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Here’s the dirty little secret of Toronto’s runaway housing boom. With escalating real estate prices in the GTA, who gets a little-noticed share of the profits? Well, of course, the provincial government and the City of Toronto. Ontario levies a land-transfer tax on purchasers of residential and commercial real estate up to 2.5 per cent of a property’s value across the province. Toronto further piles on hard-pressed taxpayers by doubling that amount.

As the market keeps heating up, both governments will enjoy close to a $1-billion windfall from price inflation this year. For the city alone, transfer taxes are expected to total $625 million in 2017. The province is expecting to collect $2.6 billion in 2016–17 fiscal year — almost a quarter of that from Toronto sales.

If Premier Kathleen Wynne wants to score a big win with home-buying voters, why not get rid of the land-transfer tax altogether?

The age-old land-transfer tax began with the 1694 British stamp duty that applied to paper and parchment transactions to pay for war with France. Like many temporary taxes introduced to pay for military adventurism, stamp duties outlasted the war, since they were relatively easy to collect. Britain later introduced the 1765 Stamp Act to be paid by the British American colonies, helping establish Americans’ enduring resentment towards taxation. Perhaps that’s something policy-makers should keep in mind, before there’s a Tea Party in Lake Ontario.

Stamp duties, including the 2003 U.K. Stamp Act, no longer apply to portfolio transactions, since they discourage investors from replacing poorly performing assets with better ones. But taxes on real estate sales remain more common — although China recently eliminated one of its land-transfer taxes and Ireland and Spain are sharply reducing theirs this year. 

After all, there is little, if any, economic rationale to tax mobility. Households and businesses buy and sell real estate for good economic reasons.

In Toronto, a young couple hoping to start a family and move out of a crowded condo will face $37,000 in land-transfer taxes on the average detached-home price. To avoid the doubled land-transfer tax in Toronto, young city workers will either try making do with a renovation, or head to the suburbs and suffer the long commute.

Workers and immigrants looking to settle for the first time in Toronto face a difficult housing market made worse by transfer taxes. The tax, by costing investors more upfront, also discourages development in rental apartments, which are especially important for immigrants. It also increases investment costs in commercial real estate. In some recent work, a colleague and I estimated that the Ontario land-transfer tax increases the effective tax rate on new investment by almost 10 per cent (from 19 to 21 per cent), making the province less competitive.

It is therefore not surprising that transfer taxes impose a high cost on the economy. An Australian Treasury study found that stamp duties (primarily a real-estate transfer tax) cost 72 cents in GDP losses for each dollar raised — worse than its (already uncompetitive) corporate income tax.

Some might argue that the elimination of the land-transfer tax will simply result in higher housing prices. While there is some basis to this argument, the effective impact of the land-transfer tax is to discourage the turnover of property. With fewer homes in high-demand areas available for sale, the land-transfer tax can cause prices to shoot up relative to low-demand areas.

With Toronto’s housing crisis, politicians are feeling tremendous pressure to act. But most of solutions being proposed could worsen housing markets over time.

As many economists have remarked, the essential problem in Toronto is that supply has not kept up with demand. With annual population growth of roughly 1.5 per cent, the GTA has increased by over a half-million people just in the past five years. With restricted land development available for housing, it is simple Economics 101: higher demand plus little new supply equals higher land prices, especially for detached homes, which are land intensive. Supply-friendly policies have helped many cities in North America maintain affordable housing for middle-class families. But the long-run answer is not found in policies that suppress demand — unless we want our cities to stop growing.

For example, a new purchaser’s tax on foreigners has somewhat cooled Vancouver’s market (prices have fallen almost 10 per cent since last year as foreign investors shifted to Seattle and other parts of the West Coast). But making Vancouver affordable to people who want to move there will require more supply.

Rent controls have also failed in large cities over time. While protecting tenants from abrupt rent increase, controls eventually restrict the supply of apartments and improvements to them, making it more difficult for tenants to find adequate housing.

So instead of looking for new taxes and regulations only, Ontario and Toronto can reduce a tax that is unfair to purchasers. It will cost them some revenue, but they can make it up with better fiscal policies that aren’t nearly as harmful to the economy as the land-transfer tax.

Jack M. Mintz is the president’s fellow at University of Calgary’s School of Public Policy.

Source: Financial Post