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The Fallacy that the City of Toronto Needs New Taxation Powers

By: Dr. Frank Clayton

February 4, 2016

Let’s get real about why the city of Toronto faces a revenue crunch at budget time each year. Yes, it is partially the result of council’s apparent inability to stop the incessant rise in the police and fire protection spending.  But the real reason for the fiscal crunch and the inexorable neglect of much needed updating of the city’s infrastructure is the failure of council to raise residential property taxes to a level necessary to produce the revenues the city needs to carry out its responsibilities.

If the councillors had the fortitude in pursuing the common good they would support higher residential property taxes. In light of the enormous increases in property values over the past decade, I think the electorate could be convinced of the need for a jump in property tax rates above the inflation rate over the next several years to provide the services it demands and to renew and expand the infrastructure so essential to the quality of life for Torontonians.

Let’s examine the facts regarding the property tax as it is applied in the city of Toronto.

First, the property tax is a good tax for municipalities.  According to Enid Slack and Richard Bird in a global review of the property tax “residential property taxes are especially appropriate to fund local government spending because they are largely borne by local residents who use local services”. (IMFG paper No. 21, How the Reform the Property Tax: Lessons from Around the World, 2015).

Second, the city’s residential property taxes for both city and education purposes are the lowest of 25 municipalities (in the Greater Toronto and Hamilton area plus Ottawa) surveyed by BMA Consulting Inc., according to the city’s 2016 Preliminary Operating Budget & 2016-2025 Capital Budget & Plan dated December 15, 2015:

  • Toronto’s 2015 effective residential tax rate (taxes levied as a percentage of assessed values) was just 0.72% compared to an average rate of 1.07% for all municipalities surveyed;
  • Taxes levied on the in the city in 2015 on the average residential property was just $3,170, 24% lower than the average of $4,182 for the municipalities surveyed; and
  • Toronto taxes in 2015 were equivalent to 2.7% of average household income compared to an average of 3.7% for all the municipalities surveyed.

Third, an econometric analysis of the relationship between effective property tax rates and tax revenues in the Greater Toronto Area by Almos Tassonyi, Richard Bird and Enid Slack found that the city of Toronto and the 905 regions in the GTA could increase revenues by raising the effective property tax rate with Toronto having the largest untapped capacity (IMFG paper No.20, Can GTA Municipalities Raise Property Taxes? An Analysis of Tax Competition and Revenue Hills, 2015).

The obvious conclusion is that the city of Toronto has considerable room to increase its tax revenues from residential properties if council has the will to do so. The key is to make higher residential property taxes more palatable to both city councillors and their constituents. Here is a four point strategy for generating support a higher property tax regime in the city:

  • Alter public perceptions about property tax increases. Higher property taxes in line with general inflation are not really a property tax increase at all – only increases in excess of inflation constitute a real property tax increase.

Mayor Tory recognized the reality of inflation when during the last election campaign he promised to hold property tax increases to the rate of general inflation rather than keeping taxes flat like his predecessor advocated. Unfortunately, his campaign promise was couched in terms of being a maximum tax increase rather than a minimal increase.

  • The Ontario government should require municipalities to raise their property tax rates annually by the general inflation rate.

Toronto’s council would only need to deliberate and vote on the portion of any property tax rate increase exceeding the inflation rate. Removing inflation-related adjustments to property tax rates from council’s purview should focus the attention of council and the public on the need for real tax rate adjustments to fund services and infrastructure.

  • Toronto council should make a much greater effort to link property tax rate increases above the inflation rate to particular infrastructure investments and services supported by a majority of residents and to effectively communicate these linkages to taxpayers.

Toronto has already made a start towards linking added revenue needs and service/infrastructure improvements. The city has been raising billings for water/sewer services by 8-9% or more annually for a number of years now to help fund the renewal and improvement of the existing water/sewer distribution and treatment infrastructure. There has been little opposition to these increases since both council and the public recognize the importance of maintaining the water/sewer infrastructure in good shape. The recent property tax increase allocated for funding the Scarborough subway extension over a number of years is another and the proposed levy for a City Building Fund are other examples.

A committed, responsible and communicative city council, with support from the province for automatic inflation-adjusted tax rate increases, could generate a significant rise in the city’s property tax revenues. There is no need at this time for the city to gain access to added taxing powers like the income tax or sales tax beyond which is permitted under the City of Toronto Act.

Dr. Clayton is a Senior Research Fellow at Ryerson University’s Centre for Urban Research and Land Development

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