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How BC Could Tax Soaring Property Values for the Public Good

Land wealth is fuelling inequality and rising housing costs. Here’s a solution.

Alex Hemingway 30 Aug 2023The Tyee

Alex Hemingway is a senior economist and public finance analyst at the Canadian Centre for Policy Alternatives, B.C. office.

Property wealth has become a massive source of inequality in B.C. as home prices and rents have risen dramatically amid a severe housing crisis and shortage. A consequence of high prices has been an explosion of residential real estate wealth now totalling over $2.1 trillion in the province, a stock of wealth that remains only lightly taxed.

In less than two decades, just the increase in residential property wealth has amounted to a staggering $1.7 trillion. Even the most equally distributed segment of property wealth — owner-occupied principal residences — is highly concentrated. As of 2019, the top two-fifths of British Columbians (by net worth) held almost 80 per cent of principal residence asset values. 

While the B.C. government has taken some worthwhile steps towards taxing the most expensive properties, these have only scratched the surface of the enormous property wealth gains in B.C. 

In this report, I examine provincial property tax policy options with three main aims:

The policy options examined here inevitably involve technical or political trade-offs, or both. There is no perfect property tax reform, but a range of options are worthy of consideration individually or in combination. Five key policy options examined in this report include:

  1. Doubling the existing provincial property tax rates on residential property value above $3 million (to 0.4 per cent) and $4 million (to 0.8 per cent, as well as adding a new bracket above $7 million (1.5 per cent).
  2. Using the above brackets and rates, restructuring these progressive taxes to apply to the total property holdings of a given owner, rather than applying on a per-property basis.
  3. Applying progressive property tax brackets at a lower threshold ($1.5 million) to cover a greater portion of residential property wealth in B.C. (in this case including about 11.7 per cent of households).
  4. Ending the automatic cuts to base property tax rates that occur as property values rise.
  5. Shifting property taxes towards a tax on land value specifically (as opposed to the value of productive investments in the buildings or improvements on a property).

Land wealth is created collectively 

The vast majority of B.C.’s residential property wealth — $1.5 trillion — is in the value of the land rather than in the buildings on it. Unlike the value created by constructing or improving a building, increases in land values are not the result of any effort or expense by property owners. Rather, the land value is a social creation in that it reflects what makes the use of a particular location attractive to people.

Land values are generated by everyone participating in the life of a city or community, creating the culture, social connections, goods and services that make a place desirable to live (and shaped by the geographic features of a place). They are also created by direct public investments in infrastructure and services like streets, sewers, water, electricity, public transit, schools, parks, libraries and community centres. Yet, socially and collectively created land value gains flow into concentrated private hands. 

One important way that land value can be shared more broadly is through public or community ownership of land. Given that much of B.C. is on unceded land stolen from Indigenous peoples, it’s notable that the Squamish Nation is showing the potential of this approach with lands it controls. The nation’s Sen̓áḵw housing development will add 6,000 new homes to its reserve lands in Vancouver, creating a major revenue stream of rental income for the nation while providing homes to help ease the wider housing shortage. A similar approach is being taken jointly by three First Nations that own the Jericho lands. 

Our focus here, though, is another way to ensure that privatized land value gains are more broadly shared: tax them. Property and land taxes can generate significant revenues to invest in the public good.

Understanding the property tax system

In regions where property value gains have been most concentrated in B.C., property tax rates are low and have declined sharply over the past two decades. Unfortunately, the existing annual property tax system is designed in a way that ensures that only an ever-shrinking share of property value will be taxed.

As things stand, property taxes work very differently from other taxes. Rather than locking in a tax rate (or set of rates) as we do with income or sales tax, property tax rates change annually. At the municipal level, a city, town or village determines its budget for the year and then sets property tax rates at a level that will raise this amount of money. When property values rise, the property tax rate (or “mill rate”) decreases to ensure revenues don’t exceed the planned spending. The municipal portion of the property tax rate in Vancouver has fallen by half from 0.3 per cent of assessed value in 2000 to 0.16 per cent in 2023, and the city’s overall property tax rate fell from 0.63 per cent to 0.28 per cent over the same period. 

