But why? Our proposal will benefit the vast majority of British Columbians, and make life more affordable for young and old alike. Here are some frequently asked questions that might help clear the air.
Why do you think a Tax Shift is a good idea?
Why would the vast majority of British Columbians benefit from the Tax Shift?
What taxes are you proposing to cut?
Why do you propose a Tax Shift Special Commission?
How will this proposed Tax Shift affect Professor Kershaw? Is he just trying to win a tax cut at the expense of other hard-working people?
But didn’t that other UBC prof say more taxes on high value homes is just a cash cow?
How do current taxes on residential property compare to taxes on income?
How do annual property taxes in B.C. today compare with a generation ago?
I keep hearing people refer to a blog which claims that Vancouver property tax payments are the highest in the country, is that so?
My home may be worth a lot, it’s not real wealth. Isn’t it just paper wealth that doesn’t become real until the home is sold?
What do you mean when you say new annual taxes on high value homes would be deferrable?
What if the person never sells their home? Can they defer forever?
What if I want to leave my house to my kids, but they can’t afford the taxes?
I don’t want debt! If I defer the taxes, won’t I be taking on debt?
Why not just tax capital gains from principal residences instead?
What about a hard-working young person who just bought a home that cost more than $1 million? Aren’t you squeezing them when they're a part of the squeezed generation?
What if home prices drop by 20 per cent?
What if the market crashes well beyond a 20 per cent reduction in prices, and the value in my home becomes less than the deferred taxes I would owe?
How would you protect seniors with modest incomes in high value homes?
Some are claiming if I buy a million dollar home now, this tax will take more than half of my home equity increase over the next 25 years — is this true?
Why exempt purpose built rental buildings from additional property taxation?
Why exempt land that is demonstrably under development from additional property taxation?
Because less tax on local earnings, more tax on unhealthy home values, and better investment in young and old alike allows us to:
- Stretch local earnings further by cutting income, sales and/or payroll taxes in response to the problem that earnings have been falling (after inflation) — especially for younger British Columbians
- Provide one more policy signal to cool down home prices
- Address wealth inequality driven by rising home prices
- Ensure older generations do not inadvertently pass on unpaid medical care bills to their kids or grandchildren
Because we’re proposing to cut taxes on income, sales and/or payroll for everyone, along with new investments in young and old alike. The tax cuts and investments would be paid for by higher annual (deferrable) taxes on high value homes. Most of us don’t live in multi-million dollar homes. In fact, only 20 per cent of homes in B.C. cost more than a million dollars. That’s why the vast majority can benefit from a tax shift.
We’re proposing cuts to taxes on income, sales, and/or payroll. We’ve considered various options that include:
- No provincial income tax on the first $30,000 of individual earnings
- Elimination of B.C.’s second income tax rate, which would leave earnings from $39,676 to $79,353 taxed at the rate of 5.06 per cent rather than 7.7 per cent
- Reduction of the provincial sales tax from 7 per cent to 5 per cent
- Elimination of the newly announced employers’ health tax, which is a tax on payroll
Estimates of impact on provincial finances suggest any of these options could be accommodated via the revenue projected for a Million Dollar Homes Tax in B.C., often with revenue remaining to pay for other government priorities like medical care, child care, transit, below-market housing, etc.
There are a variety of issues to consider when selecting from the wide range of options to reduce income, sales or payroll taxes. For example, priority should be given to measures that grow disposable income for the widest segment of the population for whom the gap between earnings and home costs are particularly challenging. This may require privileging some tax cuts specifically for renters, and/or younger residents.
There are precedents for the latter, since current property and income tax systems include measures that generate savings specifically for those age 65 and older. For example, provincial property tax systems routinely provide the largest “home owners grant” to residents age 65+, including in British Columbia. Similarly, the income tax system includes an “Age Credit” for Canadians age 65+ who earn less than $84,597.
