A pro­gres­sive hous­ing cost pro­posal

Ap­ply­ing a sur­tax that in­creases with the price of a home would help in sev­eral ways

Vancouver Sun - - OPINION - RHYS KES­SEL­MAN Rhys Kes­sel­man is the Canada Re­search Chair in Pub­lic Fi­nance with the School of Pub­lic Pol­icy, Si­mon Fraser Univer­sity.

Van­cou­ver’s hous­ing cost cri­sis has gen­er­ated di­verse pro­pos­als for poli­cies to curb price in­creases, spec­u­la­tive pur­chases, for­eign own­er­ship, va­cant prop­er­ties, and large homes crowd­ing out mod­er­ate-priced hous­ing. With the goal of mak­ing hous­ing more af­ford­able for both renters and new buy­ers, clearly no sin­gle pol­icy will re­solve all of th­ese prob­lems.

One ap­proach that has been over­looked is the po­ten­tial for ap­ply­ing res­i­den­tial prop­erty taxes at pro­gres­sive rates — with higher rates ap­plied to higher-val­ued homes. Homes val­ued below a spec­i­fied thresh­old — for ex­am­ple, $1 mil­lion — would be un­af­fected by such a prop­erty sur­tax.

The sur­tax could be ap­plied at 0.5 per cent on value be­tween $1 mil­lion and $1.5 mil­lion; one per cent be­tween $1.5 mil­lion and $2 mil­lion; 1.5 per cent be­tween $2 mil­lion and $3 mil­lion; and two per cent on all value in ex­cess of $3 mil­lion. Thus, a $1.5-mil­lion home would bear sur­tax of $2,500 (0.005 x $500,000), and a $2-mil­lion home would bear $7,500 sur­tax. Higher sur­taxes would ap­ply to still higher-val­ued prop­er­ties.

The thresh­olds and rate brack­ets could vary across the prov­ince to re­flect the widely vary­ing house price pat­terns. Each mu­nic­i­pal­ity would set its rate brack­ets un­der au­thor­ity of new pro­vin­cial leg­is­la­tion, and the sur­tax rev­enues would flow into mu­nic­i­pal cof­fers for af­ford­able hous­ing ini­tia­tives.

Two im­por­tant fea­tures would ac­com­pany this pro­posal. First, to tar­get the tax on spec­u­la­tive pur­chases, non-res­i­dent pur­chasers, and va­cant prop­er­ties, each home­owner would be able to credit against sur­tax their B.C. in­come tax paid in the pre­vi­ous year. Ex­cept for higher-val­ued prop­er­ties, this fea­ture would in­su­late from sur­tax most res­i­dent home­own­ers who are oc­cu­py­ing their home.

Non-res­i­dent for­eign own­ers, satel­lite fam­i­lies, tax evaders, and crim­i­nals us­ing their pro­ceeds to buy homes would be most im­pacted by the sur­tax, since they would have paid lit­tle or no B.C. in­come tax to off­set against their sur­tax. Both for­eign and do­mes­tic spec­u­la­tors in higher-val­ued res­i­den­tial prop­er­ties would also bear sur­tax since they would not have suf­fi­cient in­come tax to credit against all their hold­ings.

The other im­por­tant fea­ture of the pro­posal is that all home­own­ers would have the op­tion of de­fer­ring pay­ment of their prop­erty sur­tax un­til the home was sold (sim­i­lar to the tax de­fer­ral on prop­erty tax now of­fered se­niors). This pro­vi­sion would cush­ion own­ers of higher-val­ued prop­er­ties who are “home­rich but cash-poor.”

Even at rates ap­proach­ing two per cent on the high­est-val­ued prop­er­ties, the sur­tax would ab­sorb only a frac­tion of the long-run ap­pre­ci­a­tion on res­i­den­tial prop­er­ties in the Van­cou­ver area. Al­though highly vari­able year to year, th­ese rates have typ­i­cally run be­tween five and 10 per cent. Thus, the ac­cru­ing debt of those choos­ing to de­fer their sur­tax should never out­run the ap­pre­ci­a­tion on their prop­er­ties.

How can such a new tax be jus­ti­fied in terms of fair­ness within the over­all tax sys­tem? Home own­er­ship is per­haps the most favourably treated form of wealth. The rental val­ues of the ser­vices of an owner-oc­cu­pied home are tax-free; if the owner were to hold equiv­a­lent wealth in fi­nan­cial in­vest­ments, the re­turns would be taxed.

More­over, the cap­i­tal gains re­al­ized upon the sale of owne­roc­cu­pied homes are fully taxfree in Canada. Many coun­tries tax such gains; the United States taxes the gains on sales of owner-oc­cu­pied homes above $250,000 US per owner. And un­like al­most all coun­tries, Canada does not im­pose any death levies such as es­tate or in­her­i­tance taxes, so the large ac­crued gains on homes flow tax-free to ben­e­fi­cia­ries.

While not a cure-all for the prob­lems af­flict­ing Van­cou­ver’s over-priced hous­ing, this scheme would help in sev­eral ways. It would re­duce the re­turns to spec­u­la­tion on ris­ing home prices by both for­eign and do­mes­tic agents. It would raise the cost of hold­ing va­cant houses and un­rented con­dos, thereby in­creas­ing the rental sup­ply.

The scheme would also dis­cour­age the pur­chase of highly priced prop­er­ties and thereby re­lease land and re­sources for con­struc­tion of more mod­er­ately priced hous­ing. Re­duc­ing the high ap­pre­ci­a­tion rates on de­tached homes would ex­ert rip­ple ef­fects on ex­pec­ta­tions about fu­ture price in­creases, damp­en­ing the per­ceived ur­gency to buy.

How does this pro­posal com­pare with other ideas for curb­ing high and in­creas­ing home and rental val­ues? To il­lus­trate, B.C. Fi­nance Min­is­ter Mike de Jong has mooted an in­crease in the prop­erty trans­fer tax for high-val­ued homes. But a sur­tax ap­plied an­nu­ally would be more ef­fec­tive than a sur­tax ap­plied just one time at pur­chase.

My pro­posal does not ex­plic­itly dis­tin­guish be­tween do­mes­tic and for­eign pur­chasers; only the in­come tax off­set to the sur­tax of­fers some lev­er­age against for­eign buy­ers. How­ever, a prop­erty sur­tax could be sup­ple­mented by a sur­charge in the prop­erty trans­fer tax on for­eign pur­chases. This could be pat­terned af­ter ini­tia­tives such as Aus­tralia’s three per cent or Sin­ga­pore’s 15 per cent sur­charge on for­eign pur­chases.

A prop­erty sur­tax needs to be con­sid­ered along­side other pol­icy can­di­dates such as taxes on spec­u­la­tive hold­ings or cap­i­tal gains, re­stric­tions on for­eign own­er­ship, and zon­ing and lan­duse re­forms. Yet a prop­erty sur­tax would be easy to im­ple­ment, cause min­i­mal dis­tor­tion in hous­ing mar­kets, re­store eq­ui­table tax­a­tion to hous­ing, and yield rev­enues that could be used to tackle other parts of Van­cou­ver’s hous­ing prob­lem.

DOU­GLAS TODD/VAN­COU­VER SUN FILES

Ex­pen­sive houses, such as those in the Shaugh­nessy-Arbutus neigh­bour­hood, would be hit with a higher rate of prop­erty sur­tax than homes of lesser value in Van­cou­ver un­der Rhys Kes­sel­man’s pro­posal.

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