Sunday, 24 July 2016

The vacancy tax that won't work

The Globe and Mail published this piece I wrote in their Monday July 25 edition.
British Columbia’s MLAs are returning to Victoria on Monday for a mid-summer legislative session to deal with changes to the Vancouver Charter intended to allow the city to impose a special “empty housing” tax.
I was struck by a comment made a few days ago by West Vancouver Mayor Michael Smith, who thinks a better approach to the issue would be to levy an additional tax on non-resident owners. He’s quoted as saying, “I pay a non-resident tax rate in Hawaii because I own a house there. It’s a much more logical way to go than a vacancy tax because, first of all, how do you enforce it and everyone has a different definition of vacant.”
For anyone that repressed a grin thinking that only a mayor of West Vancouver would be happy talking about his house in Hawaii, there’s a much more serious point that his observation completely misses. It’s a point invariably avoided by nearly everyone who discusses housing issues.
In Hawaii, as in the rest of the United States, there is no principal residence exemption for capital gains on the sale of your house. Everyone, resident and non-resident alike, pays capital gains taxes on the increase in value in their house when it is sold. Creating a two-tier system of taxes thus becomes a way of providing at least some comparative tax advantage to resident homeowners.
In Canada, of course, you pay no capital gains tax on your house, provided it is your principal residence. If you own property here but don’t live in it, you are taxable on the full amount of the increase in its value when you sell it. That’s true even if you live in it part-time, as long, of course, as you have a principal residence somewhere else.
This is a massive tax benefit for resident homeowners. In some parts of Vancouver, houses are being sold for literally 10 times what they were purchased for decades ago. All of that gain is tax-free if the house is your principal residence. But if you have purchased the property for an investment, if you’ve flipped it, or if you are planning to subdivide it and sell it off, it’s all taxable.
In other words, we already have a very significant two-tier taxation system for residential property.
Indeed, there is another such scheme, the Home Owner Grant, which reduces the amount of property taxes you pay each year on your principal residence. Admittedly, the grant doesn’t offer much value any more in Vancouver because the ceiling on eligibility has not kept up with the rising values of real estate in Vancouver.
But in other parts of the province, the grant is a very efficient way of distinguishing between houses that are lived in by their owners and houses that are owned by investors.
So there are at least two mechanisms already in place for distinguishing between resident homeowners and property investors. Do we need a third?
The proposed tax on vacant houses is partly about the apparent growth in non-resident investor-owners, and also about the shortage of rental property in the city. Rarely, in the long history of housing policy, has a tool been conceived that is more poorly designed to increase the stock of rental accommodation than the vacancy tax.
There are at least two fundamental problems with it. One, the definition of vacancy, whatever it is, will be arbitrary. How long does a property have to be uninhabited to be “vacant”? A week, a month, a year? No matter where you draw the line, it will be arbitrary.
In fact, there are lots of reasons why a house might be empty for many months, and many of them will have nothing to do with investors sitting on capital assets. What about the family that bought a house intending to move here because of a job transfer, but the transfer has been put on hold and the family decides to hang on to the house for a while to see if things change? It’s not hard to imagine dozens of such scenarios: Mom’s just been put in a care home, but there’s some chance she might recover and wouldn’t it be great if we could make arrangements to care for her in her house? And in such a situation, why would it make any sense at all to force the family to rent her house?
Of course, some properties are being left vacant because that is a rational investment decision by their owners. I’m not for a moment pretending that’s not happening. But I can tell you this from long experience overseeing public-policy administration: Every exemption proposed to try to limit or narrow the focus of the tax in a way that targets the “pure” investor will turn into a loophole and magnify problems of enforcement.
The second fundamental problem is that it will be an exercise in impossible magicianship to determine the right amount of the extra tax. Why? Because if it’s not high enough, it won’t deter vacancy or produce any significant revenue, and so will do nothing to help Vancouver achieve its goal of funding additional affordable housing. And if it’s too high, it will simply – and instantly – give an incentive for avoidance. Experts will spring up overnight to advise you on how to make it appear that your house is being lived in.
If I were an MLA, I’d be more than a little grumpy about taking time away from the summer barbecue circuit to debate a tax that is neither necessary nor enforceable, and will do nothing to address the problem it is intended to solve.

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