Property taxes include municipal, provincial and regional portions. For example, in Vancouver the overall property tax rate is now 0.28 per cent, with the 0.16 per cent municipal levy and 0.08 per cent provincial levy (known as the "school tax") being the largest portions and the remainder going to TransLink, Metro Vancouver, BC Assessment and the Municipal Finance Authority of BC.

The focus of this report is on provincial property tax policy options, but much of the analysis and logic could be applied to improving municipal tax policy.

A long-standing B.C. policy holds that provincial property tax rates are decreased annually when property values rise to ensure the “average provincial revenue per home only increases by B.C.’s consumer price index rate of inflation.” Since rising values have far outpaced inflation, provincial property tax rates have fallen (even faster than municipal ones, at least in Vancouver). Furthermore, effective property tax rates are even lower than the posted rates, at least for the 92 per cent of owner-occupied households in B.C. that receive the provincial government’s homeowner grant tax break each year.

Having property tax rates that automatically fall in response to rising property values is standard policy in Canada, but there’s no reason it should be in an era of ballooning property wealth. This tax structure effectively locks in land wealth inequality — ignoring hundreds of billions of dollars in land value gains — and ensures the property tax system does little to alleviate it. Annual property taxes are treated exclusively as a means to raise revenues for a limited set of municipal services and as a modest provincial revenue source. As land wealth grows, an ever shrinking proportion of it is harnessed for the public good even though public infrastructure investments give urban land much of its value. 

Low property taxes also make real estate particularly enticing for passive investment. There are few if any other financial products where as the value increases, the tax rate applied decreases. Combined with the federal exemption of principal residences from capital gains tax, this makes owning housing a highly attractive investment relative to other assets (including for owner-occupiers), which drives up prices.

Towards a more progressive property tax system

The B.C. government has taken some important but limited steps in recent years when it comes to taxing residential property wealth, which my colleague Marc Lee recently reviewed in detail. 

Most relevant for our purposes, B.C. added two new brackets and rates to the provincial portion of annual property taxes (school tax): 0.2 per cent on value above $3 million and 0.4 per cent on value above $4 million. These newer brackets are known as the additional school tax.

Notably, these tax rates are fixed rather than regularly adjusted downward as with the rates on the main bracket. This was an important step towards establishing a progressive property tax system, for which the CCPA has long made the case. 

The province also introduced the speculation and vacancy tax on empty homes and so-called “satellite families,” a foreign buyers’ tax and a new bracket to the property transfer tax on value above $3 million.

But these recent property tax reforms are very small relative to the huge increases in land wealth. For example, while $223 million was raised last year by the new additional school tax brackets, that’s a drop in the bucket compared to residential property value gains of $1.7 trillion since 2005. 

In the following sections, I consider policy options to extend progressive property taxation in B.C. 

First, I model a revision and expansion of the existing provincial property tax brackets on value above $3 million. Then I examine the prospects for applying these revised brackets to the total property holdings of a given owner, rather than solely on a per-property basis as under the current system. Next, I consider two more policy approaches that would include broader portions of the property tax base. I then discuss why focusing taxes on the land portion of property values would generally be an improvement to the design of the existing property system (and to any of the other policy options presented).

1: Increase top end progressive property tax rates and add new bracket

In this policy option, I model a doubling of the rates on the two current additional school tax brackets on the value of properties over $3 million and over $4 million that were added to provincial property taxes in 2018, as well adding a third bracket (1.5 per cent on property value above $7 million).

The revenue estimate of $579 million represents more than double the revenues generated by the existing AST brackets and rates ($223 million in 2022). This estimate is extrapolated from Ministry of Finance revenue figures for the existing brackets. The actual revenues may be somewhat lower due to decreased property values in this market segment. Whatever combination of lower housing prices and increased revenues results from the tax, these are both good policy outcomes.

