New Fiscal Deals for Cities

Despite the strength of the Toronto region’s economy and the wealth it produces, we have witnessed a growing gap between the public investments required in the region and the financial capacity of our local governments to fund those investments. Regional municipalities face escalating costs but have limited abilities to raise revenues. This is forcing tough choices on the city-region – choices between building roads or paying the police, supporting public health programs or digging sewers, reducing homelessness or supporting the arts. We are home to the second highest proportion of immigrants amongst worldwide cities, surpassing Sydney, Los Angeles and New York and trailing only Miami.

Quite simply, Canadian federalism is not working for our large city regions. Toronto and other cities are in a fiscal straightjacket because property taxes are the only mechanism for raising substantial revenues. The provinces and the federal government have significantly more fiscal capacity and a wide range of taxing powers, including sales and income taxes. Traditionally, the governments of Ontario and Canada have provided the core funding for social welfare, social housing and other programs that involve income redistribution.

But in recent years, many of those social programs have been downloaded to municipalities. In 1988, for instance, we spent 18 per cent of our municipal operating expenditures on health and social assistance. By 2000, that figure had soared to 33 per cent as a direct result of the province’s 1998 decision to transfer responsibility for affordable housing and 20 per cent of the Family Benefits and the Ontario Disability Support Programs to municipal governments, and to increase the municipal share of social assistance administrative costs to 50 per cent. Administrative costs have grown the fastest, tripling since 1990.

While the provincial service realignment gave cities some education property tax room, the bottom line is that senior levels of government have succeeded in protecting their budgets against the next economic downturn by downloading significant social costs to the municipal level. They have submitted the small, already overburdened property tax base of municipalities to greater cost pressures. A downturn in the Toronto region economy would result in rapid escalation of social assistance costs for the level of government least able to respond.

Other issues are contributing to fiscal constraints:

  • Urban sprawl is exacerbating problems with traffic, transit and pollution, and will increase pressure on existing revenue sources. The GTA Task Force estimated in 1996 that, if development patterns continue in the Toronto area as they have over the past 25 years, we would require about $55 billion of capital investment over the next quarter-century to build new road, water and sewer networks, as well as another $14 billion in operating expenditures. A more compact and efficient development pattern could save roughly $12 billion.
  • The amalgamation of the City of Toronto has not produced the overall cost savings that were projected. Although there have been savings from staff reductions, the harmonization of wages and service levels has resulted in higher costs for the new City. We will all continue to feel these higher costs in the future.
  • Municipalities have limited revenue sources and must rely on property taxes and user fees to generate revenue. Property taxes account for the lion’s share – almost half of municipal revenues in the GTA. Most large U.S. cities, in contrast, draw only about 20 per cent of their revenues from this source, and make up much of the difference through municipal access to a variety of excise and income taxes, plus higher levels of transfers from senior levels of government.

Ironically, municipalities cannot take fiscal advantage of good economic times. Local governments receive little extra revenue when their region benefits from economic expansion since property taxes do not increase automatically with economic growth. The benefits from higher taxes generated by economic growth flow almost totally to the federal and provincial levels.

In the short-term, increased provincial and federal government grants could relieve some of the financing burden on municipalities. Ultimately, however, local governments are closer to their residents and should be able to meet most local needs without going cap-in-hand to senior levels of government. There are some positive recent signs from the federal and provincial governments. As of February 1, 2004, the federal government is provising relief by allowing municipalities to recover 100 per cent of the GST and federal component of the harmonized sales tax (HST) they pay. The rebate for municipal purchases prior to that date was 57 per cent. At the provincial level the government has committed to giving municipalities one cent of the provincial gas tax beginning on October 2004, rising to two cents by October 2006.