Proceedings of the Standing Senate Committee on
National Finance
Issue 15 - Evidence - Meeting of May 16, 2007
OTTAWA, Wednesday, May 16, 2007
The Standing Senate Committee on National Finance met this day at 6:19 p.m. to examine and report upon issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Nancy Ruth (Deputy Chairman) in the chair.
[English]
The Deputy Chairman: I call this meeting of the Standing Senate Committee on National Finance to order. My name is Senator Nancy Ruth. I am from Toronto, Ontario, and I am Deputy Chair of the committee.
On September 27, 2007, the Standing Senate Committee on National Finance was authorized by the Senate to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada and to report back no later than June 30 of this year.
In the fall of 2006, committee members heard presentations by key officials, from various provincial and territorial government departments, academics and policy and market experts from across the country. The hearings took place over a six-year period.
On December 12, 2006, the committee issued an interim report entitled The Horizontal Fiscal Balance: Towards a Principled Approach as part of its ongoing study of Canada's fiscal arrangements for provinces and territories.
The committee is now working at vertical fiscal balance specifically, by reviewing the division of fiscal resources and spending responsibilities between various orders of government in Canada.
Today, I welcome the wonderful Professor Slack, through video conference from Toronto. She is the Director of the Institute of Municipal Finance and Governance at the Munk Centre for International Studies at the University of Toronto. Dr. Slack is one of Canada's foremost experts on municipal finance. She is an adjunct professor at the university, teaching a graduate course in urban public finance to the planning students.
Professor Slack has been working in this field for over 25 years and is respected nationally and internationally for her research on property taxes and other aspects of municipal finances. As President of Enid Slack Consulting Inc. since 1981, she has advised governments and private companies in Canada and abroad on property taxes, intergovernmental transfers, the divisions of expenditures and revenues among levels of government, municipal boundary restructuring and other local finance issues.
Dr. Slack, we look forward to your opening remarks.
Enid Slack, Director, Institute of Municipal Finance and Governance, Munk Centre for International Studies, University of Toronto: Thank you for the invitation to make a presentation to the Standing Senate Committee on National Finance, and thank you for allowing me to make this presentation by video conference.
I thought in my opening remarks I would pose three questions and try to answer them. The first question is, is there a municipal fiscal imbalance? The second question is what is different about the municipal debate compared to the federal-provincial debate about fiscal imbalance? The third question is what can each order of government do to reduce that fiscal imbalance?
Is there a fiscal imbalance at the municipal level? That is a very difficult question because, if we look at fiscal measures over time in Canada, we will find that municipalities have done fairly well. They do not have an operating deficit at the municipal level; it does not exist. As you know, municipalities are prohibited by provincial statute in each of the provinces to run an operating deficit, so their budgets are balanced. They have to be balanced.
If we look at the amount of borrowing municipalities have done to make capital expenditures, we will find that this has fallen over time. Debt charges relative to municipal expenditures have actually been declining. That is, in part, because interest rates have been falling, but also because municipalities have reduced their borrowing. If we look at size of their reserves, they look fairly healthy. Again, these are averages across Canada and will not be true of every municipality, but on average this is the case.
If we look at the rate of property taxes increases over the last 20 or 25 years, we will find that it is not dramatic. Of course property taxes have been going up, but the increases have not been dramatic.
The reliance on provincial grants has fallen, so municipalities are depending more and more on their own source revenues.
Finally, if we look at tax arrears, we find that municipalities have very low tax arrears. In other words, people pay their taxes at the municipal level. I have been in countries studying property taxes in all parts of the world, and I can tell you that our tax arrears are very small compared to other places.
The question is what is the problem? If municipalities are looking so good on all of these fiscal measures, what is the problem?
I would argue that the problem is that their fiscal health has been achieved at the expense of their overall health. By that, I mean the state of the municipal infrastructure is a problem. Whether we are talking about water or sewers or roads or community infrastructure or recreational facilities, we know there is a problem in infrastructure. We also know that the quality of service delivery has declined.
The problem with these measures is that they are very difficult to get a handle on. We have tried to estimate the infrastructure deficit and tried to look at service delivery, but these are much more difficult to measure than some of the other measures that I talked about initially.
Is there a municipal fiscal imbalance? Most definitely there is, but it is difficult to measure because it has played itself out in terms of deteriorating infrastructure and service delivery.
The second question I wanted pose is what is different about the municipal debate on fiscal imbalance compared to the federal-provincial debate? As I understand the federal-provincial debate, the provinces have been arguing that the federal government has more fiscal capacity than it needs to meet its expenditure requirements. Provincial governments, on the other hand, have less fiscal capacity than they need to meet their expenditure requirements, particularly with respect to health care. In its turn, the federal government argues that provincial governments have access to the same tax bases as the federal government, and by that, I mean income taxes and sales taxes, so why cannot the provinces not just raise their taxes? I will not answer those questions but would say that that debate plays out a little differently at the municipal level.
Municipal governments are different than the federal and provincial governments. First, municipal governments do not have the same taxing powers as the federal and provincial governments. Municipalities, as you know, rely largely on property taxes to meet their expenditures requirements. They do not have access to income and sales taxes. Second, municipalities are constrained by provincial governments in terms of what revenues they can raise and what expenditures they are required to make. They have much less flexibility than provincial and federal governments in terms of their expenditure and tax decisions.
The property tax is a unique tax. It is different than income and sales taxes. First, we argue it is an inelastic tax. What does that mean? It means that as the economy is growing, the tax base does not grow necessarily as quickly in the same way that an income tax base or a sales tax base would grow over time. Yes, the property tax base will grow, but there is a lag and it does not grow as quickly.
One of the unique characteristics about the property tax and one of the things I like about it is that it is a very visible tax. Unlike income taxes which are withheld at source for most people, the property tax has to be paid directly. People receive income, after income tax, and they have to write a cheque for their property taxes, whether it is once a year or twice a year or six times a year. People are aware of the cost of their property taxes. That visibility is good initially because it means accountability, but it restricts a municipality's ability to increase its taxes. What happens when the tax base grows, you will find most municipalities reduce their tax rates so that the tax burden does not change.
