Why does Ontario tax new housing so heavily?
Some conjectures from Mike Moffatt
Twitter thread by Mike Moffatt:
Why are residential development taxes so much higher in Ontario than in other provinces (and so much higher than 20 years ago?)
We get asked this a lot. And the short answer is that there isn't good research on this. Yet. So here are some possible explanations.
I want to stress that these are conjectures that need to be tested. So here goes:
1. Ontario municipalities have 10 billion+ dollars in unspent dev charge money, whereas other provinces (and the Ontario of 2005) does not. That's an obvious one.
2. Perhaps Ontario simply builds more infrastructure per capita than other provinces (or Ontario circa 2005).
3. Perhaps Ontario has more white elephant projects. An Ottawa LRT or two will really mess up a place's finances. Quality of spending is vital.
4. Water/wastewater. Ontario doesn't put electricity generation/distribution on dev charges, but it does do it for water. And it's a massive expense. You can get the same results, for cheaper, and off of DCs, through municipal service corps, something Ontario is considering.
5. How we pay for roads. Instead of having cars pay for roads (gas tax), Ontario loves to make houses pay for roads (through DCs). It's a choice and, IMO, not a particularly sensible one.
6. The willingness and ability of municipal governments to borrow. Ontario municipalities tend not to borrow much, relative to N. American peers, and often brag about their bond ratings. This comes at a cost of under-investment.
7. How much of infrastructure is paid for by the province, rather than the municipality. Obvious one.
8. The split between residential and commercial/industrial. It's not just homes that need infrastructure - offices, retail, factories, etc. do too. Some places are more willing to put infrastructure expenses on business than others.
9. Approval processes for infrastructure. Governments can often coat themselves in red tape. The more difficult it is to build infrastructure, the more expensive it ends up being.
10. Number of homes built. The Ontario of 2025 is very restrictive when it comes to home building, so costs get spread over a smaller base. Build more homes (by, saying, allowing an extra floor or two on an apartment), and the DCs per home falls.
11. And the one everyone always thinks of... property tax. Some places are just more willing to finance infrastructure through property taxes than others.
I know I'm missing a bunch, but there's 11 possible reasons why Ontario residential development taxes are so much higher than in other provinces, and higher than the Ontario of 2005. It's probably a combination of some of these, along with factors I haven't listed.
It’s easy money
Personally, my take is that they need the money, and from a political perspective, taxes on new housing are one of the easiest ways to get it.
Land is immobile and fixed in supply, so taxes on it are both unavoidable and unencumbered by excess burden. These attributes, from an economic perspective, make land taxation an ideal source of public revenue. But taxing land is politically difficult. It imposes high costs on the incumbent property owners most likely to vote in local elections.
It is politically acceptable, however, to capture land value when property is developed, as the burden of value capture in that instance is much less likely to land on incumbents and more likely to fall on outsiders. Capturing value in this way, through building permit applications rather than tax bills, requires extensive land use authority. Local land use authority, as it happens, has expanded over time, even as local taxing authority has diminished. This expansion arose in part as a backlash against political structures tilted toward developers in the 1960s, and in part as a result of Great Society programs that empowered communities and neighborhoods.
The upshot is that when developers request building permits, they open a rare door for cities to act on a wide array of problems. Cities thus have good reasons to emphasize parcels: the parcel is the place of physical change, the focus of residents’ concern, and the politically acceptable lever of municipal power.
Capturing value at the point of development, however, changes the way localities approach problems. Perhaps most obvious is that it implicitly curbs municipal ambition: taxing development generates fewer resources than taxing land, because the revenue base is so much smaller: there is always far less land being developed than land that exists.
Montreal vs. Toronto
At the other end of the spectrum, Mario Polese says that Montreal doesn’t have development charges. (The CHBA benchmarking study doesn’t include Quebec.)
The city (and region) largely remained true to a philosophy of urban planning wherein the infrastructure costs of new housing developments are shared by all residents, not just newcomers, via local property taxes and provincial taxes. Primary and secondary schools are, for example, almost entirely financed by the province. Quebec’s conservative-leaning government is in the process of eliminating local school taxes altogether, to be replaced by provincial transfers to local school boards.
The result: Montreal levies no impact fees on developers. So-called auxiliary fees are sometimes charged, generally for immediately proximate amenities (such as parks), but according to recent estimates, the total sum of local charges imposed on developers for comparable new housing units is between one-fifth and one-sixth of those in Toronto.
More
Land value capture is an unreliable source of revenue. Presentation to the Metro Vancouver Regional District board.
How municipalities ratchet up the floor on prices and rents. Opening statement at an Urbaniarium debate.
Municipal finance ideas. If heavy taxes on new housing are a bad idea, what are some alternatives?