Municipal revenue toolbox: Analyzing New Taxes

NRU
Nov. 23, 2016
Leah Wong

Municipalities across the Greater Toronto and Hamilton Area are faced with changing demographics, aging infrastructure and increasingly complex expenditure demands. While the demands on municipal finances have changed over the last few decades, there have been few changes to the revenue tools municipalities use to fund the services they provide.

As municipalities start to wade into the budget process, a new report from the Institute for Municipal Finance and Governance shows that additional taxes may be appropriate in some cities and outlines the
framework municipal governments can use to analyze potential revenue tools.

“The property tax is a very good tax for local governments... It’s related to the benefits you receive from local government because many of the services you receive enhance your property value,” IMFG director Enid Slack told NRU.

Slack, who authored the report with Trent University professor emeritus Harry Kitchen, said that the limitations of the property tax are based on its visibility, which makes it hard for municipal leaders to raise taxes.

“Everybody knows what they paid in property tax. It’s very visible. That’s good because it makes governments accountable when people know what taxes they are paying, but it makes it very hard to increase or to reform it in any way.”

Earmarking property tax increases to specific services is one way to improve residents’ support. Slack said that by levying an additional property tax for something specific such as water or transit infrastructure, residents see the link between the taxes they are paying and what they are receiving. However, earmarking taxes limits a municipality’s flexibility—even if service demands change over time that money remains dedicated to the service to which it was linked.

Individual GTHA municipalities may be constrained by other revenue tools, such as a hotel/ motel tax and municipal sales taxes, because they could drive business elsewhere. “When you levy a sales tax, for example, people might shop in a neighbouring jurisdiction,” said Slack. “It doesn’t make it impossible, it just means that some people will go and shop [elsewhere]. You lose some potential revenue but it’s still a fairly good revenue generator.”

Hotel and motel taxes can have similar effects. Travellers may decide to stay in a neighbouring municipality, or more significantly said Slack, event organizers could look to hold conferences elsewhere. She suggests that hotel/motel taxes or municipal sales taxes would be more effective if applied on a regional basis for this reason.

The report authors suggest that having a mix of taxes would give municipal governments more flexibility to respond to local conditions such as changes in the economy, evolving demographics and related expenditure needs, and changes in the political climate. The report notes the strengths and weaknesses of different municipal revenue sources, including income taxes, dedicated fuel taxes and highway tolls.