This type of tax structure focuses on a small percentage of the most expensive properties in the province. According to ministry estimates, only 1.9 per cent of the most expensive properties in B.C. were affected by the progressive property tax brackets above $3 million in 2022. The new bracket I propose adding above $7 million would only affect approximately 0.2 per cent of properties. 

2: Progressive tax brackets based on total property holdings

One limitation of the existing progressive property tax brackets in B.C. is that they are assessed on the value of individual parcels separately. If an owner of residential real estate holds more than $3 million worth of residential property, but this is spread across multiple properties worth less than $3 million, then they are not subject to the existing higher progressive property tax brackets. For example, if a very large owner held 50 properties worth $2 million each, they wouldn’t pay the higher rates.

I therefore model an alternative property tax structure where brackets and rates are applied based on the total B.C. residential property holdings of any given owner (using the same brackets and tax rates as the previous policy option). With some modifications, the new Land Owner Transparency Registry created by the B.C. government could help make the administration of this tax structure possible. 

The proposed tax structure and revenue estimates are as follows: 

The revenue estimate and share of households affected are derived from Statistics Canada survey data on household assets. There is necessarily a substantial degree of uncertainty around these estimates and they should be understood in the context of the limitations of the data.

At $1.17 billion, this is estimated to approximately double the revenue relative to the per-property tax structure in option one, as well as represent a net revenue increase of an estimated $938 million compared to the revenues from the existing provincial progressive property tax rates of $223 million in 2022. 

This design still focuses on a small percentage of holders of significant real estate wealth in the province, including roughly 3.7 per cent of B.C. households with over $3 million in real estate assets. Taxing total residential property holdings of a given owner would ensure that large real estate owners can’t avoid progressive property tax rates by splitting their investments among multiple lower value properties. 

Like the existing progressive property tax brackets, the policy suggested here would exempt purpose-built rental buildings, ensuring no disincentive to creating new dedicated rental housing. In fact, it would provide an incentive for new construction on multi-family zoned land to take the form of rental rather than strata condos (since these two forms of housing are often left to compete for the same scarce parcels of land).

At the same time, it could conceivably render certain strata developments unviable while still not lowering land prices enough to make rental viable on those sites. But any negative effect on strata supply could readily be offset by sufficiently ambitious rental upzoning policies, as well as by using revenue raised to increase public investment in dedicated affordable housing. 

This tax structure may also tend to encourage a shift in use of some existing strata units towards owner-occupation rather than being rented out on the secondary market, or towards ownership of secondary rental units by smaller landlords with total holdings under the tax threshold.

A challenge to this tax design is that it would represent a significant change in the structure and administration of property taxes relative to the existing per-property approach. In essence, we are talking about a surtax applied on an individual basis (more akin to the income tax system) rather than on a per-property basis. Changes would be needed to the Land Owner Transparency Registry to ensure the total property holdings of an individual could be identified, including in more complex cases where properties have multiple beneficial owners. Implementation would take more time than the other policy options considered here. 

3: Broader-based progressive property taxes brackets

The two policy options above focus only on the top few percent of properties or owners, helping address wealth concentration at the highest end of the real estate market. This narrow focus may make these policies more politically popular, as evidenced by polling on the existing property tax above $3 million.

In this section, I suggest a property surtax option that captures a larger share of high-value properties and has higher revenue potential. While this is a provincial proposal, it is adapted from national-level proposals in the CCPA’s Alternative Federal Budget 2023 and from Generation Squeeze. 

Here, a surtax would apply at a lower threshold on the portion of a property’s value over $1.5 million:

The revenue estimate for this broader-based surtax is derived from Statistics Canada data. While the tax would affect less than 12 per cent of households, it would cover about one third of B.C.’s total residential property value. As in the previous options, purpose-built rental housing would be exempted.

Given the broader tax base captured here, one concern is that some property rich households with relatively low incomes or large mortgages may find it difficult to cover the tax payments. However, B.C. already has a range of options to defer property tax payments until a property is sold, including for people over 55, surviving spouses, persons with disabilities and families with children. One possible variation on this policy would be to make the deferral options even more broadly available for the surtax portion of the property tax, while also income-testing the deferral at the high end to avoid misuse.

