Financing Local Governments in the 21 st Century: Going Back to First Principles Presentation to the LGNSW Finance Summit Sydney, Australia August 27, 2015 Enid Slack Institute on Municipal Finance and Governance University of Toronto

Financing Local Governments  Need for “hard” services (water, sewers, and roads) and “soft” services (cultural facilities, parks, and libraries) to maintain quality of life  Local governments that fail to provide these services will lose their economic advantage  Local governments need adequate revenues to provide services and infrastructure – which revenues?

Outline of Presentation  Linking revenues and expenditures  Municipal finance in Canada and elsewhere  Property rates  User fees  Federal and state transfers  Final observations 3

Linking Revenues and Expenditures

Linking Revenues to Expenditures  People want to see what they are getting for their taxes  Linking taxes and services increases public support  Examples of ballot initiatives in the US to pay for transit 5

DIFFERENT SERVICES – DIFFERENT REVENUE TOOLS Private Public Redistributive Spillovers Water Police Social assistance Roads/transit Sewers Fire Social housing Culture Garbage Local parks Social assistance Transit Street lights __________________________________________________ User feesProperty tax Income tax Intergovernmental Sales tax Transfers 6

DIFFERENT INFRASTRUCTURE – DIFFERENT FISCAL TOOLS Taxes User fees Borrowing ______________________________________________ short asset life identifiable beneficiaries large scale assets (police cars, (transit, water) with long life computers) (roads, bridges) 7

DIFFERENT INFRASTRUCTURE – DIFFERENT FISCAL TOOLS Development charges P3sLand value capture taxes ______________________________________________ growth-related costs; large in scale; increase property values new development or revenue stream; (transit) redevelopment measurable results (water, roads, sewers) (toll roads) 8

Municipal Finance in Canada and Other Countries 9

The Canadian Constitution  Federation with three levels of government: 10 provincial governments, 3 territorial governments and about 3,750 municipal governments  Constitution divides powers between the federal and provincial governments  Municipalities not recognized in the Constitution except to the extent that they are the responsibility of provinces 10

Role of the Province  Provincial legislation determines municipal responsibilities and what taxes municipalities can levy  Provincial governments set standards for service provision  Municipalities cannot run an operating deficit  Municipal borrowing is restricted  Unconditional transfers: per capita and equalization  Conditional transfers: e.g. for social services, roads, transit, water, sewer, solid waste 11

Role of the Federal Government  Provides some limited transfers to municipalities, including:  gas tax transfer  infrastructure grants  homelessness grants  economic stimulus grants 12

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Other Municipal Taxes in Selected Provinces  Land transfer tax (stamp duty)  Amusement taxes  Hotel taxes  Poll tax  Vehicle registration tax  Billboard tax  Revenue sharing e.g. fuel tax sharing 15

International Experience  More than 80% of local tax revenues from property rates in Australia, New Zealand, Ireland, United Kingdom, Canada, US  More than 80% of local tax revenues from personal and corporate income taxes in Sweden, Germany, Switzerland  Sales taxes are levied mainly by cities in the US  Mix of taxes in Spain (40% of local tax revenues from sales tax; 30% from property taxes; 20% from income tax and 10% from other) 16

Property Rates 17

Property Rates – A Good Tax?  Property is immovable  Adequate, stable, predictable yield  Visible/accountable  Fair - related to benefits received; regressive?  Residential rates not exported to other jurisdictions  Minimum inter-municipal competition  Costly to administer -- arbitrariness of tax base  Volatile for individual taxpayers  Inelastic – doesn’t automatically grow with economy 18

Property Rates – Is It Enough?  Property tax (2010) yielded 3% or more of GDP in only three OECD countries: Canada, UK, US  More than 2% of GDP in only four OECD countries: France, Israel, Japan, New Zealand  Less than 1 percent of GDP in 22 countries The Political Economy of Property Tax Reform -- report prepared for OECD by Enid Slack and Richard Bird,

Property Rates– Can They be Reformed?  It’s hard to increase or reform a visible tax.  It’s difficult to shift tax burdens onto residential properties.  Taxpayers need to have confidence in the valuation process.  It’s crucial to determine the impact in advance.  Phase-ins and tax deferrals are essential... but they need to be simple.  Link property rates to broader reforms to improvements in public services. 20

User Fees 21

User Fees -- Pricing Services Correctly  How we pay for services affects our behaviour (e.g. how much water we consume, how much waste we generate)  Pricing also affects nature, location and density of development  Local governments need to price services and infrastructure correctly – reduce demand for services and infrastructure 22

Federal and State Transfers 23

Rationale for Equalization  Some local governments are unable to provide an adequate level of services at reasonable tax rates  Why?  costs may be higher  needs may be greater  tax base may be smaller  Equalization allows local governments with a relatively small tax base and high needs/costs to provide a comparable level of service at comparable tax rates 24

Federal and State Transfers  Equalization and grants to address spillovers are important but:  break the link between those who benefit and those who pay  not stable and predictable funding (depends on resources available)  no incentive to use proper pricing  conditional transfers distort local decision-making  accountability problems with conditional transfers when two or more levels of government fund the same service 25

Final Observations 26

Final Observations  Link decisions on spending and financing to determine whether policy decisions accord with what citizens want  User fees should fund services where beneficiaries can be identified e.g. water, sewers, waste collection, transit, roads  Local taxes – and possibly a range of taxes -- should fund services that provide collective benefits to the local community  Intergovernmental transfers should be used for equalization, spillovers 27