This credit will cost federal coffers $3.6 billion in 2018, while the Pension Income Credit will cost $1.3 billion, and income splitting permitted Canadian seniors will cost another $1.4 billion, along with corresponding losses to provincial revenue. As a point of comparison, the cumulative $6.3 billion federal price tag for these three age credits alone represents more than 60 per cent of the incremental cost required to pay for a national, universal child care program with fees capped at $10 per day.
It is therefore timely to revisit whether tax treatment of age considerations across the life course is sufficiently balanced in light of contemporary trends in earnings and home wealth.
A Tax Shift Special Commission would be well suited to make recommendations about this issue.
The Gen Squeeze Lab based at UBC has designed the tax shift proposal in light of the best available academic evidence. We’ve given it lots of thoughts, and anticipated lots of the details.
But there remain many details to work out. Like:
- What are the best ways to reduce taxes on local earnings? Best according to who? In light of what evidence, and what values?
- What should be the rate of interest charged on deferred taxes?
- How do we calculate the rate of inflation by which to adjust new taxes on high value homes over time?
Plus, our Lab’s not dedicated to the idea that new taxes on high values homes should kick in precisely at $1 million. Maybe they should kick in at higher home values. Maybe they should start at lower values. A Tax Shift Special Commission would allow people to contribute input.
We’re also open to the idea that the rate of surtax should be something other than 1 per cent. Different rates are also possible, and there are pros and cons. A Tax Shift Special Commission could consider these, and welcome people’s input.
When it comes to implementation, there will be a range of exemptions that need to be considered. Figuring out how to operationalize these without creating unintended consequences is good work for a Tax Shift Special Commission.
Also, some worry that a massive market meltdown could mean that their deferred tax bill would become larger than the value of their home asset. While this is very, very, very unlikely, a Special Tax Shift Special Commission should be tasked with thinking through the “public insurance policy” to be put in place to address such risks.
The bottom line is to learn from people’s current concerns about ill-named speculation and school taxes, give the public a chance to weigh in on how best to rebalance the tax treatment of earnings and home wealth, and avoid unintended consequences.
How will this proposed Tax Shift affect Professor Kershaw? Is he just trying to win a tax cut for him at the expense of other hard-working people?
You should know Professor Kershaw’s property taxes would go up around $7,000 (if the government ended up implementing a Tax Shift along the lines of our starter proposition), while income taxes could go down around $2k for his household. Given he and his partner pay over $50,000 a year in mortgage payments, and have done so for 14 years, and still have a mortgage over $400,000, they understand what it is like to imagine another $5k in taxes, albeit deferrable.
But they know that the challenge to their household is nothing like the challenge of those with lower earnings who are starting out more recently in the housing market. Their home value went up more last year than Kershaw’s six figure salary paid him at UBC. Just think about that. He works pretty much 60 hour weeks on a consistent basis, and even his earnings didn't keep pace with the housing wealth he accumulated while he was just sleeping and watching TV. When he thinks about it that way, then, yup, he knows it's the right thing to do to encourage a tax shift.
Yes, and no.
Professor Tansey rightly pointed out that tax changes alone will not solve the problem of housing affordability in B.C. He emphasized it’s important for provincial and federal governments to encourage cities to change zoning policy to add new housing supply. Generation Squeeze totally agrees. And that’s why we are one of the leading organizations for mobilizing younger people to use their voices in support of new developments that meet our needs. Check out:
- What we're looking for in new supply, and why
- Our new and improved questionnaire for developers to fill out to tell us about their projects (please share this among your colleagues in the industry!)
- Our big picture take on housing affordability
- Plus, keep an eye on our blog page for a range of new development stories that get featured. Recent successes include:
But Professor Tansey didn’t rule out there being other reasons for adapting taxation of housing wealth, nor that tax changes could contribute part of the solution to housing affordability. Again we are in agreement.
At bottom, the Gen Squeeze Tax Shift proposal is saying some have gained tremendous wealth in homes, which is problematic to shelter from taxation when earnings have lost so much ground.
