The Tax Man cometh III

December 2007

The Tax Man Cometh III

Toronto City Hall. Original image at http://picasaweb.google.com/sudmic/Toronto#5084582105141664898

It's December again
It's becoming a habit -- and I'm not sure it's a good one -- but the topic of my December newsletters keeps turning out to be taxation.
This year's issue isn't an exception, although the focus isn't on the problems inherent in municipal property assessment, as has previously been the case.
Instead, its concern is that buyers in the Toronto area are going to be hit with a second Land Transfer Tax, starting in February next year.

Is it justifiable?
The concept has been on Toronto City Council's table since at least last spring, and there have been several decidedly strong presentations questioning the wisdom of it (or even the need for it). These have included arguments from The Toronto Real Estate Board, the Ontario Real Estate Association, and various business organizations such as the Toronto Board of Trade and the Federation of Independent Business.
The protests have argued that "a land transfer tax on top of a land transfer tax" can be considered an ill-conceived means of balancing the city's budget, which is grappling with the costs of downloaded services in recent years (as admittedly is the case for many other municipalities). Yet a better answer could lie in convincing the provincial government (not to mention the federal one) to take over (or back) such items as welfare expenses that presently have to be paid out of the city's property tax receipts.
But other points have mentioned the likelihood of job losses and related impacts. As a recognizable principle, the more expensive it becomes to move to the city, the less attractive a Toronto location is going to be. Many people will be inclined to buy a place outside the city limits, which will result in more commuting and increased traffic congestion, not to mention the chance of further urban sprawl. Alternatively, they'll find jobs elsewhere and reduce the city's standing as a major employment and financial centre. Spending habits could also change, with retail purchases in particular filling cash registers in other communities.
Not the least consequence, as the Toronto Real Estate Board was at pains to point out to Mayor David Miller, the city could lose out on the $2 billion per year that is contributed to its economy because of spin off spending (estimated to be $27,000 a head) for furniture, appliances, and the like when people buy new or resale homes in Toronto.
Certainly an envisaged revenue shortfall of over $500 million next year has city officials worried, but it seems not to be accompanied by any serious thoughts about questioning just where the city's money goes or how well it's spent.

But we know politicians, don't we?
Studies have shown that Toronto's public at large views a second Land Transfer Tax with undoubted disfavour, but it's the votes that count and property buyers, for all their number, aren't in the majority, especially if they're newcomers to the city. Perhaps the mayor and his councillors will pay for what may prove to be a mistake, but this is going to happen -- if in fact it does -- tomorrow rather than today. In the interim, official approval of a second and separate land transfer tax was given and announced at the end of October. Full details are still forthcoming, but the city's financial and regulatory gurus will no doubt be burning the New Year oil to cross the t's and dot the i's in time for the charge to take effect as of February 1st 2008.
Seemingly, there will be some exceptions and rebates, but these aren't likely to dampen the city council's enthusiam for what, after all, recently became a right under the new City of Toronto and Municipal Acts. Moreover, by all accounts, what sounded at first to represent an additional 50% imposition over and above the provincial levy is going to end up being closer to 100%. In other words, an average provincial imposition of $4200 is going to be matched by a similar amount headed for the city's coffers. (But note STOP PRESS at end of this transmission.)
Whatever the justification or underlying rationale, though, tax of any kind has a way of becoming a permanent factor. After all, the federal income tax idea began as a solution to paying for World War One (and yes, that's I not II), but it stayed in place after the Armistice was signed. In fact, Ontario's own land transfer tax was introduced with the purpose of discourgaging property speculation, which it did to some degree for a while, but there's no talk of it being cancelled any time soon, if ever at all. And even the supposedly temporary GST is still in existence, with the reductions in it more than likely being balanced out by a total revenue that's probably (because of rising prices) not going to drop by any significant amount. (Indeed, some commentators held that other right hand aspects of the budget would recoup whatever the left hand was giving away.)
No, once the politicos find a way to take money out of our pockets, they tend to hang on to the source, let alone the amount of it, don't they?
Indeed, think of George Bush Senior's advice about reading his lips. The wording was "No New Taxes," which isn't quite the same as "Tax Cuts On the Way," is it?

Maybe the timing is right?
The cynic in me can't help wondering if Toronto's land transfer tax has another basis. Indeed, Councillor Adam Vaughan (Ward 20 Trinity-Spadina) implied as much when he wondered if taking some of the heat out of the city's housing market might not be an altogether bad idea.
"The rate at which properties are rising in price downtown is a little unrealistic," he said. "So if it (the additional land tranfer tax) slows that down, it may make housing more affordable for some."
Well perhaps, but what I'm given to calling the Mulroney Error had a similar (albeit not readily admitted) purpose and had a lot of disastrous and painful consequences -- and heaven forfend that the few more thousand it's going to take to buy a house in Toronto will prove a prick that bursts its real estate bubble.
However, I also doubt that affordability is going to see any improvement. The price spiral and reported bidding wars aren't likely to come to a sudden halt. Rather, the added thousands may be simply absorbed by the sellers, somewhat in accord wirh the US practice (rarely seen in Canada) of having the seller pay for some or all of the buyer's closing costs. Or perhaps a commensurate reduction in prices may ensue -- although what, really, is the difference between listing at $509,000 rather than $515,000?
Furthemore, the affordability question has more consequence for the low end (and often first time) buyer, who probably isn't faced with so great an increased expense. (And this will certainly be the case if talk of a rebate to first time buyers becomes a fact -- with regard to which see STOP PRESS below.)

Only a beginning?
Apart from anything else, though, the cynic in me has another concern. If Toronto gets away with charging a land transfer tax -- and the predictions are that it's going to do so -- other cash strapped municipalities could be tempted to seek authority for doing likewise.
For example, on our own doorstep there's ongoing concern about what Niagara-on-the-Lake deems a disproportionate contribution to the Region's budget. The higher assessments are a factor, of course, and a reworking of MPAC's mandate may reduce their impact. However, fellow Niagara communities aren't going to readily support a redistribution of the tax load and MPAC has to be conscious of this fact. The odds therefore seem that only a more even calculation of like property values can be expected, with no great difference to the town's total payment to the Region.
Given this, perhaps a land transfer levy could be used to increase the town's revenue and underwrite what it has to pay for Regional services. It might have to go under a different name, but I'm not sure that the principle can be entirely overlooked.
Who knows?
All I can hope is that I'm not destined to compose a further December newsletter with a heading "The Tax Man Cometh IV"!!

Neverthless, despite these Scroogelike mutterings, I do want to extend my very best wishes to you and yours for this year's holiday season. May it be a Good One.