This=20
is the story of an average Canadian =
couple. Let=E2=80=99s=20
call them Mr. and Mrs. Townfolks. Without =
any=20
disrespect, I must say that the Townfolks =
are=20
ordinary in every single aspect of their =
average=20
lives. Both of them work, one full time, =
the other=20
part-time. Together they earned $75,000 in =
2006,=20
slightly above the average Canadian family =
income.=20
Both=20
of them were granted a wage increase =
effective=20
January 1st, 2007. Thanks to =
this=20
raise, the Townfolks=E2=80=99 combined =
salary went up=20
$2,000, bringing their family income to =
$77,000.=20
As luck would have it, this extra $2,000 =
matches=20
the 2.67% wage increase that average =
Canadian=20
workers are getting in 2007.=20
It=20
would be tough to find a more average =
family than=20
this.
Mrs.=20
Townfolks keeps a close eye on money =
matters and=20
was expecting to see a chunk of this added =
income=20
taken out for taxes. Sure enough, their =
pay=20
statements show that 35% of the new =
earnings are=20
deducted at the source to cover provincial =
and=20
federal income taxes.
With=20
the first $700 of their increase already =
gone, the=20
Townfolks felt it would be prudent to set =
aside=20
some money for any other tax=20
increases.
The=20
amount they spent on property taxes in the =
previous year was already part of the =
family=20
budget, so they felt that any increase in =
property=20
taxes should come from their $2,000 =
windfall. The=20
Townfolks own an average size house in =
Port Moody,=20
BC. Their city council having approved a =
small=20
budget increase for 2007, property taxes =
are going=20
up by $65 for their home, the average =
increase in=20
Port Moody. Mr. Townfolks is comforted to =
learn=20
that the extra $65 they pay in city taxes =
covers=20
two additional police officers, six new =
fire=20
fighters and more of the kinds of art and =
heritage=20
programs that he and his wife=20
cherish.
The=20
Province is also using property taxes to =
fund=20
education so school taxes are up on their =
property=20
tax notice. The BC government also created =
a local=20
authority to look after regional roads and =
public=20
transit. It all adds =
up.
Mrs.=20
Townfolks remembers that transit and =
regional=20
roads used to be funded from provincial =
taxes.=20
=E2=80=9CWhy would funding for these roads =
come out of our=20
property taxes when they serve the entire=20
province?=E2=80=9D she wonders. =
=E2=80=9CThe province must be=20
saving a lot of =
money.=E2=80=9D
The=20
Townfolks soon realize that, after paying =
for=20
income and property tax increases, they =
are left=20
with slightly over half the original =
increase.=20
They figure their net additional annual =
income is=20
one thousand dollars and change.=20
They=20
wait until December when, feeling pretty =
good=20
about themselves, they splurge and spend =
the extra=20
money that had trickled in all year. At =
the till,=20
they are reminded that they have to =
surrender=20
another $150 or 13% of their purchase in =
federal=20
and provincial sales =
taxes.
GST=20
and PST being sales or consumption taxes, =
they can=20
be avoided for a while, but they have to =
be paid=20
eventually.
In=20
the end, the poor Townfolks have seen =
their wage=20
increase chipped away all year to the =
point where=20
it has been cut in half. They gave nearly =
$900 to=20
senior governments. They gave $65 to their =
city.
I=20
must say I have heartfelt sympathy toward =
the=20
Townfolks of this land and sincere =
admiration for=20
their tolerance toward governments who so =
eagerly=20
grabbed half of their wage=20
increase.
When=20
I first put these numbers together and =
realized=20
what they added up to, I had to double and =
triple=20
check them. The sheer insidiousness of =
income and=20
consumption taxes is the crux of the =
matter in the=20
inequity of our fiscal=20
system.
Cities=20
across the country struggle to keep =
property tax=20
increases reasonably close to inflation. =
Watchful=20
citizens ensure that cost of living is an=20
obligatory part of every debate about tax=20
increases at the municipal level. In =
contrast,=20
federal and provincial tax revenues are =
structured=20
to climb automatically, in pace with the =
growth of=20
the provincial / national=20
economy.
