Financing Local Governments in the 21st Century:

Going Back to First Principles

Presentation to the LGNSW Finance SummitSydney, AustraliaAugust 27, 2015

Enid SlackInstitute on Municipal Finance and Governance

University of Toronto

Financing Local Governments

Need for “hard” services (water, sewers, and roads) and “soft” services (cultural facilities, parks, and libraries) to maintain quality of life

Local governments that fail to provide these services will lose their economic advantage

Local governments need adequate revenues to provide services and infrastructure – which revenues?

Outline of Presentation Linking revenues and expenditures

Municipal finance in Canada and elsewhere

Property rates

User fees

Federal and state transfers

Final observations

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Linking Revenues and Expenditures

Linking Revenues to Expenditures People want to see what they are getting

for their taxes

Linking taxes and services increases public support

Examples of ballot initiatives in the US to pay for transit

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DIFFERENT SERVICES – DIFFERENT REVENUE TOOLS

Private Public Redistributive SpilloversWater Police Social assistance Roads/transitSewers Fire Social housing CultureGarbage Local parks Social assistanceTransit Street lights__________________________________________________

User fees Property tax Income tax Intergovernmental

Sales tax Transfers

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DIFFERENT INFRASTRUCTURE – DIFFERENT FISCAL TOOLS

Taxes User fees Borrowing

______________________________________________

short asset life identifiable beneficiaries large scale assets (police cars, (transit, water) with long lifecomputers)

(roads, bridges)

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DIFFERENT INFRASTRUCTURE – DIFFERENT FISCAL TOOLS

Development charges P3s Land value capture

taxes______________________________________________

growth-related costs; large in scale; increase property valuesnew development or revenue stream; (transit)redevelopment measurable results(water, roads, sewers) (toll roads)

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Municipal Finance in Canada and Other Countries

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The Canadian Constitution

Federation with three levels of government: 10 provincial governments, 3 territorial governments and about 3,750 municipal governments

Constitution divides powers between the federal and provincial governments

Municipalities not recognized in the Constitution except to the extent that they are the responsibility of provinces

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Role of the Province Provincial legislation determines municipal

responsibilities and what taxes municipalities can levy

Provincial governments set standards for service provision

Municipalities cannot run an operating deficit

Municipal borrowing is restricted

Unconditional transfers: per capita and equalization

Conditional transfers: e.g. for social services, roads, transit, water, sewer, solid waste

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Role of the Federal Government

Provides some limited transfers to municipalities, including:

gas tax transfer infrastructure grants homelessness grants economic stimulus grants

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General Government

5% Protection to Persons and

Property18%

Transportation23%

Environment14%

Health and Emergency

Services5%

Social and Family Services

18%

Social Housing4%

Recreation and Cultural Services

10%

Planning and Development

2%

Other1%

Municipal Expenditures, Ontario, 2013

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Property Taxes 41.7%

User Fees 19.9%

Transfers 21.3%

Licenses and permits 2.6% Other revenues

14.4%

Municipal Revenues, Ontario, 2013

Other Municipal Taxes in Selected Provinces

Land transfer tax (stamp duty)

Amusement taxes Hotel taxes Poll tax Vehicle

registration tax Billboard tax Revenue sharing

e.g. fuel tax sharing

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International Experience More than 80% of local tax revenues from property

rates in Australia, New Zealand, Ireland, United Kingdom, Canada, US

More than 80% of local tax revenues from personal and corporate income taxes in Sweden, Germany, Switzerland

Sales taxes are levied mainly by cities in the US Mix of taxes in Spain (40% of local tax revenues

from sales tax; 30% from property taxes; 20% from income tax and 10% from other)

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Property Rates

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Property Rates – A Good Tax?

Property is immovable Adequate, stable, predictable yield Visible/accountable Fair - related to benefits received; regressive? Residential rates not exported to other jurisdictions Minimum inter-municipal competition Costly to administer -- arbitrariness of tax base Volatile for individual taxpayers Inelastic – doesn’t automatically grow with economy

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Property Rates – Is It Enough?

Property tax (2010) yielded 3% or more of GDP in only three OECD countries: Canada, UK, US

More than 2% of GDP in only four OECD countries: France, Israel, Japan, New Zealand

Less than 1 percent of GDP in 22 countries

The Political Economy of Property Tax Reform -- report prepared for OECD by Enid Slack and Richard Bird, 2014

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Property Rates– Can They be Reformed? It’s hard to increase or reform a visible tax.

It’s difficult to shift tax burdens onto residential properties.

Taxpayers need to have confidence in the valuation process.

It’s crucial to determine the impact in advance.

Phase-ins and tax deferrals are essential... but they need to be simple.

Link property rates to broader reforms to improvements in public services.

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User Fees

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User Fees -- Pricing Services Correctly

How we pay for services affects our behaviour (e.g. how much water we consume, how much waste we generate)

Pricing also affects nature, location and density of development

Local governments need to price services and infrastructure correctly – reduce demand for services and infrastructure

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Federal and State Transfers

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Rationale for Equalization Some local governments are unable to provide

an adequate level of services at reasonable tax rates

Why? costs may be higher needs may be greater tax base may be smaller

Equalization allows local governments with a relatively small tax base and high needs/costs to provide a comparable level of service at comparable tax rates

Federal and State Transfers Equalization and grants to address spillovers are important

but:

break the link between those who benefit and those who pay

not stable and predictable funding (depends on resources available)

no incentive to use proper pricing

conditional transfers distort local decision-making   accountability problems with conditional transfers when two

or more levels of government fund the same service

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Final Observations

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Final Observations Link decisions on spending and financing to determine

whether policy decisions accord with what citizens want

User fees should fund services where beneficiaries can be identified e.g. water, sewers, waste collection, transit, roads

Local taxes – and possibly a range of taxes -- should fund services that provide collective benefits to the local community

Intergovernmental transfers should be used for equalization, spillovers

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