No Free Lunches

Commentary, Taxation, Frontier Centre

Winnipeg City Council will soon decide whether it should extend the New Home Credit program, an initiative that gives new home buyers a cool $3,500 property- tax credit over three years. It hands out even more, $5,000, if the new structure is "in-fill" housing as defined in that central planning mirage of false hopes, Plan Winnipeg.

While well intentioned, the program is bad policy and should not be renewed. It’s costing an already hopelessly over-taxed community real money but fails to address in any serious way the "urban flight" problem it was conceived to remedy.

Visible programs like this are good politics. But good politics often translate into bad economics and higher taxes. The New Home Tax Credit program is no exception. It lends local officials more profile while creating busy work for paper- shufflers. Like many ideas that litter Manitoba’s crowded public policy graveyard the program subsidizes the few by increasing costs for the many. Moreover, its impacts are temporary and will disappear when the invisible transfer ends.

The Home Credit program is designed to encourage the construction of new homes within the perimeter. It’s fatal flaw is that it deals with the symptoms of a problem – urban sprawl – instead of its cause – property taxes that are among the highest in the world. Lower those taxes, and the problem will disappear. But the dynamics of tax reduction, particularly lower-cost civic government, continue to elude our local political culture. At least for now.

Councillor Amaro Silva recently suggested: "It costs us nothing to defer taxes. We’re giving away taxes we wouldn’t have had anyway." Sounds plausible. But does the Home Tax credit program really cost nothing?

The people who pay directly for the tax credit are the owners of slightly older houses — a close substitute for the new home product being subsidized. Consider the unlucky souls who bought or built prior to the introduction of the subsidy in recently developed areas like Lindenwoods, Richmond West, Whyte Ridge and Island Lakes. If they decide to sell now, they have to face a market in which buyers can purchase the same house at a lower price.

Obviously, buyers will go with the cheaper option. Hence, the seller of a nearly new house has to deduct the subsidy from the going price to stay in the ballpark. Since the tax credit simply lowers the resale value of all such houses, it only weakens Winnipeg’s floundering property market.

Indirectly, we all pay. Lower prices mean lower assessments and lower property tax revenues. In the end, the tax credit may well cost everyone more than it saves us. The temporary spurt in revenues from new subsidized housing may be highly visible, but it is unlikely to make up for the less immediately perceived decline in property values across thousands of nearly new houses.

The same logic applies to the Province’s attempts to stimulate the housing sector. In its recent status quo budget, the Province extended a sales-tax rebate program that gives new homebuyers $2,500 relief on new home materials. Unfortunately, sellers in the resale market can now shave that subsidy off the going prices for nearly new homes. Again, we end up with lower property values, lower assessments and lower revenues for the city.

A famous economist once said: "There is no such thing as a free lunch". He was right. So beware of elected officials who skirt the sad results of excessive property taxation by offering high profile "freebies". It’s another reason your house in Winnipeg suffers from the lowest property values in Canada.