A=20
system of taxation that pegs revenues to =
the=20
economy leaves cities in its dust. Under =
this=20
system, the gaping chasm between the =
revenues of=20
cities and those of senior governments is =
bound to=20
deepen every year.
I=20
must clarify that I am not arguing for a =
system=20
where municipal taxes become more =
insidious and=20
automatic. And I am certainly not arguing =
for the=20
overall tax burden to increase just so =
cities get=20
more. I think the Townfolks are paying =
enough=20
taxes.
What=20
I am suggesting is that taxpayers take a =
close and=20
critical look at how each level of =
government is=20
approaching taxation. We need to realize =
how some=20
systems insidiously get into =
taxpayers=E2=80=99 pockets=20
without having demonstrated a need for the =
extra=20
money. This grab =
first,=20
plan later approach leads to =
inexplicably high=20
surpluses.
What=20
I call grab=20
first, plan later is a system where=20
expenditures and revenues are based on =
rough=20
economic projections rather than actual=20
needs.
Over=20
the last decade senior governments have =
fallen=20
into the habit of projecting lower =
revenues and=20
enjoying a double reward: 1) they claim =
that their=20
policies have resulted in a more buoyant =
economy;=20
and 2) they announce a surplus, trumpeting =
their=20
thrifty spending. Ministries and =
departments that=20
did over-expend can relax, confident that =
the=20
overall balance is a surplus. This =
approach=20
resulted in a whopping $29.5 billion =
surplus in=20
2007.
By=20
contrast, cities run a very transparent =
system.=20
Each city=E2=80=99s council debates in =
advance what its=20
priorities are, how much money is required =
to=20
implement those priorities, and then sets =
the new=20
tax rate for the coming year. In this =
system, the=20
amount of taxes to be collected is fixed =
and known=20
in advance. Any surplus announced by a =
city comes=20
from true savings, from actual=20
under-expenditures.
The=20
local property tax system is based on a =
simple=20
principle: plan =
first,=20
then only tax to meet the plan. This =
is in=20
sharp contrast to the grab =
first,=20
plan later system. The property tax =
system is=20
far superior in terms of its transparency =
and=20
accountability.
It=20
is evident however that the property tax =
system is=20
not adequate as the sole source of funds =
for=20
capital infrastructure and other long term =
investments.
In=20
many countries, municipal governments have =
the=20
ability to generate revenues from sources =
that are=20
tied to the local or regional economy. In=20
particular, this enables them to connect =
the=20
timing of their major investments with the =
health=20
of the economy. There are several examples =
of US=20
jurisdictions where the state lowered its =
taxes=20
when the power to implement a sales tax =
was=20
extended to cities. This practice is =
referred to=20
as transferring tax =
room.
Resistance=20
to the creation of tax room for the =
benefit of=20
cities is unexplained and unexplainable.=20
Sometimes, I think that it is by default =
rather=20
than by design that municipal revenues are =
kept=20
detached from the economy. Whenever I =
question=20
why, I feel like a kid who is being told: =
=E2=80=9CJust=20
because.=E2=80=9D
Let=E2=80=99s=20
imagine for instance that Ontario decides to =
create=20
tax room and split its 8% PST into two =
halves =E2=80=93 4%=20
to the provincial government and 4% to =
Ontario cities.=20
Let=E2=80=99s keep things administratively =
simple and=20
distribute the 4% to cities on a per =
capita basis.=20
The cost of the program is limited to =
printing and=20
mailing one cheque to each city each year. =
Not a=20
penny in new taxes is=20
levied.
In=20
this imaginary system, each city would =
spend its=20
4% based on its intimate knowledge of =
local needs,=20
not provincial policies. Therefore the =
projects=20
and programs funded in Toronto, Ontario=E2=80=99s =
provincial=20
capital, Timmins, a=20
Northern Ontario community with a =
resource-based=20
economy, and the Township of=20
Georgian=20
Bay, a resort area with a =
tourism=20
economy at the heart of Ontario=E2=80=99s=20
cottage country, would be very different. =
The=20
funds would be allocated to deal with each =
community=E2=80=99s unique=20
challenges.
