Forget a Municipal Land Transfer Tax in Ontario - Tweak the Property Tax Instead
November 19, 2015
The Ontario government is considering giving municipalities the ability to levy a land transfer tax (LTT) as a tool to raise additional revenues. Currently, the City of Toronto is the only municipality that has the authority to collect LTT.
As much as municipalities need new revenue tools, municipalities faced with resident demand for better or new services should fund them with property tax increases, rather than through the an LTT as the introduction of a LLT would make municipalities’ local tax system less fair and future tax revenues less stable.
Many municipalities in Ontario are envious that Toronto has the authority to impose a LTT and with good reason. Toronto’s revenue from LTT has dramatically increased since its introduction, growing from approximately $170 million in 2010 to $420 million four years later. The LTT now represents more than 10 per cent of Toronto’s property tax revenues.
The Association of Ontario Municipalities is urging the province to give all municipalities the same taxing powers as Toronto and subsequently the ability to impose an LTT. And the appeal of a LTT to municipalities is clear: revenues rise as property sales prices go up. For example, according to the Toronto Real Estate Board, the average price of residential properties sold in the Greater Toronto Area in September is up by 9.2 percent from a year ago. As a result, revenues generated from the LTT have also increase by 9.2 percent without a tax rate change. Municipal councils much prefer a tax such as the LTT which mechanically increases without the inevitable public flack that the property tax rate setting process generates at budget time each year. The senior governments are fortunate that revenues from their major taxes (income and sales) automatically rise when the tax bases expand without rate increases.
Before proceeding with changes to their revenue system, municipalities need to be aware of three serious limitations of a LTT.
First, the LTT scores lower in terms of equity, benefits received and the ability-to-pay. Unlike property taxes, there is no relationship between the act of buying a property and being the beneficiary of the services funded by the LTT revenue.
Secondly, targeting only the purchasers of properties and not all property owners is not equitable in terms of ability to pay.
And thirdly, the annual revenue produced by the LTT is much more volatile than a property tax. It rises on the upside of the property market cycle and declines during the downturn. Municipal dependence upon such an unstable revenue source would complicate budget planning since the spending tap cannot be turned off quickly when tax revenues are declining.
The property tax as revenue tool is very good tax for municipalities. It produces revenue that is stable year-to-year, it is highly transparent, promotes accountability, and is both equitable and efficient -- there is a strong relationship between property taxes paid and benefits received. Moreover, unlike the LTT, property taxes are much less likely to decline when real estate markets are in a slump.
There is an answer to the desire of municipal councils to avoid taxpayer angst that accompanies increasing the property tax rates and it does not require giving municipalities’ access to the subpar, volatile LTT. As a preferred alternative to the LTT, the Province of Ontario should require all municipalities to raise their property tax rates annually by the general inflation rate. Municipal councils would only need to vote on the portion of any property tax increase exceeding the inflation rate. Under such provincial legislation, municipalities would have access to much needed, predictable, stable revenues without adopting an inequitable, volatile tool like the LTT.
Dr. Frank Clayton is senior research fellow at Ryerson University’s Centre for Urban Research and Land Development. He is author of the report titled "City of Toronto’s Land Transfer Tax – Good, Bad or Merely Tolerable."