Paul Ratchford: The B.C. "school tax" is, in reality, a failed land-value tax experiment
By Paul Ratchford
It is tough to keep up with all the new and additional taxes the NDP have levied—12 in all at last tally—in its three-year fiscal plan for B.C.
- $2.5 billion payroll tax
- $1.3 billion carbon tax increase—the NDP phased out the requirement for carbon tax to be offset with other tax cuts
- $480 million speculation tax
- $115 million expanded foreign buyer tax
- $243 million increase in property transfer tax
- $450 million school tax
- $285 million increased tobacco tax
- $86 million in other tax measures, including levies on luxury cars
- 1.5 cent/litre gas tax equals approx $24 per year for each vehicle
- B.C. Hydro 25-cent monthly levy
- Income earners over $150,000 annually to face a new personal tax rate of 16.8 percent up from 14.7 percent
- Increase in the general corporate income tax to 12 percent from 11 percent
Now, just over one year into power and $5.5 billion of new and additional taxes later, B.C. stands on the precipice of a tax revolt. There exists a growing anger and frustration from community members who know the smug look of politicians who brazenly stand smiling to your face while clearly not listening or engaging with legitimate concerns. The recent Point Grey Fiesta was a great example of this, as David Eby (NDP MLA Vancouver–Point Grey) walked alongside a vintage car smiling and waving at many of the same constituents he betrayed with a “school tax” (note: there was no mention of the “school tax” during the recent election campaign).
For context, British Columbia personal income tax revenues for 2017–18 were $9.115 billion on a total budget of around $50 billion. The $5.5 billion of new and additional taxes represents an increase of $,1183.29 for every man, woman, and child living in British Columbia, based on the census population of 4,648.055.
What is the “school tax”?
The “school tax” is perhaps the most controversial and divisive of all the taxes. The “school tax” has struck an emotional chord with me and many other residents since it targets homes. Neither my family nor I are personally impacted, yet I find the notion of taxing people out of their homes (regardless of the numbers) to be offensive. Here are some facts about the “school tax”:
- The “school tax” is an additional tax that does not go to schools—it goes to general revenues. The name is misleading in this respect. The revenue generated can be spent on anything the government decides to spend it on; accountability is limited.
- B.C.’s “school tax” is presently set at 0.2 percent on property values beyond $3 million and up to $4 million, and 0.4 percent on property values byond $4 million. This has frequently been misrepresented by the media as a small increase but is highly significant on a dollar basis.
- B.C.’s “school tax” is not indexed to inflation or home values, which will result in it rapidly impacting more and more homeowners across British Columbia.
- “A report prepared by Cascadia Partners for Metro Vancouver last year showed that in 2016, $557.2 million in gross property taxes were collected from Vancouver, while the district’s expenditures were slightly over $500 million. That means Vancouver’s school property tax contribution was 111.4 percent”. In other words, Vancouver homeowners subsidized other jurisdictions across the province.
Many names have been applied to the “school tax” including “mansion tax”, “family homes tax”, “wealth tax”, and “asset tax”, but perhaps it is most appropriately called a “land-value tax”. A land-value tax is a tax on the unimproved value of land, and given that land values generally exceed improvements in Vancouver, this seems to be a fair label.
The “school tax” is similar to a land value tax as it is linked with the assessed value of the land, but differs slightly as it also taxes improvements on the land (generally considered to be a bad idea as it disincentives productive activities).
Two critical questions, which are relevant to consider with all taxes, are whether the tax is efficient and whether the tax is fair.
- Is the “school tax” a relatively efficient mechanism to raise tax dollars? Yes
- Is the “school tax” fair? No
The economics of why land-value taxes are efficient
Economists understand that taxes cause a distortion in markets which often results in deadweight loss. We also know from basic economic theory the deadweight loss, which results from taxing goods in inelastic supply (land), is lower than taxing goods that have elastic supply. Where goods are perfectly inelastic, there is no deadweight loss as the supply curve is vertical.