The ability of municipalities to increase their non-residential property taxes, their business taxes, is limited because, in most parts of the country, we already overtax businesses relative to residential properties and relative to the services that businesses receive. That is what different about municipal fiscal imbalance. Municipalities do not have as much flexibility as the other levels of government.
If there is a fiscal imbalance, what can each order of government do? There is a role for all three orders of government. Can municipalities increase their own revenues? Probably. They could probably, in some municipalities, increase their residential property taxes, although I do not recommend increasing the non-residential taxes. They could price services more correctly. Most municipalities have user fees for water and transit, but they do not always correctly price these services. They could also price garbage collection, which some municipalities do, but most do not. Correct pricing will not necessarily bring in more revenues but it could reduce the expenditure requirements as people understand the costs of providing these services.
Municipalities can borrow more. Again, not each municipality, but many could. Municipalities borrow to make capital expenditures. These are expenditures on roads and bridges. These are services that are enjoyed over a long period of time, say 25 years. It makes sense to borrow the money and pay it back over 25 years so those who are enjoying the benefits are also paying for the costs.
Even if municipalities do all these things, I believe these measures are still likely to fall short of what is needed, so we turn to the other orders of government. What about the provincial governments? For a number of provinces, they need to revisit the alignment between expenditure requirements at the municipal level and the revenue raising tools. The fiscal imbalance quite simply means that municipalities do not have adequate revenue-raising tools to meet their expenditure requirements.
For large cities and city regions, I think they could be given access to a mix of taxes — access to income and sales taxes, for example. Why? They are providing a wide range of expenditures, many of which are not appropriately funded on the property tax base. They deliver services that are used by commuters and visitors to the municipality. These commuters and visitors do not pay property taxes in those municipalities and even if they use the services, the municipalities do not get revenues from that. As I said, the property tax is not an elastic revenue source. The municipalities need revenues that grow with the economy.
An access to a mix of taxes would increase municipal flexibility. For the large cities and city regions, if they are given access to other tax revenues, they should levy the tax rate themselves. That would give them local autonomy and flexibility. They would be much more accountable when the people making the expenditure decisions are the same as those making the taxing decisions and would give stability and predictability to municipalities because they would be in charge of those tax rates. That does not mean they should set up their own tax systems; I would recommend they piggyback onto the existing provincial and/or federal systems.
What should the federal government do? That is what you are interested in. First, if the federal government carries out its own responsibilities effectively, that would help municipalities in this country quite a bit. By that, I mean issues around the Aboriginal population and on immigration settlement. It is not just the money that the federal government gives to cities but how they deliver their own services that helps cities; that is, they deliver services to people in cities.
I think the federal government has a role to play in coordinating the three orders of government. We have urban development agreements in Western Canada. That is not a bad model for coordination among the three orders of government so everyone is working towards the same goals and not overlapping and trying not to have gaps.
I think the federal government has a role in making strategic infrastructure investments to make our cities competitive internationally because if our cities are competitive, the country will do better. I think the federal government should make strategic investment in infrastructure to promote the green agenda.
Finally, I think the federal government has a role to play in information. I think there is a lot of information we do not have about cities. In my field of municipal finance, we cannot compare the revenues and expenditures of individual cities across Canada; those data are not available.
In conclusion, I would say in answer to the three questions that I posed that there is probably a fiscal imbalance at the municipal level, although it is difficult to measure. The debate at the local level is different than the debate at the federal and provincial level. Municipalities probably could do more with what they have. They could do more with their own revenues, but this will still not be enough, and the other orders of government need to be involved.
The Deputy Chairman: I am sitting here thinking that almost every other presenter we have had in the last couple of weeks must have been through your school. The only thing you have not said is the 1 per cent of the GST.
Senator Murray: I enjoyed your presentation very much, probably because I agree with so much of it, notably your remark to the effect that the federal government could start by discharging its own responsibilities effectively. Off- reserve Aboriginals are a major problem in some of our cities, notably in the West, as is immigration settlement, and so on.
Having said that, I am interested in what is properly municipal responsibility because I think it varies from province to province. When it comes to defining federal and provincial responsibilities, we have section 91 and section 92 as some kind of guideline, but nowhere is there a list of what must be considered municipal responsibilities. I presume it is in the municipal act of each province. I am most familiar with the New Brunswick act, which is the most centralized. In other places, there is a great deal of decentralization and in all places a great deal of complaint about downloading in recent years from the province to the municipalities and some consideration of uploading as a partial solution to the problem.
Would you like to comment or can you comment on what are properly municipal responsibilities across the country? There must be some commonality among the 10 provinces.
Ms. Slack: Thank you for your question.
I have looked at provincial legislation across the country. You are right, it is the municipal act or the local government act in each province. It is interesting that some are quite prescriptive; some are very clear about what municipalities have to do.
The tendency over the last few years has gone to permissive legislation; that is, leaving it very open-ended and non- specific about what municipalities have to provide. If you are talking about what services are mandated versus what are discretionary, that is very difficult to determine across the country.
We do know that municipalities provide similar services across the country. They provide fire and police protection, water and sewers, roads, in the more urban areas transit, recreation and culture. The anomaly is Ontario, as you well know, which shares the cost of social services with municipalities. That is not true across the country. The expenditures and revenue have to go together. That is what the municipalities provide.
Senator Murray: That is what the fiscal imbalance is about, is it not, whether or not they have the revenues or access to enough revenues to carry out their responsibilities and the responsibilities vary from province to province.
Ms. Slack: That is right. It is not so much how much money but the right kinds of revenues. For example, Scandinavian cities provide many social services but have access to income tax revenues. It is the matching of the services and the revenues that is important.
Senator Murray: We have had some other witnesses, as you know, including people from the Federation of Canadian Municipalities. I want to try some of their recommendations on you. One recommendation was to make the federal gas transfer permanent. They then go on to talk about expanding project eligibility criteria. Without going into all the details, they did not argue when I suggested to them that what they really have in mind is to make the federal gas tax transfer unconditional. What do you think of that?
Ms. Slack: The federal gas tax transfer is a conditional transfer. I think it is misnamed the federal gas tax because, although it is based in total on gas tax revenues, it is really a conditional transfer from the federal government. It is distributed, as you know, largely on the basis of population.
