The pandemic is adding to the cost of delivering Toronto's city services, while some residents and businesses find their incomes drastically reduced as a result of pandemic-related shutdowns. (And a small number of other businesses find their revenues increasing!)
So our property tax rates are being debated, and city council finds themselves in a catch-22.
It's time to very seriously and thoroughly study an alternative: replacing property tax with a municipal income tax, which would make a point of including (but not being limited to) rental income, business income, and revenues from selling real estate.
The primary concern expressed about property tax is that the value of your home can go up while you're just quietly living in it, even though your income and budget are unchanged - even if your income decreases!
Replacing property tax with income tax would address this. If your income suddenly decreases, your tax would decrease commensurately, regardless of what's going on with local property speculation.
At this point, some people point out that if a home has appreciated significantly, the owner is sitting on a high-value asset and should be taxed on this.
Replacing property tax with income tax would address this. It would totally tax property owners on the money they make from their high-value asset, it would just take the more user-friendly approach of levying that tax at the moment they actually have that money in hand.
People also point out that real estate can be a revenue generator, because you can rent it out.
Replacing property tax with income tax would address this by taxing landlords on their rental income. But, at the same time, landlords wouldn't be incentivized to raise rent to cover taxes, because they'd be taxed a percentage of whatever rent their charge, rather than being taxed a specific number.
These two factors converge to address the the so-called "condo tax", where commercial property owners are taxed on "highest and best use" - i.e. what their property would be worth if redeveloped - and then that tax is passed on to the business that rents the property as a rent increase.
Replacing property tax with income tax would address this by taxing property owners on any money they make selling their property to developers, but would take the more user-friendly approach of taxing them at the moment they actually have the money in hand, and the taxation burden would not be passed on to small businesses because a building that's being sold for redevelopment wouldn't be occupied by tenants.
Another argument in favour of property tax is that it's intended as a wealth tax, but property ownership provides an incomplete picture of wealth. Jeff Bezos could buy the condo next to me, which is absolutely identical to mine, and would owe the City of Toronto exactly the same amount of taxes as I do. Meanwhile, I'm fully leveraged whereas he could buy the condo outright with the money he made in the time it took me to compose this paragraph.
Replacing property tax with income tax would address this inequity, by taxing this hypothetical Jeff Bezos on the billions that he makes, while taxing me on the tens of thousands that I make.
Speaking of rich people buying condos, another problem that exists in the Toronto real estate market is absentee owners buying up condos as investments or a place to park assets, sometimes not even living in them or renting them out! (This has often been covered in the media as a "foreign buyers" problem, but the real problem is that they aren't living in the home, not that they are from another country.)
Replacing property tax with income tax might address this issue. Perhaps people rich enough to casually buy real estate that they aren't even using would be disincentivized if they had to pay income tax in a whole nother jurisdiction? (It doesn't seem like enough of a disincentive to me, but the way money people tend to talk about taxes makes me think they find taxes more of a disincentive than I do.) And if they don't find it a disincentive, it's more money for city coffers.
Q: But don't you know that municipalities aren't legally permitted to levy income tax?
A: Yes! That's why we need to very thoroughly study it, so that if it does turn out that income tax is more appropriate, we have a compelling case for the levels of government with the power to change those laws.
Q: But don't you know that rich people rarely pay taxes?
A: Yes! That's why we need to very thoroughly study this, so it can be executed in a way that doesn't leave any loopholes to wiggle out of.
Q: What about sales tax?
A: I have no objection to studying sales tax too, and it may even have already been studied because I do hear people talking about it from time to time. But it seems to me that income tax is more likely to address the flaws in the property tax model, while also being closer to its original intention as a wealth tax.
Property tax is the oldest surviving form of taxation, dating back thousands of years. It's quite possible that, like many things dating back thousands of years, it isn't the very best way to meet 21st-century needs.
The pandemic only magnifies the flaws of the property tax model. As we plan our pandemic recovery, it's time to seriously study an alternative to property tax.
2 comments:
When I was renting in the GTA, I was amazed to learn that property tax replaced municipal taxes. In expensive US cities where most people rent, and where property is mostly owned by real estate developers and management companies, municipal taxes are the norm.
In Michigan the list of cities with a municipal income tax is pretty much the list of the most economically disadvantaged cities. I can only assume that this is because poor cities are the most resource-starved, but it's a vicious cycle because the income tax itself further degrades the city's economic competitiveness. Property tax to fund local government is one thing, but in USA property tax is also the funding base for public schools. Real estate prices are about location, location, location, but specifically location relative to school district boundaries. If I were in charge of public policy, I'd do away entirely with the school district system. Education would be a gift from the taxpayers of the nation to the children of the nation. If local control is a casualty, oh well, I don't particularly care. I'm convinced most of the decentralist tendencies in USA politics are rooted in racism, anyway.
As far as income tax instead of property tax, it might work to my advantage, as I'm house rich (actually house lower-middle-class, but rich relative to my very proletarian family of origin) and very very income poor. I'm nevertheless lucky in that my wife inherited her parents' house so no rent or mortgage and the cost of housing for us is basically the property tax bill.
I'm convinced that every possible change in tax policy has "winners" and "losers." Progressive taxation (taxation based on the ability to pay) is a principle I approve of. My tax plan (not that I'm running for anything) is simple: Your percentile ranking is your tax rate. Maybe combine income percentile ranking and net worth percentile ranking to cover cases like income-poor-asset-rich and vice versa. I'm pleased as punch that Senator Warren has actually brought the idea of wealth tax to the Senate floor, but unfortunately it won't go anywhere soon.
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