Below, the Economist highlights the challenges associated with increasing taxes, the efficiency benefits of land-value taxation, and hints at the folly of the large majority of the NDP’s $5.5 billion in new and additional taxes:
"Most taxes do not just depress economic activity; they also displace it—for example to offshore financial centres. The faster that tax collectors crack down on loopholes, the more clever accountants find new ones. Land-value taxes, on the other hand, lack these perverse effects. When individuals are deciding between buying land and investing in more productive manners they focus on return whereas society would want them to focus on the societal benefit. By reducing the returns associated with land investing it creates a clear incentive to invest capital productively."
The Economist would likely approve of some aspects of the “school tax.” The economic theory behind the efficiency (reduced deadweight loss) from land-value taxes is sound. However, it is worth questioning the extent to which determining that a tax is efficient means that it is also desirable. One need not think too long to envision a tax that could be efficient and lead to greater productivity but is certainly not desirable—a tax on leisure time, anyone?
Because of their efficiency, land-value taxes often sound good in theory, but make little sense practically. Land-value taxes create an odd distortion within society by targeting owners of one asset class for special taxation while disregarding income and overall wealth, which may be held in stocks, pensions, bonds, insurance, savings accounts, et cetera. Any transition from a tax system based on high income taxes to one based on high property taxes is fraught with problems.
- Land-value taxes cause less deadweight loss (due to inelasticity of supply) than other taxes, which makes them attractive to economists.
- Were one designing a tax system from the ground up (which we are not doing), land-value taxes seem to be a less damaging tax to generate revenues than the alternatives.
- Land-value taxes create an odd distortion within society by only targeting the owners of one asset class.
The “school tax’s” Achilles' heel
The “ability to pay principle” is a basic principle of taxation which maintains taxes should be levied according to a taxpayer’s ability to pay. Adam Smith wrote about four general canons of taxation in Book V, Chapter 2 of The Wealth of Nations:
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.…
- The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.…
III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.…
- Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.…"
In simple terms, we could say good taxes are:
- proportionate to one’s ability to pay;
- certain rather than arbitrary;
- payable at times and in ways convenient to taxpayers;
- and cheap to administer."
The inherent unfairness of the “school tax”
There is no evidence that it meets the criteria of being “proportionate to incomes or abilities to pay”. In fact, there exists strong evidence to the contrary.
The 2016 census shows that Point Grey incomes are a relatively modest $84,951. Based on census data, incomes of seniors are likely to be significantly lower.
The census information shows senior families have incomes 30.39 percent lower than families where the highest earning member of the household is under 64. Extrapolating this to Point Grey, we can infer that an average senior family in Point Grey will have a household income of $58,888.79.
Assuming the $58,888.79 is “employment income” (which I will note is not necessarily fair, since many retirees will have income sources taxed at a lower rate, but I am unsure as to the distribution), that leaves $45,610 of after-tax income for the average senior family—nonseniors are left with $64,166.
A nonsenior owner of a $5-million home could see their income drop by 9.35 percent [1-($64,166-$6,000)/$64,166] and a nonsenior owner of a $6-million home could see their income drop by 15.58 percent [1-($64,166-$10,000)/$64,166].
A senior owner of a $5-million home could see their income drop by 13.5 percent [1-($45,610-$6000)/$45,610].
A senior owner of a $6-million home could see their income drop by a whopping 21.92 percent [1-($45,610-$10000)/$45,610].
With already modest incomes, it is easy to see how these sudden taxes do not fit the criteria of being “proportionate to one’s ability to pay”.
Critics might argue that home values are correlated with income levels and homeowners with homes in the $3-million to $5-million range likely have much higher incomes and thus are able to pay the “school tax.” However, what we see is that the large increases in home values over a short period of time (65.7 percent in five years) have left incomes and home values highly disconnected. This is a perfect recipe for unfairness in this circumstance.
A quick search of Real Estate Board of Vancouver data shows the benchmark price for a home in Vancouver West is $3,430,500. The “school tax” is moderate for benchmark homes at this price point (since it starts at $3 million), but depending on the distribution of homes it will impact numerous individuals rather acutely (as demonstrated above).
Note, I was unable to obtain information as to the distribution of homes valued at more than $3 million in Point Grey, but based on everything I have seen anecdotally, it seems fair to say there are a significant number of homeowners with modest incomes in impacted homes.