When I said I thought the federal government should be involved in strategic investments, I meant that it should be focusing on specific investments to make our large cities competitive, for example. That would mean that you would not necessarily give it out on a per capita basis to everyone across the country.
I think municipalities should be given the ability to levy their own taxes rather than depending on transfers because they may not be permanent. That is part of what I said before, namely that if they had their own tax room they would have more stability and predictability over time.
Senator Murray: A strategic investment would be one in public transit, for example. That would be obviously pursuant to some agreement between the federal, provincial and municipal governments and would be conditional to that extent.
My question is whether, in terms of revenue sharing with the municipalities — and I am thinking of the gas tax or, if we want to dream, a point of the GST, which would be, as they -big bucks,'' we should try to make a transfer like that conditional. Should we make it conditional or should we hand it over to them unconditionally, recognizing that they have needs and do not have access to the revenues that are necessary to carry out all their responsibilities? I am arguing for unconditionality, but I want to hear what you have to say about that.
Ms. Slack: I would argue for tax room. I would argue that if you were going to give one cent on the GST that you allow the municipalities to determine what portion of that one cent they want and they should set the tax rates themselves. Then, of course, the money would be unconditional because they would be setting their own tax rates.
I prefer to give tax room and let municipalities decide how much of it they want to take rather than revenue sharing. I think it is more accountable, stable and predictable for municipalities.
Senator Murray: Fair enough.
Senator Mitchell: You mentioned that the federal government should, in making investments in the cities, ensure that in part some of them would be directed at enhancing economic competitiveness of the city. Under that heading, you listed among others a green agenda and that they should promote a green agenda. There are those — I am not one of them — who would argue that kind of investment does not help an economy; I think it does. I am sure that within that structure would be public transit. Do you have any other kinds of green agenda investments that the federal government might make at that level?
Ms. Slack: That is a good question. I have not thought about it in any depth. I was trying to make the point that these investments should be for particular purposes that are in the national interest. The federal government should be spending its funds in cities on things that are of national interest, that affect the whole country. Those were two that come to mind — the green agenda and competitiveness. Those are in the national interest.
Senator Mitchell: We had presenters in an earlier meeting who addressed the issue of poverty and, specifically, women in poverty. Women probably bear the burden of poverty disproportionately. Do you see any specific federal initiative that could address that in the contexts that you have been raising, namely, that the federal government should go with targeted funding, perhaps, or fulfil its obligations that happen to bear on urban issues? Would women in poverty be one of those issues and how would that be addressed?
Ms. Slack: Yes, I think so, but it is not particularly money to cities. Whether it is through the income tax system or specific programs to deal with issues of women in poverty, it would certainly help cities. If there are less women in poverty in those communities that would mean they would use less municipal services. I do not see it as particularly an urban agenda but, as you said, something that the federal government should be doing that will have an impact on cities.
Senator Mitchell: You mentioned there are urban development agreements between the two levels of government in the West. Could you describe those agreements and maybe mention some of the elements?
Ms. Slack: There are urban development agreements that involve three levels of government. Vancouver is one example; Winnipeg is another. In Vancouver, there is a program in the Downtown Eastside, which has some issues around poverty, drugs and criminal activities. All thee levels of government are coordinated to work together. All three levels of government make expenditures trying to work together and with the private sector, to develop that area and remove some of the problems. It is not so much about funding but about coordination of their activities.
Senator Mitchell: They generally address a specific issue or program delivery area that they address and coordinate that way?
Ms. Slack: That is right.
Senator Mitchell: It becomes a way that the federal government can get around the jurisdictional issue to some extent, which remains a political issue at this point, where there are those who think the federal government should go to the cities and there are those who think the federal government should stay out of the cities.
Ms. Slack: Again, as we have said, much of what the federal government does affects people in cities. Many of the programs in the Downtown Eastside are provincial programs, whether employment insurance or some of the health issues at the provincial level. There are so many issues that are interrelated that involve all three orders of government. The federal government is involved, by the way, through Western Economic Diversification in the urban development areas in Western Canada.
Senator Ringuette: I appreciate your experience and the data that you have in this field.
A few years ago, I could not help looking at what the Harris government did in Ontario by downloading a whole slate of provincial responsibilities to municipalities and then reducing its income tax rate and saying, -Bravo, we are good,'' while leaving the Ontario municipalities in dire straits. That is the situation in Ontario, and we have to look at the national scale of the issue.
Part of my question was about the gas transfer, which was one federal program going directly to municipalities. We also had one program that was a cooperative program between three levels of government, which was the infrastructure program. In order for a municipal infrastructure to avail itself of federal money, the province also had to agree to the priority of that infrastructure program in that community.
I would like to have your comments on that kind of arrangement with regard to looking at the infrastructure deficit that we have across the country and the kind of cost sharing of this capital investment.
Ms. Slack: I would like to go back to Ontario for a minute before I get to the infrastructure question. You are right that there was a downloading that was quite explicit in Ontario in 1998, although some things were uploaded as well; not everything was downloaded.
As I go across the country — I have been doing that lately — people have other descriptions of downloading than just the blatant one that went on in Ontario. People talk about how the federal or provincial governments do not do their own responsibilities or cut back on their own expenditures and how that is a form of downloading because municipalities then have to pick up some of those services.
They also talk about the standards that the federal and provincial governments put on their service delivery. Water quality is one that we are hearing a lot about for obvious reasons. People at the municipal level feel that is a form of downloading as well because the province, for example, will say, -You have to meet these standards but we are not giving you any more money to do it.'' You are quite right about what happened in Ontario, but we hear the term -downloading'' in other contexts right across the country.
On the infrastructure program, there is a role for each of the orders of government to come together and look at the infrastructure deficit and do something about it. Those kinds of programs do make sense for municipalities to pick up some of the cost of that infrastructure that they obviously cannot do on the property tax alone. Those programs do work.
The Deputy Chairman: Do you have any preference for a sales tax as opposed to an income tax or other kind of tax for cities? Growth in the cities requires larger amounts of money. Coupled with that is the question of city governance.