In Vancouver the 2018 mill rate is $2.46826 for every $1,000 of residential value. This means that a home worth $1.25 million pays an annual tax bill of $3,085. A home of this value is among the most expensive 20 per cent of homes in the province.
Someone with $71,000 is among the top 20 per cent of earners. Presently, they pay around $13,550 in annual income taxes.
Statistics Canada data show that annual property taxation in B.C. is down by $2.5 billion when measured as a share of the economy by comparison with 1981 (the earliest year for which provincial data are available, see Figure 1 below). Revenue is down even though average home prices have tripled in the province, and the net value in principle residences is over $650 billion dollars higher after adjusting for inflation.
Source: Kershaw, forthcoming, “A Tax Shift: the case for rebalancing the tax treatment of earnings and housing wealth,” Canadian Tax Journal.
I keep hearing people refer to a blog that claims Vancouver property tax payments are the highest in the country?
We haven’t had a chance to double check the data reported in that blog. But even if we concede the point, it’s not really surprising. Just as people with higher incomes pay more in taxes than those with lower incomes, it makes sense that people with higher home values pay more in taxes than those with less valuable homes. Since Metro Vancouver is home to the highest average priced residences in the country, we shouldn’t be surprised that average property taxes paid in Vancouver are higher than elsewhere.
It’s worth noting that Vancouver now has a history of keeping its residential property tax “mill” rate low by comparison with other cities. For example, the 2018 mill rate in Vancouver is $2.46826 for every $1,000 of home value. In Toronto it is $6.355054 for every $1,000. So property taxes would be considerably higher in Vancouver if the city had the same property tax rate as in Toronto.
As home values have been increasing in Vancouver, the City has been reducing property tax mill rates. Check out the 22 per cent decline in rates just over the last three years below:
My home may be worth a lot, it’s not real wealth. Isn’t it just paper wealth that doesn’t become real until the home is sold?
It may be paper wealth, but paper wealth is real! The value of our assets shapes our financial security. The more assets we have, the more security we have in case there are reductions in our income. The more valuable our assets, the more we can borrow for other investments, whether a vehicle, home improvements, etc. Plus, there are entire industries devoted to freeing up cash from our homes for people age 50 and older while they still live in their homes. Turn on any 24-hour news station on CBC, CTV, or Global, and you will regularly see the commercials.
At bottom, here is a key issue we aim to address with the Tax Shift. Two people may earn $40,000. One is a young renter. The other has been in the housing market for decades and owns outright a home worth more than a million dollars. When measuring their ability to pay for important programs like medical care, our provincial and federal governments currently treat these two people almost identically. But they are not identical. The person residing in the million dollar home has much more financial security, and a greater ability to pay. Just measuring income is no longer a fair way for governments to measure our ability to pay for medical care and other services when calculating our taxes owed.
That said, we propose less tax on earnings and more deferrable taxes on residential housing wealth. This means new taxes on high value homes wouldn’t need to be paid until the sale of the home.
It means the annual tax doesn’t have to be paid until the home is sold. That way we protect “house-rich, cash-poor” residents, so no one would have to move before they want. Those who defer would be charged a modest interest rate. That rate would be the same for all age groups.
The deferred tax would be collected when the home is transferred to another party as part of an estate.
This shouldn’t be a problem. Imagine your home is worth $1.25 million now. Say you plan to live in it for the next 20 years, and defer the proposed new Million Dollar Home Tax. Here’s what the situation would look like: your annual tax bill will rise by $2,500 this year, and you can defer the payment. Suppose your home value never increases again (after inflation). So your tax bill would stay an extra $2,500/year for the entire time. $2,500 x 20 years = $55,048, after assuming a 1 per cent interest rate on deferred payments.
Now you want your kids to inherit this $1.25 million asset. But they don’t have the $55,048 in cash lying around to pay your tax bill. No problem. With your home as financial backing, they can take out a mortgage for the value of your deferred tax bill. After the mortgage, they’d still be gaining $1.195 million, less some interest they’d need to pay on the new mortgage.
