- Interview by
- David Moscrop
Jacobin’s David Moscrop recently talked to Canadian Centre for Policy Alternatives senior economist and public finance policy analyst Alex Hemingway about a new report that takes aim at property wealth inequality. The report lays out policy options for taxing owners and closing the wealth gap in British Columbia and across Canada.
Canada’s housing crisis is spiraling out of control. The situation has been critical for a long time, but it’s now moved well past critical and into deep crisis. The circumstances are particularly rough in British Columbia, where people are being priced out of the province or are trapped within it, grappling to make ends meet. Meanwhile, landowners have seen windfalls as prices soar and create a massive wealth gap between those who’ve won the property lottery and those left behind. But it doesn’t have to be that way. Hemingway has some ideas about how to close the wealth chasm and make housing more affordable.
I want to start with the problem. What are the causes of property wealth inequality and what are the effects? Some people will say, “Well, that’s just how the market works. What’s the big deal?” But the problems with property wealth inequality seem undeniable. What are they?
I think it’s worth making a distinction at the outset — if we’re talking about how to make housing affordable again — that there’s a lot we need to do outside of property taxation. Other measures include massive public investment in nonmarket housing and dismantling exclusionary zoning at the municipal level, which effectively bans apartments on most of our residential land. But the focus of this report is on what property tax can do and how it can address some of the extreme inequality that’s been created as housing prices have skyrocketed.
We know house prices are way up, as are rents, amid this housing crisis. And the flip side of those high prices is that property wealth has ballooned and become a huge source of inequality in British Columbia and many other places. And to put a number on it, the surge in residential property wealth in British Columbia over less than two decades has reached an astonishing Can$1.7 trillion. So, we’re talking about a massive pool of wealth here, and it’s a pool of wealth that’s very lightly taxed under the current property tax system.
This means, first of all, that by failing to tax these huge land wealth gains, we’re locking in growing wealth inequality. Second, we’re depriving the government of badly needed revenue that could be put toward direct investment in affordable housing. And having ultralow property tax rates as we do, particularly in cities like Vancouver, makes real estate particularly enticing for passive nonproductive forms of investment. And it drives up prices directly in that way.
Crafting Taxes That Work
There’s a distinction to keep in mind here. Property taxation is not like taxing income. With property, we’re taxing an underlying asset. So, what’s the incentive structure you’re talking about? Is it to make sure owners are making good use of their asset?
I think there’s a couple of things that are helpful to say. One is that the property tax system works very differently from the income or sales tax system. With income or sales tax, we have a set of tax rates that are set, they’re locked in, whereas property tax rates change each and every year. And the way it works is that as prices have gone up and up, the property tax mill rate is reduced each year to offset that. So, in a place like Vancouver, property tax rate is about half of what it was twenty years ago. It’s about a quarter of 1 percent. It’s extremely low.
The underlying logic of that system was that property taxes would only be used to raise revenue for a limited set of municipal services. So, you set a budget at the beginning of the year and then you adjust the property tax rate to ensure you bring in that amount of money. Well, there’s a logic to that system, but when you’re in a situation where housing and property wealth is exploding, that system may not be serving us anymore because it’s a locking in that land wealth inequality. And it’s purposely ensuring that that land wealth is not taxed and shared.
The other piece, which is maybe what you’re getting at, is that there are some big advantages to taxing property wealth. You can’t pick up and move a plot of land. You can’t hide it. You can’t evade that type of tax. And when you tax land wealth specifically, which is one of the recommendations in the report — taxing land wealth rather than taxing the buildings on top of the land — that creates incentives for better and more efficient land use, which is something we certainly need to do to tackle the housing crisis.
Just how bad are prices in Vancouver right now, both for buyers and renters?
They’re absolutely out of control. And you can take different measures because, fortunately, we have a half-decent system of rent control in British Columbia. It has gaps in it, but we do have rent control. If you’ve been in a unit for a long period of time, your rent is going to be lower than if you’re out looking for one right now.