Are you confident of the governance models that you see as you cross this country? If they had more money, are you confident that it would be well spent?
Ms. Slack: Those are good questions, thank you. There are advantages to sales taxes and to income taxes. The advantage to sales tax is that it captures commuters who come to work in the city but then go home and pay property taxes somewhere else. Sales taxes are also good because they are elastic and grow with the economy. Income taxes are more progressive in incidence, as you know. Depending on how they are levied, they could possibly get commuters in the form of a payroll tax at the place of work. There are advantages and disadvantages to both sales and income taxes.
In terms of whether governance models and governments would know what to do with this money, we have seen differences across the country. I am a big fan of municipal governments because they are close to the people, accountable and visible in what they do. If they have an agenda and it is clear to people what they are trying to do and how much it will cost and people would be willing to pay for that.
The governance issue that is a problem for me occurs in the many regions of the country known as metropolitan regions that are not governed as regions. An example is Toronto within the Greater Toronto Area. Could they levy their own income tax? Would that be a problem when cities outside do not levy such a tax? Similarly, there is Montreal. If we had the governing structure that truly reflected the right boundaries, these taxes would make more sense to levy at the regional level.
Senator Di Nino: We talked about municipalities and the image that generally comes to mind is larger cities. Municipalities also mean small- and medium-sized cities, and even villages. Do you think the so-called imbalance exists? If so, does it exist in the same manner in smaller centres?
Ms. Slack: The imbalance exists but it is a different kind of issue. The problem for smaller and rural communities, in particular, is trying to levy on the existing tax base. If the property values are not that high and there is not much growth, then the property tax revenues will not grow much. User fees often do not make much sense in some of these communities because people cannot pay them. To charge the cost of picking up the garbage or providing water would be exorbitant and people could not manage it. In smaller centres, problems would occur on the revenue side. Problems on the expenditure side would be different as well. Municipalities that are small cannot achieve economies of scale, making it very expensive to provide services. In remote Northern communities, the costs are that much higher to deliver basic services.
Yes, there is an imbalance but it is created for slightly different reasons than you would find in large cities.
Senator Di Nino: Are the solutions the same as they would be for larger cities? As an example, Senator Nancy Ruth suggested she would prefer to see a sales tax as opposed to another kind of tax. A sales tax might not make a big difference to a smaller municipality. What kind of solutions do you envisage in trying to deal with the problems of the smaller municipalities?
Ms. Slack: I am glad you raised that line of questioning because it comes to the fundamental point that all municipalities are different, and we cannot treat them all the same way. We always fall into the danger of trying to come up with solutions for the whole country, which we cannot do.
You are absolutely right in saying that to have a municipality that is a small, rural, remote community levy a sales tax is a waste of time. They will not generate enough revenue to help them. In such communities, you need provincial or federal grants. When we talk about giving taxing authority to municipalities, we are talking about the large cities and city regions. When we talk about smaller, rural communities, we are talking about intergovernmental transfers.
Senator Di Nino: We talk about the imbalances and solutions to the imbalances. We often deal with questions such as transfers, uploading, downloading, et cetera. I do not often hear the terms -an investment,'' -economic benefit,'' or -economic value'' of putting tax dollars into a municipality to generate wealth and economic benefit. Would you care to comment on that?
Ms. Slack: Everyone says that our cities are the economic engines of our country. Anything we do to invest in that economic engine will benefit the whole country. Absolutely, the money we put into municipalities to make services better, to attract the knowledge workers and to increase the quality of life is an investment for all of us.
Senator Di Nino: Surely there is some value to that as well in some of the smaller rural communities in terms of a benefit to tourism. Surely there is an advantage to increasing the potential of smaller communities as well. That is precisely the point I was trying to make before that when we envision this discussion, it is always Toronto, Montreal, Vancouver, maybe Halifax or some of the smaller cities, but is there not a benefit as well to be had with investment in infrastructure of a different nature, such as transportation, in smaller communities that could be of economic benefit?
Ms. Slack: Yes, of course there is a benefit. When you make an investment, there will be benefits. People look at the large cities, though, because they talk about international competitiveness, which applies more to large cities. All of those investments will have benefits.
Senator Eggleton: One of the difficulties that occur at the federal level of government is the one-size-fits-all and the thought that somehow, what we do with municipalities should be the same, whether they are big or small. When our party was in government, we started a new deal for cities that quickly morphed into a new deal for cities and communities over concern for dealing with various sizes of municipalities.
If taxing authority goes from the federal-provincial level to the municipal level, how do we develop equality between the big cities that have a greater capacity to do that versus the smaller cities? Where do we begin to draw those lines? What do you do about rates of taxes that might be different on one side of a boundary of a municipality than they are on the other side? I have heard those concerns.
Can you comment on that, perhaps drawing on the experience of other major cities in North America and in Europe that have sales tax or income tax to supplement their municipal revenue systems? Perhaps we could learn from them.
Ms. Slack: Other cities around the world levy income and sales taxes. In some cases, but not usually, they levy their own taxes; mostly they piggyback onto a federal or provincial tax.
The border issue will be a problem. If you are north of the boundary and you are not paying the tax and you are south of the boundary and you are, you will have some problems across that boundary. However, I do not think the problems are as large as people think.
There are American cities, such as Chicago and New York, which levy other taxes — income and sales taxes. You might have to constrain the rates. If it is the GST, you might say you can levy between one-half a cent and one cent, or between zero and one cent. You would have to put some boundaries on what the municipalities can do.
However, you are right; many American cities have income and sales taxes. Many European cities have mostly income taxes — in northern Europe, for example — and it does work.
If I could add one more thing, I do not know if you were in the room when I said this but if we had governing structures that covered our city regions and allowed those regions to levy these taxes, the problem would be much smaller across boundaries. All of the municipalities within that region would be paying the same rate. The problem is we do not have those kinds of boundaries now; we do not have regional government structures in the large cities and it would be easier if we did, in terms of taxing.
Senator Eggleton: What would that be in the case of Toronto? Is that the GTA or the Golden Horseshoe; which is the city region?
Ms. Slack: That depends on the purpose of your definition. Are you talking about the economy, about commuting or about social issues?
