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Monitor: That &@#! Property Transfer Tax

As B.C. prepares to roll back the harmonized sales tax later this year, the property transfer tax is exiting its first quarter century firmly entrenched in the economic landscape.

As B.C. prepares to roll back the harmonized sales tax later this year, the property transfer tax is exiting its first quarter century firmly entrenched in the economic landscape.

In 2011-12, it applied to nearly 93,000 transactions, more than half of them single-family homes, according to the Canadian Taxpayers Federation, and generated $927 million for provincial coffers. This year, as real estate stagnates, the PTT is expected to raise an estimated $800 million. Neither the Liberal finance minister nor the NDP finance critic can see how to raise that much cash any other way. The Canadian Centre for Policy Alternatives says it’s a good revenue-raiser in the absence of a wealth tax, but critics say it comes with sticky strings — compromising the mobility of the workforce and putting housing out of reach by inflating the cost of a new home by tens of thousands of dollars over the several transactions from bare land to developer to final sale.

Katherine Dedyna explores in this week’s monitor.

The tax that keeps on taking

As B.C.’s property transfer tax completes its first quarter-century, buyers of homes, land and businesses can take a begrudging bow for injecting $12 billion into provincial revenues, with no end in sight.

From its humble beginnings, when a B.C. house typically sold for $102,000 and the tax was barely $1,000, the levy has become a critical source of revenue for the province, injecting mega-millions into the budget.

Both the finance minister and his Opposition critic defend the need for the tax, which is expected to bring in just under $800 million for 2012-13. It’s calculated at one per cent of the first $200,000 paid and two per cent of the value over that.

Finance Minister Mike de Jong called the transfer tax an important revenue source that helps fund a wide range of programs and services, although he noted the tax is reviewed each year to determine whether changes are appropriate, adding: “We are interested in looking closely at the thresholds, given real estate prices in British Columbia.”

While De Jong called the tax “a one-time tax paid when property changes hands,” it’s actually collected each time the same property is bought and sold.

That’s the worst thing about it, said Royal Roads business professor Charles Krusekopf. “You are taxing one thing multiple times. With most sales taxes, you tax something once. It discourages people from buying and selling property and making a move that make sense.”

In its current form, the tax is “borne most heavily by those individuals who have the greatest need for or desire for mobility within the province, which is economically inefficient,” said Simon Fraser professor J. Rhys Kesselman, who holds the Canada Research Chair in Public Finance.

The tax has become so vital to provincial coffers that a real estate slump helped add to the deficit by causing a $95-million dip in revenues from the levy — which peaked at $1 billion in 2008-09.

B.C. forecasts a deficit of $1.5 billion for the 2012-13 fiscal year — $328 million more than projected.

But some critics say the tax helps make a real estate market that’s already almost out of reach for many even more unaffordable.

“The PTT is one of the main reasons that housing is unaffordable for many CRD residents, and many people are unaware of the multiplying impact it has on housing purchases,” said Saanich councillor Paul Gerrard, chairman of the Capital Region Housing Trust Commission, who would like to see the levy relaxed. “It is an open-ended and continuous collection of a tax on every change of ownership of a property.”

Leaders of the housing commission and the B.C. Real Estate Association would like to see the transfer tax become an issue in the May provincial election.

“The PTT has been a cash cow for provincial governments who have not directed much of these taxes back into affordable housing,” said Gerrard, calling on senior levels of government to make housing ownership a priority and introduce housing-affordability policies. “The federal government has not had a housing policy for many years, either, so in very expensive areas of housing, many people have given up on the idea of ever having a house.”

Jordan Bateman, B.C. director of the Canadian Taxpayers Federation, said the province desperately needs a long-term strategy to wean itself off the transfer tax. He said a phase-out would make land costs cheaper and reduce red tape, leading to economic growth that would replace the lost revenue over time. Bateman also questions whether the tax needs to apply to every class of property. “Could residential be removed, for example?”

