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Robert Murray Haig.

The exemption of improvements from taxation in Canada and the United States [electronic resource] : a report prepared for the Committee on Taxation of the City of New York online

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the reduction of the tax on buildings has been much stronger than the dis-
^ couragement to building through the impairment of increments by heavy
land taxes. This conclusion is strengthened by the evidence in regard to
the increase in land values in all of the cities. The increases in selling values
have been phenomenal, probably greater than the general expectation.
Moreover, the tax rates have been low and the transfer to the land tax
has in most cases been gradual and without shock. In very few cases, it
will be recalled, was it found necessary to raise the tax rates when the
reductions were made in the tax on buildings.

All of this would indicate that the Canadians have ground for the faith
that is in them. It is certain that, right or wrong, they believe that the
^ system stimulates building and their belief is, of course, tremendously
important so far as practical results are concerned.

With the aid of the accompanying diagram showing the value of build-
ings constructed annually in the various cities visited it is possible to make
some general deductions concerning the effects of the land taxes upon
building activity.

In the first place the reduction of the tax on buildings does not in itself
insure a building boom. The tax system is not the primary cause of build-
ing activity. In 1913 Saskatoon reduced the tax on buildings ten per cent.
The value of buildings constructed that year dropped from approximately
seven and one-half million to two and one-half million dollars.

Moreover, the absence of a tax on buildings is not in itself an insurance
' that building activity will continue indefinitely. Witness the slump in all

of the cities except Winnipeg in 1913 and 1914.

i^ It is true that the changes in the tax systems were accompanied by

Ij great building activity. That the changes in the tax systems were

V' responsible for part of the activity is not denied. On the contrary, it is

i vigorously affirmed. But tax changes are not of chief importance. They

j are not the most influential factors. It is easy, here, to confuse cause and

I effect. It is probably true that the building activity was a more important

I cause of the tax changes than vice versa. The members of the councils

were careful in almost every case to make the changes only during periods

of expansion and prosperity. Building activity is one of the primary tests

of prosperity in the Canadian cities.

(Note to diagram.) (a) The 1914 figures, in the following cases, are estimates
based upon the figures for the first months of the year: Winnipeg, five months; Sas-
katoon, six months ; Vancouver, nine months ; Victoria, seven months ; Calgary, six
months ; and Regina, six months.



271



BUILDING STATISTICS OF SELECTED CITIES IN WESTERN CANADA (a)



.1902 1903 t904 1905 1906 1907 1908 1903 1910 1911 1312 1913 1914.



21




1302 J303 1904 1305 1906 J907 1308 1909 Im m f912 fi?3 |94



>/



272



It is impossible to draw convincing conclusions from the data as to
the effect upon buildings because of the lack of sufficient statistics suitable
for purposes of comparison. Additional analysis, however, may have the
result of showing more clearly that the tax factor does not deserve the
attention it has received. From 1908 to 1912, Vancouver and Winnipeg ran
a close race for first honors in building activity. Vancouver in 1910
dropped off its last twenty-five per cent, on buildings. In 1909 Winnipeg
reduced its building assessments one-third. These two cities, which are
often compared, although they are very different, economically, were almost
even in the race in 1912. During the past two years Vancouver, with all
improvements exempt, has slumped enormously, while Winnipeg has main-
tained a very considerable degree of activity.

Calgary and Edmonton are often compared. Edmonton has not taxed
improvements during this period. Calgary brought the assessment of build-
ings down from one hundred to twenty-five per cent, in a series of reduc-
tions extending from 1909 to 1912. Calgary's curve increases more rapidly
and goes higher than Edmonton's. Both drop heavily in 1913 and 1914.

It may be interesting, if not important, to point out that building
activity like that described above is not peculiar to Canadian cities. Port-
land and Seattle can show statistics which equal Vancouver's and Winni-
peg's in amount and exceed them in the number of years during which the
activity was sustained. ( 1 )

The foregoing discussion may at least serve to show how difficult it is
to trace statistically the effects of changes in a tax system. That the changes
are not so important as is sometimes claimed is patent.