You will always have these problems. Someone has to decide what those boundaries are on the basis of some principles and draw the lines. It is easy to walk away from these tough issues and say we cannot let municipalities levy an income tax because they do not have regional government structures, so we cannot define the boundaries. I cannot answer your question, but I think wise people could sit down and come up with an answer.
Senator Eggleton: I believe that absolutely. I have confidence in municipal governments being able to make these kinds of decisions. We have to stop hitting on municipal governments as some remote entity from the people. They are not a remote entity and they are quite capable of making decisions. We have good people in municipal governments, just like any level of government — you have the good, the bad and the ugly.
Senator Murray: Would you agree that any transfers should be unconditional?
Senator Eggleton: Absolutely, but should we hold our breath waiting to get there? I think we are going to need some action a little bit sooner. Not that I would give up on that, I certainly would not; but ultimately, we need to relate what the needs of different levels of governments are — how much they need to provide the services ought to relate to their capacity to raise the money. That is ultimately where we should be, but will we get there tomorrow? Will it require a constitutional amendment to get there? I would not hold my breath on waiting for that to come about. We need to work toward it; but meanwhile, we need to take interim steps to do that. We need more of a transfer of money from this level of government in particular.
Senator Murray: The witness makes a good point in reply to my suggestion that we should go to revenue sharing, which is that we would be better off to provide tax room to the municipalities, say on the GST, and let them levy their own and be accountable for it. Ideally, that would be the way to go.
I am not clear as to how we could do that without having the province move in as first mover and occupy the room that we have vacated. Like everything else, perhaps it would take a tripartite agreement of some kind.
Senator Eggleton: Tri-level agreements are a great idea as they worked in Winnipeg and Vancouver. In this case, we have had a 1 per cent reduction in the GST. Has anyone noticed it? The 1 per cent reduction that is still forecast to come, or promised by the government to come, would do far better in the hands of our municipal governments; it is $5 billion in the hands of our municipal governments. Whether it is unconditional or conditional, it still would be a good move.
The Deputy Chairman: Would you comment on that, Ms. Slack?
Ms. Slack: Senator Murray is quite right; you can reduce the GST but municipalities cannot pick up that room because provincial legislation in each province prevents them from doing that. You absolutely have to have the provinces involved in allowing the municipalities to levy these taxes because provincial legislation is quite clear that they cannot levy income or sales taxes.
The Deputy Chairman: Of the monies that go from the federal government to the cities, what portion of it is tied and what portion is not? Does anyone know this?
Ms. Slack: I think it is all tied.
Senator Eggleton: Even the gas tax is tied to infrastructure.
Senator Murray: There are various project criteria, as we heard from the Federation of Canadian Municipalities. One of the things they are asking for is for us to expand the project eligibility criteria for the gas tax transfer. They want to do it so that municipal governments could put their share of gas tax funds toward local priorities — transit and water systems, sports facilities, libraries, parks or other social infrastructure.
I hear what they are saying. Frankly, I do not think we should get into setting criteria for projects. Give it to them — they are accountable to their voters — and let them use the money as they see fit.
Ms. Slack: These are federal funds, so what is the national interest? Does the national interest not have to be met? What is the rationale for giving funds to municipalities? If it is because they do not have enough —
Senator Murray: It is the same rationale as giving unconditional money to the provinces, as we do all the time — equalization being an outstanding example. If the federal government wants to get into investing in urban transit, that is earmarked and would have to be done pursuant to some kind of agreement. However, to meet the fiscal imbalance from which the municipalities suffer — their revenue sources vis-à-vis their responsibilities — my inclination would be to be as unobtrusive as possible. Either transfer the money or, as you suggest, provide the tax room for them to occupy. They are accountable, as you have said.
Ms. Slack: If I may, the mismatch between expenditure responsibilities and revenue-raising tools is really a provincial issue, is it not? It is provincial legislation that determines what municipalities spend their money on and where they can collect their money. If there is a mismatch there, is it not the role of provinces to make that match, either by uploading some expenditures or downloading some revenue tools?
Senator Murray: I take that point, but this committee is discussing the vertical fiscal imbalance; and it has been impressed upon us that the imbalance that exists is not just between the federal government and the provinces, but between the provinces and their municipalities. I will not prejudge anything that we might come up with, but I think it is an interesting and timely aspect of our study — that is, the provincial/municipal imbalance. It is worth our thinking about it and thinking about what we can do to help resolve it.
The Deputy Chairman: I am afraid it is time. If you could wave a magic wand, what would you have this committee do? You get the final word and then we are finished.
Ms. Slack: I guess I said it at the beginning. You have to recognize that all three orders of government need to solve this problem and they each have a role to play. We should not forget that municipalities can do more than they are already doing. The province has to deal with the mismatch between revenue-raising tools and expenditure responsibilities. The federal government has to be strategic in terms of making cities internationally competitive and in addressing environmental issues and it can coordinate activities among the three orders of government. I would put in a plea for information because it would be nice to be able to compare the revenues and expenditures of the cities across Canada; we cannot do that right now.
The Deputy Chairman: Thank you very much. We will do what we can and thank you for taking the time to be with us tonight.
We welcome our next panel of witnesses. The Association of Manitoba Municipalities is with us tonight with its President, Ron Bell, and its Executive Director, Joe Masi.
Ron Bell, President, Association of Manitoba Municipalities: Good evening honourable senators. Thank you for the opportunity to appear before the committee on behalf of the Association of Manitoba Municipalities, the AMM.
The AMM was formed on January 1, 1999, because of a merger between the rural and urban associations in Manitoba. The AMM represents all 198 municipal corporations in Manitoba; all the cities, villages and rural municipalities in Manitoba. As one municipal association in Manitoba, the AMM speaks with one unified voice to government on behalf of municipalities.
Municipal government is playing a more important role in the everyday lives of Canadians. No longer is the local council seen as merely the local tax collector and tertiary service provider. Today, they have greater responsibilities, often playing a key role in areas that are not typically municipal in nature, such as health care and environmental protection.
