Much of the debate over systemic municipal finance reform in Canada is currently dedicated to the potential of a more diverse tax mix to address concerns with a singular over-reliance on the property tax. Fuelling the debate is a clear recognition that most of Canada's competitor cities, whether in Europe, Asia, or the U.S., have significantly greater access to a wider range of taxes, including general local sales taxes, selective sales taxes on specific items, motor vehicle taxes and fees, business taxes, as well as broader tax-sharing arrangements with their national, state, or provincial governments (Vander Ploeg 2002c). This is not to say that a drastic increase in municipal taxation is the silver bullet to the infrastructure problem. It is not. However, a more diverse tax system carries specific advantages that directly address some of the most important drivers of infrastructure deficits.
■ Advantages: An expanded set of revenue levers that includes local sales taxes or more comprehensive tax-sharing based on points of personal and corporate incomes taxes would yield better growth in municipal revenues. With these taxes, cities would be able to access a larger portion of the economic growth occurring within the local region. These taxes grow based on the inherent vitality of a broader tax base and therefore relieve cities of the need to make the politically difficult decision of increasing property tax rates. Better revenue growth can also be leveraged with modest amounts of debt to increase infrastructure investment. Ultimately, it is difficult to argue that large cities benefit from a singular dependence on the property tax if only because these taxes can lag population and economic growth, and more importantly, they are the tax tool least able to capture revenue from non-residents who nonetheless impose a significant load on municipal infrastructure.
| INTERNATIONAL PPPs Portugal: The 12 km Vasco da Gama Bridge is a $1 billion (US) crossing of the Tagus River in Lisbon, Portugal. The partners are the Government of Portugal, the EU, and a group of private investors who are helping finance, construct, and operate the new bridge in exchange for the right to collect tolls. The bridge opened in 1998 and projected revenues have exceeded forecasts. The project's success has prompted the EU to adopt new policies encouraging the use of PPPs to better maximize the use of EU grants. Colorado: The E-470 is a 48 mile, four lane toll road circling the Denver metro area. The tollway was financed entirely by private enterprise and the E-470 Public Highway Authority. Future toll revenues were used to back bonds totalling some $722 million. The E-470 is setting the standard for the construction of a new generation of urban roadways. Britain: In 1990, the UK Department of Transport tendered out a new crossing of the Severn River between England and Wales. An existing toll bridge was transferred to the successful bidder in exchange for building a new crossing. The Severn River Crossing Society won the bid. Construction of the new five km bridge, at a cost of $986 million (US), was financed by income from the existing bridge and debentures. Australia: One of the world's most ambitious PPP transportation projects has taken place in the State of Victoria. The Melbourne City Link Authority was established in 1994 to oversee construction of a privately funded road system running through the centre of the city. A 34 year concession contract worth $1.25 billion (US) was awarded to a private consortium. Construction of the 22 km roadway started in 1996, and features electronic traffic management systems and automated toll collection transponders. As of May 2000, over 520,000 transponders have been issued and 340,000 vehicles are accommodated on the system daily. California: A three tunnel system through the Santa Ana Mountains with a combined distance of almost 36 miles has been proposed to link two interstates in California. The Riverside-Orange-County Link (ROC Link) would see one tunnel with two eastbound lanes for cars, and another tunnel for westbound vehicles. Running under each tunnel will be fibre optic lines and a high voltage electricity line. The third tunnel will be dedicated for east and west bound truck traffic on a lower deck, with a light rail transit system on the upper deck. Underneath the truck deck will run a water pipeline. The project is anticipated to cost $3 billion (US) and will not use any tax dollars. Tolls and user fees collected are projected at some $305 million annually. SOURCE: www.innovativefinance.com |
| LOCAL TAX REFORM: Winnipeg's "New" Deal The most interesting effort to re-think municipal finance in recent years was the City of Winnipeg's proposal for a "New Deal", announced in September 2003. The New Deal proposed a 30% to 50% reduction in property taxes in exchange for increased user fees and the right to levy new taxes on general retail sales, gasoline, and liquor. The idea behind the New Deal was to build a more dynamic, innovative city that would be attractive to investors and encourage young people to stay. The objective was to change the financial tools available to Winnipeg, use them to create new incentives, increase overall annual revenues, and ensure that visitors and those living outside Winnipeg also pay when they use the city to work, shop, or recreate (Winnipeg 2003c). The New Deal was not directly aimed at fixing streets or repairing watermains, but it did have important implications for infrastructure. For example, the City aimed to increase the ties between infrastructure use and infrastructure financing through a dedicated fuel tax and increased water service fees. The City also hoped that the New Deal would ultimately result in less demand for infrastructure by promoting increased urban density and more transit use, as well as using better pricing for water services to reduce demand. Indeed, the City's argument against the "Old Deal" (the status quo) was in part based on infrastructure needs. Under the Old Deal, the City stated that property taxes would need to go up by more than 50% to pay for needed improvements to streets, bridges, sewers, and water mains (Winnipeg 2003b). The primary proposal is presented below. The City did not propose a single New Deal, but rather a series of ideas for discussion. The City ran a large-scale public consultation process to debate the ideas, and the insights gained through this process are now being used to develop a refined New Deal. Nationally, urban analysts and commentators praised the New Deal. In the Globe and Mail, Paul Sullivan captured this sentiment when he wrote that the New Deal would result in "the transformation of Winnipeg from one of the coldest cities in Canada to one of the coolest."
