Revenue Options for Canadian Municipalities

Enid SlackInstitute on Municipal Finance and Governance

Presentation to Canadian National Summit on Municipal Governance

July 11, 2005

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Outline of Presentation Background on municipal finance

Fiscal challenges facing municipalities

Revenue options - existing sources

Need for a mix of taxes at the local level

Revenue options – new sources

Revenue sharing versus taxing authority

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Background on Municipal Finance – Expenditures Municipal expenditures, Canada, 2003:

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%)

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Background on Municipal Finance –Revenues Municipal revenues, Canada,

2003:

Property and related taxes – 53% User fees – 23% Provincial transfers – 15% Federal transfers –1% Other revenues – 8%

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Fiscal Challenges Facing Municipalities Offloading of services

International competitiveness

Urban sprawl

No diversification of revenue sources

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Fiscal Challenges – Success on Fiscal Measures Municipalities have done well on

fiscal measures:

Size of the operating deficit Amount of borrowing for capital Rate of property tax increases Reliance on provincial grants Extent of tax arrears

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Fiscal Challenges –Infrastructure and Services

Fiscal health may been achieved at the expense of the overall health of Canadian municipalities:

The state of municipal infrastructure (water, sewers, roads etc.)

The quality of service delivery

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Revenue Options – Existing Sources

Property taxes

User fees

Development charges

Borrowing

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Property Taxes Good tax for local governments

(related to benefits received, property is immovable, visible tax)

Modest increase

Over-taxation of business

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User Fees Price at marginal cost

Altering behaviour versus generating revenues

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Development Charges Appropriate to pay for growth-

related costs associated with development

Marginal versus average cost pricing

Tool to reduce sprawl

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Borrowing Appropriate to pay for capital

expenditures

Debt charges relative to own-source revenues have fallen in Canadian municipalities

Need for new debt instruments

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Municipal Access to Other Taxes Cities should have access to a mix

of taxes:

Range of expenditure responsibilities (need revenues to match)

Services used by commuters/visitors Revenues that grow with the

economy Increase municipal flexibility

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Revenue Options – New Tax Sources

Income tax

Sales tax

Fuel tax

Hotel tax

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Taxes per Capita, 2000LA Atlanta Chicago Boston Detroit Toronto

Property

General Sales

Selective Sales

Income

Other

Total

$461

153

205

0

194

$1,013

$1,038

558

332

0

175

$2,103

$444

147

415

0

85

$1,091

$962

0

65

0

65

$1,092

$383

0

142

480

35

$1,040

$1,005

0

0

0

0

$1,005

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Non-Tax Revenues per Capita, 2002

LA Atlanta Chicago Boston Detroit Toronto

User Fees

Transfers- Federal- State/Prov.- Local- Total

Other Revs.

Total Revs.

566

98935

161,049

307

$2,935

945

6030

262352

640

$4,040

264

111360

0471

264

$2,090

508

430902

01,332

236

$3,168

687

2041,101

81,314

534

$3,575

281

52422

96570

198

$2,054

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Income Tax Revenue elasticity

Appropriate to finance social service expenditures

Large potential revenues

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Sales Tax Revenue elasticity

Taxes commuters and visitors

Incentive for cross-border shopping

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Fuel Tax Benefit tax if used to pay for roads

Not as good as tolls to reduce congestion

Not very elastic

Limited revenue potential

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Hotel/Motel Occupancy Tax Taxes visitors to pay for the

services they use (e.g. roads, policing)

Limited revenue potential

Potential “cross-border” problems

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Revenue Options: Revenue sharing versus local taxing authority Municipalities should set their own tax

rates: Autonomy Flexibility Accountability Stability and predictability

But have to address border problems

Expenditures and tax rates need to be determined on a regional basis

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Concluding Comments Municipalities face fiscal challenges

Municipalities would benefit from new sources of revenue

Municipalities could also do more with existing revenue sources