When considering the fundamental fairness of the tax, we should not be overly focused on the number of families unfairly impacted. Regardless of whether it is 100, 1,000, or 10,000 affected, from a fundamental fairness and good tax—bad tax standpoint, the number of families negatively impacted by the “school tax” is not the determinative factor.
The determinative factors (at least as outlined in The Wealth of Nations) are that the tax should be proportionate to one’s ability to pay, certain not arbitrary, payable in a convenient manner, and inexpensive to administer. This tax is clearly not proportionate to one’s ability to pay.
A society that imposes taxes on individuals (wealthy or not) that are not proportionate to their ability to pay would seem to be acting in a tyrannical fashion. That is hardly hyperbolic either….
The definition of tyranny is “unjustly cruel, harsh, or severe; arbitrary or oppressive; despotic”.
So if it isn’t proportionate to one’s ability to pay, am I looking for sympathy here? Certainly not, I am not even impacted by the taxes.
Am I suggesting that people struggling to pay their rent should feel sympathetic toward a homeowner with significant equity in their home? No, I wouldn’t expect them to feel that way.
However, I am saying that we should all support a good government. We should all be opposed to tyrannical and unfair government policies regardless of who they may target today.
A society that endorses the forced removal of a targeted group of people from their homes (using taxes as the instrument) is one that could soon endorse the removal of anyone from their homes.
Ironically, it seems that with the “deferral option”, the government tipped their hand to just how bad this tax is. Imagine the government allowing you to defer your income tax at next to nothing in interest. Why would they ever do that?
The answer appears to be that they understood the tax was fundamentally flawed and needed a backup plan—enter the deferral program. Unfortunately, there are a couple of serious flaws with any deferral.
- For all homeowners who have mortgages, the government doesn’t get to decide if you can or cannot defer, your lender does. So, for many residents, deferral is not an option.
- Homeowners who can defer their taxes today may run into problems in the future. For example: If for any reason they need to access equity in their homes, they will likely need to first pay back their deferred “school tax”. For homeowners who couldn’t afford the tax in the first place, this also leads to a forced sale.
Anecdotally, when I go to community event after community event, what I hear from homeowners is exactly this. People here cannot afford to pay the tax. I recently helped some community members at the Point Grey Fiesta with an anti-“school tax” and excessive NDP taxation tent.
I walked to the parade with a woman, and I asked her a simple question, “Why are you here?”
Her response was, “Simple, we can’t afford to pay this tax.”
She is the mother of three young children, works as a counsellor, and is spending her weekend protesting this tax because, while she may not know the four canons of taxation laid out in Adam Smith’s The Wealth of Nations, she most certainly understands in her heart that this tax is fundamentally unfair.
- Regardless of whether this unfairly impacts 100, 1,000, or 10,000 families it remains unfair and I would call it that.
- The “school tax” violates a basic canon of taxation regarding taxes being proportionate to one’s ability to pay. Adam Smith wrote about this in the 18th century, and it still holds true today.
- A society that imposes taxes on individuals thatare not proportionate to their ability to pay would seem to be acting in a tyrannical fashion. Any time a government acts in a tyrannical fashion, everyone should be concerned regardless of the target.
- Anecdotes from rallies and community meetings confirm what census income data suggests, which is that many residents can’t pay the “school tax".
- Deferral is a false choice.
- You may not be sympathetic toward West Side homeowners with significant equity needing to sell their homes and move, but you should be concerned with a government that acts in a tyrannical and unfair manner.
Other “school tax” weaknesses
With respect to Adam Smith’s other basic principles of taxation, the “school tax” seems to also fail on point #3 as it is not convenient when compared with alternatives. On point #4 it appears to pass, and on point #2 it is okay but not great.
There is an arbitrariness inherent in taxes determined based upon assessments due to the perverse incentive that exists for government to assess your property higher than its true market worth. However, I don’t see evidence to suggest the assessment system is so far off from actual market values that this point alone is enough to invalidate the tax.
The "school tax" is inconvenient
Land taxes and property tax surcharges also appear to fail in the eyes of some prominent economists on Adam Smith’s third point. The existence of automatic withholding undoubtedly makes tax-paying convenient for citizens and ensures they don’t get hit with large tax bills while having no money in their bank accounts to pay them.
