British Columbia’s new surtax on high-value homes has elicited outcry by many affected homeowners, calling it “radical,” “punitive,” “confiscatory,” and simply “unfair.” In contrast, opinion polls of the general public find wide support for this addition to the provincial “school tax.”
What would taxation policy analysts say about the charge that the property surtax is unfair? To begin, they would ask whether it meets the four criteria of good tax policy enunciated first by Adam Smith: simplicity, certainty, efficiency and equity. Let’s see if it does.
Here the surtax passes with flying colours. It is simple: surtax liability can be calculated directly from assessed valuations already undertaken for basic property tax.
It is certain: payment of surtax cannot be avoided or evaded through stealth or sophisticated accounting.
It is efficient: a tax on land poses the least cost to the economy, and the value of homes subject to surtax lies mainly in land.
In short, the property surtax — like the basic property tax — scores better than almost any other tax in simplicity, certainty and efficiency. Costs of administration and collection are also low for the surtax since it is done as an add-on to the basic property tax. That leaves the more complex and nuanced criterion of equity; how does the surtax score on that basis?
Equity (measured horizontally)
Taxation policy analysts typically focus on the “horizontal” and “vertical” dimensions of equity. Let us consider those aspects as well as more commonplace notions of what is equitable in taxation.
Horizontal equity is the concept that persons with similar levels of economic resources — be it income or assets or wealth — should be taxed similarly. Wealth holdings in various forms convey economic power as does current income and thus affect the ability to pay taxes.
If one person possesses a $5 million home and another has $5 million in financial assets or a family business, should they be taxed very differently? The latter person must pay income tax on interest, dividends, profits, and capital gains and can pay their rent only out of the after-tax income.
In contrast, the owner of a $5 million home not only lives rent-free but also is exempt from tax on gains in their home’s value when selling it. This sharp discrepancy between the tax treatment of wealth held in homes versus other assets violates the horizontal aspect of equity. This approach also inclines individuals to invest their savings disproportionately in housing, thus spurring the escalation of house prices.
While society may wish to encourage home ownership to some degree, providing unlimited tax preferences for owners of the highest-valued homes strains basic notions of fairness. Moreover, British Columbia’s wealth inequality is among the most extreme of the Canadian provinces, and skyrocketing housing prices in Metro Vancouver are a major contributor. This point leads us to the second aspect of fairness, vertical equity.
Equity (measured vertically)
Any family owning a home valued above $3 million is among the wealthiest of Canadians. The great majority of home owners subject to the surtax have enjoyed large gains, often in the millions of dollars. In contrast, most Canadians never accumulate even $1 million in savings of all forms including home equity and business assets over their lifetimes. Vertical equity is the notion that individuals’ tax liabilities should increase more steeply than the level of their economic resources.
Vertical equity is thus associated with the progressivity of taxes — the average tax rate rises with the individual’s income or other taxable base. Almost all of our major taxes have progressive elements in their rates: personal income tax, corporate income tax, property transfer tax, and even payroll taxes with their exempt levels. B.C.’s sales tax on vehicles also applies progressive rates, rising in steps from seven per cent on cars below $55,000 up to 20 per cent for cars above $150,000. Thus tax rates can embed the vertical notion of fairness.
Some critics of the property surtax assert that progressivity has no role in this type of taxation. However, the BC Home Owner Grant already introduces rate progressivity, with low tax for homes valued below the grant and the grant phased out for homes valued above $1.65 million. There is nothing novel about explicitly progressive property taxes; they are found in Singapore, Lithuania, and Ireland (which applies a surtax rate to homes valued over the Canadian equivalent of about $1.5 million).
The application of a surtax rate on high-valued properties thus does not raise any novel principles or practices. It is consistent with the principle of progressivity in almost all of our taxes. Still, the specifics of B.C.’s property surtax are open to discourse. Are the $3 million threshold and the two and four tenths of one per cent rates too low or too high?
How much is too much?
The surtax threshold and rates have to be assessed jointly to understand their financial impact. At $4 million a home will bear $2,000 in annual surtax; that is just one-twentieth of one per cent of value. Even for a $6 million home the surtax of $10,000 will be just one-sixth of one per cent of value. Homes in the City of Vancouver must exceed $9 million before their surtax equals their basic property tax of one-quarter of one per cent.
Only when expressed in dollar terms do the surtax amounts sound large, but they are all relative to the multi-million dollar values of the affected homes. And relative to the sharp increases in values of such homes in recent years — and the phenomenal appreciation over holding periods of 30 years or longer — these are very modest levies.
The option to defer paying
The ability of owners aged 55 years or more to defer their surtax as well as their basic property tax further relieves payment burdens that might arise for some retirees. Those owners eligible and electing to defer payment are charged a highly favourable interest rate of 1.2 per cent without compounding. Given the sudden and unanticipated imposition of the surtax, however, some form of deferral option should be extended to all affected homeowners.
The charge of critics that owners deferring the surtax will lead to “confiscatory” burdens defies basic mathematics. Homes valued between $4 and $5 million will accrue debt including interest over 15 years totalling just one per cent to 2.5 per cent of their value, and this assumes that the home does not appreciate further over that period. This result can hardly be characterized as confiscation. For comparison, the owner will face a larger expense of 2.5 per cent to three per cent of value for realtor’s commission and other costs when selling their home.
Commonplace notions of tax fairness
In addition to taxation analysts’ concepts of fairness, more commonplace notions also support raising any needed public revenues from high-valued properties rather than increased tax rates on income or consumption.
The large gains that have accrued to the owners of top-valued homes in B.C. were no more the result of hard work or scrimping than the efforts and sacrifices made by owners of homes that have appreciated far less in other parts of the province or Canada. These gains are the result of good fortune as well as policies provincially and nationally that have allowed large pools of foreign wealth to inflate the local housing market.
Even though the gains in value of top-tier properties have arisen mainly through luck, these homes carry low property tax rates and go totally tax-free on their gains and any bequests. In contrast, most Canadians face relatively high rates of tax on earnings from their daily efforts as workers, employers, self-employed and proprietors. If any taxes need to be increased, commonplace fairness suggests that emphasis be on currently low-taxed high-value real estate and not by raising rates on already highly taxed activities .
Despite the preceding point, some critics of the surtax have proposed an alternative that would raise income tax rates by 0.25 percentage points for incomes above $150,000. That would push the marginal tax rate in B.C. for top earners above 50 per cent. Yet, an individual earning $150,000 (or even $200,000) would not be able to buy a home priced over $3 million unless they had a massive down payment. It is ironic that some who through good fortune became property rich would be pointing to increased taxes on productive upper earners.
That the owners who have benefitted the most from a skyrocketing real estate market must pay modest increases relative to their home values should be acceptable in a region where many families are struggling to pay rising rents or to become owners of lower-valued homes. In short, the property surtax is neither radical nor punitive nor confiscatory nor unfair. Rather, the new surtax will generate public revenues in a simple, certain, efficient, and equitable manner.