As the importance of the local community grows municipal government, as the order of government closest to the people, is becoming more important. Yet, municipal governments do not have the tools they need to meet the new expectations. Many communities are starting to see the decay of key infrastructure and the unfortunate reduction in program delivery because of limited resources and increasing responsibilities. Municipal councils are left with the impossible task of delivering all of the services expected by both the citizens and other orders of government while only having access to limited resource streams. This is not sustainable and consequently it is necessary to undertake a major review of municipal government in Manitoba to create a fiscal balance between all orders of government.
Nationally, through the work of the Federation of Canadian Municipalities, municipal governments have been able to secure a rebate of the GST as well as the gas tax rebate. Community issues have become front and centre on the national stage and the AMM is pleased with the recognition by the federal government of the importance of local government and the need to put resources in the hands of the order of government that delivers the most key services.
Provincially, municipal governments in Manitoba have seen advances as well. Most recently, the province announced a new Building Manitoba Fund that will link municipal grant money to provincial gas tax revenues. Manitoba is also unique in that the provincial government shares a percentage of personal and corporate income tax with municipalities through the previous provincial-municipal tax sharing agreement, now under the Building Manitoba Fund. In addition, municipalities in Manitoba receive a share of video lottery revenues.
While these initiatives are positive, more is needed. Many of the resolutions currently worked on by the AMM deal with issues of funding or more specifically, inadequate funding. A serious discussion of the resources available to municipalities needs to be undertaken. For this discussion to be fruitful, it must be raised within the greater context of -what are'' and -what should be'' the responsibilities of municipal government.
Municipal government in Manitoba has embraced taking on additional responsibilities as these have been seen to be for the betterment of the local community. For instance, many municipalities have gone to great lengths to help provincial regional health authorities recruit physicians. As well, municipalities have undertaken projects to help reduce greenhouse gas emissions and improve the environment, yet there are limits as to how much they can do with current revenue streams.
We have consistently heard that Manitoba municipalities fare better than almost every other province in terms of funding transfers from provincial governments. However, this discussion is meaningless without a discussion on the responsibilities of these municipal governments. If Manitoba's municipalities are continually expected to take on additional responsibilities, it is imperative that new revenue sources are made available.
In Manitoba, a major municipal issue is the financial implications of the recently passed Water Protection Act. While the intent behind this legislation is laudable, the overwhelming lack of detail, especially in the area of responsibilities and finances, has many municipal governments concerned. Municipal governments cannot take on the financial costs associated with implementing and enforcing this act. The municipal budget is already stretched too thin.
The current municipal infrastructure deficit in Manitoba further compounds the need to re-examine the resources available to municipalities. Communities are facing crumbling roads, deteriorating community centres and inadequate water facilities. It is estimated that Manitoba's infrastructure deficit is $3 billion, which includes $2 billion in rural municipal infrastructure and $1 billion within the City of Winnipeg. These are staggering numbers when compared to the revenue streams available to these municipalities. When only eight cents of every tax dollar goes to municipalities it is evident there is a lack of resources to deal with this deficit.
This is why the AMM has been advocating for a five-year plan to significantly reduce the reliance on property tax to fund education. Currently the property tax base is the principal source of revenue for municipalities. However, this tax base is diminished when education tax takes up over 50 per cent of the property tax in Manitoba. Equally concerning are the continuing increases which force municipalities to seriously reconsider any municipal tax increases as there are limits to what local residents are able to withstand. The AMM fully supports maintaining and improving the quality of education in Manitoba, however the current system of education taxation is not sustainable and in reality it is hurting local communities by limiting municipal resources.
In addition to the removal of education tax from property, there are other options to provide greater revenue to municipalities. For example, the provincial government can follow the lead of the federal government with the GST and exempt municipalities from provincial sales tax. The Province of Quebec has been already started implementing such a policy for their municipalities. Not only would this leave more money in the hands of municipalities but it would significantly reduce the costs of many major infrastructure projects, therefore freeing up valuable funding for other areas of need. This would represent a significant shift away from the current tax and return system toward a new system that allows municipalities to retain resources for community needs.
Strong communities are the foundation of a strong province and a strong Canada. As the association that represents all incorporated municipalities in Manitoba, we understand this. The AMM has long been advocating for municipal governments to look at ways of improving how they do business to ensure strong, sustainable communities across Manitoba. We also hear firsthand the challenges faced by communities and see the implications provincial actions are having on municipalities. It is for this reason it is time to take a closer look at the resources available to municipalities and take stock of the roles of municipal governments in Manitoba. It is only through this type of examination that we can truly create fiscal balance in Manitoba.
In conclusion, we have some recommendations for your committee. We need to develop a long-term plan to eliminate the municipal infrastructure deficit. The $3 billion municipal infrastructure deficit in Manitoba has far exceeded the scope of what municipal governments can finance alone. A long-term plan is needed to eliminate the deficit and should involve the federal government, the provinces and municipal governments. This plan could include a permanent gas tax transfer with an escalator clause to protect its value over time and long-term extension of federal infrastructure programs. In addition, the federal and provincial governments should ensure a significant portion of new infrastructure programs are explicitly dedicated to municipal projects and project funding is available and accessible to meet the needs of small, rural and northern communities.
We need to clarify roles and responsibilities. We must reconsider the way governments work together to find economies, efficiencies and street-level solutions, particularly for issues that cut across jurisdictional boundaries, like climate change and immigrant settlement. This includes evaluating public policies and programs that overlap among orders of government and realigning roles and responsibilities with adequate and appropriate sources of revenue.
Thank you for the opportunity to present our thoughts regarding this important public policy issue of the municipal fiscal imbalance.
The Deputy Chairman: I have no doubt your recommendations are spot on in a number of ways. I am interested in knowing how you see the three orders of government getting together to start on this process. Do you have any suggestions of how that might happen?
Mr. Bell: I believe we have already started on this process. It started when all Canadians recognized that we had a problem, particularly with our infrastructure in all of our communities across Canada. It started with the GST and gas tax rebate. The infrastructure programs have been significant. We have already started to find a way and it is difficult when we have municipalities who operate by and large under the provinces; constitutionally that is the system we have. We can still work within that system and still have federal, provincial, municipal sharing of projects. We have many examples of how this can work well. I am very positive that we are already started on this process. We need to continue and recognize that there is a significant federal role in our communities and recognize the constitutional jurisdiction of the provinces.