However, the Winnipeg public's receptivity to the New Deal was more mixed. Residents expressed concerns about new municipal taxes, arguing that they are already overtaxed. In addition, many residents and citizen groups expressed concern that shifting away from a property tax to a sales tax and increasing a range of user fees would hurt low-income families, young people, and the elderly. A number of city councillors also stated their opposition. The New Deal received a major blow in late November 2003, only two months after it was announced. Manitoba Premier Gary Doer stated that the Province would not raise the sales tax in Winnipeg, nor would it grant the City authority to implement its own sales tax (Welch 2003). As the sales tax was a major plank of the New Deal, this provincial position has left the City rethinking its strategy. It remains to be seen what will happen with any "new" New Deal in Winnipeg. However, the experience to date has demonstrated a number of important lessons. First, the public is prepared to become engaged - indeed very engaged - in conversations about municipal finance issues. Second, the public is at least somewhat receptive to the idea that cities need new mechanisms and structures for dealing with infrastructure problems. And third, the public may not yet be ready to consider extremely bold changes in municipal finance. As such, municipal governments may have to consider more incremental approaches to achieve their goals. SOURCES: City of Winnipeg. 2003a. New Deal Power Point Presentation (www.winnipeg.ca/newdeal). Consulted December 10, 2003. City of Winnipeg. 2003b. New Times. New Ideas. New Deal (www.winnipeg.ca/newdeal). Fall 2003. City of Winnipeg. 2003c. What is a New Deal? (www.winnipeg.ca). Consulted December 3, 2003. Sullivan, Paul. 2003. The real deal on the new deal for cities. Globe and Mail. September 30, 2003, A15. Welch, Mary Agnes. 2003. New deal dead: Mayor. Winnipeg Free Press. November 27, 2003, A1-2. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
■ Disadvantages: Allowing cities wider access to sales taxes could create new and unwanted distortions such as a shift in consumption patterns as shopping gravitates to non-taxing jurisdictions. These problems can be overcome if the taxes are levied by all municipalities across a city-region with minimal tax rate differentials, but such alignment would likely be difficult to achieve. The typical solution is for these taxes to be set and levied province-wide with amounts rebated to cities. While this would overcome some of the distortions, it could also lead to problems with accountability. More important yet is the fact that elastic taxes are more vulnerable to the ups and downs of the economy. Municipal budgets that are heavily reliant on these types of taxes could find themselves with severe revenue shortfalls during economic downturns.
■ Moving Forward: To move a tax reform agenda forward, cities have three options. First, cities can simply argue that extra taxes are needed. While this argument is the easiest to frame, this really amounts to an increase in effective taxation. The prospect of a higher effective tax burden can hardly be considered the appropriate response. Second, cities could argue for a transfer of taxes from the federal government or their respective provincial governments, avoiding an increase in taxation. But again, this ignores the fact that the federal government is already coming under pressure to increase provincial transfers for health care and education. Most provinces are also fiscally stressed. The competition for scarce tax dollars is indeed fierce. Third, cities could sidestep objections over a tax increase or pressuring other governments' budgets by agreeing to sacrifice a small amount of their revenue now as an investment toward better tax tools in the future.
For example, a city could commit to a one-time reduction in their property taxes if that stimulated provincial agreement for new taxing authority, whether a local sales tax or some new tax-sharing scheme. To ensure a "win-win" for taxpayers, the province, and the cities, the new tax revenue would not have to make up the entire difference in lost revenue. The short-term revenue loss in the operating budget could be covered by reducing the amount of "pay-as-you-go" transferred to capital. Because many western Canadian cities have relatively low amounts of tax-supported debt, some modest borrowing in the short-term could be taken on to support infrastructure until the revenue generated by the new tax tools closes the gap in the long-term (Vander Ploeg 2002c). In effect, cities would be offering a tax cut - making an investment in lost revenue now to secure a more diverse set of tax tools with much better revenue-generating capacity in the future.
SUMMARY: The ideas of a renewed focus on core priorities and responsibilities, correct pricing, competitive service delivery, public-private partnerships, and increased diversity in the local tax system are still on the table and probably offer the most sustainable answer to the infrastructure issue. But change of this magnitude is never easy. Interests supporting the status quo are often firmly entrenched, and require more than just a little heavy lifting, particularly considering recent opinion surveys that have tapped the views of Canadians on these alternatives.