Lower property taxes to the ground to save cities & nature

There are two big problems with our property taxes: they are too high, and too low.

How can that be? Well, it’s because in Ontario, as across Canada, property tax is actually two taxes: a tax on land, and a tax on buildings.

Taxing land value is fair, because a site’s value stems from the community around it; land rent is higher in the middle of a bustling city than in a quiet village, and higher in a town than in a remote wilderness. When realtors say the three most important things are location, location, and location they are right; the value of a site comes from what you can do there, determined by what is around it. Roads, services, and customers are all vital links for a business, so even though remote land is cheaper than land near a city, smart businesspeople pay more to be where they can easily access inputs and markets.

On the other hand, taxing the value of buildings is harmful, penalizing those who maintain or improve their properties while rewarding those who let them run down. Install new elevators in your apartment building and your taxes go up, but let the balconies rust and your taxes go down. It’s a perverse incentive.

Even worse, property taxes subsidize speculators who hold valuable land vacant. With no building, they get a tax break for as long as they want, waiting for a big payoff when someone else finally pays the inflated price to build. In the meantime, those willing to contribute to the local economy now are driven to the green spaces at the edge of the city, creating sprawl. Sprawl not only destroys natural habitat, it worsens traffic and costs more to service, so we all must pay higher taxes.

There’s an easy solution to these twin problems: split-rate taxation. Under this approach, buildings are taxed at a lower rate, land at a higher rate. The total tax stays the same, but how it is applied changes incentives for landowners. Those using land appropriately pay less, as their buildings get a break. Speculators pay more tax, encouraging them to either do something with the land or sell it to someone who will.

Under split rates, long-vacant downtown lots will come back on the market at reasonable prices, reducing the pressure to sprawl past the city’s edges. Downtown becomes a place to do business, not a place to gamble on land values. With urban land no longer held vacant and wasted, green spaces need not be paved over.

But does this really work, or is it just fantasy? Luckily, this approach has been tried in many places, and it works every time. Split-rate property tax leads to more building permits, more affordable housing, less sprawl, a higher rate of home ownership, and improved urban economies. It’s time for Ontario to allow cities to implement this tax reform to, at no cost to us, improve our local economies.

Published as my Root Issues column in the Barrie Examiner under the title "Tax reform badly needed in communities"

Erich Jacoby-Hawkins is a director of Living Green and the Robert Schalkenbach Foundation.