In another variation, this lower tax threshold and rate structure could be combined with policy option two, applying the tax to the total residential property holdings of a given owner rather than on a per-property basis. In this case, the revenue estimate rises to $3.69 billion and 15.3 per cent of households are affected.

4: End the automatic cuts to base provincial property tax rates

In addition to adding new brackets and increased tax rates on the highest-valued properties, what about addressing the long-running decreases in base property tax rates? Among the three policy options above, even the broadest of them would still leave over $1 trillion of B.C.’s residential property wealth untouched. From this perspective, there is a good case for increasing base property tax rates. 

As discussed above, property tax rates have plummeted in cities like Vancouver as property values exploded. B.C.’s high-priced cities have among the lowest property tax rates in North America. For example, Vancouver currently has a residential property tax rate of 0.28 per cent, Burnaby is 0.27 per cent, Langley is 0.30 per cent, Richmond is 0.29 per cent, Victoria is 0.44 per cent, Saanich is 0.41 per cent and Kelowna is 0.40 per cent (including the municipal, regional and provincial portions).

By contrast, Toronto’s property tax rate is more than double many of these at 0.67 per cent, Calgary is 0.66 per cent, Seattle is 0.88 per cent and the U.S. average is over one per cent (though cross-jurisdictional comparisons entail some complexity due to different assessment practices). The historical contrast is also striking: Vancouver’s rate was 0.63 per cent as recently as 2000 and was 1.2 per cent in 1988.

Whether in combination with new progressive brackets, or as a standalone policy, addressing ultra-low base property tax rates would help reduce inequality, raise revenue and dampen housing prices. 

A first step would be to stop automatically cutting provincial property tax rates when property values rise faster than inflation. Holding rates steady wouldn’t raise much revenue initially, but if property values continue escalating, it would raise revenue and ensure more land value gains are captured for the public good (while helping to contain price escalation). In turn, if property values don’t escalate — for example, due to much more ambitious policies to build affordable homes and address the housing shortage — then a rate freeze would have little effect because tax rates wouldn’t have fallen anyway. But this would imply that housing costs are coming under control, which is an even better outcome than raising revenue.

The province could also consider reversing past rate cuts by putting a minimum floor on overall property tax rates, gradually raising rates in high-value cities from the current ultra-low levels. Low property tax rates entrench wealth inequality and make passive investment in housing highly attractive. Introducing a property tax floor could also address the large regional inequalities in school tax rates, where communities with less property wealth pay substantially higher rates than the places where property wealth has exploded.

Of course, the politics of raising base property tax rates would be challenging. Broad-based property taxes are consistently less popular in public opinion polling than other taxes. This is in contrast to B.C.’s top-end property tax increases, which have had high levels of support in opinion polls. To address objections relating to fixed-income households, options to defer additional tax payments until sale could be included, as discussed above. Enacting a property tax floor could also be packaged as part of a tax shift wherein property tax rates would rise but income tax rates would fall, which may have its own popular appeal. But this latter approach, whatever its merits, doesn’t address our goal of raising more revenue.

5: Shift to a land value tax

Property tax policies — including both existing policies and those proposed in this report — would be improved by shifting their focus (in part or in full) to the land portion of property value, as opposed to the building or “improvement” value. As discussed above, land value represents the vast majority of residential property values in B.C. Because land value is created through no action of the landowner — and because the physical supply of land is fixed — taxing it results in no disincentive to productive investment. Moreover, since land can’t be picked up and moved, taxation is very difficult to evade. For these reasons, economists tend to view taxing land value as an especially efficient form of taxation. 

In single-family zoned areas of high-priced cities like Vancouver, the existing property tax is already close to functioning as a land tax because the large majority of property value is in the land portion. But for apartment housing, the value of the building represents a much larger portion of the overall property value. As a result, land value taxation provides an incentive to build apartments rather than low-density detached houses, encouraging more efficient land use in high-demand cities facing housing shortages. In fact, at the beginning of the 20th century Vancouver briefly had such a land value tax.