The Deputy Chairman: Does the system you describe seem a bit ad hoc to you? Are you happy with a little bit here and a little bit here so to speak rather than a more rigorous system?
Mr. Bell: We have said that we want to sit down and talk with our provincial government about how to develop a better system rather than doing things on an ad hoc basis. We have to recognize that we need a suite of ways to deal with municipalities. There is no one single answer. We cannot expect to have one program or one way of dealing with all of the communities in Canada. We need a suite of tools at our fingertips. It may look ad hoc but we need to have a system that has this suite of tools.
Senator Ringuette: I liked your comments about the agreements with your provincial government regarding the sharing of revenues from the provincial income tax and video gaming. Is it possible for you to provide this committee with a copy of that agreement? We would like to see how it is done in your province.
Mr. Bell: Certainly we can provide that. We had the Provincial Municipal Tax Sharing Act, but two years ago, the government brought in legislation and created the Building Manitoba Fund. Within legislation they put in place the formula under which this money would flow. We can certainly provide the legislation and the framework to your committee.
Senator Ringuette: Are we talking about targeted funds?
Mr. Bell: No. Previously it was not targeted at all. It was unconditional. When they created the Building Manitoba Fund the new monies that came as the economy grew needed to be put into infrastructure. The reporting mechanism is extremely simple and there is no requirement for it to be a specific type of infrastructure, it just needs to be for infrastructure.
Sen. Ringuette: Is the Building Manitoba Fund that was put in place part of the Urban Development Agreement with the federal economic development agency in Western Canada? Is it part of that stream?
Mr. Bell: No, it is not. I am not very familiar with it but it is an actual agreement specific to a number of different types of projects. In Manitoba's case it is the City of Winnipeg, the Province of Manitoba and the Government of Canada. They are separate agreements put in place through western diversification.
Joe Masi, Executive Director, Association of Manitoba Municipalities: On the tax sharing, it goes to all municipalities.
Senator Ringuette: On what basis?
Mr. Masi: It is on a per capita basis on base amounts. We can provide you with the details. The agreements Ms. Slack talked about are unique to Winnipeg. They deal with the revitalization of neighbourhoods and immigration money. It is a whole package; it is a partnership. It started out as a core area initiative. Previously Minister Godfrey spoke highly of them when he was in that portfolio at the federal level.
Senator Ringuette: That is very interesting. This is the first time that I have heard about those two agreements.
Mr. Bell: The provincial and municipal tax sharing has been in place for Manitoba since the mid-1970s.
Senator Ringuette: Bravo to you. Thank you.
Senator Mitchell: Thank you very much. It is really good to hear from you. You mentioned climate change as an issue, I think, at the municipal level. I am not sure exactly what context that was in. Could you elaborate on that and on the responsibilities that the members of your association feel or the pressures that you feel to address the initiatives that you are taking, and so on?
Mr. Bell: We know that municipalities will be major players in any climate change initiative when it comes, and particularly our larger cities with urban transit and with trying to reduce greenhouse gas emissions from vehicles. That will require significant municipal resources to bring in those programs. Often, these municipal people are not involved in the actual legislation or the writing of the rules. I guess we were using it in the context of other orders of government putting in place rules that will cost municipalities money.
That is not to say that these are not things that we need and want; that is true in most every case — water protection would be another example. We are talking about rules, laws or regulations being legislated and municipalities needing to meet those regulations and having to pay for them.
Senator Mitchell: There is that side to it, namely, the initiatives that you might need to take to reverse the proverbial carbon footprint. The other side of it is that there might already be or are beginning to be effects of global warming. Certainly there has been terrible flooding in Manitoba, but that seems to be relatively calm — maybe not just from global warming but there could be effects. Are municipalities beginning to assess that potential and the costs and the mitigative measures that they might have to take?
Mr. Bell: In Manitoba, we are probably not as far along as we would like to be. Yes, we have seen, over many decades, a number of floods and other natural disasters, for example forest fires are very common. Mr. Masi and I just returned from Churchill, where they had an early spring thaw this year. We saw what is happening with the ice. Everything that is happening up there is affecting northern Manitoba in particular as climate change affects northern Canada the most.
Senator Mitchell: Work needs to be done?
Mr. Bell: An awful lot of work is being done in the energy savings area in Manitoba. With work through FCM programs, the Green Municipal Fund has played a significant role there also.
Senator Mitchell: You mentioned the progress and the relationship you have with the province over sources of funding, municipal tax sharing agreements, video lottery sharing, and so on. That may be unprecedented across the provinces; I do not know. You said that while it helps, it is not enough.
I know you do not want to be pinned down but what would be enough and what would be the best source of funding? I know you alluded to that to some extent, but what is the figure?
Mr. Bell: One of the biggest problems we have not only in Manitoba but also in Canada is that we do not even know what would be enough. Together, between all of the orders of government, we need to study our infrastructure deficit. We do not even know what it is across Canada. We know, I think instinctively, that we are looking at a problem that will take a generation to fix — 20 years at least, if we start concentrating on it. One of the first things we need to do is come to some kind of terms with what we have as an infrastructure deficit out there. I do not know how much would be enough.
As to how we get there, I honestly believe that we need a suite of programs. Some of our major cities have opportunities to resource themselves with their own taxation measures, if they were allowed to do so. Some of our smaller cities may have some opportunities in that way as well. Some of our smaller communities, though, will have to depend more on grants and other programs from both the provincial and federal governments. The reality is that they just do not have the resources or are unlikely to have the resources.
The truth is that if all of our communities in Canada are suffering from the infrastructure deficit — and they are — then we have a significant national interest in ensuring that all of our communities in Canada are strengthened. All of our governments in Canada need to work on this.
Senator Mitchell: The previous presenter mentioned the federal responsibilities that seemed to be focused, somehow or another, at the municipal level, one of which was Aboriginals living in urban areas. That has certain programming responsibilities that come with it.
Were you aware of what the Kelowna accord would have brought? Were you able to assess that as being helpful? Was it far enough along so that you could make that assessment? Would you like to have it come back?
