Toronto Election 2010
Housing and transit are not just the biggest infrastructure issues facing cities today, they are also the biggest social, economic, and equity issues. A healthy city must be able to house people of all income levels in a stable way, allowing them to build social capital in neighbourhoods and live close to where they work, play, and shop. The ability to move around the city easily, to work, to worship, to play, and to buy things, weaves relationships throughout the city, creating a strong civic fabric.
The 2010 municipal elections will see other important issues raised. Many, like immigrant settlement, waterfront development, or anti-poverty initiatives, will relate to housing and transit. They will have significant “city building” aspects to them that will respond to the demands that the large numbers of new city residents will make over the coming four years. Other issues will have more to do with the processes of running the city – whether work is done by city employees or contracted out, for example.
The question of municipal finances will be hotly debated – whether the city has been saddled with limited revenue tools which will never meet its needs or is simply spendthrift and wasteful. Within that debate will be the old chestnut of residential versus business property taxes. Property tax has an uncanny way of inflaming passions among normally civil people. Also within the financial realm will be the consideration of whether the city should sell some of its assets, and to what purpose the proceeds should be put.
Substance and process will intertwine during the 2010 municipal campaigns, thrown into relief by the receding recession and torqued up by political rhetoric. *The Mark* has invited a number of writers to comment on various issues as the campaigns unfold in cities across Ontario.
Paying the Bills
by Enid Slack
Director, Institute on Municipal Finance and Governance, University of Toronto.
- First Posted: Mar 01 2010 08:00 AM
- Updated: 4 months ago
To close its budget deficit, Toronto will need to consider different revenue tools.
Every year at budget time, we hear tales of woe from the City of Toronto. How will they make up the deficit that runs into the hundreds of millions of dollars? What services are going to be cut? How large will the tax increase be? And, every year, the city pulls through with the help of a handout from the provincial government, by raiding its reserves, and by instituting modest property tax increases. This is not sustainable. In the face of its own mounting deficit, the provincial government is unlikely to continue providing bailouts to the city, reserves will eventually run out, and property tax increases are very unpopular.
What can the city do? Simply stated, it has to find a way to increase its revenues, reduce its expenditures, or both.
How much more can the city raise property taxes? Business taxes are already much higher than residential taxes in Toronto and business taxes in the rest of the GTA. The city has rightly been trying to reduce this burden. Residential property taxes can be increased but that is always a difficult choice politically because the property tax is very visible (not deducted at source like the income tax or collected in small amounts on each purchase like the sales tax). While the visibility makes the city accountable, it also makes it difficult to increase the tax.
The city can continue to raise additional revenues under the new City of Toronto Act. It has already imposed a land transfer tax, a vehicle registration tax, and a billboard tax. But, at the end of the day, these taxes bring in a small amount of revenue, considering the city’s $9 billion budget.
It might be time for something more substantial, such as the province allowing the city to piggyback onto the income tax or the new harmonized sales tax. Local autonomy and accountability demands that the city set its own rate for these taxes: those who make the expenditures should raise the revenues to pay for them.
Certainly there will be problems to be worked out with such a plan. One question mark is what will happen on the borders of the city. Maybe the tax needs to be levied on a regional basis or maybe there are other ways of getting around the problem. Maybe the problem isn’t even as big as some people think.
At the very least, we need to start the discussion around other revenue tools rather than dismissing them out of hand. Some cities in the U.S. and Europe have income and sales taxes, so these obstacles have been overcome elsewhere.
Finally, the city needs to price services correctly, not only to raise revenues, but also to ensure that services are delivered efficiently. When people know the costs of services and have to pay them, they can make much better decisions on how much to consume than if they are being subsidized by someone else. One of the positive outcomes of Walkerton was better pricing of water. Perhaps the increasing costs of traffic congestion and pollution will eventually lead to the use of tolls in the region.
On the expenditure side, the city needs to consider other ways of delivering services. While this does not necessarily mean privatization, it does mean that the city needs to introduce an element of competition in service delivery. In a number of U.S. jurisdictions, unions compete successfully with the private sector and even other municipalities to provide services such as garbage collection. Such competition would keep costs down.
The city can also choose to cut services, although it needs to be strategic about this. The city needs to determine which services are most important to achieve its objectives (such as those set out in the Agenda for Prosperity) and continue to invest in them.
It is time for the city to take control of its own destiny. It cannot rely on other levels of government whose transfers are unpredictable and distort local decision-making. It needs to ask people what services they want and tell them how much they are going to cost. People can then decide if they are willing to pay for those services or not.
A world-class city requires high-quality services, and high-quality services require adequate funding. The choice is ours.
This is one in a series of essays on the big issues in Toronto's upcoming municipal election.
Comments
Re:Marks
“ One big flaw in this argument is the premise that people should pay the price of providing services. The whole concept of government is the idea that we create a structure to provide as a common good those services which could not be afforded by all, or which can more effectively be delivered on a large scale as a matter of public policy. Strict accounting fails to consider the benefits, for example, of a good transit system in reducing the need for more roads and parking lots, reducing the cars/household ratio, and the value of better mobility for the population as a whole. These too have a value, but they don't show up on the balance sheet when homeowners and businesses complain about their property taxes and user fees.
Steve Munro
“ Governments have to get the money to pay for service, and ultimately it comes from the people. The city should stop being so wishy-washy and just raise property taxes. The province should not provide a bail out when the problem and the solution are both firmly under teh city's control.
