There's no way around it: cities need new taxation powers — now

OPINION: We may not agree that cities need more money. We should at least agree that they need different sources of money
By John Michael McGrath - Published on Jan 21, 2020
While all three levels of government have funded Toronto’s waterfront-revitalization efforts, the fiscal benefits have overwhelmingly accrued to the provincial and federal governments. (Peter Power/CP)

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The Rural Ontario Municipalities Association — which represents all but the 20 largest of Ontario’s cities and towns — held its annual conference in Toronto this week, and one perennial complaint of Canadian cities was again on the agenda: municipalities have growing costs they’re finding increasingly difficult to manage, and new types of revenue would make that job easier.

The fiscal problems for big cities are serious enough — as tonight’s episode of TVO’s Political Blind Date, featuring Toronto councillors Gary Crawford and Shelley Carroll, illustrates, it's a struggle to contain property-tax increases while delivering effective services — and there are no easy answers. But Toronto has an incredibly hot real-estate market to help pay the bills: the vast majority of Ontario municipalities aren’t so lucky. As ROMA likes to point out, for a majority of the province’s 444 cities and towns, a 1 per cent increase in property taxes raises $50,000 or less. That’s not a lot of money considering the political pain that comes with it.

Cities and towns won’t stop talking about this problem, because the problem isn’t going away: they’ve got growing infrastructure and service obligations. Communities have to be protected from the ravages of climate change, for example, and made more accessible and livable for an increasingly grey population.

But the argument for new and different taxes for cities doesn’t rely exclusively on the (inarguable, arithmetically based) fact that cities simply need more cash. Where towns and cities get their revenue from also affects the decisions they make. One of the most obvious examples of this relates to housing: despite a crippling housing crisis across the GTA, municipal councils are frequently skeptical about adding more housing. That’s because, while workers (and their employers) generate a lot of property-tax revenue and require relatively little in the way of services, homeowners do the opposite.

Of course, residents do generate lots of tax revenue — but almost none of it (sales taxes, payroll taxes, income taxes) flows to municipalities. Some cities and towns get a share of gasoline taxes, and Toronto has a few additional taxing powers that its smaller Ontario counterparts lack. But, in general, cities make large investments in infrastructure and services, and other levels of government reap the benefits.

A concrete example from Toronto: while all three levels of government have funded the city’s waterfront-revitalization efforts, the fiscal benefits have overwhelmingly accrued to the provincial and federal governments, according to a 2013 economic impact study (a 2016 update produced similar results). The explanation is simple: when new office and condo towers get built, new workers and residents pay large sums to the federal and provincial governments —the city, for the most part, can tax only the building itself.

It’s obviously not as simple as saying that Toronto hasn’t benefitted from the revitalization of the waterfront — derelict industrial wastelands don’t generate much tax revenue either — but it can’t be denied that municipalities are asked to spend money in ways that largely make more money for other orders of government. This is going to be true so long as municipalities don’t have access to the basic financial tools that other modern governments have. It’s also a problem that can’t be solved simply by tinkering with the existing system of ad-hoc grants from other levels of government: cities and towns need long-term, predictable incomes that they have some degree of control over.

This is true whatever you think the appropriate size of government is: People can have sincere disagreements about what services their city government should provide. But it’s silly to have policy choices dictated not only by how much money is available, but also by which narrow streams of revenue we allow cities to have.

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