Replacing revenue from development charges
What's the path of least resistance?
To paraphrase the MacPhail Report, housing is scarce and expensive because municipalities in BC and Ontario regulate new housing like it’s a nuclear power plant, and tax it like it’s a gold mine. Their incentives are backwards: they depend on that revenue stream, and that depends on housing remaining scarce and expensive.
Revenue from raising DCCs on new housing has a number of disadvantages.
It ratchets up the floor on prices and rents. (Municipal politicians call it “growth pays for growth,” but it’s actually “renters pay for growth.”)
It pushes more projects underwater. In fact with sharply higher interest rates pushing down condo prices, the market appears to have completely locked up.
It's very volatile.
It's a leaky bucket. It raises the floor on prices and rents for existing housing as well as new housing, and those rent increases go to private landlords rather than local governments.
The BC and Ontario governments are well aware of this problem. In Ontario, the Ford government tried to slow down DCC increases a couple years ago, but they ended up backing off because they couldn't come up with replacement funding. Similarly, at the federal level, Sean Fraser pressured the Metro Vancouver Regional District to freeze development charges, offering funding from the Housing Accelerator Fund - but it’s hard to convince municipal politicians to give up a stream of future revenue in exchange for a one-off payment.
What local governments need is a revenue source that increases by 4 or 5% every year, not just one-off payments. Without it, they’re unlikely to give in, no matter how much pressure you put on them.
Replacing revenue from development charges
If municipalities are stuck in a bad equilibrium, what are some alternatives that would be appealing to municipal politicians? What’s the path of least resistance?
A regional sales tax, or a share of GST/PST.
A flat payment per housing start. Mike Moffatt and Cara Stern suggest $10,000 per housing start. Ontario pays $3,600 per housing start.
Increase the size of the existing Canada Community-Building Fund (currently about $2B annually). It's distributed on a per-capita basis, rather than per housing start.
Use a fixed mill rate, instead of adjusting it downward as total property value increases. (In other words, make property taxes work the way that people already think they work!)
References
Illustration of how raising costs pushes more projects underwater. From Yes, Red Tape and Fees Do Raise the Price of Housing. Dan Bertolet, Sightline, July 2017.
A flat payment per housing start: Mike Moffatt and Cara Stern suggest a federal payment of $10,000 per housing start, with some conditions required to participate. The cost would be about $2B per year.
Ontario introduced a similar incentive in 2023, the Building Faster Fund. It's a $400M fund, with a target of 110,000 housing starts in 2023, which translates to $3600 per housing start. A municipality has to achieve at least 80% of its target to receive anything. In 2023, the city of Toronto had about 31,600 housing starts and received $114M. It looks like the incentive diminishes over time - the target is 125,000 for 2024, and the total was $400M, so the amount per housing start was $3200. Toronto just received a payment of $67.2M, because there were 21,000 housing starts in 2024.
Using a fixed mill rate: mentioned in Upzoning New Zealand. Eleanor West and Marko Garlick, Works in Progress, November 2023.
Unlike local governments in the US, Denmark, and Australia, which tax a fixed percentage of a property’s value, New Zealand councils levy tax via a rating system. Councils determine the total amount of revenue to collect each year, and then each homeowner pays in proportion to their share of total property value. In other countries, more housing automatically brings in more revenue; in New Zealand, new housing only slightly reduces the burden on existing properties.
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Previously: municipal finance ideas, “a small tail wagging a very big dog”
I'd propose revenue sharing as well, possibly the provincial capital gains tax (the part that comes from real estate); ofc one can extend the base to make revenue more consistent (remove the principal place of residence exemption for the provincial tax). And couple this with changing the method of calculating the property tax (personally I'd also change the tax itself, like removing differentials for example, and split the rate so land is taxed more) and maybe adopt a frontage tax for linear infrastructure (if utilities are not corporatised, which should be preferred).
I personally don't like solutions like giving money for housing construction, the tax&transfer system should have a long-term orientation. An intervention like this is more good politics than good policy imo.