Across North America, seniors are fighting to defer or reduce their property taxes. Their anger is understandable, since property taxes in Canada are rising almost three times faster than inflation during a cost-of-living crisis, but their victories could mean higher taxes or reduced services for the rest of us.
Taxpayer revolts against property taxes are not new – voter backlash in California led the state in 1978 to adopt Proposition 13, which limited property-tax increases and eliminated reassessments until the time of sale, permanently distorting the state’s real estate market. Those measures, however, applied to all homeowners, regardless of their age.
As baby boomers get older, the percentage of homeowners who are seniors is also increasing. In Canada, it surpassed 30 per cent for the first time ever in the 2021 Census.
The growing number of seniors, coupled with their propensity to vote, creates the conditions for seniors-focused property-tax policies, with Indiana Governor Mike Braun floating the idea of full property-tax exemptions for seniors.
Advocates of such an exemption argue that if you own the house outright, without a mortgage, the home is fully yours and you should not have to keep paying for something you already own.
Opinion: Younger Canadians will pay for Carney’s massive spending and borrowing
This argument, which has spawned a thousand Facebook memes, ignores that having a paid-off house does not eliminate the need for residents to have roads repaved or garbage picked up – services that are covered by property taxes.
These same political pressures exist in Canada, but to date, the measures proposed and implemented have been far more modest, involving rebates such as Ontario’s Senior Homeowners’ Property Tax Grant or low-to-no-interest property-tax deferrals.
The number and scope of these policies continues to expand, with Alvin Tedjo winning the recent Mississauga mayoral race on the back of a promise to freeze property-tax rates for seniors, and the Conservative Party of British Columbia promising to lower the interest rate on the province’s property-tax deferment program to prime minus two per cent.
The logic behind deferral programs is compelling: While seniors might live in expensive homes, some have relatively modest incomes and lack the cash to pay property taxes along with other living costs. Without these programs, the reasoning goes that they would have no choice but to downsize.
The deferral acts as a loan, allowing homeowners to borrow against their home equity rather than sell, with the loan repaid when the house is sold.
Ontario’s taxing problem with property owners
However, it is simply untrue that seniors would have no choice but to sell without these programs, given that banks and private lenders offer a wide variety of options, including home equity lines of credit and reverse mortgages.
Property-tax deferral programs are not filling a need that the market is leaving unfulfilled, but instead offering subsidized borrowing rates – often below what it costs the government itself to borrow – notably only to a politically powerful demographic group.
In addition, these programs impose substantial administrative and financing costs on the government. If it costs a government 5 per cent to borrow and it lends at 2 per cent in a deferral program, it absorbs a 3 per cent annual interest cost, or $30,000 for every million dollars deferred.
Those costs must then be made up for through either spending cuts or tax increases. These exemptions and deferrals can create a doom loop, where property taxes must be hiked to cover the cost of these programs, spurring calls for eligibility to be expanded as seniors cannot afford these rate hikes, leading to more exemptions and further property-tax growth.
Canadian snowbirds miss out on Florida’s biggest tax cuts. But there’s a silver lining
These deferral programs often lack an income test, so for many seniors, they act as an inexpensive source of capital they can reinvest in other assets, including the very government bonds that are needed to finance these programs in the first place.
A senior can effectively borrow from the government at 2 per cent, then lend that same money back to the government at 5 per cent, earning risk-free returns at the expense of taxpayers ineligible for these programs.
Property-tax deferrals and freezes for seniors are often promoted as important anti-poverty measures, but the data do not support that claim. Like any other group in Canada, there are seniors who are doing well while others struggle to get by. But on average, homeowning seniors have the lowest rates of poverty in the country.
Children are more than twice as likely to be living in poverty as seniors, yet their younger parents are ineligible for these measures.
Despite the fiscal cost of property-tax programs for seniors, and how they transfer wealth from younger, less wealthy taxpayers to older, wealthier ones, political pressure to grow these initiatives will only intensify as the senior population rises.
Mike Moffatt is the founding director of the Missing Middle Initiative and co-host of the Missing Middle podcast.