The author is a full professor in the Department of Economics at the School of Management Sciences at UQAM. He was also Minister of Finance and Economy in the Quebec government.
Due to an insufficient number of dwellings, the housing market is under pressure. The scarcity of housing results from the combination of several phenomena. On the one hand, the demand for housing is increasing because the population is growing rapidly, in particular due to immigration and because teleworking, which requires space, has become widespread with the pandemic. On the other hand, on the supply side, housing starts are not even keeping pace with population growth. We will therefore not be surprised that the market favors owners and sellers and that rents and property purchase prices are rising sharply.
We know the consequences of this situation: scarcity of affordable housing for low-income households, difficulty of access to property for young people and even a brake on worker mobility, which reduces the quality of the worker-worker match. employment and hence productivity.
In a context of housing scarcity, measures aimed at helping households tend to increase demand and exacerbate market tensions. They are therefore not a real solution. As for measures that would reduce demand, this same context makes them politically inconceivable.
It is therefore worth looking for solutions on the supply side. There are several reasons why housing starts are insufficient. Among them is that the costs of building and owning a home are high relative to the price that can be obtained by selling or renting it. These high costs discourage construction. One of those costs is property taxes.
In Quebec, the property tax on a residential property is calculated very simply. On the one hand, we establish the value of the property, including the building and the land on which it is built. On the other hand, the municipality sets the tax rate applicable to residential properties. The amount to be paid by the owner is then the tax rate multiplied by the value of the property.
Quebec municipalities tax land and buildings at the same rate. But this is not the case everywhere in the world. For example, in Pennsylvania, we long ago opted for property tax at separate rates: buildings are taxed at a much lower rate than land. In this state, it is not uncommon for the rate applicable to land to be three times, four times, and even ten times higher than that applicable to buildings.
Why not a reform?
Property taxes at lower separate rates for buildings than for land provide significant benefits. First, by taxing buildings relatively less, we encourage the construction and renovation of housing. For example, for a given piece of land, there is an interest in building more housing because the resulting increase in the value of the building is less taxed.
Similarly, an owner who renovates his dwelling, and who thereby increases the assessment of the building, will suffer a smaller increase in his tax bill. Moreover, because land is taxed relatively more, it is in our interest to build more housing units per square meter of land, as this allows the land portion of the property tax to be spread over a greater number of housing units.
Studies have confirmed that separate property taxes encourage home construction and renovation. Adopting such a tax here would therefore increase supply and, ultimately, ease market tensions. In addition, and this is significant in the context of the current fight against climate change, studies confirm that such a tax promotes the densification of the territory and that it reduces urban sprawl. With a denser territory, it is reasonable to believe that public transit would be used more and that local businesses would be favored.
Why do we, in Quebec, continue to use the single rate property tax when the separate rate is higher? Could we not envisage a reform of property tax, keeping the overall burden of this tax unchanged, in which the tax rate for buildings would decrease and that for land would increase?
The short answer is that despite the collective benefits it would bring, such a reform would result in some losers. Among the losing taxpayers, there would be those whose land is relatively expensive and who would see their tax bill increase as a result. Politically, such a reform could therefore be perilous.
If the proposed reform provided for the introduction of separate rates and a reduction in the overall property tax burden, then there would be the possibility of reducing the number of losers and the acceptability of the reform would be greater. On the other hand, a reduction in the overall burden means that the municipalities would see their revenues decrease, which is not possible. In fact, in order to move forward, the Government of Quebec would have to compensate the municipalities for the drop in their revenues. If we find this proposal valid, the negotiations for the next Québec-municipal tax pact would be a good opportunity to discuss it.