Your kids won’t be complaining about inheriting over a million bucks! At least, they shouldn’t be, when we consider there are many in the province whose parents have never been home owners, and won’t be leaving that large asset in their estate.
Boy, do we understand that feeling. The amount of debt that people are taking on as new home owners these days has gone up dramatically. Others are being financially squeezed by catastrophic childcare costs, out-of-control tuition and student debts, commuting costs, and high rents — without gaining any equity from paying for their housing. So, yup, we know where you're coming from.
And that’s why we’re asking for your help in adapting alongside us. Many young people are already adapting by paying far more for housing than in the past, living further from where we work or study, often with fewer bedrooms, and less access to the ground to send our kids outside to play. As we adapt, we are asking other British Columbians who have accumulated wealth from higher home prices to adapt a little too by accepting a shift in the way we collect taxes. For some, this may even mean deferring the tax — something we understand can be unnerving. FYI: there are no monthly payments required on the deferred tax, so it’s not like a regular debt or mortgage.
Polling data are clear that the majority of British Columbians agree about what is most unfair in today’s housing market. In fact, 62 per cent agree it is definitely or probably more unfair that local jobs don’t pay enough for many regular people to afford suitable homes because of skyrocketing housing prices, than it is to collect additional taxes from regular people who now own million-dollar homes because of skyrocketing home values.
Even though older residents have disproportionately gained wealth from rising home values, those over 55 are especially likely to agree (at 66 per cent!) that it is more unfair home prices have left local earnings behind, than it is to shift taxation toward those who have gained windfalls from the rise in home prices.
The Gen Squeeze Lab at UBC is also ramping up research about capital gains policy regarding primary residences. Currently this exemption costs the federal coffer $7 billion, with corresponding losses to provincial governments, too. We are particularly interested in how capital gains taxation could be used to discourage speculative flipping. From our initial examination of BC Assessment sales data in 2017, it looks like 7 per cent of all homes sold last year were flipped after just being purchased six months earlier. So stay tuned, as we propose further tax policy changes to address such issues.
Still, we think changing annual taxes of housing wealth is an important place to start. Why? Because additional annual (deferrable) taxation of housing wealth is an appropriate response to wealth windfalls won from real estate price escalation. Some windfalls reflect wealth accumulation over the last decades whether (a) the person has been in the same home purchased decades ago, or (b) they purchased their current home very recently by drawing (partly) on capital acquired from price escalation that accrued in homes previously owned. Additional annual (deferrable) taxation of housing wealth treats fairly the asset accumulation of both owners. By contrast, capital gains taxation imposed retroactively would tax scenario (a) far more heavily than scenario (b). Different tax treatment is unwarranted, because the purchase date of the current home is arbitrary in regards to the wealth accumulation forces at play as a result of rising home prices.
Adapting annual housing wealth taxes can also capture for the public some of the property-value increases generated by the public when municipal governments revise zoning to add density in efforts to increase supply. Zoning changes are only going to grow more common as governments aim to moderate local home prices, and stimulate the development of new affordable housing.
What about a hard-working young person who just bought a home over $1 million? Aren’t you squeezing them when they're part of the squeezed generation?
Imagine a successful, hard-working young couple just purchased a single detached house or large townhome in Vancouver at a price of $1.25 million after saving $250,000 as a 20 per cent down payment. What would the Million Dollar Homes Tax mean for them?
At current lending rates, this couple would need to be able to pay a $5,000 monthly mortgage, which requires an annual household income of approximately $200,000. For the sake of simplicity, let’s assume the two people are each earning $100,000 annually. The annual Million Dollar Homes Tax for this household would be $2,500. This annual levy is just one-quarter to one-half of the approximately $5,000 to $10,000 reduction in federal and provincial income taxes paid by someone earning $100,000 today by comparison with someone in the mid-1970s to mid-1990s earning the same amount (after adjusting for inflation).
