1. 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

2. 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?

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

4. Linking Revenues and Expenditures

5. 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

6. 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

7. 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

8. 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

9. Municipal Finance in Canada and Other Countries 9

10. 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

11. 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

12. 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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15. 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

16. 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

17. Property Rates 17

18. 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

19. 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, 2014 19

20. 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

21. User Fees 21

22. 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

23. Federal and State Transfers 23

24. 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

25. 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

26. Final Observations 26

27. 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