Josh Gordon: Speculation tax is essential for housing affordability
The announcement of a “speculation tax” in the provincial budget has generated considerable debate in the media. One initial concern was that the tax might apply to cabins in rural or vacation areas, such as the Gulf Islands or Parksville. Others wondered about the fairness of taxing vacant second homes in urban areas, if they were being used part-time by individuals undergoing medical treatment.
These concerns have now been addressed. The NDP clarified last week that only the main urban areas in the province will be affected, thereby exempting cabins or vacation areas. They also exempted vacant second homes in cases where owners are dealing with medical issues, or where career obligations are implicated.
The upshot is that less than one per cent of British Columbians who pay income tax in the province will be hit by the tax, according to the government’s calculations.
In turn, this means that if critics of the speculation tax want to keep up their opposition, they must now defend the status quo. And the status quo is hard to defend.
The speculation tax is meant to address a weakness in our existing tax system which generates housing unaffordability. Our current system broadly assumes that people work and pay income taxes in the jurisdiction where they and their family reside. This means that when they consume social services and use public infrastructure in that community, they have contributed in a way commensurate with their income or means. This is part of our social contract.
A problem arises, however, when people can buy housing with income or wealth not generated locally, and yet are still able to use social services — education, health care, etc. — and infrastructure — roads, bridges, legal system, etc.
If property taxes are comparatively low, as they are in B.C., this allows such individuals to pay much less than their fair share of taxes. They can, in short, free ride on the contributions of others.
What will be the effect of that dynamic? If the jurisdiction is an attractive place to live, it will mean that wealthy people from around the world will want to place their families there. They will buy expensive housing, pay minimal income taxes, and enjoy public amenities and services — all for the modest cost of their property taxes.
That prevailing dynamic means that housing prices come to reflect the purchasing power of a global elite, not local working people. Those working people, meanwhile, are left to subsidize that elite with their income taxes, and they struggle to save up enough to pay for what is now unaffordable housing.
If unchecked, cities like Vancouver become subsidized resort towns for the world’s rich.
There are three major problems with this model. First, those who benefit most from this dynamic — developers and those ready to cash out their real estate gains — are generally well off. But those who suffer from this dynamic — local working people who rent — are usually more precarious financially.
This is a recipe for an unhappy society — heaping windfall gains on the wealthy and debt and stress on working people. It is no coincidence that Vancouverites recently reported the lowest life satisfaction in urban Canada.
Second, non-real estate related businesses will get squeezed or stifled, as high housing costs harm their ability to attract and retain mobile skilled workers.
Third, the social contract, and thereby the social fabric of society, will fray. Working people who dutifully pay their taxes, but who see rising housing costs and subsidized elites as their reward, will come to resent the entire, rigged system. Their support for the social contract will weaken, they will become disaffected, and politics will become resentful and divisive. In some measure, this is already happening in Vancouver.
So how does the speculation tax help?
It helps by providing a backstop to our income tax system, which has a hard time taxing global income. This means that global elites will be pressed to pay their fair share — discouraging foreign ownership — and housing prices will come to more closely reflect local incomes. This re-coupling of the housing and local labor market will also reduce speculative activity, which assumes that the “resort town model” will continue indefinitely.
The tax achieves this by introducing an annual two percent tax on urban properties owned by those who do not pay income taxes in Canada, such as satellite families, where the breadwinner earns abroad. This is where the vast majority of the tax will fall — not vacant second homes, which are small in number and often exempted, as explained above.
So what the opponents of the speculation tax must answer then are the following: Should young working British Columbians be forced to subsidize those who are using foreign funds to out-compete them for housing? Would you accept that situation if you were in their shoes? And how do we avoid becoming a subsidized resort, if not through some version of the speculation tax?
The NDP deserves credit for addressing this obviously perverse and socially destructive situation. So too do the Greens, who kept pressure on the NDP to act.
That leaves Andrew Wilkinson and the B.C. Liberals. Are they interested in creating a level playing field for young working people in urban B.C.? Or will Mr. Wilkinson continue to defend the status quo kept in place for so many years by his predecessor, Christy Clark, which helped bring us the housing crisis.
With 81 percent of British Columbians in support of the speculation tax, that shouldn’t be a difficult decision.
Josh Gordon is assistant professor in the School of Public Policy at Simon Fraser University.