Building a Sustainable Fiscal Base for our Cities and Communities

Our cities and communities face many challenges. Probably the most important is the serious and ever-growing mismatch between growing program and investment responsibilities on the one hand, and financial resources on the other. Put simply, most municipalities are cash-strapped, getting just eight cents of every dollar raised in taxes in Canada.

Many services have been cut back as a result of past funding cuts, but new demands are being imposed, especially in a time of economic downturn. The basic municipal infrastructure deficit is huge and continues to grow because of long-standing underfunding, and other levels of government continue to require municipalities to deliver programs and services that should not be funded out of property taxes (for example, a significant proportion of social assistance benefit costs in Ontario).

The current recession will make an already bad situation even worse if nothing is done.

Falling house prices, rising foreclosures, and business failures will erode property tax revenues unless tax rates and other sources of revenue, such as user fees, are raised, which would be extremely unpopular in a time of high unemployment.

Almost all provinces will be running deficits, and may choose to cut rather than increase transfers to municipalities just as they did in the mid-1990s.   As employers, local governments will have to deal with big pension fund shortfalls, and troubled economic times will increase demands on already badly stretched local level, public and social services.

Unlike the federal government and provinces, municipalities are not usually allowed to run a deficit to cover operating costs. Cities can borrow to fund major capital investments, but usually only with the agreement of the provincial government. Lack of ability to borrow means that any further growing gap between revenues and expenditures will quickly result in damaging cuts and layoffs—unless something is done.

Even before the downturn, property taxes made up the majority (54%) of local government revenues. This is a huge problem because the property tax base grows more slowly than municipal needs and spending, and because property taxes are not based upon ability to pay but rather on the value of houses and commercial real estate. Home owners with large families and big mortgages pay as much or more as mortgage-free, relatively affluent homeowners. Struggling business pays the same as those that are highly profitable.
Aside from fees charged for goods and services, almost all other local government revenues come in the form of transfers from provinces, all but a small proportion of which is generally tied to specific uses. Local governments have virtually no access to sales taxes, or personal and corporate income taxes.

We need to have serious discussions within our communities about what kind of resources our cities and smaller municipalities need to thrive, and what services should and should not be delivered by local governments. Where responsibilities and the attached revenue needs are large, there is a strong case for giving local governments direct access to the provincial income tax base. That would allow local citizens to choose to pay a bit more in fairly collected taxes for better services – a choice which is important to local democracy.

A few provinces have introduced revenue-sharing in a limited way. British Columbia, Alberta, and Québec, for example, transfer part of gas tax revenues to cities to pay for public transit and roads. But only Manitoba shares personal and corporate income tax revenues. Even here, provincial funding can be changed at any time.

The problem of underfunding can also be addressed by increasing direct federal government transfers to local governments, with the approval of the provinces. Part of the gas tax (five cents per litre) is already being rebated to municipalities, and this share should be increased and made permanent. Going one step further, a designated share of all Goods and Services Tax revenues could be directed to local governments.

The federal government (which is best placed to raise money in tough times and has the lowest borrowing costs of any level of government) should also be supporting local investments in basic municipal and environmental infrastructure through grants, recognizing that many communities will not be able to pay a one-third share of the costs. Current federal infrastructure programs require provinces and municipalities to pay one-half of costs, which may mean that money ends up being spent by the best-off communities, not those most in need.

The bottom line is that we can’t build vibrant cities based on an outdated model of funding. We need new fiscal arrangements. There are many possibilities, but one thing is certain: cities and communities need access to a long-term and predictable source of revenue that grows with the economy.

The labour movement can and should support increasing and diversifying municipal revenues through grants and revenue-sharing by senior levels of government.