The State of Canada's Cities and Communities 2012 - FCM

Chapter 1
Page 17
as an offset, the former stifles the creative impulse and competition between municipalities,
and the latter implies little or no local control. A much more creative option is to
allow cities a more diverse tax system that enables them to equalize such fiscal pressures
themselves.
Economic Rationale: In many ways, the property tax can be considered a “horse-and-
buggy” tax that is becoming increasingly archaic in the new globalized information
economy. In times past, property was essential to wealth creation. It has become less so
in today’s modern high-tech world, where people can be located almost anywhere to do
almost anything. In some ways, the property tax can also act as a capital tax. Capital taxes
are among the worst possible taxes, as they target savings and investment: the
very fuel of economic growth and gains in productivity.
Political Rationale: A more diverse tax system provides a great opportunity to establish
better accountability. Only tax revenues that are imposed and raised locally—with expenditures
decided locally—can ensure the highest accountability. A singular reliance on the
property tax, by necessity, implies that grants must remain an important feature of the
local fiscal scene, despite the many accountability issues they create.
Embracing Creative Options
Since the property tax does possess certain characteristics that provide a good fit for
many local requirements, it should continue to serve as the foundation tax for local
government. At the same time, there would be clear benefits to supplementing the
property tax.
In April 2011, Canada West Foundation outlined a proposal for a local “penny tax” for
infrastructure. The idea derives from broad-based local sales taxes used in some 36
American states. A penny tax could be imposed only with voter approval in a referendum,
the maximum rate allowed would be 1%, and all revenues would be dedicated for specific
infrastructure projects, also approved by voters. The tax would have a prescribed time
limit—two local election cycles—after which the tax would lapse. To employ the tax again,
another set of projects and another referendum would be required. The tax would piggyback
off the federal GST. If the tax generated more revenue than anticipated, this would
be returned to taxpayers through lower property taxes.
Selective Sales Taxes: Another option is to supplement the property tax with a set of
selective sales taxes on specific goods and services that tie directly to municipal responsibilities.
For example, since local governments are responsible for a good portion of the
national transportation network, selective taxes on car sales, car rentals, fuel, or a municipal
registration fee make a lot of sense for funding roads and bridges, as well as public
transit.
Formalized Tax-Revenue Sharing: Some municipalities lack a sufficiently large tax base to
move much beyond property tax, and must still depend on federal and provincial grants.
However, grants would be much improved if they were formalized through a process of
tax-revenue sharing. Particularly instructive here is Manitoba which, unlike most other
provinces, has a long history of tying granting support to a stream of provincial revenue.