Would=20
it end up working against the provincial =
interest=20
to let communities allocate funds =
differently in=20
an urban centre, a mining town and a =
resort area?=20
These communities have vastly different =
needs,=20
don=E2=80=99t they. Of course it would =
work in favour of=20
the overall provincial=20
economy.
Besides,=20
if funds are coming from taxes tied to the =
provincial economy rather than just tied =
to local=20
property values, wouldn=E2=80=99t cities =
favour projects=20
that support the provincial economy as =
well as=20
their own?
The=20
above scenario strikes me as logical. It =
also=20
struck New=20
York State =
officials as=20
logical in the late 1970=E2=80=99s, when =
New York =
City=E2=80=99s =
impending bankruptcy=20
was making international headlines. Today, =
New York=20
City collects a 4% =
sales=20
tax on all goods and services sold in the =
city.=20
New=20
York State=20
continues to finance its operations by =
also=20
collecting a 4% sales =
tax.
In=20
the 1970=E2=80=99s, with its revenues =
spiraling downward=20
as property values decreased, New York =
City=E2=80=99s=20
infrastructure started to crumble, crime =
became=20
rampant and New Yorkers suffered the taste =
and=20
smell of decay surrounding them. Wealth =
and=20
business fled New York =
City.=20
At=20
the time when NYC actually ran out of cash =
and=20
started to default on its obligations, the =
city=20
relied almost exclusively on the same =
antiquated=20
property tax system that is still =
prevalent in=20
Canada.=20
The parallels between the =
USA=E2=80=99s metropolis=20
then and Canada=E2=80=99s Toronto =
now are=20
uncanny. Statements made in 2007 by =
Toronto=E2=80=99s =
Mayor David Miller=20
are interchangeable with those made 30 =
years=20
earlier by New York =
City=E2=80=99s=20
Mayor Abraham Beame, the man who presided =
over the=20
worst fiscal crisis in NYC's history.=20
Like=20
Miller, Beame spent the bulk of his term=20
attempting to secure additional taxation =
authority=20
to ward off =
bankruptcy.
In=20
the end, New York =
City was=20
given additional taxation authority. As in =
Toronto =
today,=20
property taxes used to make up nearly 100% =
of the=20
city=E2=80=99s revenues in 1975. Property =
taxes amount to=20
only 26% of NYC=E2=80=99s total revenues =
in=20
2007.
It=20
is time for Canadian cities to stop =
relying on=20
property tax as their sole source of=20
revenues.
The=20
property tax is a highly visible tax. =
Unlike=20
income taxes, the property tax is not =
withheld at=20
the source. Unlike sales taxes, it is not =
broken=20
up in tiny amounts attached to our =
consumption=20
throughout the year. The annual property =
tax=20
statement can be scrutinized and easily =
compared=20
to the previous years=E2=80=99 statement. =
Taxpayers phone=20
their mayor or complain to staff at the =
tax=20
counter. Some take the time to write =
letters to=20
the editor when their city=E2=80=99s =
budget is announced.=20
They say: =E2=80=9CWhy do cities keep =
raising taxes? The=20
GST went down by 1%, why can=E2=80=99t you =
do the=20
same?=E2=80=9D
The=20
obvious answer is that the GST is a =
percentage=20
tied to the economy. Even if the =
percentage stays=20
the same, the revenues it generates just =
keep=20
going up and up each year, as more goods =
and more=20
services are sold. The other big source of =
revenues, payroll taxes, also climb up =
each time a=20
Canadian joins the labour force or gets a =
pay=20
raise.
The=20
property tax increase that city councils =
struggle=20
with each year, the tax increase that the=20
Townfolks of this country complain about, =
is a=20
small fraction of the amount that we pay =
in additional=20
PST and GST each year as part of our ever =
growing=20
consumer spending.
Adding=20
insult to injury, cities are not immune to =
this.=20
When it purchases goods, whether it is =
chlorine to=20
make drinking water safe or a fire truck, =
a city=20
and its taxpayers still pay PST in a =
majority of=20
Canadian provinces.
Yes,=20
unbelievably, cities collect more taxes =
just to=20
pay tax!