Could this one cool trick solve Toronto’s budget problems?

Reader mail suggests a lot of people already think their property taxes are pegged to market inflation. Making that true would hugely boost revenue.


Thestar.com
March 9, 2015
By Edward Keenan

Recently, I wrote about how the city’s property taxes don’t increase automatically with inflation, which prompted a lot of people to write to me insisting that they do.

I wrote another piece explaining why they are wrong: real estate assessments are revenue-neutral for the city, so the budget doesn’t benefit from a hot housing market. Even when I explained it to some people, they wrote back to me saying they did not believe me. They are certain that property tax bills and city revenue increase at the same rate as the housing market value does.

Which made me wonder: What if, instead of correcting people’s mistaken beliefs about how the system works, we just changed the system to conform to their beliefs? If the system had been the way so many people think it is since amalgamation, the city would not be in the financial mess it is in now.

Our intuitive understanding of how taxes work mostly comes from the most visible taxes we pay: sales and income taxes. These are based on paying a percentage of the value of the thing you’re paying taxes on. If your income goes up, you pay more in income tax; if the prices of things you buy goes up, you pay more in sales taxes. And so on.

Many, possibly most, people incorrectly assume that’s how property taxes work. That there’s a “rate” that equals a percentage of the value of their home, which is partly true. So they think if the value of their home goes up every year, the amount they pay goes up automatically, too, which is not true. For reasons I explained in my earlier column, the “rate” is constantly changing to ensure that the average homeowner’s bill does not go up at all, unless council votes to raise taxes.

Between 1998 and 2014, city council raised property taxes by a total of 25.5 per cent. Over the same period, total Consumer Price Index inflation was about 37 per cent. Which means taxes were cut, in real dollars, by more than 10 per cent.

But people who wrote to me, who may be representative of the average Torontonian, were under the impression property taxes increased with housing market inflation. House values have gone up 160 per cent since 1998. If property taxes had kept pace with housing market inflation, the average homeowner last year - who paid about $2,600 in property taxes - would instead have received a bill for $5,330.

No one would like a jump like that, but under a different system, they wouldn’t have experienced a jump like that. They would have seen incremental increases year after year, as they do on their payroll deductions and supermarket receipts.

The effect on city revenue in this alternate tax system since 1998 would have been dramatic: the 2015 budget projects $3.85 billion in revenue from property taxes; adjusted for housing market inflation since 1998, that figure would be over $8 billion.

That’s a lot of extra coin: if we had that kind of revenue we could pay for the city’s share of SmartTrack and the Scarborough subway extension in cash in a single year and have change left over.

The beauty of this as a proposed change is that, as I’ve recently learned, this is how people already think it works. The political blowback is already being suffered without the change.

Every year right now, there’s a fierce battle to raise property tax bills by the rate of inflation - we in the press run headlines about tax “hikes,” Ford and Co. stomp around city hall, people shake their heads at the rising cost.

All this rebellion when, in real dollars, taxes are often being cut. It’s bad for city revenue, and bad for politicians who have their reputations punctured in the process every year.

Meanwhile, in Ottawa and at Queen’s Park, tax revenues rise with inflation from the HST and income taxes, and no one says anything. No one even notices. There are few protests demanding tax rates be cut to keep dollar revenue flat.

There would be some big problems with setting property tax rates this way, though - and not just the practical one of convincing Queen’s Park to implement the change.

If we’d had this system since 1998, property taxes would actually be pretty high (they are very low now). The owner of a plain bungalow in Willowdale - imagine a senior citizen on a fixed income, since that’s who our politicians always imagine - could be paying $15,000 a year in property taxes. Rents on many condo apartments, as taxes are passed on to tenants from landlords, might go up by $500 or more. You get into dramatic affordability problems.

The easy solution to that problem is actually a political benefit to our leaders, who could constantly be debating the size of tax cuts every year to keep bills relatively affordable - the debate about how much revenue you need becomes not an argument about how much more you can or should ask people to pay, but how big a tax cut you should give people. The psychological difference between those premises is massive.

But the likelihood that our politicians would be cutting the rate regularly throughout inflationary housing booms leads to one of the other big pitfalls: if the housing market collapsed, so would city revenue. The current system, for its faults, is recession-proof.

The threat recessions pose to government revenue is ever-present for provincial and federal governments, who depend on economy-pegged sales, income, and payroll taxes. But those governments also have the option of borrowing to balance their budgets in hard years, so they don’t have to face raising taxes just as people are least able to pay more, or slashing services at the times when people are most in need of them. City governments are prevented by law from running operating deficits, even temporary ones.

So a system that saw tax revenue boom with housing market would bust with it, too, leaving the city in an untenable spot.

Which is a good argument against pegging tax revenue to property values. Housing prices are too volatile, in both up and down directions, for such a system to be reliable (take note, those currently banking on land transfer tax revenues).

But if there is a way to index property taxes to regular consumer inflation, it would be worth taking a close look at. It seems like it shouldn’t be too controversial. After all, many people think that suggestion is the status quo.