Perhaps it may be worth while to mention a point which is much dis-
cussed in Vancouver at present. It is claimed that under the conditions
now existing in the city — population decreasing, many buildings unrented —
it is economic suicide to build. So far as the land tax operates as a pro-
pelling force influencing owners to improve their lots, it is claimed that it
is unjust. The owner cannot build. Yet he is penalized for not building.
Vancouver, of course, is in the midst of a depression and the situation is
unusual.

It is evident that here, too, the question of the effects of exempting
improvements is largely a question of the circumstances present where the
change is made. Under normal conditions the change may be confidently
expected to have the effect of stimulating building unless the new arrange-
ment involves the impairment of the expected increment and thus discour-
ages building to a greater extent. Whether the expected increment is im-
paired is then a question of the size of the tax, of the expectation and of the
increment, all three of which vary from situation to situation. ' Under the
conditions recently present in Western Canada, the system seems to have
operated to encourage building to some extent and the various social con-

(1) The crest of the wave was reached in Portland and Seattle in 1910, while in
Canada it was not reached until 1912.



273

sequences which follow increased building may fairly be attributed to the
system. The fact that it has stimulated building in Western Canada,
however, is not certain evidence that it will have that effect in New York
City.

G. Rents

Western Canada has little experience of value to offer as to the effect
upon rents of the policy of exempting improvements. There has been an
interesting movement in rents. The story is the same in all the cities. Until
the last two years rents have been exorbitant. Recently they have fallen.
In some places they are now as inordinately low as they were high a few
years ago. The whole situation is abnormal. During the years of expansion
it was impossible to supply the demand for houses and business quarters.
It is said that four thousand people lived in tents in Edmonton through the
winter of 1912. With the contraction of activity and decrease in popula-
tion there is in some places an over-supply of buildings. Rentals are
proverbially unstable and susceptible to influence. A few houseless tenants
or a few tenantless houses can do much to demoralize rents. Since the tax
system has had something to do with stimulating building, it is partly
responsible for the present supply of buildings and for the present low rents.
But to attribute to the tax system the total responsibility for the drop in i
rents would be as great a mistake as to attribute to it the responsibility for j
the entire building boom.

H. Congestion

The problem of congestion is not an important one in the Canadian,
cities. Nevertheless some observations of value may be made. In the first
place, there are many indications that the tax system tends to encourage
economy in the use of land. ^A number of persons testified that the pressure
of the land taxes made it necessary for them to sacrifice lawns which they,
would gladly have retained if this had not involved the doubling of their tax
bill. The tendency to split up lots in Vancouver is considered by the assessor
as significant in this connection. The average building lot is extremely ~
narrow in most of the cities. The movement toward apartment building is
strong and the tax system may be partly responsible for this ; but, if so, it
is probably not the most important factor. These are indications of a
tendency toward increased congestion per acre. So far as buildings are \
made cheaper because of the reduced carrying charge, the exemption of I
improvements undoubtedly operates to reduce congestion per room.

/. Credit Conditions

There is general agreement that the special land taxes have had no'j'
unfavorable effects upon credit conditions. Loanable funds have not been
withheld or mortgages foreclosed to any considerable degree because of the
pressure of the tax system. It is true, there has been a scarcity of loanable
funds recently, but the bankers and business men ascribe this to other
causes than the tax system. Two points should be kept in mind, however,



274

t
in considering this aspect of the question. First, real estate loans are very
conservatively financed. Loans are almost never made upon the security of
unimproved real estate. Building loans are restricted to a low percentage,
usually less than fifty per cent, of a conservative valuation of the land
and building. A large shrinkage in value can therefore be endured without
serious consequences. In the second place, the sources of loanable funds
are somewhat peculiar in character. Most of the funds come from insurance
companies and mortgage companies. The latter sell bonds in the East and
in Europe and loan the proceeds upon the security of western real estate.
These sources would seem by their character to be less susceptible to in-
fluence by factors such as changes in tax systems than might be the case if
funds came exclusively from private sources.

