News broke on Tuesday, October 27, that the Ontario Liberal Party under Premier Kathleen Wynne would be moving ahead with a proposal that allows for municipalities to charge their own Municipal Land Transfer Tax (MLTT). This instantly raised red flags with concerned tax payers and real-estate organizations such as the Ontario Real Estate Association (OREA).
In fact, OREA President Patricia Verge has already stated via press release that following through with this plan will force homebuyers to pay approximately CAN$10,000 in total land-transfer taxes on the average-priced home in Ontario. For buyers in big markets like Toronto, that tax bill will be significantly higher.
Although the provincial Liberals have broken their 2014 election promise that they would not extend these powers to municipalities, there is a silver lining here. The MLTT, as currently formatted, is the right step, in the wrong direction. The reason why this is a right step is that the MLTT allows for the possibility of jurisdictional competition between municipalities. That being said, this competitive possibility is essentially null and void while the Provincial Land Transfer Tax (PLTT) still exists.
So what should be the next step for the Province of Ontario? In my opinion, they should have cancelled the PLTT and exchanged it for the MLTT. Why? Because it would put significant downward pressure on land-transfer taxes as a whole, given that municipalities would have to compete with each other in finding a tax rate that home buyers find appropriate.
What is meant by jurisdictional competition? Look at Switzerland. The Swiss have successfully created a system where lower forms of government have more autonomy over local initiatives (including taxation). This approach to politics has spurred an economy where the tax burden is relatively low, and where regulatory restrictions are kept to a minimum. Why is this the case? It happens largely as a result of their decentralized approach where policies like land taxes are decided and implemented locally. For those who don’t know, Switzerland is the fifth freest country in the world, one place in front of Canada, and seven places in front of the United States.
That is exactly why the MLTT is the right step, via decentralization, but the wrong direction, since it adds significantly more taxes to a population that is already overtaxed. If the MLTT were to replace the PLTT, we could actually see municipalities fund their own infrastructure projects, as opposed to being locked into the current dependency trap of fiscal mismanagement followed by provincial funding.
Just look at the region of Halton as an example of why the decentralized approach is needed. During the recent federal election, Regional Chair Gary Carr announced that Halton would have an infrastructure shortfall of approximately $5.6 billion by 2031. How is it that one of Canada’s wealthiest regions could fall so short on its own infrastructure needs? The reason boils down to two important trends:
- Poor fiscal management at the municipal and regional level. Municipal and regional governments are notoriously bad at balancing the books and demonstrating even a remote understanding of fiscal responsibility.
- A lack of autonomy over local policy. This lack of autonomy is locking municipalities into a dependency trap with the provincial and federal government. Because municipalities have very little autonomy, they are often stuck operating under the conditions set out by the province. What compounds this problem is that these municipal governments then poorly manage their fiscal situation, and seek more funds, via transfers from the province. This is what I like to call subsidizing “bad government.”
So here we have a region that is one of the wealthiest in Canada, poorly managing its own books (partly because of the province’s mandates) and then having their poor fiscal management bailed out by higher levels of government. This is exactly why the province needs to exchange the PLTT with the MLTT, and not have them coincide with each other. Doing so can empower municipalities to improve their fiscal accountability, get them out of the dependency trap, and provide jurisdictional competition for homebuyers.
Will the provincial Liberals go the decentralized route? They almost certainly won’t. The government of Ontario is broke, and they need every revenue tool at their disposal, especially given their unwillingness to curb spending. With both taxes running side by side, we should expect some gruesome economic effects. The OREA has already stated that the double tax in Toronto prevented over 38,000 housing transactions and $2.3 billion in economic activity.
That being said, exchanging the PLTT for the MLTT would create more autonomous, responsive, and competitive communities, that benefit everyone involved.