Financing Local Governments in the 21 st Century: Going Back to First Principles Presentation to the...
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Transcript of Financing Local Governments in the 21 st Century: Going Back to First Principles Presentation to the...
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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