The Canadian Centre for Policy Alternatives, however, called the tax a small price to pay to discourage property speculation and quick flipping of houses, which would drive property costs up even higher. “Because we do not have wealth or inheritance taxes, a small PTT is appropriate,” said B.C. director Seth Klein.

Robert Laing, CEO of the B.C. Real Estate Association, said the levy was originally considered a wealth tax, with the two per cent tax on properties sold for more than $200,000 expected to apply to only five per cent of homes sold.

Instead, last year, the two per cent portion was levied on about 87 per cent of homes sold. “It’s no longer a wealth tax — it’s a tax that affects almost everyone,” Laing said.

Yet the NDP says it has no interest in recommending changes in the property transfer tax, nor in making it an election issue. “I suppose that’s up to the voters of the province — it’s not something that I would decide,” said Bruce Ralston, Opposition critic for finance and public accounts. The NDP is aware of concerns about the tax, but it’s an important source of revenue for government, Ralston said.

“Therefore, we are not committing to any changes at this time. If we form government in the spring, we are willing to review alternatives being put forward and see if there are ways to offset the lost revenue that would result from any proposed changes.”

In an interview with the Times Colonist, Ralston said he’d met many groups concerned about the tax during his seven years on the finance and government services committee that tours B.C. every fall.

But in the current fiscal climate — with the province running a deficit and trying to balance the budget — Ralston said the tax is good public policy.

“Given the province’s fiscal situation, I don’t see changing it in the upcoming budget or recommending changes,” he said.

“The thing I like about the tax is that it raises money for health care and education — the major expenditures of the provincial government … I just don’t see taking money away from general revenue at this point.”

Nor does he see it as a tax grab, despite the proportion of property transfer tax revenues nearly tripling as a percentage of B.C. revenues in the last 25 years.

“If you cut it by two-thirds, then you’d have to make up that revenue from somewhere else,” Ralston said.

Krusekopf of Royal Roads, however, suggested replacing the levy with a carbon tax. “Buying and selling property is a good thing, and we want to encourage it, whereas carbon tax is a tax on something we want to discourage. A tax on pollution is better public policy.”

Real estate CEO Laing said easing the property transfer tax could stimulate more real estate sales, with each MLS sale generating nearly $60,000 in expenditures, including fees for lawyers, surveyors, appraisers and real estate agents, new appliances, furniture and renovations or repairs and more than $9,000 in other taxes.

Ralston isn’t sure what the alternative to funneling the transfer tax into general revenue would be. “That’s what it was designed to do — to contribute to general revenue.”

But when the tax was announced in 1987, then Social Credit finance minister Mel Couvelier told the legislature: “It will help to diversify the government’s sources of revenue without placing a disproportionate burden on taxpayers who are not in a position to pay.”

When Finance Minister Mike de Jong announced the growing deficit in November, he said the province had to make “some tough choices in order to protect the B.C. economy, create jobs and make life more affordable for families.”

Some observers argue, however, that the transfer tax actually works against the creation of jobs and affordable lives for B.C. families.

“The worst aspect of the tax is that it discourages mobility by individuals who either would like to move homes … or need to move homes,” said Kesselman, an expert in public policy.

Even downsizing when families need less space, when children move out or a spouse dies — or employment elsewhere beckons — incurs “PTT liability,” he added.

Bruce Carter, CEO of the Greater Victoria Chamber of Commerce, says the transfer levy is a consumption tax that affects “a necessity of life” — the home — and notes that Greater Victoria residents pay much more than in many other areas of B.C.

“This has the effect of exacerbating the affordable-housing challenge in areas with high property values,” he said.

For Carter, the worst aspect of the transfer tax is the “blanket exemption” across B.C. for first-time home buyers paying less than $425,000. That’s because it’s based not on average housing values in any given area, but a set figure for all of B.C. “This, once again, has the effect of putting a greater tax burden on those areas where average home prices are far in excess of the exemption.”