From road tolls to a municipal sales tax: Insiders share five long-term fixes for Toronto’s budget disaster

As the amalgamated city faces its biggest-ever financial crisis, the Star sought long-term solutions from budget-making experts.

Thestar.com
Jan. 20, 2023
David Rider

Toronto’s budget crisis is different this year only because the annual gap between city expenses and revenues has, thanks to the pandemic, exploded to Grand Canyon proportions.

COVID-19 ravaged revenues from transit and jacked up costs to provide city services such as seniors homes. This budget can’t be balanced with revenues from the land transfer tax and creative accounting, such as leaving jobs vacant.

As city manager from 2015 to 2018, Peter Wallace repeatedly sounded the alarm that Toronto is a “free rider” on land transfer revenues. Without new revenue sources beyond property taxes, Canada’s biggest city was a sitting duck for financial disaster, he warned.

City council, for the most part, listened politely and then continued papering over budgetary cracks every February -- until disaster struck.

The Star asked a half-dozen city budgeting experts, including some with direct experience: “What must Toronto do to finally makes its finances sustainable, ending annual crises that threaten treasured public services?”

There is no quick fix because the pandemic will bedevil Toronto for years to come. Even if all of Toronto’s dreams are answered, and the provincial and federal governments fill this year’s $1.3-billion budget hole, the city will enter 2024 with expenses exceeding revenues by between $1.5 billion and $1.7 billion.

Here is what we heard from the experts:

1. A slice of the tax pie

Toronto, and other big cities, need an annual share of income taxes or sales taxes, either skimmed from revenues currently flowing to the provincial and federal governments, or via a tiny but lucrative surcharge.

Unlike property tax, those revenue sources grow with the economy and could sustainably fund social housing, transit and other huge, ongoing cash draws on Toronto’s budget which is bigger than those of four provinces.

Skeptics point to logistical challenges but experts note the city already gets a share of provincial and federal gas tax revenues. There is collection, a formula and a transfer of money. A solution might be complex and “messy,” in one expert’s word, but it is entirely possible.

A municipal sales tax would work best regionally, such as across the Greater Toronto-Hamilton areas, to discourage residents from driving to avoid tax on big purchases.

The biggest impediment is provincial and federal buy-in, but the reward would be the end of annual demands for budget bailouts and other emergency stopgaps.

“The city provides a lot of services, a wide range of services … and it has very limited revenue sources,” said Enid Slack, a Toronto-based, internationally recognized expert on municipal finances. “The sources that could potentially bring in substantial revenues are income or sales taxes.”

2. Upload costs

If sales and income taxes are off the table, Toronto needs to upload some or all of the expenses that overwhelm the property tax base. They include transit operating costs and social spending including Toronto Community Housing Corporation.

Hashing that out would require deep discussions with the provincial and federal governments followed by a phased-in transfer of responsibility over five to 10 years.

No other province in Canada has municipalities 100 per cent funding the operating costs for social housing, and no other city faces such hefty shelter costs for refugee claimants.

“In some cases it makes sense for municipalities to keep delivering the service -- they are closest to the ground -- but other governments should be funding it,” said one anonymous sources who’s made budgets in the past.

Skeptics will say it won’t happen but there is precedent -- negotiations that started in 2005 led to the 2008-2018 upload to the province of full costs for the Ontario Works social assistance plan, a service Toronto continues to administer.

3. Lift the lid on property taxes

Don’t keep property tax hikes below the rate of inflation. The experts agreed that amalgamated Toronto’s long fixation on keeping a lid of property taxes, while popular with many residents, made the city more vulnerable to disaster.

The pandemic would still have punched a hole in city finances requiring emergency cash infusions from the other governments. But if tax hikes had remained at or slightly above inflation to reflect rising home values, Toronto’s ability to fund services and capital maintenance would not be so diminished.

“If we had raised taxes the city wouldn’t be in such trouble,” said Coun. Gord Perks, de facto leader of city hall’s progressive wing and the most experienced budget watcher on council.

“Also, one of the reasons province is balking (at further bailouts) is some 905 (area) MPPs are saying ‘Why should we give Toronto money when its taxes are the lowest?’”

4. Explore new revenue tools

While Toronto fights for sales or income tax revenues, it must introduce other revenue tools that can be introduced quickly to help stanch the financial bleeding.

City hall can and should continually look for efficiencies and cost savings, experts said. That should include a focus on Toronto police costs that have largely escaped scrutiny, said Jin Huh, executive director of Social Planning Toronto.

But efficiencies alone aren’t going to fund contractually required hikes in police officer pay or run partially full streetcars up and down King Street West.

City council needs to look at a host of revenue-raising possibilities, from a parking spot levy to a renewed push for road tolls, while ensuring that those who pay can afford it. Also, unlike the defunct vehicle registration tax that sent money to general revenues, the public should see where the tangible benefits of every new tax.

5. Stop trying to go it alone

Mayor John Tory should stop trying to be a one-man band. His private lobbying of Premier Doug Ford and Deputy Prime Minister Chrystia Freeland has not worked. Even if it eventually works for 2023, the city’s structural problems will persist.

Toronto needs to engage city council, residents, community organizations, mayors of other big cities in Ontario and beyond, to agree on common demands and convince the provincial and federal governments that solving the city problem, via sales tax, income tax or uploading, is in their interest.

“Toronto demanding money doesn’t play well in the rest of Ontario,” said another expert, who requested anonymity so they could speak candidly about governments with whom they have dealings.

“What could work is building a provincewide coalition with London, Ottawa, Hamilton, Windsor, et cetera, around uploading transit and social services costs.”