Some of the latest reporting on rents for folks who need to find a place are on the order of $3,000 a month for a one-bedroom apartment. It’s wildly unaffordable. And in terms of prices, as I mentioned, just the increase in the aggregate property value in British Columbia has been Can$1.7 trillion in less than two decades. So, the scale of the price increases is staggering.
Land Value Is Socially Created
To clarify the inequality point, is the idea that inequality is stemming from having a class of property owners who are sitting on an asset that’s appreciating in value unreasonably fast? And, on the other side of the equation, there are those people who are shut out from ownership and rental because of the demand pressures and the lack of stock, nonmarket options, and purpose-built rentals?
Exactly. The concentration of property ownership in British Columbia is very significant. Even if you look at the most widely distributed subset of properties — just principal residences — the top two-fifths of households own 80 percent of the property values in the province. You have a divide between owners, particularly in the high-value centers of the province, who have enjoyed enormous land wealth gains while renters are facing both ultrahigh rents and scarcity of available apartments, and are shut out of those wealth gains.
Under the current property tax structure, is there a particular class of homeowner who benefits the most or is it that every homeowner is benefiting from the property tax structure and pretty much everyone who doesn’t own a home is shut out of those benefits?
It largely depends on where you own property and how much property you own. Just the land under the single-family homes, just in the city of Vancouver, those land values have increased by hundreds of billions of dollars. So, certainly your single-family homeowner has enjoyed big gains. And if you’re a larger landowner who’s held onto land, particularly for a long period of time, those gains are even larger. And that’s part of what we try and get at in the property tax proposals that we put forward in the report.
The report mentions five policy options for property tax reform, including moving to a land tax. I want to start with the land tax because I find that one the most interesting. How would a land tax work and what would it achieve that current policies don’t?
It’s helpful to note that land wealth is created collectively when land value increases — it’s not through any effort or expense of the property owner. Land value increases reflect what makes the use of a particular location attractive to people. They’re created by public investment in infrastructure that gives a particular location value. Thus, land value increases are socially and collectively created. And, so, there’s a strong moral case for taxing land value.
It’s worth noting that Vancouver did once, for a brief period of time over a hundred years ago, have a land value tax. It’s a proposal that goes back over a century and has existed occasionally in certain places. But the fundamental point is that rather than taxing the total value of the property, including the buildings or improvements made on top of it — which are productive forms of investment — you focus the taxation specifically on the land portion of property value, which the owner has no part in creating.
This approach ensures that the tax doesn’t discourage productive investments. It means that we’re rightly bringing in revenue to share collectively created wealth in the form of a land value. And it’s something that can be done quite easily. In British Columbia, the provincial Crown Corporation BC Assessment does property assessment for every property in the province and distinguishes between the land and the building value. So, from an administrative perspective, that’s something that can be done straight away.
Taxing the Palaces
What about progressive tax bracket options for property? What are the potential models there?
In the report we look at a menu of progressive property tax options. One example is increasing the rates on property values above $3 million. Now, we actually already have a $3 million-and-above property tax bracket in British Columbia. We’ve taken a step toward progressive property taxation, though it’s currently at a minimal level. One of the options we’re suggesting is to double the property tax rates applied above $3 million and to add a new bracket above $7 million. This adjustment would impact less than 2 percent of the most expensive properties in British Columbia, while generating an annual revenue of $350 million. It’s important to clarify that our focus is solely on taxing the value surpassing these thresholds. The initial $3 million value of the property remains unaffected by this surtax. It is a very narrow and targeted approach.
I think the most novel proposal we put forward in the report is taxing the total real estate holdings of large landowners, as opposed to individually taxing each property using the aforementioned brackets. This could entail situations where large landowners own a portfolio of properties, each falling below that $3 million threshold, but that cumulatively add up to tens of millions of dollars. In this scenario, by taxing the total holdings instead of each property separately, these owners would no longer be able to avoid paying those progressive property tax rates. This would broaden the scope of taxation and increase provincial revenues by an estimated $900 million per year.
