Issue in Depth: Taxation and the Fiscal Imbalance

A fundamental issue facing the City of Toronto is the inequity of the property tax system. Like all municipalities in Ontario, Toronto receives most of its revenue from taxes on property. There are three major problems with this type of tax that make it unfair and unequal.

• The property tax system is regressive. It taxes lower income people at a higher rate than upper income people because people with lower incomes spend higher proportions of their incomes on housing.

• The system in Toronto is biased against tenants. Multi residential units are taxed at a rate four times higher than single-family dwellings. People with low incomes rarely can afford to own a house

• The assessment of property is subjective. The system currently in use assesses the value of the property at a particular moment in time. (It now is the first day of every year but the date varies.) Every assessment is based on a decision of assessors. Inevitably the assessed value is the result of subjective judgments that are very difficult to justify. As a consequence there are complaints about the inequity of property tax and appeals clog the system.

However, there is an even greater flaw in the tax system that is a serious problem for municipal politicians. Income and corporate taxes have a built in expansion factor. As the economy expands, the revenue of the federal and provincial governments expands because the incomes of individuals and corporations have grown. In good times this is an enormous bonus to federal and provincial politicians. Revenues of their governments expand without having to make the politically unpopular decision to raise taxes.

The same is not true for taxes on property. They are fixed to a given moment in time. A municipality may gain a little more tax revenue if new buildings are built but that is a marginal benefit that takes a long time to realize. The only way that municipalities can increase their revenues to meet the ever-growing costs of government is to take the ever-unpopular decision to raise taxes.

As if the problems of being locked into a regressive, unequal and unpopular system of taxes were not enough, in recent years cities like Toronto have been facing a financial crisis created by the federal and provincial governments. Beginning with the Paul Martin budget of 1994, and the election of the Mike Harris Ontario government in 1995, senior levels of government in Canada have lowered taxes and slashed services. This has led to downloading of services, cuts in welfare budgets and social services and the elimination of programs like assisted housing.

The cuts by the Conservative Ontario government were particularly difficult for the City of Toronto. The province eliminated all funding for transit and new housing. Provincial downloading affected hospitals, public health programs, roads, parks and other services. In the reorganizing of education the provincial government took all of the education taxes while at the same time cutting funding for the city’s schools. On top of all of this the province legislated the amalgamation of the six Metro Municipalities into a Toronto Mega-City that raised administration costs and led to a deterioration of services.

These funding problems have led to a serious crisis. Budget debates in Toronto have been agony as City Councillors struggled to save vital services for their constituents. The city’s infrastructure deteriorated alarmingly. Homelessness increased to emergency proportions as services were cut. Poor families in the hundreds were made to live in motels, youth programs were cut, culture became the responsibility of the rich, litter accumulated in piles on the streets and the only service growth area were food banks run by volunteers.

And yet Toronto remains a very wealthy city. The economy is booming. Unemployment is low. Over fifty percent of new immigrants to Canada settle in Toronto and people from across the country continue to come here looking for improved opportunities. The number of luxury cars on the road increase exponentially, and one statistic claims that Toronto has a higher proportion of millionaires than any city in North America.

Toronto is the cash cow for the entire country. The city comprises less than 10% of the Canadian population but creates about 20% of the country’s wealth. Ottawa now collects $20.5 billion per year from the taxpayers of Toronto but only spends $13.9 billion in the city. This resulting $6.6 billion gap translates into $6,648 for every household in the city, or $2,500 for every man, woman and child.

Clearly something is wrong with the financial arrangements that prejudices against the City of Toronto and other municipalities who produce so much of the wealth that supports the country. There needs to be a new agreement on tax policies between the three levels of government. These are some basic principles that can shape that agreement.

Municipal Responsibilities

Municipalities have traditionally been responsible for services to property. This includes such things as police, fire protection, parks, recreation, roads, transit, sewers, garbage collection, recycling and libraries. Municipalities should continue to provide these services out of property tax.

Because municipalities have the responsibilities for roads and transit, they should be given all gasoline taxes generated within their boundaries and have the right to levy special taxes against parking lots, businesses that deal with transport, and taxes for the use of their roads.

Federal and Provincial Responsibilities

At present 24% of Toronto’s budget pays for the costs of programs mandated by senior levels of government such as social services, homes for the aged, public health, mental health facilities, drug and alcohol rehabilitation programs, and children’s services. These programs should all be paid for out of income tax not property tax and become the sole responsibility of the senior levels of government.

Municipal governments often have a much better record of delivering these services, and in some cases large cities, like Toronto, should be contracted to provide them. The costs, however, should be paid for entirely by senior levels of government.

Capital Costs

Under this type of funding arrangement municipalities can pay for operating expenses, but it will continue to be difficult for them to pay for capital costs such as new buses, subway lines and art galleries. Senior levels of government should provide funds for these types of capital costs.

Tax Reform

This type of reorganization of tax powers and responsibilities will provide long term stability and begin to sort out the financial difficulties of cities like Toronto. It will help all municipalities move away from regressive property taxes, but this is only the beginning of the reforms of our tax system that are so badly needed. Cities must develop a tax system that encourages “good” economic and social behavior such as the use of public transit, the reduction of energy use, and garbage recycling, and discourages “bad” behaviour such as urban sprawl, gas guzzling vehicles and pollution.

This is not terribly difficult to do, but when it comes to taxes politicians always choose the status quo because nothing riles the public more than a perceived increase in taxes. These are some ideas that should be implemented now.

• There should be a tax on all cars coming into the centre of the city, and the money raised should be used to improve transit. In London, England a tax of eight pounds a day is levied on all cars going into the central core of the city. This led to a significant reduction in pollution and gridlock. At first there was opposition to this tax but it now is widely supported.

• Special taxes should be levied on parking spaces to discourage people from bringing cars downtown.

• Parking lots are now taxed at a lower rate than buildings. This encourages demolitions of older buildings and leads to a loss of revenue for the city. Taxes should be designed to stop demolitions and encourage renovations.

• It should be illegal for employers to provide parking for their employees in the downtown core.

• The city should be allowed to put a tax of five cents on every liter of gasoline. All money raised on vehicles should be used to reduce public transit fares.

• There should be free pickup for all recycled garbage and a fee charged for every bag of non-recyclable garbage.

• Green buildings that reduce energy consumption and green house gas emissions should be given tax credits and buildings that are high energy users should be taxed at a higher rate.