In sum, income taxes for this household are down $10,000 to $20,000 by comparison with previous decades. So even after a $2,500 annual Million Dollar Homes Tax, this household would enjoy considerable tax savings by comparison with previous years. If they choose, the entire Million Dollar Homes Tax could be deferred until the sale of the home.
If $1 billion of the $3 billion in revenue from the Million Dollar Homes Tax were used to eliminate the second B.C. income tax rate so that the first $80,000 of individual earnings are taxed at 5.06 per cent, then this couple would incur almost no net change in their total tax burden.
Similarly, if another billion dollars of the Million Dollar Homes Tax revenue is used to pay for the full implementation of the BC Child Care Plan announced in the 2018 budget, then this household will accrue tens of thousands in additional savings if they (choose to) have children. Covering the costs of the income tax cut and the BC Child Care Plan would still leave $1 billion in annual revenue from the Million Dollar Homes Tax to contribute to medical care for the aging population.
Imagine a successful, hard-working young couple just purchased a single detached house or large townhome in Vancouver at a price of $1.25 million after saving $250,000 as a 20 per cent down payment.
Now imagine that there is a 20 per cent reduction in average prices for residential real estate, returning B.C. and Metro Vancouver to home prices as they were in 2014.
This reduction would drop the value of the couple’s home from $1.25 million to $1 million, at which point they would no longer be subject to the Million Dollar Homes Tax. Imagine this price drop occurred abruptly after five years. At that point, they would have incurred a deferrable tax liability of $12,753 dollars (assuming a 1 per cent interest rate on taxes owed), which would still not be due until the sale of the home.
Over that five year period, the couple would have made mortgage payments of $300,000, of which approximately $147,000 is paid in interest assuming an interest rate around 3.19 per cent on offer from the Vancity Credit Union at time of writing. As such, their outstanding mortgage debt would be approximately $847,000 down from the $1 million dollar mortgage where they started on the date of purchase. Whereas their equity/debt ratio began at 25 per cent on the date of purchase, it would now be only 17 per cent. Not doubt this would be discouraging, but likely still manageable given the level of mortgage debt the household initially financed.
What if the market crashes well beyond a 20 per cent reduction in prices, and the value in my home becomes less than the deferred taxes I would owe?
Well, if home prices suddenly implode, and a person’s home asset is worth less than she owes in deferred taxes, then much bigger issues are underway. Such issues would be an economic disaster — not any different than when forest fires or floods damage entire cities. In such cases, the public empowers governments to provide public insurance coverage that can’t be bought in the private market. Similarly, a Tax Shift Special Commission could be appointed with the task of thinking through the comparable “public insurance policy” for deferred property taxes in the case of a massive market meltdown.
First, the Tax Shift will raise funds to pay for the medical care desired by the aging population. Second, the tax shift will ensure that “house-rich, cash-poor seniors” can stay in their homes, and keep the vast majority of the wealth windfall they have gained from rising home prices.
Consider the circumstances of a senior who has made public his concerns about the new ‘school tax.’ Shortly after the 2018 budget was released, the Vancouver Sun featured the circumstances of a retired economics professor who lives with his wife in a Point Grey home they bought 31 years ago for $370,000. Now BC Assessment estimates the house is worth almost $6.5 million. The retired professor calculated that his home will soon be charged $12,000 in additional ‘school taxes’ each year, which he observes is beyond the budget he and his wife, a retired school teacher, have as pensioners.
According to the retiree, “I’m beside myself because I’m looking at maybe another 20 years here and I don’t know how I’m going to be able to afford that tax. We’re going to be taxed to death and we’ll be forced to move. My whole standard of living is shrivelling before my eyes and it’s all a result, in my mind, of inept political decisions.”
While one can sympathize with the task involved in adapting to additional taxation of housing wealth, the retired economist compromises the credibility of his profession when we claims his “whole standard of living is shrivelling before my eyes” and that “we’ll be forced to move.”