The report also discusses ending automatic cuts to base provincial property tax rates. How does that work? What does that achieve?
We talked a little bit earlier about how the property tax system works differently than other elements of our tax system. With the surge in property values, tax rates applied to assessed values are consistently reduced each year to counterbalance these value increases. And in the process, we’re locking in land wealth inequality. The property tax system doesn’t have to work that way. We could say, look, we don’t want to see continued increases in property wealth because we want to bring the housing crisis under control. Rather than perpetually decreasing property tax rates, we can consider retaining these rates even as property values rise. And in fact, it’s crucial to ensure that a portion of these accumulated wealth gains is subject to taxation, with the resulting revenue being shared and used to directly address the housing crisis by investing in affordable housing initiatives.
A key aspect of the changes you suggest is that the revenues that are collected are put to a very specific purpose that are logically tied to the reason you’re collecting them in the first place.
I think one of the other ways of coming at this — that we talk about in the report — is the possibility of having a property tax floor; a minimum level of property tax for regions with high land values. Given the gradual decline in tax rates over time in Vancouver and nearby municipalities, the property tax rates have reached remarkably low levels, often among the lowest in North America — around a quarter of 1 percent in Vancouver. One plausible approach would be to gradually bring in a property tax floor, such as a half a percent. This would begin to recapture a portion of the accrued land wealth, directing it toward sensible endeavors. This would also help to get away from some of the perverse effects of ultralow property taxes, which attract passive investment because the carrying cost of the investment is so low.
If you think of any other financial products, it’s rare, if not unheard of, for the tax rate applied to an investment to decrease as its value increases. It doesn’t make any sense in a society that has the extremes of housing, property, and wealth that we’re seeing today.
Class and Real Estate
How likely do you think it is that the province or any municipalities take this seriously, either within British Columbia or elsewhere? Everyone says there’s a housing crisis. Everyone in politics says they care about the housing crisis. Few of them seem to be trying any ideas outside of tinkering at the edges. Do you think this is going to get people to say, well, here are some practical ideas that might work?
One of the reasons we presented a menu of ideas in this report is that some are going to be bigger political swings than others. When you look at some of the more narrowly targeted policy options — such as focusing on those properties above $3 million — I think they are realistic possibilities. We’ve already started down that road in British Columbia, and the polling suggests that it’s very popular. So that’s within the realm of possibility.
There’s also increasing discussion around the idea of land value taxation and both its effects in terms of encouraging more efficient land use, but also the possibility of addressing inequality through a shift to land value taxation. I think that’s a genuine part of this discussion. But I think looking at the bigger picture here, it’s true that by failing to address the housing crisis over a period of decades, we’ve backed ourselves into a difficult corner as a society because we have a substantial portion of the population that has benefited financially from the housing crisis.
I think many property-rich British Columbians and Canadians understand that land wealth gains have been a stroke of luck. They’ve been winning the lottery, and that’s unintentionally come at others’ expense with really corrosive effects on the social fabric. But I think there’s an opportunity to open up the discussion to acknowledge the sheer scale of inequality that’s been created by the housing crisis and begin a conversation about what we’re going to do about it.
One of the additional recommendations we put forward in the report is that British Columbia should consider convening a citizens’ assembly on land and property tax reform where people can have the opportunity to deliberate in a long-form and serious way, consider the policy trade-offs and conflicting interests at play here, and come up with a way forward in terms of the property tax element of the housing crisis.
I often think about what happened in the UK when the Thatcher government sold off so much of the council housing. There was an explicit political purpose to that, which was to create a large property-owning middle class that would have a fundamentally different political outlook because of the property wealth that they held. And we’re in an analogous situation in Canada. So, I want to acknowledge that there’s a real challenge there. And the politics of property tax reform are different than the politics of, for example, a federal wealth tax, which is almost universally popular. The property tax base is just much more complicated.