The “school tax” is not nearly as convenient as progressive income taxes are. Some may argue the convenience or inconvenience of a tax is not especially relevant, but I don’t find that compelling and neither did one of the fathers of modern tax theory, Milton Friedman.
He famously stated why land-value taxes don’t exist: “It’s unpopular in my opinion for one simple reason. It’s the only tax left on the books for which people must write a big cheque."
Proponents of a land-value tax should seek ways to address the inconvenience of this tax as well as the disconnect with taxpayers’ ability to pay.
The "school tax" is unpredictable
Large numbers of homeowners sit on the cusp of being struck down with this sudden tax increase should their assessments rise. While I focused on the constituency of Vancouver–Point Grey in my analysis (because that is where much of the immediate impact is), it would be fascinating to see the extent to which other constituencies will be significantly impacted soon.
Do we have any estimates as to how many families and which areas of the province could see a significant impact in the next five years? 10 years? No, the government has not bothered to conduct any kind of analysis into the anticipated impact of this tax on British Columbians.
However, we know assessments frequently change at rates that are multiple times the rate of inflation. Should assessments suddenly rise at any point in the future, many additional families will suddenly be impacted.
The inability to predict if taxes will be owed, and if so how much will be owed, frustrates regular people who expect certainty with respect to taxation. For those who experience variable income taxes from year to year, this is different because it is proportionate to your earnings. Because the “school tax” is not linked to earnings, certainty is of heightened importance.
Since revenue generating taxes are rarely reversed, we should not analyze this tax from the perspective of a single moment in time (today), but consider the long-term impact of the “school tax” on homeowners. A homeowner who may owe $0 in Year 1 could owe a considerable amount in Years 3 or 5. A homeowner who owes a negligible amount in Year 1 could owe a large amount in Years 3 or 5.
A fair analysis must consider the fact that the “school tax” will likely impact numerous families who are not presently impacted and result in potentially large and sudden tax spikes for current homeowners. British Columbians who are presently impacted and those who are not presently impacted should both be leery of this tax due to its unpredictability.
- Numerous families (not presently impacted) will be impacted by this tax in the future, though it is uncertain when this will happen and how much they must pay.
- The government (which also conducts assessments) has a perverse incentive to assign a higher assessed value to your home than it is worth because higher assessments generate larger revenues.
- For those who are immediately subject to the tax, their tax bills will likely vary in a dramatic manner from year to year based on assessed values (which have been much more volatile than the consumer price index and census incomes).
- The “school tax” is not convenient when compared with income taxes. Milton Friedman identified this as a major impediment for land taxes.
- The “school tax” is highly uncertain due to the unpredictability of real estate assessments. This creates all sorts of financial challenges (planning issues, etc.) for taxpayers.
Undoubtedly, there is room for discussion around what an optimal taxation system looks like and whether the wealthy in our society need to pay more tax in the face of rapidly escalating health-care costs and an aging boomer population. There are also plenty of worse injustices in this world than a bad tax.
But today, on this topic, I am simply here to tell you that this tax by the government is wrong, this tax is not proportionate to people’s ability to pay, this tax is not consistent, and this tax is not convenient.
The “deferral option” is a false choice and people's anger at our government over this tax is justified. Having studied this tax in depth I can tell you that if you supported the school tax, you should reconsider your position, and if you were opposed to it previously, please speak up.
The “school tax” was ideologically driven and the result is an unfair, unpredictable, callous, and fundamentally flawed tax. People who have been mocking the anger and uncertainty this tax has created should reconsider their flawed populist positions.
Think for yourself, think critically, and don’t let “tax the rich populism” sway you from seeing this tax—and the manner in which it has been implemented—as poorly thought through and a bad tax!
P.S. Community members have posted signs on their lawns protesting the “school tax” and I have one of those signs. That sign has been vandalized or stolen on five separate occasions (as have those of other neighbours I know). Sadly, there are aggressive ideologues in our midst who have engaged in nasty rhetoric and are seeking to intimidate and silence voices of dissent. I hope we all can stand united against this kind of reprehensible behaviour.
Paul Ratchford lives in Point Grey with his wife and two children aged three and one. Neither he nor his family is directly impacted by the “school tax”.More