First, his entire property tax bill is deferrable until the sale of the home, including the new surtax. Second, the math involved in his circumstances does not add up to a shrivelling standard of living. The 20 years that the retired professor intends to be in the home multiplied by $12,000 a year equals $240,000. The interest charged on deferring the new tax at a rate of 1 per cent (higher than the current rate charged seniors by the B.C. government) is an additional $24,228. By his own account, the equity in the retired professor’s home has grown by $6.13 million, even after consuming his home for 31 years.
Imagining his home never increases in value again, the retiree will still net $5.87 million after paying the new property wealth surtax for 20 years with interest. There are hundreds of thousands of younger British Columbians who can no longer afford to buy homes, and many renters of any age, who would love to see their standard of living “shrivel” before their eyes by accumulating $5.87 million while they make a home for themselves.
Rather than shrivel his standard of living, the retired professor’s scenario gives good reason to judge that the recurrent property surtax rates selected by the new B.C. government are too low. Our Million Dollar Homes Tax proposal provides a useful counterpoint for discussion-purposes. Under this proposal, the retired professor will incur additional housing wealth tax bills of $55,000 annually, which equals $1.1 million when multiplied by 20 years. If the resident chooses to defer the taxes owed until the sale of the home, he will incur interest payments of approximately $111,000 over that period, bringing the total tax bill under the Million Dollar Homes Tax to $1.21 million.
When this figure is subtracted from the $6.13 million in value that has accrued in his home over the last 31 years, the retired professor will still enjoy a wealth windfall of over $4.9 million. Again, there are hundreds of thousands of British Columbians would love that very scenario — accumulating millions while sleeping, eating, watching TV, and raising a family in their home — if only they had been born early enough to get into the housing market when this former professor did.
Some are claiming that if I buy a million dollar home now, this tax will take more than half of my home equity increase over the next 25 years?
Nope, not true. Here’s what some have suggested:
“Let’s assume in this period of lower expected returns on most asset classes that future returns on homes just match inflation (as has been the case in most of the world for the last 50 years). Let’s further assume you acquire a home for $1 million today under professor Kershaw’s model. Your tax is 1% annually and you can defer it. If inflation is 2% per year, then your home is $1,650,000 in 25 years. Even if the government agrees to allow you to defer the taxes with a 1% rate of interest, your deferred tax bill will be about $360,000 payable when you sell the home. That is about 22% of the entire value of your home, and more importantly, about 54% of your profit on the home.”
If the Tax Shift were to include the Million Dollars Home Tax to pay for cuts to taxes on earnings, there would be good reason to adjust the million dollar threshold so that it grows with inflation over time — just as income tax thresholds are typically adjusted for inflation over time. That’s one of the key details that a Tax Shift Special Commission should work out.
If the threshold is adjusted for inflation over time, then here’s the actual scenario. A person who owns a million dollar home would not pay any additional tax today, because the proposal only adds taxes to homes OVER $1 million. And if that home only increased in price at the rate of inflation in each of the next 25 years, there would be no additional tax over the entire 25-year period.
Exemption from the tax would provide an incentive for developers to build more purpose-built rental, for which there presently are supply shortages, while ensuring existing operators do not pass down new taxes to their tenants in the form of higher rents.
Even if they aren’t “purpose-built” we’d consider exempting existing rental buildings that have at least three rental suites in order to minimize the impact on existing landlords and renters. This detail is definitely good fodder for a Tax Shift Special Commission.
Since income, profits and capital gains generated from sites owned by developers are already subject to corporate taxation, additional recurrent residential housing wealth taxation should be applied to new homes once they are occupied if they meet the criteria, but not before.
This issue is definitely a good topic for a Tax Shift Special Commission to make recommendations on. It can get complex quickly when trying to identify when land is “demonstrably” under development.
Let’s do more
We want to restore housing affordability for renters and owners — forever.