Land Transfer Tax a Bad Idea According to C.D. Howe Institute

Land Transfer Tax a Bad IdeaLand transfer taxes are a bad idea that have a negative impact on both homeowners and the governments that enact them, says a new report by Benjamin Dachis, senior policy analyst for the C.D. Howe Institute.

The tax measure reduces the number of homes that are sold, particularly in the lowest price ranges, and inhibits household mobility, says Dachis. As a revenue source for governments, they are not reliable because of the volatility of the real estate market, and they distort the residential and commercial markets where they are in place, he says.

Dachis studied the Toronto Land Transfer Tax (LTT), which he says adds an additional tax of about $11,400 to an average detached Toronto home. That’s in addition to the provincial land transfer tax of $12,100. The city is the only municipality in Ontario to have a double LTT, which ties it with Philadelphia for the highest statutory transfer tax rate in North America.

Dachis says other municipalities in Ontario have been looking at similar LTT schemes, but he says, “This is one bad idea that should not spread.” Toronto’s LTT was introduced in 2008, and within the first eight months of its existence, it reduced single-family dwelling transactions by 16 per cent, and reduced the average sale price in Toronto by 1.5 per cent, he says. Dachis also studied the tax in a 2008 report.

The new study says that from 2008 to June 2012, even though Toronto enjoyed a real estate boom, “the number of real estate transactions was reduced by about 16 per cent in Toronto relative to sales elsewhere in the Greater Toronto Area” and that “the most pronounced effect on the market was in areas with relatively low sales values.”

Dachis also says the tax caused many homeowners to choose to renovate their existing homes rather than to relocate.

“The existing economics literature suggests that reduced mobility might increase unemployment in places with an LTT, starve firms elsewhere of employees, deter workers from switching to more productive jobs, and result in homeowners keeping homes they no longer desire,” he says in the study.

In addition to Ontario, there are land transfer taxes in British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador and Prince Edward Island. Quebec requires municipalities to collect an LTT of a maximum of 1.5 per cent for homes valued at more than $250,000. In Montreal, there are two higher LTT rates for homes priced more than $500,000 and $1 million. Some Nova Scotia cities also have their own LTTs.

The Toronto Real Estate Board (TREB) launched a website to get out its message opposing the LTT. The board commissioned a poll by Ipsos Reid that says 60 per cent of Torontonians support a commitment by Mayor Rob Ford to repeal the tax. In another poll, in 36 of the city’s 44 wards, at least half of the residents supported repealing the tax, says TREB.

The first poll also found that 25 per cent of Torontonians expecting to move in the next two years are planning to leave Toronto for the areas around the city that don’t have the extra LTT. Only three per cent of residents from those areas say they were planning to come to Toronto.

Dachis says an LTT “is likely more politically appealing to politicians than is a broad-based property tax because few residents are directly subject to an LTT in a given year, compared with the population of homeowners generally.”

TREB says: “Other taxes do not share the same flaws as the LTT. For example, because property taxes are paid by all, they are fair and put more pressure on the city council to think twice about its spending decisions or about raising taxes.”

Although one of Ford’s campaign pledges was to repeal the LTT, Toronto is struggling to pay for a crumbling infrastructure and a number of social services that have been downloaded on municipalities by the province. In 2011, Toronto collected $319 million from the LTT, which represents three per cent of that year’s operating budget. Without a large property tax increase, that money would be hard to replace.

Montreal is in a similar position. In 2011 it collected $100 million from the tax – 2.7 per cent of its operating budget.

To replace the tax, TREB says Toronto should continue to watch its spending and maximize the value of its large number of real estate holdings across the city. It should sell assets it does not need to own or operate, says TREB, to pay down its capital debt, and it should use existing city assets creatively to generate income, such as selling air rights above city-owned parking lots.

Dachis says Toronto should “repeal its LTT and replace lost revenue by increasing its residential property tax, for which it has fiscal room.” He says Montreal, Quebec and the municipalities in Nova Scotia should also repeal their LTTs and offset the lost revenue with “less economically damaging property tax adjustments.”

Written by Jim Adair