Revenue Options for Canadian Municipalities Enid Slack Institute

Revenue Options for Canadian Municipalities Enid Slack Institute on Municipal Finance and Governance Presentation to Canadian National Summit on Municipal Governance July 11, 2005

Outline of Presentation n Background on municipal finance n Fiscal challenges facing municipalities n Revenue options - existing sources n Need for a mix of taxes at the local level n Revenue options – new sources n Revenue sharing versus taxing authority 2

Background on Municipal Finance – Expenditures n Municipal expenditures, Canada, 2003: n n n n Transportation (19%) Health, social services, social housing (13%) Fire and police protection (17%) Water, sewers, garbage (17%) Recreation and culture (12%) Debt charges (4%) Planning and development (2%) Other (16%) 3

Background on Municipal Finance –Revenues n Municipal revenues, Canada, 2003: Property and related taxes – 53% n User fees – 23% n Provincial transfers – 15% n Federal transfers – 1% n Other revenues – 8% n 4

Fiscal Challenges Facing Municipalities n Offloading of services n International competitiveness n Urban sprawl n No diversification of revenue sources 5

Fiscal Challenges – Success on Fiscal Measures n Municipalities have done well on fiscal measures: n n n Size of the operating deficit Amount of borrowing for capital Rate of property tax increases Reliance on provincial grants Extent of tax arrears 6

Fiscal Challenges –Infrastructure and Services n Fiscal health may been achieved at the expense of the overall health of Canadian municipalities: n n The state of municipal infrastructure (water, sewers, roads etc. ) The quality of service delivery 7

Revenue Options – Existing Sources n Property taxes n User fees n Development charges n Borrowing 8

Property Taxes n Good tax for local governments (related to benefits received, property is immovable, visible tax) n Modest increase n Over-taxation of business 9

User Fees n n Price at marginal cost Altering behaviour versus generating revenues 10

Development Charges n Appropriate to pay for growth-related costs associated with development n Marginal versus average cost pricing n Tool to reduce sprawl 11

Borrowing n n n Appropriate to pay for capital expenditures Debt charges relative to own-source revenues have fallen in Canadian municipalities Need for new debt instruments 12

Municipal Access to Other Taxes n Cities should have access to a mix of taxes: n n Range of expenditure responsibilities (need revenues to match) Services used by commuters/visitors Revenues that grow with the economy Increase municipal flexibility 13

Revenue Options – New Tax Sources n Income tax n Sales tax n Fuel tax n Hotel tax 14

Taxes per Capita, 2000 LA Property Atlanta Chicago Boston Detroit Toronto $461 $1, 038 $444 $962 $383 $1, 005 General Sales 153 558 147 0 0 0 Selective Sales 205 332 415 65 142 0 0 0 480 0 Other 194 175 85 65 35 0 Total $1, 013 $2, 103 $1, 091 $1, 092 $1, 040 $1, 005 Income 15

Non-Tax Revenues per Capita, 2002 LA User Fees Atlanta Chicago Boston Detroit Toronto 566 945 264 508 687 281 98 935 16 1, 049 60 30 262 352 111 360 0 471 430 902 0 1, 332 204 1, 101 8 1, 314 52 422 96 570 Other Revs. 307 640 264 236 534 198 Total Revs. $2, 935 $4, 040 $2, 090 $3, 168 $3, 575 $2, 054 Transfers - Federal - State/Prov. - Local - Total 16

Income Tax n n n Revenue elasticity Appropriate to finance social service expenditures Large potential revenues 17

Sales Tax n Revenue elasticity n Taxes commuters and visitors n Incentive for cross-border shopping 18

Fuel Tax n Benefit tax if used to pay for roads n Not as good as tolls to reduce congestion n Not very elastic n Limited revenue potential 19

Hotel/Motel Occupancy Tax n Taxes visitors to pay for the services they use (e. g. roads, policing) n Limited revenue potential n Potential “cross-border” problems 20

Revenue Options: Revenue sharing versus local taxing authority n Municipalities should set their own tax rates: n n Autonomy Flexibility Accountability Stability and predictability n But have to address border problems n Expenditures and tax rates need to be determined on a regional basis 21

Concluding Comments n n n Municipalities face fiscal challenges Municipalities would benefit from new sources of revenue Municipalities could also do more with existing revenue sources 22