Cities Cannot and Should Not Fund Growth Alone

In February 2001, The Ottawa Partnership, (TOP) Ottawa's economic advisory group, commissioned KPMG to study ways the federal and provincial governments could invest in urban economic growth. The report — Towards a Partnership to Invest in Economic Growth: Ontario and Federal Government Tax Revenues from the City of Ottawa — states that 93 per cent of new tax revenues generated by economic activity and growth in the City go to the federal and provincial governments.

In May 2002, the Federation of Canadian Municipalities (FCM) appeared before the House of Commons Standing Committee on Finance and presented its case for urban renewal: A New Deal for Cities: On the Road to Fiscal Sustainability. A key concern expressed by the FCM was the urgent need for municipal governments to be granted new tax room. The FCM's position echoed calls from several prominent institutions-including the Conference Board of Canada and the Toronto-Dominion Bank-to provide new sources of funding to Canada's municipalities. All agree existing municipal revenue streams have not kept pace with the requirements of Canada's cities.

The economic benefits accrued to provincial and federal governments through the collection of income, consumer and employment taxes are widely recognized to be a direct result of the work of municipalities. While the United States and European governments have recognized the value of investment in urban infrastructure, Canadian federal and provincial governments have not yet taken the same approach.

This must change. As the TD Economics report A Choice Between Investing in Canada's Cities or Disinvesting in Canada's Future states:

If Canadians have any hope of raising their living standards above US levels over the next 15 years, then the status quo is not an option. A new way of thinking is urgently required - one that puts the affairs of cities front and centre on Canada's economic and policy radar screen.

A number of potential revenue sources need to be made available to the City, many of which are already available to Canadian municipalities outside of Ontario. These revenue sources include a hotel tax, fuel taxes, provincial and federal sales tax exemption, shares of income tax revenues and vehicle registration fees, taxation of off-street parking lots, and land transfer taxes.

• A hotel or motel occupancy tax is an excise tax levied on occupants of hotels and motels. This tax would be charged principally to visitors, who use services provided by the City. In Canada, this tax is levied in Vancouver and Montreal, and is permitted by legislation in Manitoba. In the City of Vancouver, the province sets a two per cent tax rate on hotel occupancy. In 2001, this tax raised an estimated $5.4 million in additional revenues for Vancouver.

Revenue streams associated with this tax vary according to economic conditions. A two per cent tax rate would raise an estimated $4 million for the City of Ottawa. This tax could be used either in a general manner or dedicated to specific priorities, such as tourism promotion or cultural programs.

• A fuel tax is an excise tax levied on gasoline consumption. Funds generated from this tax could be dedicated to transportation purposes, such as renewal and expansion of the City's transit system. One option would see the City receive a share of the gasoline tax now collected by the federal and provincial governments. Because the tax would be collected under agreement with the federal and provincial governments, the City's cost of administering the tax would be minimal. Further, the tax would generate stable and reliable funding. Since the tax would work much like a grant, however, allocation of tax funds could be reduced by the federal or provincial government during poor economic times or as a result of a shift in policy.

An alternative method would allow the City to levy the tax based on the City's expenditure needs, but within specific bounds established by the federal or provincial government. Since the City would set its own tax rate, this approach would give it considerably more autonomy. For example, the Government of British Columbia permits both Vancouver and Victoria to collect fuel taxes. The tax rate is fixed by these cities, but any rate changes must be cleared by the provincial government. In Ottawa's case, the tax could be collected by an existing agency, such as Canada Customs and Revenue Agency.

Revenue generated by fuel taxes is currently available to the cities of Vancouver, Victoria, Calgary, Edmonton and Montreal. The fuel tax share that Victoria and Vancouver receive is 11 cents per litre; for Calgary and Edmonton, the share is 4.5 cents of the provincial fuel tax. The Government of Alberta will reduce this share to 1.2 cents in 2003. Montreal receives 1.5 cents per litre. In each case, rates are set by the provincial government, which collects fuel tax revenue and transfers it to the cities. A five cents per litre share of fuel taxes in Ottawa would raise an estimated $60 million.

• Exemption from provincial sales taxes (seven per cent) or the goods and services tax (GST) (the City currently pays three per cent net) would reduce the cost of all purchases made by the City and ease budgetary pressures. As municipalities are unable to pass on the GST charged to them, the City of Ottawa taxpayers pay approximately $14 million in GST annually. If exempted, municipalities could direct these savings to pay for increasing costs of growth.
  
• Allocation of a share of income tax revenues would mean an increase in revenue to the City as economic activity grows. Manitoba, for instance, transfers to municipalities two per cent of personal income taxes and one per cent of corporate income taxes on a per capita basis. Income tax revenue could help offset the cost of infrastructure construction. One per cent of personal income tax revenue would represent an additional $21.7 million for the City.
  
• Vehicle registration fees could be collected by the City to help pay for transportation projects. Montreal, for example, receives $30 from each vehicle registered in the city. A $10 share of each vehicle registration fee would result in some $4.4 million for the City.
  
• A specific tax, or a share of sales taxes, collected from off-street parking lots could also be applied to the City's transportation needs. Moreover, increasing the cost of parking would encourage transit use. Vancouver receives seven per cent of sales taxes charged at parking lots in the city.
  
• Land transfer taxes could be levied by the City to help pay for growth. Quebec and Nova Scotia, for example, have ceded this power to municipalities. No revenue estimates exist concerning a land transfer tax levied by the City.

Accessing these sources requires changes to legislative and other instruments under federal or provincial jurisdiction.

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