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

2 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

3 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%)

4 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%

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

6 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

7 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

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

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

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

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

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

13 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

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

15 Taxes per Capita, 2000 LAAtlantaChicagoBostonDetroitToronto Property General Sales Selective Sales Income Other Total $ $1,013 $1, $2,103 $ $1,091 $ $1,092 $ $1,040 $1,005 0 $1,005

16 Non-Tax Revenues per Capita, 2002 LAAtlantaChicagoBostonDetroitToronto User Fees Transfers - Federal - State/Prov. - Local - Total Other Revs. Total Revs , $2, $4, $2, , $3, , , $3, $2,054

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

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

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

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

21 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

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