/. Speculation

In none of the larger municipalities have the land taxes seriously inter-
fered with the practice of buying land in the hope of profit from an antici-
pated rise in price. The experience of some of the smaller towns, however,
shows that this is only because the tax rates in the cities have been low. It
has been demonstrated that it is possible to make the tax rate high enough
to counterbalance the prospect for gain and to force the owners of land to
surrender it. This amounts to saying that speculation in land can be utterly
destroyed by this method. The proof of these propositions may be found in
some of the Alberta towns.(l)

In the cities many well informed real estate men testify that, in the
past, taxes have not been considered in their calculations. Most of them,
however, add that taxes will in the future be taken into account. The ex-
periences of real estate men who have had to carry quantities of unimproved
land during the present period of depression will doubtless bear fruit not
only in opposition to the land taxes, but also in the practice of more careful
discounting of tax burdens. There is no question but that the speculator is
now under pressure and that he is now conscious of it. This pressure, it is
recognized, is greater than it would be, were concessions not extended to
improvements. The heavier taxes mean heavier carrying charges. The
possibility of, being held responsible for these charges, it is generally ex-
pected, will act as a deterrent to some who otherwise would invest. The
land taxes certainly have not served to prevent a very great amount of specu-
lation. Whether the amount has been greater or less because of the tax
systems, it is impossible to say with definiteness. It is probable that they
have exercised only slight effects.

One surprising fact in connection with the situation in the Canadian
» cities is the friendliness of the speculators to the plan of exempting improve-
ments from taxation. The professional real estate element in all the cities
had much to do with the adoption of the single-tax proposals. Indeed, had
these interests not been in favor of the proposals, their chances of becoming

(1) Cf. supra, pp. 78-81, 129-154.



275

law would have been very slight. For almost everywhere the professional
real estate men are and have been for years past in control of city govern-
ments. It is necessary to specify the professionals or the statement would
be meaningless, for apparently real estate is at least an avocation with most
of the residents of the Canadian West. The statistics concerning the num-
ber of home owners and the number of cases where such individuals have
invested in an extra lot are significant. ( 1 ) Almost every one in the region
seems to have a personal pecuniary interest in upward movement of real
estate values. The primary test of culture, one citizen whimsically com-
plained, was one's knowledge of local real estate values. In addition to this
general real estate interest and the professional interest there is yet another —
the non-resident interest. But it is the local professional real estate men
who have made themselves the effective force in local politics. These are
the men who, usually starting with little capital, buy and sell real estate,
planning never to hold any piece long and always ready to shift investments,
at the temptation of a gain. These men have found it desirable to have
themselves elected to their local councils. An analysis of the membership
of the various city councils almost always reveals a high percentage of real
estate men. In addition there are sometimes contractors or lawyers whose
interests are so identified with the real estate faction that their support is
assured upon any measure of importance. This is true at the present time
of Vancouver. In Calgary the council for a number of years back has been
composed largely of men of this type. The council in Edmonton, which has
ten members, had only three real estate men in 1914, but in 1913 it had six.
The 1912 council is said to have been a " real estate " body, as were the
councils of several earlier years. Before 1914 the Saskatoon city council
was said to have been composed predominantly of real estate men. The
highest percentage was found in Regina, where eight out of ten members of
the 1914 council were said to represent the professional real estate in-
terests. (2) Similar conditions have existed in previous years in this city.
Under these circumstances, therefore, the general statement can be made
that the tax legislation passed by the local councils in western Canada has
been passed with the consent of the real estate men.

