Federal proposal to tax vacant land
We need to reduce costs, not increase them
The 2024 federal budget included a proposal to support municipalities in taxing vacant land. The immediate reaction from housing people on Twitter (like Mike Moffatt and Alex Beheshti) was that this wasn’t a great idea. The Finance Department is accepting comments until December 31, so I sent mine in.
We need to reduce costs, not increase them
The problem
The scarcity and cost of housing in Metro Vancouver has been a major issue for years. A joint federal-provincial expert panel headed by Joy MacPhail took a close look at the problem of inadequate housing supply in BC, issuing their final report (“Opening Doors”) in 2021. To paraphrase, they concluded that there’s two key bottlenecks: at the municipal level, we regulate new housing like it’s a nuclear power plant, and we tax it like it’s a gold mine. (I understand that the situation in Ontario is very similar.)
This combination of red tape and heavy taxes on new housing has resulted in a major shortage of housing in the GTA and in Metro Vancouver. So then prices and rents have to rise to unbearable levels to force people to give up and move away, or to crowd into whatever housing they can find, or worst of all, end up homeless.
And then when Covid hit, suddenly there was a massive surge in people working from home, needing more space, and willing to move. It’s like the housing shortage spilled over from Toronto and Vancouver across the entire country. Smaller towns in BC, like Nelson and Nanaimo, are now like suburbs of Vancouver, with prices and rents to match. Even if we cut back on population growth (which is happening now), we need to build more housing everywhere, not just in the biggest cities. Our pre-Covid housing stock simply doesn’t line up with where people want to live and work.
Taxing vacant land: higher costs, bad incentives
As I understand it, the municipal push to tax vacant land is driven by frustration with approving housing, only to find that nothing happens; as well as the desire for more revenue.
There’s two problems:
Failure to recognize that it’s not just approval that’s a bottleneck. Costs are also a bottleneck. The value of the new building, minus all the costs of building it, has to be more than the value of what’s already there. When higher interest rates are pushing down the prices that people can pay, and when costs are way up (as they have been since Covid), a lot of projects are now underwater: it no longer makes sense to build them.
Taxes on vacant land are an additional cost, which will be passed along to homebuyers and renters, in the form of higher prices or rents. (There’s no free lunch.) And it leads to bad incentives for municipalities: if the approval process takes longer, they collect more revenue from the tax on vacant land.
The need to reduce costs
If the federal government and provincial governments want to make housing less scarce, expensive, and tiny, that means reducing costs, and specifically cost per square foot of floor space. We should be pursuing all of the following:
Reducing the cost of land per square foot of floor space by allowing more density, as Auckland did in 2016.
Reducing the cost of labour and materials by increasing productivity, e.g. by using more pre-fabricated assemblies.
Reducing the cost of approvals by allowing more housing by right, or by speeding up rezoning and permitting.
Bringing down barriers to entry, so that smaller builders with lower cost structures can enter the market.
Reducing taxes and fees, including municipal development charges.
The federal government is reducing the cost of building housing in a number of ways:
Reducing financing costs for purpose-built rental housing by providing low-cost long-term loans, through the Rental Construction Financing Initiative (now ACLP).
Waiving GST and allowing accelerated depreciation on new rental housing.
Using the Housing Accelerator Fund to convince municipalities to allow more housing and speed up approvals.
Offering $6B in infrastructure funding, with the requirement that municipal development charges be frozen at April 2024 levels.
Along the same lines, the Conservative opposition is promising to waive GST on new individually-owned homes under $1M.
Alternative sources of municipal revenue
It’s hard to beat something with nothing. Municipalities need more revenue, which is why they’ve been raising development charges and proposing taxes on vacant land. What are some alternative sources of funding?
Some specific suggestions:
Frank Clayton at Toronto Metropolitan University and Ben Dachis at C. D. Howe propose using full-cost water charges, via water metering, the same way that we pay for electricity infrastructure.
In US cities like Houston, it’s common to use a fixed mill rate. That way, revenue automatically increases as new housing is added.
Another idea I’ve heard mentioned is a regional sales tax or income tax. In terms of minimizing economic impact, economists recommend taxing property, then consumption. Taxing income discourages labour, taxing investment reduces our productivity growth, and taxing a narrow base like new housing is worst of all.
It’s common practice right now to require new housing to include some percentage of below-market housing, so that the market housing is cross-subsidizing it. Unfortunately this pushes the rents on the market side even higher and out of reach for more people, creating housing need faster than you can fill it. An alternative is to use property tax waivers to pay for it, like Portland does.
Finally, of course, there’s funding from senior levels of government. Mike Moffatt and Cara Stern suggest a flat $10,000 infrastructure payment for each housing start.
More
Use-it-or-lose-it entitlements. Brandon Donnelly, October 2022.
Federal budget floats idea of taxing vacant residential land. Joanne Lee-Young, Vancouver Sun, April 2024.
Vacant residential land stirs surtax rumblings. Barbara Carss, REMI Network, October 2024.
The land tax fiasco is inexcusable déjà vu. Thomas Hubert, August 2024. Discusses the political implications of Ireland’s similar Residential Zoned Land Tax.
Is it possible an under-occupancy tax might work? Thinking specifically about Vancouver I see in my job many many new houses being built for huge families that will never materialize. And there are countless more retirees sitting in homes with empty bedrooms. Maybe it's an incentive to build suites, maybe it's a cash grab.
Is there a way to change the vacant land tax to only penalize developer sitting on the land? Perhaps don't charge the tax if there is a development application but only for the average length of time for planning approval. This will provide incentive to planners to approve quicker since it will lower the average time to approval. It will also somewhat prevent the developer stretching out the approval process when they really want to sit on the land.