Time for Toronto councillors to stop being skittish about raising property taxes

By: Dr. Frank Clayton, Senior Research Fellow, Centre for urban Research and Land Development, Toronto Metropolitan University  

December 13, 2016

There is agreement that municipalities like the city of Toronto are experiencing financial anguish. On the expenditure side, they are doing a reasonable job in restraining operating expenses despite being hampered by costly and inflexible union agreements. In Toronto’s case, the city’s real gross operating spending per capita actually declined by 3.8% over the last six years. However, municipalities are falling behind in the replacement of deteriorating physical infrastructure and adding new infrastructure which cannot continue indefinitely. Toronto has a $29 billion backlog of unfunded capital needs.

Everybody agrees that municipalities need more revenues to effectively carry out their traditional responsibilities let alone the ostensive new mandate of adapting to or fighting the effects of climate change. The most obvious source of significant new revenues, especially for the city of Toronto, is to raise the rate of the residential property tax. Yet Toronto council continues with the misguided objective of “. . .  maintaining an overall tax rate increase at or below inflation” (Staff Report dated May 16, 2016).

This lack of willingness to increase property taxes to finance pressing operating and capital servicing needs is in direct contrast with council actions 40-60 years ago. Between 1955 and 1975 Toronto’s property tax collections in inflation-adjusted (real) dollars climbed by slightly under 5% per year, according to historian Richard White in a new study. He observed “. . . there is [was] no sign of significant public resistance to rising property tax” during this time.

Why were Toronto councillors accepting of sharp rises in property tax rates historically but not now? Richard White mentions four possible factors: property taxes were well thought out and equitably applied, real incomes were rising, the benefits from the higher taxes were hard to miss – plenty of new infrastructure, and regional equity. The primary difference I see between then and now is that real incomes are not growing much now. Having said this, the effective residential property tax rate (taxes as a percent of market value) is lower now than then.

The message White gives to current councillors is: “So the lesson may be that property taxes can be more easily raised when the benefits of the taxation are perceived by the taxpayers.”

The property tax is close to being an ideal tax for municipalities to use to fund their responsibilities. I echo the May 16^th Toronto staff report which says the tax has important characteristics including highly stable and predictable revenues, efficient assessment, straight-forward collection, limited potential for evasion, broadly borne, and well-matched to the overall funding of public goods. Analyses also demonstrate that the Toronto has room to increase its property tax rates.

The tax has a single critical flaw as constituted in Ontario: revenues do not rise automatically with a given property tax rate, unlike the sales and income taxes levied by the senior levels of government. Municipal councils must set a new tax rate every year that consists of two components: an increase just to keep up with inflation (which has been running at around 2%) and, if they have the fortitude, an increase to allow for a real increase (an increase above the inflation rate). In Toronto’s case, the debate and argument about tax increases has been with the inflationary increase, which comes to the senior governments automatically.

Toronto councillors face two fundamental challenges in increasing real property taxes by more than the inflation rate: (1) how to increase taxpayers’ awareness of the benefits to be funded by the higher taxes; and (2) to remove annual inflationary adjustment in tax rates from contention.

So what does the council have to do to do to change taxpayer perceptions about the merits of more substantial tax increases?  Here is a plan:

• Re-educate taxpayers to regard increases in property tax rates equivalent to inflation not to be a tax increase at all – only increases in tax rates exceeding the inflation rate represent a real tax increase

It should not be that difficult to change taxpayers’ attention to the inflation-adjusted property tax rate once the members of council and city staff embrace this reality.  A series of attention-grabbing advertisements highlighting differences between property taxes and income, and sales taxes should be convincing. Also all city releases and reports should separate actual and proposed property tax rate increases into their 2 components – inflation-adjusted and ‘real’ increases.

• Be more aggressive in linking property rate increases above the inflation rate to particular services or infrastructure improvements.

The city has been raising billings for water/sewer services by 8-9% or more annually for a number of years 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 and the proposed levy for a City Building Fund are other examples.

Toronto is advised to adopt measures to significantly raise its property tax revenue instead of adopting new taxes or pursuing access to the tax bases of the senior levels of government. The result will be a more sustainable revenue system that causes relative little distortion or inefficiency in the city’s economy.