It has been reported that the government of Ontario plans to allow municipalities to increase their land-transfer taxes; this would be ill-advised.

The province’s graduated land-transfer tax currently ranges from one half to two per cent of property values (see table below), and these rates are even higher inside Toronto’s municipal borders. Not only does this tax add to the government-imposed costs and fees baked into the price of new homes—which are estimated near $45,000 for the average new build in Ontario’s largest urban region—higher land-transfer taxes would have severe repercussions for the resale market.

Like most taxes, the land-transfer tax does more than transfer money from homebuyers to the government. It stifles economic activity and makes moving less attractive. In fact, the land-transfer tax does more economic damage than a typical property tax.

To see how, consider a simple example in which two individuals live on opposite ends of town and are thinking of moving. If these people happen to live in similar homes, but each prefers the other’s location, it makes sense for them to sell their homes to each other. If both homes are valued at $600,000, Ontario’s land-transfer taxes on this deal would add up to almost $17,000. This might be enough to make the swap less attractive, encouraging both people to maintain the undesirable status quo.

While this story of a forgone house sale takes place in a very simple world, its logic extends to our economic reality. Indeed, the most recent increase in Ontario’s land-transfer tax has been associated with substantial economic losses. This increase occurred in 2008, after the City of Toronto Act gave council special rights to increase certain taxes. As a result, Toronto’s land-transfer tax rate moved to just shy of double that in the rest of Ontario. A detailed study, comparing trends in similar neighbourhoods on either side of Toronto’s border, estimates that the hike in Toronto’s land-transfer tax caused a 15 per cent decline in house sales.

Proposals to increase land-transfer taxes should not ignore the excess burden they create. Property taxes are less costly than land-transfer taxes since they only increase with property values, not with each transaction. User fees, such as road tolls, are preferred to both. They create an incentive to use existing infrastructure effectively while generating revenue.

Municipal governments feeling cash strapped should look to spending cuts, user fees, or property taxes—not land-transfer taxes—as solutions to their financial woes.