OP-ED: Municipal Finances Need Overhaul

By James Fletcher and Doug McArthur

Our cities and towns are in trouble.

The present model of local government financing simply doesn’t work, and indeed, it can’t work.

Local governments receive only eight per cent of all tax revenues collected in this country but are faced with ever-growing costs, as other levels of government offload responsibilities without providing adequate resources to pay the bills.

The result has been a steady erosion of services, an unsustainable increase in property taxes and user charges, and a growing infrastructure deficit as necessary projects are deferred.

The consequences of this broken funding model include higher housing costs, reduced disposable income, a less competitive business environment, higher unemployment, increased traffic congestion and longer commutes, a lower standard of public services, and a slow erosion of our quality of life.

Fundamentally, local governments are created by the province. Their tax raising powers are set out in provincial law – such as the community charter and the local government act. These taxing powers are limited to the ability to tax property and impose various user charges for services. Provincial government revenues such as sales taxes, income taxes, resource royalties, and various other taxes are not shared.

It was not always this way in BC. In 1978, the province introduced a revenue-sharing program that provided a guaranteed share of provincial revenue sources including personal and corporate income taxes, sales and fuel taxes and natural resource revenues. It also ensured that less well off communities could afford services comparable to the rest.

Over the past 32 years, successive provincial governments have chipped away at these transfers, leaving local governments with little choice but to cut services and increase taxes.

The results have been predictable – large industries and small businesses alike are demanding tax breaks, well aware that their competitors benefit from more favourable tax regimes in other jurisdictions.

Many cities and towns, including Vancouver, have responded by shifting the tax burden from businesses to residents, and from property taxes to charges for services. Residents in Port Alberni saw their tax bills jump by 23.6 per cent this year when Catalyst Paper refused to pay its taxes. In Vancouver homeowner taxes increased four per cent  while charges for water and sewer and other services increased by over 11 per cent.

Shifting the tax burden from businesses to residents and driving up user charges doesn’t reduce the burden on residential property owners, takes money out of consumers’ pockets, and ultimately, does not solve the real problem.

Earlier this year, the province established the industrial property taxation review to address the concerns of big business, such as Catalyst Paper. However, its recommendations will impact communities – and residential taxpayers – all over the province.

Having opened this can of worms, the province needs to completely re-examine how local governments in this province are financed. Maybe this means expanding the taxing powers of local governments. Maybe this means sharing sales tax revenue like Saskatchewan does – perhaps by reconfiguring the HST to provide direct, unconditional funding to local government. And maybe it means some form of revenue equalization.  

A new model of local government financing is necessary – and the need for it is becoming more urgent with each passing year.

For the past year we have studied this issue, and have just released a paper titled “Local Prosperity: Options for Municipal Revenue Growth in British Columbia.” We argue that local governments in BC are far too dependent on property taxes and property-related user charges and need access to a much broader range of revenue sources.

We examine the changing economic landscape and propose dozens of new revenue generating ideas and promising economic development concepts.

As part of our research, we surveyed mayors, councilors and senior staff in local government all over BC. We found many municipalities struggling to adapt to challenging economic conditions, an aging infrastructure that is becoming more costly to operate and maintain, escalating costs in areas beyond their control, and a residential and business tax base unable to sustain the current rate of tax increases.

It is time for a fundamental restructuring of provincial-municipal financing in British Columbia. Any new system should ensure that local governments have the infrastructure and operating funds necessary for communities around BC to successfully make the transition to a modern economy, provide an overall tax regime that is competitive for business, and address some of the growing inequities between urban and rural BC and between higher-income and lower-income taxpayers.

This kind of change will require the provincial government act to increase transfers and broaden the revenue tools available to local governments.

This change is needed urgently if British Columbia is to compete successfully as an efficient, high-wage, high-value producing economy in the global economy.

James Fletcher is a researcher and writer with Think City. Doug McArthur is a professor with the School of Public Policy at Simon Fraser University.

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.