Jack M. Mintz: Don’t hike Toronto's most-distorting tax, the land transfer tax
Toronto City Council today considers a budget proposal to hike its land transfer tax (LTT) from 2.5 to 3.5 per cent on house transaction values in excess of $2 million. The proposal is projected to raise $18.7 to $26.7 million in 2021, a minuscule amount compared with Toronto’s $14-billion municipal budget. It would affect almost 40 per cent of Toronto sales this year (based on Feb. 12 listings).
Not surprisingly, the Toronto Regional Real Estate Board is on a rampage to defeat the proposal. A similar proposal died last year; nor is this one expected to pass. Whatever happens, however, a basic question needs to be asked: why would Toronto levy an LTT in the first place when Torontonians are fleeing to neighbouring municipalities that offer them more space?
In 2008, Ontario’s McGuinty government gave the City of Toronto the right to impose its own LTT on both residential and non-residential property — perhaps one of its worst decisions, as I explain below. Readers of this newspaper know that Toronto has become an expensive city to live in, with an average house costing close to $1 million. But on top of that a Torontonian buying this average home will pay $33,000 in provincial and municipal LTT. On a $3-million home, LTT is $123,000 (which the proposal would boost by another $10,000).
Toronto’s municipal government is the only “winner,” extracting close to $800 million in LTT revenues in 2019, sharply up from $525 million in 2015 — although it fell back to about $700 million in last year’s pandemic recession. But the tax has drawbacks even for it.
It has become fashionable for politicians at all levels of government to hike every conceivable tax on the rich. But the LTT is not a tax on income, which is the best metric to determine whether someone is rich or not. It isn’t even a tax on net wealth since it excludes financial and other assets and does not correct for whether a homeowner is debt-free or is still up to his or her eyeballs in mortgage debt.
Instead, the LTT is a tax on people who buy a house because they have decided to move. And why do people move? They might be trying to get closer to their job or to a better school. They may be looking for a larger home for their family or downsizing at retirement. Or they may be first-time buyers, possibly migrants moving to the city. So, why is taxing mobility a smart idea?
It isn’t. The LTT is a turnover tax paid each time a house is sold. It is thus a highly distortionary tax, discriminating against people who have to move. Taking account of these distortionary costs, international studies estimate that the economic cost of raising a dollar in real estate transfer taxes is fully 50 cents, more than the economic cost of raising an extra dollar of personal income, property or sales taxes. Only the corporate income tax is more distortionary.