Collateral Damage: Land Transfer Tax Takes Bite Out Of Home Sales - C.D. Howe Institute

By C.D. Howe Institute —— Bio and Archives October 11, 2012

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TORONTO, - Toronto's Land Transfer Tax (LTT) has had a significant impact on home sales and household mobility in the city over the longer term, according to a report released today by the C.D. Howe Institute. In "Stuck in Place: The Effect of Land Transfer Taxes on Housing Transactions," Benjamin Dachis finds the LTT has depressed sales volume by 16 percent, on average, since its introduction in 2008. "Municipalities across the country - especially those neighbouring Toronto - should beware Toronto's example, where the imposition of a land transfer tax depressed housing sales, raised relocation costs and reduced household mobility," said Dachis, a Senior Policy Analyst with the Institute.

The report builds on previous studies, by estimating the long-term effect of Toronto's LTT, and uses a uniquely detailed dataset of resale housing transactions from 2005 to mid-2012. Dachis finds the effect of the LTT on transactions varies by house price, with the largest negative effect on homes in areas with resale prices below the median market sale price. Because the LTT reduces the incentive to move, Dachis finds that the LTT also has resulted in more Toronto residents choosing to renovate their current homes rather than relocate. "The higher transaction costs, owing to the LTT, may cause some households to tolerate living in ill-suited homes for longer than they would have otherwise desired," said Dachis. Other potential effects of LTTs include government revenue volatility, commercial real estate market distortions, and higher construction costs. Numerous provinces and municipalities across Canada levy LTTs. Among them, Toronto and Montreal have recently introduced municipal LTTs that apply alongside province-wide LTTs. The study recommends they replace LTTs with less distortive taxes. Toronto, like other municipalities that levy LTTs, should limit itself to its other revenue-raising tools, and replace the LTT with a revenue-equivalent property tax levy. Provincial governments that impose an LTT should replace their LTTs with revenue from value-added taxes. For the study go to: (Link)