In recognition of the fact that land value is created through the activity and public investments of the broader community, one related approach is sometimes referred to as land value capture, which can be tied directly to large public infrastructure investments. As the BC General Employees' Union has pointed out in its housing policy analysis, when a new public project like a rapid transit line is built, nearby private landowners’ benefit enormously from increased land values resulting from the investment. The portion of land value increases in the area attributable to the transit investment can be calculated by BC Assessment, and the BCGEU suggests taxing that portion of the increase.

Paths forward for taxing land and property wealth

The scale of B.C.’s property wealth explosion — an increase of $1.7 trillion in less than two decades — is extraordinary. Skyrocketing property values are a reflection of the broader housing crisis. While rising property values are a boon to existing owners, they are a massive source of inequality as well as a burden to renters, would-be buyers and businesses struggling to recruit workers who can’t find housing. 

The hard truth is that housing can either be affordable, or it can be a source of wealth gains for owners, but it cannot be both. To make housing affordable, we need to massively increase public investment in non-market housing and increase overall housing supply by dismantling municipal roadblocks like exclusionary zoning, which effectively bans apartments on most of the residential land in our cities. 

Property tax reform serves a related but distinct purpose: to address accumulated land wealth inequality and help ensure this wealth can be harnessed for the public good. Property tax rates have plummeted to historic lows, but if that were changed they could serve as a bigger source of much-needed public revenue. After years of neglect, there is a huge backlog of need for public investment in housing and other critical services as we face social and environmental challenges from health care to climate disruption.

This report has examined five such provincial policy options that deserve consideration, focused primarily on annual recurring property tax structures. There are many other policy options that could be considered, of course.

For example, as my colleague Marc Lee has suggested, B.C. could overhaul the $910-million per year homeowner grant tax break currently given to property owners. Another option is to increase property transfer taxes, although this approach comes with some significant policy trade-offs and the revenue potential of a well-designed version may be modest. In addition, while the focus of this report is provincial, the federal capital gains tax exemption for principal residences (worth $9 billion in foregone revenue) is a strong candidate for reform either by phasing it out or enacting a lifetime cap.

There is no use pretending that the politics of property tax reform are easy. While property wealth is highly concentrated, it still financially benefits a substantial portion of B.C. households. In contrast with policy proposals like a federal wealth tax on the richest 0.5 per cent, property taxes are far from being a slam dunk with the public. Property taxes seem to cause an unusual level of animus in part because they are so salient: they don’t automatically come off of paycheques and they’re paid in a lump sum. Indeed, reforming the administration of property taxes to allow for automatic payments by instalment — and making this the default — is also worth considering and could shift the perception of this tax.

At least in the short term, the more narrowly targeted policy options presented in this report may be more politically realistic than the broader-based ones. But the narrower approach comes at a cost: leaving hundreds of billions of dollars in privatized land wealth gains untouched. 

To open up further political space for reform and bridge the conflicting interests at play, one promising possibility would be to convene a citizens’ assembly on land and property tax reform. Many property-rich British Columbians understand that land wealth gains have been a stroke of luck — like winning the lottery — that has unintentionally come at others’ expense with corrosive effects on the social fabric. Given the unique opportunity that a citizens’ assembly affords to gather information, deliberate and reflect with fellow citizens on the nuances of the problem, owners too may be ready to prescribe property tax reform. 

Regardless of the politics, as we seek to address growing inequality and a housing crisis, we will have to face up to these challenges. In the lead up to the next provincial election, B.C. deserves a serious debate on how to fix a flawed property tax system that has contributed to massive wealth inequality and high housing prices. Property and land tax policies are needed that can reduce wealth inequality, raise revenue for public investment, level the playing field between regions and encourage more efficient land use.   [Tyee]

Read more: BC Politics, Housing

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