It’s no secret that Canadian municipalities have limited revenue-raising tools at their disposal. In fact, because municipalities are not recognized by the Canadian Constitution, what a municipality can and cannot do depends on the powers that the province decides to bestow it with, which can be granted, revoked, or changed at any time. As a result, Canadian municipalities are over-reliant on only a few sources of revenue, many of which are regressive forms of taxation like property tax.
Property Tax as a Regressive Tool
Most municipal practitioners are aware that their choices are few when it comes to accessing and allocating financial resources. Instead, the provinces regulate how municipalities can generate revenue by outlining what taxes can be levied and disallowing others. As of 2008, property taxes accounted for almost 50 percent of total municipal revenue in Canada, while other taxes generated just 1.4 percent of own-source revenue.[i] In Ontario, property tax rates are even higher than the rest of Canada, as it is the only tax that most municipalities are permitted to levy.[ii] For example, property taxes accounted for the highest amount of the City of Toronto’s 2013 total operating revenue, at 39.4 percent. Provincial grants and subsidies were next, at only 19.7 percent.[iii] Unlike many municipalities in the United States, Ontario municipalities simply do not have a broad range of revenue tools at their disposal, burdening Ontarians with some of the steepest property tax rates in the world.
This is problematic for a number of reasons, one of which being that property tax is regressive, meaning low-income earners pay a higher percentage of their income than those who are wealthier.[iv] For example:
In 1998, families with incomes under $20,000 paid 10 percent of their income in property taxes whereas those with incomes of $100,000 and over paid just 1.8 percent. Between these two extremes, the proportion of income consumed by property taxes declined with each step up in family income.[v]
Other groups, like retirees, may also be disproportionately disadvantaged. For example, as property values increase, a retiree will have to allocate a greater portion of his or her fixed income to property taxes each year, even though he or she has not experienced an increase in income.
While some reform efforts have been implemented since 1998 and tax relief has been offered by some governments on residential properties, municipalities must nevertheless regularly raise property tax rates to meet their fiscal responsibilities. There is therefore resistance because low-income households are adversely affected. Ultimately, despite reforms to Ontario’s property tax system, equity has not improved. In fact, a homeowner in Ontario who paid $3,000 in property taxes in 2015 is estimated to owe $4,663 by 2025.[vi]
Other revenue-raising tools available to Canadian municipalities are regressive as well. User fees are another significant source of income for Canadian municipalities, representing the second largest source of own-source revenue. Indeed, 19.9 percent of municipal revenues are generated through user fees, representing nearly $9 billion for municipalities across the province.[vii] As the name suggests, user fees are charged for the use of certain municipal services, such as parking, recreation, and public transit. Advocates of user fees argue that they make the government more responsive to changing demands for public services, therefore increasing accountability to voters. Further, they hold that fairness is a product of user fees because taxpayers must only pay for the goods and services they actually use.[viii]
CUPE estimated in 2014 that the Greater Toronto and Hamilton Area (GTHA) could raise $1.4 billion each year through a tax on incomes.
Alternative Solutions for Canadian Municipalities
While property taxes and user fees are important sources of municipal revenue, it is possible that they could be balanced with other, progressive income sources. In fact, broadening municipal revenue-raising tools has long been pushed for by Canadian municipalities. At the 2016 Association of Municipalities Ontario (AMO) Conference, Premier Kathleen Wynne indicated her government would approve requests for increased revenue-raising power, provided municipalities consult with their residents and form a unified request through AMO. This begs the question, then, of what suitable revenue-raising tools would entail.
One possibility are progressive revenue streams, which could be a viable complement to current revenue-raising tools. Progressive taxation is a step public officials can take to increase equality by ensuring all citizens have access to public services paid for by the taxpayers but at a variable rate relative to their income level. Income tax is the most obvious example. In 1998, families earning less than $20,000 annually paid 4 percent of their income in income tax. By contrast, families earning over $100,000 were taxed at 28.6 percent. This illustrates progressivity because the tax rate increases with income.[x]
Most importantly, though, extending income tax to municipalities has utility. Half of Organisation for Economic Cooperation and Development (OECD) countries have some form of a local income tax, with New York City collecting 18 percent of its revenue or $9 billion annually from personal income tax. In other cities and counties throughout the United States, local income taxes account for a lower portion of total revenue, but are nonetheless used to complement other revenue sources. Country-wide, local governments generate an average of 4.8 percent in local income tax. However, in Indiana, Kentucky, Maryland, New York, Ohio, and Pennsylvania, that number is more than 10 percent. Local government services are also funded more by local income tax than property taxes in European countries, including Switzerland, Sweden, and Finland.[xi] These tax dollars help to fund a variety of municipal services, from garbage collection to sewer maintenance.
While it is possible that Canadian municipalities could, in theory, request the power from the province to levy a local income tax themselves, this is the least likely option as significant institutional change would be required. A more feasible option would be for municipalities to access a portion of the income tax already collected by the central governments. In such systems, municipalities typically are transferred a share of the funds after the income tax has been administered and collected by the central government. The municipalities would likely work with the Province to construct a formula to use certain criteria, such as population, to distribute the revenue.
In recent years, the Alberta Urban Municipalities Association (AUMA) asked the Province of Alberta for this taxing option. Manitoba is now the only province in Canada to provide a share of income tax revenue to its municipalities on a population basis, with 2.2 percent of personal income and 1 percent of corporate income tax revenue being transferred.[i] Municipalities elsewhere could do the same. Indeed, CUPE estimated in 2014 that the Greater Toronto and Hamilton Area (GTHA) could raise $1.4 billion each year through a tax on incomes. Giving municipalities additional revenue, in the form of a share of provincial income tax, could therefore be a viable option for diversifying municipal income streams.
[i] CUPE, 2014, 11; City of Halifax.
[i] FCM, 2012, 4.
[ii] Bird, Slack and Tassonyi, 2012, 1; Chawla and Wennell, 2003.
[iii] Fanelli, 2014, 9.
[iv] Slack, 2002, 578; AMO, 2015, 28.
[v] Chawla and Wennell, 2003.
[vi] Slack, 2002; Fanelli, 2014, 5; AMO, 2015, 22.
[vii] CUPE, 2014, 4-5; AMO, 2015, 25.
[viii] Gruff, 2004, 395-396; Dewees, 2002.
[ix] Gruff, 2002; CUPE, 2014, 6).
[x] Chawla and Wennell, 2003.
[xi] CUPE, 2014, 11; City of Halifax; Kitchen, 2000.
