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Land value tax should replace community amenity contributions

According to the City of Vancouver, “community amenity contributions (CACs) are in-kind or cash contributions provided by property developers when city council grants development rights through rezoning.

According to the City of Vancouver, “community amenity contributions (CACs) are in-kind or cash contributions provided by property developers when city council grants development rights through rezoning.”

CACs are simple to explain, an easy sell for the city: the property developer who is asking for rezoning, often resulting in extra density, should pay for the amenities needed to support the new density. Not surprisingly, the development industry doesn’t like CACs and wants mass rezoning and relaxed regulation for easy profit. For anti-development industry folks, CACs are a way to stick it to developers that prioritize profits over housing needs of the local working residents. But the reality is very different.

In business, backers expect a profit margin on total investment. For property developers, CACs are another cost that needs to be financed. While additional cost is simply passed on to the buyers, the developers also expect a profit on every CAC dollar they put in. If CACs add 25% to the cost, the developers walk away with original profit plus 25% extra profit made on investment used to pay CACs.

While reasoning for CACs is simple, calculating CACs is not. CACs are negotiated on a project-by-project basis in a complex process that takes into account, among other factors, future land value, profit from additional density, cost of amenities and services the city will provide and taxes the city will collect.

Both pro- and anti-development industry groups also agree there is a complete lack of consistency and transparency. The CAC process is perceived as full of backroom deals, highly prone to corruption and fraud.

Large developers, well connected to city hall, can walk away with sweet deals, while smaller developers can be taxed out of the market. The acceptance of in-kind payments, where developers create community spaces or other amenities instead of paying cash, gives developers a second chance to shortchange taxpayers by inflating the cost of community spaces they create in exchange. In the end, taxpayers lose millions of dollars with this murky model of taxing development.

CACs payable at the time of rezoning are a poor way to capture true land value lift from rezoning and development; they are also a free pass for land speculators to hold on to prime developable land at a small cost of just property tax.

Being a one-time payment, CACs are also a very poor source for generating sustained revenue needed for the continuous maintenance and improvement of the city’s public infrastructure and services. The municipal politician and planning department often become addicted to these one-time revenue opportunities and constantly need to generate new rezoning and construction activity to raise new revenue. Without CACs, the elected politician will have to look at other ways, like increasing the property tax, which for many will be political suicide. As a result we are stuck with a broken model, with no urgency to fix it.

A bold approach for a municipal government will be to replace CACs with a land value tax rolled up into strata fee or other taxes, which will create a perpetual stream of predictable recurring revenue for the city. Being a direct cost for buyers, it reduces capital investment and profit based on fixed profit margins, while increasing competition. The result: costs rolled up in monthly expenses, lower borrowing requirements for buyers as banks factor them in, resulting in lower potential mortgage amounts, restraining pressure on price. And most importantly, shifting tax from development to holding land cuts into profit margins for speculators making money by just holding on to the land.

With municipal elections looming in B.C., eliminating CACs in favour of a land value tax is the kind of bold idea Vancouver needs. •

Raza Mirza is a software engineer and the director of government relations with Housing Action for Local Taxpayers.