Mr. Bell: I would have to say that I do not know enough about it, to be honest.
Senator Eggleton: In response to Senator Mitchell's question about the provincial-municipal tax sharing agreement, you have said that is not enough.
What is your reliance on property tax? I think nationally it is about 53 per cent on average for municipalities. In terms of the infrastructure deficit, you mentioned $3 billion — the figure usually cited nationally is $60 billion; another $20 billion for urban transit. In the case of Manitoba, why has that infrastructure deteriorated to that point of having that significant deficit?
Mr. Bell: You have asked a number of questions here.
I think in Manitoba that we are probably somewhere around 47 per cent, which I believe is probably pretty good across Canada.
The truth is that our communities are not able to provide the services that our citizens require. We cannot replace the aging infrastructure as quickly as needed. We are still falling behind in that area.
As to how that happened, it is my belief that in the 1980s and 1990s, and perhaps even as far back as the 1970s, we became conscious about increasing taxes. There was a national goal to decrease debt and spending, not just at the federal or provincial levels, but also at the local level. We stopped or slowed down our spending on infrastructure, because it is something that is often hidden away, under the ground where we cannot see it, and it deteriorates at a rate where we do not notice it this year. Next year we might say, -It is maybe not quite as good as it was the year before.'' We lose track every year.
Throughout the 1980s and 1990s, in particular, we were creating an infrastructure deficit by not spending and not raising taxes. We still live in a world where people do not want to have taxes raised. The problem is that municipal taxes, the property taxes, do not increase with the economy. It is not a growth tax. The federal and provincial governments see revenues increase even as they decrease the taxation rate. We can only increase our revenues by increasing our taxation rate. When we have provincial and federal governments decreasing their taxes, it is difficult for us to increase ours.
Mr. Masi: Our brief referred to the education reliance property tax for education. In Manitoba, there has been a major lobby effort with our provincial government to get education off properties and into general revenues so that municipalities have room to finance more infrastructure. Many of our member communities say that they do not want to raise taxes because the education part of it is so high. In Manitoba they have made some moves and have tried to chip away at it, but a major source of revenue on the property tax bill goes to fund education.
Senator Eggleton: What percent of your property tax is education?
Mr. Bell: Across the province, it is probably about 50 per cent.
The Deputy Chairman: If the 50 per cent for education were removed, would you see municipalities reducing the taxes. First, let us say they could keep some of the realty taxes so they would have an increase in the monies for settlement and infrastructure and so on, would you see a reduction? You are a three-time elected president of your organization. What hopes do you have in the negotiations with your provincial government that you can pass this back up? Is it still a problem that it is not an elastic tax?
Mr. Bell: Obviously, in the long term, we have the problem that it is not a growth tax.
If we could ever get to having less of the education tax from property taxes, it may given us some tax room. Personally, I think it would be difficult to take it all up because — for the same reason I said before — people do not want to see tax grabs. That is one of the problems with making tax room. If you ask a taxpayer, -Do you want to pay more taxes?'' I can tell you that 90 per cent plus will say no; but if you ask, -Do you want more services?'' they will say yes. Unfortunately, with municipalities the only way to provide more services is to charge more taxes, because that is the kind of tax regime we have. It would be hard to move into any kind of tax room.
The Deputy Chairman: At some point in your paper you said there was a problem with lack of detail. I cannot find the context in which you said it, but it is something that always comes up for me when I look at the way some of the intergovernmental things works. It asks levels of government to do something and it is not detailed out specifically. Everyone is left doing the best they can, or what they will. Then there are complaints from the citizens that X, Y and Z were not done. Can you find that in your paper? It caught my mind when you said it.
Mr. Bell: Yes. In Manitoba, a major municipal issue was the recently passed Water Protection Act. This act is really an enabling bill. Most of what will result from it will be from various regulations as they come along. We have already started on that legislation. There are requirements to do watershed planning, which is a good thing. To be honest, we do not disagree with anything that will be achieved through the Water Protection Act.
The province is providing up to $25,000 to put together a watershed plan, but the watershed plans are costing in the neighbourhood of $100,000 to $200,000 to put together. When they put together the watershed plan — and there is one now that has been completed and has been accepted by the province — the plan indicated there was about $6 million worth of work that needed to be done as a result of the plan. There is no funding for that as yet, as far as we know. There is no detail. There is nothing in the regulation or legislation that says what it will cost and who will pay for it. It is just, -This is what you shall do.'' As you start doing it you begin to realize how much it will cost. That is a frustration of municipal governments. So often other governments make regulations or laws without concern about how much it might cost the municipalities to implement.
The Deputy Chairman: When you talked getting a percentage of the video gaming, I thought, -How did your province manage to do that?'' What have other provinces asked about the process you went through to get those taxes under your control and how are you accountable for them to the province?
Mr. Bell: They were all before my time. The tax sharing was unconditional. I believe that at the time the provincial government — and I believe Mr. Schreyer was the premier at the time — said this is what they would do. I do not think it was negotiated; it just happened.
Senator Mitchell: Might that not have had something to do with the fact that the greater Winnipeg area constitutes such a significant portion of the population of Manitoba and, therefore, the political power? Do not 50 per cent of the seats in the provincial legislature come from one single area?
Mr. Bell: Winnipeg has about 58 per cent of the total population of Manitoba.
Senator Mitchell: It has huge political power.
Mr. Bell: Yes, but the provincial tax sharing goes to everyone and because of the base amount, Winnipeg actually gets less per capita.
Senator Mitchell: I am saying that simply because Winnipeg would be such a significant political power base, you would have to appease it, and if you give it to Winnipeg, you have to give it to all the other municipalities.
The Deputy Chairman: Call Mr. Schreyer.
Senator Mitchell: It all comes down to politics.
Mr. Bell: The politics in Manitoba — and I am getting out of the municipal area — is that we have one government for a while and then we have another, not like Alberta. At any point in time, there can be a new government and maybe something happens because of that change of leadership.
The Deputy Chairman: Thank you both very much for taking the time to come here this evening.
Mr. Bell: Thank you for inviting us.
The committee adjourned.