OP-ED: Provincial Cutbacks Squeeze Local Taxpayers

By Doug McArthur 

July 2 marked the deadline to pay local property taxes and many homeowners are justified in asking, “Why are my taxes rising so steeply?”

Part of the answer is that local governments in British Columbia are among the least supported in Canada by provincial financing, and the amount of such support has dropped dramatically over the past ten years.

For example, the BC government provided about $5,325 million to municipal governments in 2007-2008, compared to about $8,850 million in 1997-1998. Over the same period, off-loading has been substantial and local government costs have increased markedly.

Taxpayers in Vancouver have been especially burdened. Notwithstanding unprecedented growth in the property tax base, residents experienced a tax increase of almost 8% in 2009,and there is little relief in sight.

Approximately a quarter ofthis increase was due to a shift of the tax load from businesses to residents, and city council has vowed to continue shifting the tax burden onto residential taxpayers. Furthermore, there is little likelihood of any reduction in cost pressures in the near future. Indeed with the Olympics in 2010, additional cost pressures are almost a certainty.

It is highly unlikely that residential taxpayers will be willing to accept tax increases in the 8%-10% range in coming years. The 2009 increase, at a time when inflation is below 2% and wages are generally frozen, failed to galvanize focused opposition. Arguably this was because of the unusual silence of the city’s business organizations, the usual lead voices in anti-tax campaigns. This silence was no doubt intended to reward the city for the tax shift from commercial to residential property, but it seems unlikely that it can be counted on to continue in the future.

The danger, of course, is that in the next budget cycle, tax resistance will blossom into a full-blown tax revolt in the face of rising costs. If so, councillors will find that further tax increases could very well be at the cost of their electoral survival. In an effort to bring tax increases in line with inflation, cuts in programs and services could become inevitable. The hopes and dreams of progressive citizens could be smashed by a revenue crunch that few saw coming.

There has been virtually no public discussion of this impending crisis in local government finance. The province, with its own financial crisis, has no inclination to reverse its abandonment of local government, and city councillors don't see any point in stirring up voters and employees until they absolutely have to.

This is short-sighted. It is essential that a dialogue begin between taxpayers and their elected city councils. Tax increases on the same scale as those of 2009 will almost certainly be unacceptable. Other alternatives must be explored and pursued.

The real problem is that local governments have been starved of finances over the past decade. They have been forced to rely almost exclusively on one source of revenue – the property tax base – which includes the local property tax and property-based user charges. In British Columbia, these together make up about 85% of municipal revenue, the highest proportion in Canada.

The only alternative to ever growing charges on property is to expand the tax base of municipalities.The heavy reliance on property taxes is not sustainable if local services are to survive in the form we now know them. A tax revolt cannot be disavowed as simply a matter of speculation.

Sales taxes, including fuel taxes, are an option, much as is the case in many cities in the United States. One advantage of such taxes is the burden is extended to tourists and visitors who draw on local services but contribute little to their costs. New, reformed business taxes that are fairer than property taxes are another possibility. And there are several other possibilities. 

But the important point is that we need to start talking about these matters. Cities in particular are vulnerable to a wrenching fiscal crisis if we do not turn our attention to these matters.

Doug McArthur teaches in Simon Fraser University’s Graduate Public Policy Program

OP-ED articles do not necessarily reflect the opinions of Think City. To make a submission to the OP-ED section of the Think City Minute, please email editor@thinkcity.ca for details.

Sales Taxes For Cities

In reply to Kesselman:

Yes tourism does enhance business profits and property values and thus creates an enhanced flow of taxes to the city. But is unlikely to meet the extra costs to the city of tourism. I suspect the extra revenue is well below the extra (marginal) costs. Not that it really matters. My proposed sales tax takes money from tourists and thus adds to city revenues. The net amount depends on how the tax affects local tourist purchases. If it affects them very little, which I believe will be the case in any feasible tax range, business property tax payments stay about the same and the city is better off by the amount of the tax. Your point does however inadvertently call attention to a fallacy in the tax fairness argument made in support of property tax shifts from business to residential properties through adjustments in mill rates (as Vancouver City Council is committed to doing). A cut in the property tax rate, in this case on business, increases business profits. Business property values increase as a result. The increase offsets the affect of the tax rate reduction. Businesses end up paying the same amount of tax and the city gets the same amount of revenue from them. On the other hand, house prices increase less rapidly, reducing the tax yield from residences. Wealth is shifted around but nothing is gained in allocative efficiency or fairness. This does show how powerful ideas of fairness are in demands for reforms in policy. Because something appears fairer, demands for change get all kinds of support. In this case, appearance and reality are quit different. And politicians get caught doing unpopular things for nothing. Which is a reminder of the importance of analyzing things before giving way to the demands of powerful groups, and of thinking before listening to experts aligned with them.

This post warrants more discussion

An excellent piece...as I understand it, municipalities across Canada receive only 8% of the taxes paid, and yet are expected to provide increasing public services. The current system does not work and I for one strongly urge more public debate on how to improve the system. The HST proposal is an excellent springboard for such discussion.

Tourists do pay

A useful contribution to our understanding of these issues, Doug. One minor point is that tourists already do contribute to municipal finances, since their demand for various services and goods from the business sector pushes up the assessed values of the related business properties, and that leads to higher municipal property taxes from those businesses. And we have to recall that business properties pay tax at a rate far higher (per dollar of assessed value) than residential properties in BC, particularly in Vancouver. The recent and ongoing shift of tax burden from business to residential property classes is relatively minor, leaving the disproportionate taxation of business properties mostly intact. It is politically unhealthy (as well as economically damaging) for businesses to pay at a much higher rate than homeowners (and implicitly renters, since they bear the property taxes nominally paid by their landlords), since voters (mostly homeowners and renters) do not feel the full impact of all the services they demand from the city.This political dynamic also imposes higher burdens on business and discourages business expansion and employment in the city. Adding sales tax powers to the cities might well be desirable but is unlikely to happen in the next few years as voters/consumers digest the impact of the impending harmonization of the provincial sales tax with the federal GST.

Whiners!

Property owners need to get out and get a life! You have been subsidized by renters for years, just so you can nest in a box to call your own. It's not the city's fault your places are over inflated.

more tax, PHEW!!

Thanks Doug for illuminating an escalating problem here in Vancouver. It's helpful to learn about just why the tax increase has spiralled so uncomfortably over the past few years. I think you are right about the city facing stiff reaction from the taxpayers if the ballooning doesn't stop. I would rather see less "social services" and pay less tax!! Also, while small businesses do have a tough go, even in the best of times, I believe that there has to be more attention paid to a careful balancing between the dutiful sharing of tax payments between commercial and residential properties. I also liked the idea of spreading tax revenue options as far as inluding tourists. Thanks again. Knowledge usually helps! Sincerely, Paul Plimley

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