German submarines ... His many years as a merchant captain undoubtedly inclined him to trust his own instincts over bureaucratic directives he didn’t fully understand.”
Warnings in the newspaper. Bureaucratic directives. Who wants to listen to those? Certainly not Toronto city council, which under mayors Rob Ford and John Tory has failed to either raise property taxes or adequately diversify its income streams. Instead, they have doubled and tripled down on their dependence on everincreasing revenue from land transfer taxes.
Councillor Gord Perks, and some of his allies, have warned this is not wise. Hacks like me have gone through barrels of ink saying that if the real estate market ever slows, we’re in for a world of hurt. Two city managers in a row, Joe Pennachetti and Peter Wallace, have gone hoarse repeating that the tax is a cyclical source of revenue and that overreliance on it to fund operating expenses would lead to disaster in the event of a real estate market downturn, or even a mild correction.
Give those who preferred to gamble the city’s fortunes on real estate their due, the bets have paid off for more than a decade. The revenues have gone up and up and up: more than quadrupling since the tax’s introduction in 2008. Every time they hit blackjack, council increased its reliance, basically doubling the share of city revenue coming from this one tax between 2014 and 2018.
Not that this has been fair or easy for everyone. In 2008, you could buy an average house in Toronto for $379,000 and you’d get a bill from the city for the land transfer tax worth $3,500. Buy that exact same house last year and the price was now $823,000 and the Toronto tax bill immediately payable had shot up to $12,935. (For the poor homebuyer, that’s in addition to the provincial land transfer tax, which more or less doubles the amount payable.)
Our elected council has been happy to bank that revenue, and budget more and more on it, all the while fighting to the death to keep existing homeowners like me from having to pay an extra $50 per year in property taxes.
The council recipe has been: intense, punitive pain for homebuyers, continued comfort for homeowners.
Anyhow, for the city, the land transfer tax has been a relatively simple budgetary lubricant. But that may be changing. Almost $100 million less than projected is kind of a big deal, in a city where we routinely spend budget season haggling over the continued existence of programs worth hundreds of thousands of dollars. As the Star reported Monday, the crisis is not at hand yet — the city as a whole is still projected to show a slim budget surplus at year-end because of other adjustments. But no real estate downturn is at hand yet either.
This shortage isn’t the result of a deep recession, or a crash in the housing market. Prices for real estate continue to be higher than ever before. It’s simply a slightly slower market, with less volume of sales than before, that has caused the nearly nine-digit shortfall. If the market does slow further, or prices drop — and even worse, if such things are causes or indicators of a broader recession — we’ll be in deep trouble as a city.
We can consider this a final warning, one starker and (I hope) harder to dismiss than those before. If you didn’t believe the newspapers and the council opponents and the bureaucrats, maybe the reality of a budget line will make it clear.
Different revenue sources are needed to fund much of what the city does. If that’s not the property tax, it needs to be something else. And soon. Otherwise, we’re sunk. And we won’t be able to say we had no warning.