A Tax’s Time To Die:

Commentary, Taxation, Frontier Centre

Property taxes are dead or dying in European countries. The Netherlands, which until recently applied two property taxes, eliminated one of them as of January this year, and now politicians are calling for the other’s elimination. Italy’s Silvio Berlusconi, despite his scandal-ridden government, came close to upsetting his rival in April by promising to scrap property taxes for first-time home buyers if re-elected, and the U.K.’s Liberal Democrats want to scrap them altogether. Ireland and Germany scrapped them. And now Sweden seems set to abolish its municipal property tax, too.
If the polls hold, Swedes will wake up on Sept. 18 to find they have turfed out the ruling Social Democrats, the architect of the country’s welfare state, for a newly formed market-oriented coalition of four parties called the Alliance.

Sweden’s property tax isn’t the only item in play. In what has been an ideological election campaign, the conservative coalition argues for less generous unemployment benefits to foster entrepreneurship, privatization of government stakes in industry and lower income taxes. But it is the Alliance platform’s vow to scrap property taxes that has been grabbing the headlines, and the credit for vaulting the Alliance into first place in the public opinion polls.

The Alliance’s decision to target property tax reform, as in other countries, is a sign of the growing clout of free markets and urbanization. Property taxes in many, if not most, jurisdictions do not stay within local communities. They are often collected by senior levels of government for use as redistribution mechanisms. Wealth from urban areas, which pay high property taxes that are in excess of the cost of services they require, then flows to rural areas, which cannot afford to pay their own way. As rural regions lose populations to urban areas, politicians reassess this long-standing tax.

In Sweden, the reassessment follows dramatic increases in the value of real estate, particularly in Stockholm and other urban areas. Over the past decade, property tax increases of 10% per year have outraged homeowners who have seen their tax bills soar without any corresponding increase in services, and for no reason within their control. The arbitrariness of property taxes – no other tax is divorced from either personal earnings, personal expenditures or services received – gave the Alliance a political opportunity all of its coalition partners could agree on. The Alliance agreement to scrap the property tax is all the more significant since one of the four Alliance partners – the Centre Party – has a strong rural constituency that could be harmed by the abolition of property taxes.

But the Centre Party has been changing. Historically a steadfast ally of the Social Democrats, it has lost its share of the electorate over the years, and its clout, as rural areas vegetated. The Centre Party is now recasting itself as a party acceptable to urbanites – adopting entrepreneurial free market policies and touting measures that will protect the environment. The Alliance’s alternative to the property tax provides an example of how taxation may morph as industrialized countries stop favouring ruralia.

To recover the government’s lost revenue in abolishing property taxes, the Alliance plans several measures that would, indirectly, encourage both a rural depopulation and denser cities. About half of the property tax revenue would be a replaced by set fees – 2,800 kronor for a house and 900 for a condo – regardless of their value or location. While the fees would be much lower than the amounts that urbanites had been spending on property taxes, directly saving urbanites a bundle, the proposed fee would exceed what many rural property owners now pay.

To raise the other half of the lost revenue, the Alliance is eyeing two loopholes that distort the housing market: the deductibility of mortgage interest and the capital gains exemption on the sale of homes. Closing one or both of these loopholes would diminish existing government incentives that artificially encourage people to invest in new homes rather than securities or their businesses. Without these loopholes, numerous studies around the world have shown, cities would be more compact and suburbs would be less sprawling. In the process, governments would also save costs in delivering utility services. Whether collecting garbage or stringing electricity lines, utilities operate more efficiently the closer housing units are to each other.

Canada lags behind Europe in casting out property taxes, not because property taxes in Canada are any less offensive but because of an accident of history. Our cities are creatures of the provinces, which long ago allowed municipalities the property tax and little else by way of funding. Although many provinces are urbanized, our electoral system gives rural ridings a disproportionate amount of power, which they use to maintain subsidies to rural lands. But change is coming to Canada’s provinces, too, as urban population continues to swell and as the injustice of property taxation hits home. Some provinces have loosened their grips and others will be forced to, when opposition political parties recognize the electoral gains to be had.