Why these real estate men should desire single tax legislation is explained
when the characteristics of their business are understood. Since they do
not expect to hold their land long, often not even over one tax-paying period,
they do not object strongly to shifting of the burden to the land. Moreover,
in the cities the tax rates have been low and, as has been pointed out
above, (3) reductions in the tax on buildings have almost never been made
when the step involved an increase in the tax rate. With these objections
removed they are influenced by the argument that the adoption of the sys-
tem will stimulate development. They are eager to encourage anything
which prom ises to assist in increasing land values and nothing seems to be

(1) Cf. infra, pp. 63, 100.

(2) Only five out of the ten were in the real estate business. The others were said,
however, to have interests which identified them with the group.

(3) Cf. supra, pT 266.



276

more effective for this purpose than the rapid construction of buildings.
They are convinced that the land tax stimulates building and, as one of them
expressed it, every real estate man " is for all the single tax he can get."
They look upon the plan as a bonus to building, and they, being interested
primarily in that part of the land which is ripe for building, pay only part
of that bonus. Part is borne by the other land owners who had already
purchased land when the tax was imposed — ^purchased it perhaps from these
very real estate men. Thus, indirectly, they pay at least part of the bonus
themselves.

But this is true only during a period of real estate activity. During
periods of stagnation when property is stationary or declining in value, there
is no action by these councils toward a further reduction of the tax on
buildings. A tenderness develops for those who have been caught with
large amounts of unimproved land in their possession. There is even con-
siderable discussion in favor of relief by restoring the old system of taxing
buildings. It is evident, therefore, that the interest which has been taken in
these tax changes by this class of speculators has in most cases not sprung
from any altruistic motive or from a consideration of the fundamental
economics of the subject but rather from a desire for direct pecuniary gain
which is expected from the operation of the system.

Moreover, it is interesting to notice the changed attitude toward land
speculators in general in some of the Alberta towns, where tax rates and
assessments have been pushed up to an inordinate height. Here, when the
municipality is face to face with the prospect of " bidding in " large amounts
of land for unpaid taxes, a feehng of consideration arises for the speculator.
It is realized that in some cases land is not being merely held out of use, but
is held for future use at the expense of considerable outlay, and that in the
meantime, when there is no demand for the land for actual use, the munici-
pality is able to collect taxes on the basis of the prospective future use.

In the larger places, therefore, the taxes have been so light that specu-
lation has not been seriously interfered with. The experience of the towns
of Alberta shows that the tax system may be effectively used to drive out
speculation.

K. N on-Resident Ownership of Land

What has been said in the preceding section applies equally well here.
The non-resident owner may or may not be a speculator. In Western
Canada, he almost invariably is. On the other hand, of course, not all
speculators are non-residents.

Non-residents are protesting against the special land taxes in Saskat-
chewan.(l) Thus far, however, there seems to have been no marked
diminution of non-resident holdings in the cities traceable to the tax system.

L. Home Ownership
The cities of western Canada show a large percentage of home owners.
Certainly the tax system has not prevented home-ownership on a large scale.

(1) Cf. supra, p. 34.



277

Probably it has encouraged it. The decreased carrying charge is an item
which appeals to the man in moderate circumstances. It should be remem-
bered, however, that under the conditions present in Canadian cities the
reduction of the tax on buildings has meant a net reduction in taxes payable
on residence property, the weight of the burden being largely assumed by the
vacant and underimproved real estate. Moreover, in the cities the rates
have not been so high as seriously to affect the gains to be made through
increased value of land. In Vancouver, at least, the expectation of the
land increasing in value has been a potent factor in persuading residents to
build rather than to rent.

M. Employment
The unemployment situation has been very acute recently in the western
provinces and there has been some disposition to place the blame partly upon
the tax system. Until 1913 not only was private building very active but
local improvements were also constructed on a very large scale in all the
cities. With the collapse in the building boom and the curtailment of
local improvement work in some of the cities, due to the difficulty in
obtaining loans, many men have been thrown out of work. The high
wages paid until recently has drawn a supply of labor to the region which
is more than sufficient during dull times. Some persons are inclined to
credit the exemption of buildings from taxation with the spurt in building
and to debit this policy with the inconveniences caused by the presence
of surplus labor which the building activity has attracted.

