No more handouts


Self-sufficient cities are far more efficient than those subsidized by the feds or provinces, says economist


Harry Kitchen



The federal government’s election promise to give municipalities five cents of federal gas-tax revenues and the big-city mayors’ recent demands to get even more of this money raise the question of Ottawa’s role in financing cities.


Bluntly put, Ottawa should be restricted to funding those services for which it is directly responsible (immigration and urban aboriginal programs), those programs that are of national interest and where the federal government should have a national presence (such as social housing).


Ottawa should not participate in revenue-sharing programs (such as the gas-tax proposal). Nor does it have any constitutional right to give cities access to new revenue sources and financing instruments.

International experience is clear on one thing: Cities that raise the money they spend are more responsible, accountable, transparent and efficient in their spending decisions than cities that spend money handed to them by federal or provincial governments.


In addition, a solid local finance system is only possible when correct user fees and taxes are set for funding local public services.

This is a two-part argument: First, the beneficiaries of local public services should pay for them; and second, the correct tax and user fee per beneficiary should equal the additional cost of services consumed.


What, then, should Canadian cities do? They should start by introducing more efficient pricing and taxation practices for property taxes, development charges and user fees. Property taxes, for example, seldom correctly match benefits received and taxes paid.


Assessment practices must be improved so that all properties (commercial, industrial and residential) are assessed at the same percentage of market value. And variable tax rates should be used to reflect the costs associated with servicing different properties, property types and neighbourhoods, and to eliminate the overtaxation of commercial and industrial properties. Correcting the latter is particularly important for Canada, given its exposure to international competition and reliance on global markets.


Development charges should also be reformed. These charges finance the off-site capital costs of new development — water and sewer systems and roads, for example. The general practice is to impose an identical charge on all properties of a particular type regardless of where the property is. Thus, some properties and locations are overcharged, while others are undercharged; that means unnecessary sprawl. Far better to make each individual property or neighbourhood pay a charge reflecting the true costs of its development.


Municipal user fees are almost always inefficient because they are set to generate revenue rather than to direct resources to their most efficient use. This tendency has led to overinvestment in services and the building of unnecessarily large plants or facilities. Water and sewer efficiency, for example, could be improved by using sophisticated metering that allows variable charges according to the time of day or season of the year; accurate and complete accounting, budgeting and information retrieval systems; and making users pay for all capital, operating and opportunity costs, including annual asset-replacement costs.


For solid waste collection and disposal, efficiency could be improved by introducing bag fees for garbage collection everywhere. Fortunately, an increasing number of Canadian cities have moved in this direction. Tipping fees for solid waste disposal should also be changed, so they capture all costs, including the true cost of acquiring a new landfill site.

To cut traffic, especially at peak hours, cities should be permitted to impose higher taxes on parking lots; add city fees to current provincial ones for drivers’ licences and vehicle registration; have a dedicated municipal fuel tax with rates set locally; and use tolls or congestion charges on major arterial roads.


The efficiency of public transit could be improved by using zone charges to capture higher costs associated with distance, and higher prices in peak hours to reduce peak-hour demand and to encourage riders at off-peak hours.


Provinces should also change their approach to cities. The latter should be given access to new or additional taxes with rates set locally and piggybacked onto the provincial tax base. This is vital: Experience shows that tax rates must be set locally if efficient local governments are to exist. Access to new taxes would permit cities to tax both residents and non-residents (commuters and visitors) more fairly for services that both groups consume. Moreover, an expanded range of taxes would give cities more flexibility and autonomy, and leave them with greater potential to achieve important social and economic policy objectives.


Finally, cities should borrow to finance genuine infrastructure that demonstrably benefits future generations. Most cities have borrowing capacity but do not use it, even though it makes perfect sense that those who benefit from these investments should pay (including those who will benefit in the future).


Pay as you go is inefficient for financing infrastructure that benefits future generations. Cities should also be given access to new financing instruments, including revenue bonds and special financing districts, and they should move to full-accrual accounting where all capital assets are amortized over their expected life, rather than expensed in the year of purchase. And provincial governments should require municipal asset-management plans.


Ottawa and the provinces should move away from transferring money to cities and should give them the instruments and tax room they need to become mature, responsible governments with the right incentives to serve their citizens responsibly, efficiently and fairly. Not only would this lead to a more optimal level of municipal services, it would enhance the quality of life for Canadians and improve the competitiveness of Canadian cities.


Harry Kitchen is an economics professor at Trent University in Peterborough, Ont. This is a brief summary of a recent study published by the Atlantic Institute of Market Studies (AIMS) – Financing City Services: A Prescription for the Future”.