While a heavy reliance on the property tax has arguably helped drive infrastructure deficits, it is the only substantial tax source available for cities. Some argue that it could better contribute to financing infrastructure if the tax were applied in different ways.
■ Lower or eliminate the education portion of the property tax: This has been a long-standing position expressed by numerous provincial urban municipal associations. With this approach, municipalities could move in and use the vacated tax room for infrastructure. However, the approach is not without its problems. Clearly, provinces would be forced to increase taxation elsewhere to fund the resulting revenue shortfall in education. But even more important, the move would simply increase an already heavy reliance on this one tax source and the disadvantages that come with it. In the long-term, cities would likely be better off in having access to a more diverse tax regime directly, as opposed to increasing their reliance on the property tax.
■ Earmark property tax increases: Property taxes could be increased, with the additional funds dedicated for infrastructure projects that have strong and widespread community support. Earmarking tax increases lessens public opposition by increasing the visibility of the increase and communicating the purpose behind it. Earmarking provides assurances that the increase will not simply disappear into general revenue. Earmarked fees for infrastructure improvements in municipal utilities are already employed, and are one reason why utility infrastructure tends to be in better shape than tax-supported infrastructure. The downside to this approach is the possibility of a growing tendency for taxpayers to want every type of increase earmarked, and without appropriate safeguards in place, the temptation remains to draw earmarked revenues into general revenues.
In western Canada, three examples of property tax earmarking stand out. The City of Saskatoon has recognized that what little property tax growth they have should support both operations and capital. To that end, the City allocates one-third of annual assessment growth to its capital base or "pay-as-you-go" envelope. Since 1998, the policy has resulted in an additional $1.3 million in annual funding for capital on an ongoing basis. In 1998, the City of Calgary implemented a 1.7% tax levy specifically to cover the interest on new tax-supported debt. Edmonton also imposed a 1% tax increase to pay for up to $250 million in new tax-supported debt.
■ Combine earmarking with sunset clauses: The earmarking of many types of taxes is a well established practice in many U.S. cities. Typically, property taxes are split between general revenue, special revenue funds, debenture funds, and pension funds. Sales tax revenues are also dedicated to support specific operations such as convention centers or the construction of projects like sports stadiums. But in the U.S., earmarking goes even further. Many cities attach sunset clauses to specific taxes that have been implemented and earmarked to pay debt on particular infrastructure projects. Once the debentures used to finance the project have been repaid, the taxes are terminated or renewed based on voter support for new infrastructure projects. In Canada, however, these lessons have been slow to catch on, and it drives taxpayer suspicion. For example, in 1995 the federal government increased the federal gasoline tax from 8.5¢ to 10.0¢ per litre as a deficit fighting measure. While the federal deficit was closed five years ago, the tax remains (Canadian Taxpayers Federation 2002).
■ Devise a policy to address revenue inelasticity: It is generally conceded that property tax revenues across the municipal sector have not kept pace with inflation or growth in populations and incomes (Vander Ploeg 2001). One idea is to employ a variant of the U.S.-style tax and expenditure limits (TELs), which prescribe the amount by which property tax revenues can grow year over year. In the U.S., TELs are designed to cap property tax revenue growth. But they could also be used in the other direction to form the basis of a new guiding principle for cities - an explicit policy of ensuring property tax revenues keep pace with incomes or some other measure of economic growth. For example, a city could pass a policy stating that property tax revenues should represent 3% of the total incomes earned in a city on an ongoing basis. This would remove some of the political wrangling over annual tax increases and limit the public and media's tendency to see any increase in the millrate as a tax "increase" when it may not be an increase relative to incomes. While there are obvious implications for taxpayers on fixed incomes, a system of property tax rebates and other measures could address some of this concern.
■ Institute special area taxes or cascading levies: Cities might also consider levying special taxes on properties that simply cost more to service and that drive the demand for infrastructure. As already noted, property taxes are assessed based on property type and do not vary based on the costs of delivering services or providing infrastructure. To reduce urban sprawl and promote urban density, one can conceive of a set of special property tax levies on suburban properties, or a set of cascading taxes that gradually increase as one moves away from the city centre to the periphery. To be sure, such an approach could be immensely unpopular politically. Further, such taxes may not be allowed under provincial legislation, and there would also be difficulties in arriving at some quantifiable method of applying such taxes so that they actually reflect the variable costs that they are trying to capture. But the essential point remains: if the incentives inherent in the property tax are part of the problem, then measures must be devised that offer the potential to reverse some of those incentives. If the incentives and drivers are not addressed, one has not tackled the source of the problem.