N. General Prosperity
The statistics presented in Part One(l) show first, that the changes in
the cities were made in almost every instance at a time of great economic
expansion, and, second, that the changes apparently had no unfavorable
effects upon that expansion. Because of the difficulties mentioned above, (2)
it is not possible to make positive statements as to the relative effects upon
general prosperity in the various cities.

Ill,

The Significance of the Experiments

The most important question remains to be discussed. Of what value
are the Canadian experiments as a guide for action in other cities? What
lessons do their experiences teach?

Under Certain Circumstances the Plan of Exempting Improvements Can
be put into Operation Without Disastrous Consequences

The experiences of the Canadian cities show that under some conditions

the exemption of buildings can be accomplished without perceptible ill

' effects and with results of considerable social value. There is no doubt,

(1) Cf. supra, pp. 30, 48, 63, 101, 123, 208, 237, 250 et seq.

(2) Supra, p. 263 et seq.



278

for instance, that the measure to some degree stimulates building and dis-
courages speculation. In Winnipeg one-third of the value of the buildings
was eliminated in one year and few people seem to have realized that the
action had been taken. In other cities similar decreases generally caused
little or no disturbance.

The Effects, However, Depend Largely upon Local Conditions

An examination of conditions in the Canadian municipalities leads
to the conclusion that the practical results of the plan of exempting improve-
ments are very largely a matter of local conditions. It has been customary
to think of western Canada as a region where single-tax measures have
been uniformly and conspicuously successful. Such is not the case. In
some places the measures have been conspiciously unsuccessful from prac-
tically every point of view. Even where the operation may be termed
successful, the measures have not achieved the decided and clear-cut effects
hoped for and predicted by their supporters. But this is rather a discredit
to the supporters than to the system, as some of the effects predicted were
clearly beyond the power of such measures to accomplish.
/^ The investigation has shown that in some places the plan of exempting
' improvements has worked well. In other places it has worked poorly. In
particular cities it has given satisfaction at one time and dissatisfaction
^ at another. This means that the success or failure of the system depends
upon circumstances. An attempt should then be made to determine what
conditions are essential to the satisfactory introduction and operation of the
plan.

The Plan has had Undesirable Effects where its Introduction has Involved
a Material Increase in the Tax Rate

As has been seen, the cities in most cases found it unnecessary to
increase the rate of taxation upon the imposition of the plan. Where there
were increases, they were very slight. In the towns, on the other hand,
where high rates were found necessary, the results were unsatisfactory.
The experience of Canada, therefore, offers no promise of complete satis-
faction if local conditions make an increased tax rate an essential part
of the transition. What may happen if the increase in tax rates is con-
siderable is shown by the experiences in some of the towns.(l)

The Plan has had very Undesirable Effects where its Introduction has
Involved a Material Decrease in the Tax Base

It has been the phenomenal increase in the tax bases in the Canadian
cities which has rendered unnecessary increases in tax rates. Where the
tax base has contracted, the system has been modified, the amount of the
levy has been decreased, or very unsatisfactory fiscal consequences have
followed.



(1) Cf. supra, pp. 78-81, 129-154.



279

Where the System was Successfully Introduced Land Values ^
Were Increasing Enormously

The fact that the reduction in the tax on buildings has been made ahnost
without exception during periods of great expansion in land values is doubt-
less of significance. The weight of the burden was borne by values just
coming into being. The changes made involved a shifting of part of the tax
burden to land, it is true, and undoubtedly tended to depress land values.
But it is one thing to take from a man values which he already possesses
and another thing to prevent him from receiving values which he probably
never expected to possess. The indications are that most of the shock



Online LibraryRobert Murray HaigThe exemption of improvements from taxation in Canada and the United States [electronic resource] : a report prepared for the Committee on Taxation of the City of New York → online text (page 29 of 31)