Tom West
“ As expected, Dr. Slack demonstrates a through understanding of the issues facing this city. With respect to taxation, the city, and Dr. Slack herself have never attempted to discern the most effective tax rate for businesses. We frequently hear that Toronto has the highest rate of business property tax in the Province. What we hear little of is the cost of that, and whether a lower rate would be more productive in the long term. There is much evidence to support this. It is not only possible, but not that difficult to prove. Here are some links and quotes from some research papers…….. I believe the most relevant, by means of establishing an actual formula based on industry capitalization rates, capital mobility and demand elasticities, is the paper from John F. McDonald, Dr. McDonald might be the foremost expert in this area. Previously I discussed this issue with him and he informed by that the Chicago CMA is similar to Toronto, with both inter and intra jurisdictional differences. His conclusion has been that in the case of Cook County IL. (like that of Toronto) it’s tax rates are not in its best interests. Maximization of Non-Residential Property Tax Revenue by a Local Government For example, McDonald and Yurova (2006) report a property tax rate of 4.36 percent on industrial property in Cook County, Illinois in 2004.4 Dye, McGuire, and Merriman(2001) reported average tax rates of 5.52 percent on commercial property and 5.78percent on industrial property in Cook County for 1990, compared to 2.54 percent on average for both types of property in the neighboring counties. The classification system in Cook County is used to impose a higher property tax rate on commercial and industrial property than on residential property. The basic result in this paper is that tmax= r*/b if the demand for industrial real estate is perfectly elastic. If capital is perfectly mobile, then tmax = r*/(3+5eL). Even if Cook County is fully developed (which it is not)and is unwilling to provide more land for industrial use (which it certainly is not), the property tax rate implied is not greater than r*/3. If the elasticity of supply of land is amodest 0.2, then the implied property tax rate is not greater than r*/4. Real Estate Research Corporation (2005) reported that capitalization rates for industrial real estate were around 9 percent from 1995 to 2003, and then fell to about 8 percent in 2004,which suggests a long-run revenue-maximizing tax rate of about 3 percent to 2.67percent at most. It would appear that the imposition of such a high property tax rate on industrial property is not in the long-run interests of Cook County. http://www.uic.edu/cuppa/gci/publications/workingpaperseries/pdfs/GCP-07-06%20John%20McDonald.pdf Estimating property tax base elasticity over time: Evidence on the revenue maximizing politician The Laffer curve analysis suggests a possible policy conflict between short-run revenue maximization and long-run fiscal health. This paper estimates short-run and long-run property tax base elasticity in order to test whether such a conflict exists for the property tax in central cities. A stock adjustment model is used and separate time-series estimates for four New York State central cities lend empirical support to such a conflict. The results show that while disincentive effects associated with property tax rate increases are not strong enough to reduce property tax revenue in the short-run, they are substantial enough to reduce long-run revenue in all but one city. The paper also tests for asymmetric response to property tax rate changes and finds significant results for only one city. http://www.springerlink.com/content/pg54494065235576/fulltext.pdf?page=1 The incidence of differential commercial property taxes: empirical evidence National Tax Journal, Dec, 1995 by Joyce Y. Man By examining the commercial real estate market in the Phoenix metropolitan area, I find that over 70 percent of interjurisdictional differences and about 60 percent of intrajurisdictional differences on commercial property taxes are borne by property owners, either capital or land owners, instead of consumers as Mieszkowski suggested. It implies that the spatial demand for commercial real estate is highly price elastic in metropolitan Phoenix and differences in commercial property taxes largely caused by errors in the assessment practice may have significant resource allocation effects. http://ntj.tax.org/wwtax/ntjrec.nsf/03F468170EE4D546852567EF0057A8B5/$FILE/v48n4479.pdf Commercial property tax are so high in Toronto that building retail space on one of the city’s most vibrant streets, is uneconomical. The retail portions of 611-625 Queen St. West, destroyed by fire, will not return without addressing this issue. What Fire did to these stores the loss of capping protection will do city wide. Councillor Adam Vaughan has been working diligently to help address the difficulties in the redevelopment of these properties. This is what he found…. ” Through the process of working with the six property owners of these buildings in the aftermath of the fire, I have discovered that any new buildings constructed on the fire site would pay property taxes at the full CVA rate, and would be ineligible for capping protection. The reality of the significant tax increases facing these property owners threatens the viability of redeveloping these properties with street-related commercial uses. The longer the fire site remains vacant, the more severe the social and economic impacts facing Queen West and the broader neighbourhood become. This is why it is in the City’s interest to facilitate a timely and appropriate replacement of the lost fabric of this street. ” Think about this. It is not viable to rebuild commercial space on Queen West, on land that is already owned. If the redevelopment of these properties had included the need to purchase the land also, it would have only compounded the problem and made it even more un-viable. The added cherry on top is that the calculation of the new tax burden were based on the 2008 MPAC assessments. In the case of Dukes cycle (623-625 Queen St. West) it was woefully under-assessed. The 2008 assessment has these properties valued at $ 654,975.00. As someone who is very familiar with the area, this assessment does not reflect the market. The Cameron house, a much smaller building of similar age is currently listed for more than 2 million. In light of this it is fair to say that being un-viable at a full CVA tax rate of $ 26,598 per year, think about what might happen with a more realistic assessment. If the assessment was updated to a more realistic 3 million, the taxes would rise to more than $120,000 per year. Toronto's tax rate discourages or prevents development, then the city is left with a higher rate on nothing, as opposed to a lower rate on something.
Glen Magder