Martin Horak, Department of Political Science, Western University
Relevance of the Practice
As noted earlier, Canadian municipalities are extraordinarily dependent on property taxes. The level of property tax dependence in Ontario is slightly lower than the Canadian average (about 40 per cent of all local government revenues, including transfers). This is mainly a function of the fact that Ontario local governments (unlike those in other provinces) are provincially mandated to deliver a range of social services, which are partly paid for by the provincial government. In the 1960s and 70s, the Ontario provincial government also provided transfer support for a variety of non-mandated local government activities (such as transportation infrastructure and social housing construction), but in the face of budget pressures, provincial support for local services not mandated by provincial law declined to virtually zero by the late 1990s. This made Ontario municipalities extraordinarily dependent on property taxes, intensifying fiscal capacity problems for both rural and urban municipalities. However, these capacity problems are different in nature in rural and urban contexts. We will examine the character of fiscal capacity problems generated by the high reliance of property taxes in these two contexts, as well as the re-emergence of provincial fiscal transfers over the past 20 years in response to these problems. Doing so can give LoGov researchers insight into the promise and the limits of supra-local support for local fiscal capacity in a context of high dependence on a single local revenue source.
Description of the Practice
In Ontario, as in much of Canada, many rural areas have been economically and demographically stagnating for some time. This is reflected in much lower – and often stagnant or decreasing – rural property values as compared to urban property values, although urban out-migration associated with the Covid-19 pandemic is now leading to rapid housing value increases in rural areas close to urban centres.[1] Despite a major round of amalgamation in the late 1990s,[2] rural Ontario municipalities are relatively small in population, and the combination of small size and limited tax base tightly constrains fiscal capacity. As a result, rural municipalities often lag behind in terms of many of the services that their urban counterparts provide (parks, libraries, social service facilities, etc.).
In 1998, the Ontario government set up a modest unconditional transfer program – the Community Reinvestment Fund – aimed specifically at fiscal equalization for small and assessment-poor municipalities. In 2005, this program was re-named the Ontario Municipal Partnership Fund (OMPF). The amounts distributed through the program grew in the initial years, and OMPF now distributes about CAD 500 million per year to selected municipalities – mainly small rural ones – based on a formula that takes into account population, economic variables, and property values. While the program constitutes a minority of overall provincial transfer funding to municipalities, it is the primary provincial unconditional transfer program, and makes a significant difference to the fiscal capacity of many small rural municipalities.
In Ontario’s large urban centres, dependence on property taxes creates problems for other reasons. First, while the assessment bases of most large cities are healthy and growing, the property tax is a highly visible tax, and so is subject to tight political limits. As assessment bases increase and taxes grow, politicians face intense public pressure to limit tax increases, ensuring that the property tax windfall from economic growth is incremental at best. At the same time, growth brings major new costs in urban areas – such as the capital costs of major infrastructure works, and the need to provide affordable housing solutions in expensive real estate markets.
Since the late 1990s, which marked the low point of provincial fiscal support for municipalities in Ontario, the provincial government has become increasingly fiscally involved in supporting major urban capital infrastructure projects – especially transportation projects – through conditional transfers. It has done so partly as a result of lobbying by local officials, and partly because the federal government began to roll out a variety of capital infrastructure funding programs based on matching funding in the early 2000s. As a result, Ontario cities have experienced significant capital investment – especially, but not only, in public transit infrastructure – over the past decade.
By contrast, the Ontario provincial government has, in general, resisted calls to increase the range of permissible local revenue sources. The exception to this general reluctance serves as an instructive case. In 2008, after intense lobbying by the City of Toronto (the largest municipality in Ontario, with almost 3 million people), the provincial government passed stand-alone legislation that granted the city the power to levy a number of new taxes, including a vehicle registration tax and a land transfer tax. The city soon instituted both taxes, but they faced intense local political resistance. The land transfer tax has weathered the resistance and generates significant revenue for the city, but the vehicle registration tax was scrapped by a new mayor in 2011 and has not been reinstated.
Assessment of the Practice
By adopting differential responses to local fiscal stress in rural and urban areas, the provincial government has acknowledged and attempted to address the different character of fiscal stress in these two contexts. However, in both cases the responses have been limited and subject to various problems and limitations. According to one former public servant interviewed for this research, the OMPF essentially compensates for the increased financial burden placed on municipalities by the provincial downloading of certain services in the 1990s. In addition, it is spread thinly across many rural municipalities, and – since it is subject to a yearly provincial budget allocation and is not guaranteed into the future – it has declined in the last few years as provincial fiscal priorities have shifted. Meanwhile, intergovernmental capital funding for major urban infrastructure, while it has spurred useful new construction, has also been subject to high transaction costs, since the projects thus funded require concurrent political approval at multiple levels of government. In Toronto, Ottawa, London, and other major cities, transit infrastructure projects have in recent years repeatedly been delayed and altered as political priorities have shifted at one or another level of government.
Many commentators continue to argue that the longer-term solution to the limits of the property tax base in both rural and urban contexts is diversification of permissible local-source revenues to include items such as local sales and income taxes.[3] However, the provincial government remains reluctant to go down this road, preferring conditional and/or unconditional transfers to new local revenue sources. Furthermore, as we saw in the case of Toronto, granting access to new revenues would not in and of itself mean that municipalities would choose to use them.
References to Scientific and Non-Scientific Publications
Eastern Ontario Wardens’ Caucus, ‘Facing our Fiscal Challenges: A Report on the Financial Sustainability of Local Government in Eastern Ontario’ (2012) <http://www.eowc.org/en/economic-development-sustainability/resources/Report-FacingourFiscalChallenges.pdf>
Government of Ontario, ‘Ontario Municipal Partnership Fund’ (2020) <https://www.fin.gov.on.ca/en/budget/ompf/2020/>
Kitchen H and Slack E, ‘More Tax Sources for Canada’s Largest Cities: Why, What and How?’ (IMFG Papers on Municipal Finance and Governance 2016) <https://munkschool.utoronto.ca/imfg/uploads/348/1839_imfg_no_27_online_oct.11_final_revised_oct_11_2016.pdf>
McMillan M, ‘Do Local Governments Need Alternative Sources of Tax Revenue? An Assessment of the Options for Alberta Cities’ (University of Calgary School of Public Policy SPP Research Papers 2014) <https://www.policyschool.ca/wp-content/uploads/2016/03/mcmillan-dahlby.pdf>
Slack E, Tassonyi A and Grad D, ‘Fiscal Health of Ontario Large Cities: Is there Something to Worry About?’ (Conference on Measuring Urban Fiscal Health, Toronto, May 2013)
[1] Interviews with local government experts, Toronto (13 June 2021), York University (10 July 2021), Guelph University (28 July 2021).
[2] See report section 4.1. Beyond Municipal Amalgamations in Ontario.
[3] Harry Kitchen and Enid Slack, ‘More Tax Sources for Canada’s Largest Cities: Why, What and How?’ (2016) 27 IMFG Papers on Municipal Finance and Governance <https://munkschool.utoronto.ca/imfg/uploads/348/1839_imfg_no_27_online_oct.11_final_revised_oct_11_2016.pdf> accessed 29 July 2019.