Our Cities, Canada’s Political Doormat

Commentary, Taxation, Frontier Centre

Eighty percent of Canadians live in cities, and their important role in defining “community” is commanding a lot of attention. In a world where governments are over-centralized, distant and disconnected, cities are the closest political institutions to people.

An urban renaissance is underway from Halifax to Vancouver. It owes its vigour to several factors. The cheap dollar means booming exports to the U.S., and falling tax levels are promoting economic expansion. Beyond that, the misunderstood benefits of globalization — the technological revolution and the efficiencies gained from free trade, privatization and deregulation — are contributing to the upswing. In the New Economy the city is ground zero.

Dynamic urban centres are the engines of regional economic success, yet Canadian cities remain distinctly disadvantaged compared to their counterparts in other countries. This is an accident of history. The powerful city-states of Germany predate the area governments around them. They thrived because their autonomy protected them from regional incursions on their wealth and power. The U.S., with its penchant for bottom-up government and dispersed political power, remains a laboratory of dynamic urban government. Phoenix, Arizona, enjoying a chartered legal status separate from the state, prospers and grows under efficient, accountable local government.

Canadian cities, in stark contrast, are the doormats of Canadian politics. Canada’s first constitution was created when 90% of the country was rural. Even though strong cities are the building blocks of the modern economy, they exist merely as creatures of provincial legislation. They are prone to occasional policy fads and restructuring plans that get passed off as public sector efficiency measures but are really power grabs.

Our 1972 Unicity legislation is arguably Canada’s most notorious case study in failed urban reorganization. Amalgamation stamped the soul out of our neighbourhood communities when it moved decision-making power and local service-delivery choices into the hands of distant, usually unconnected, politicians. The new model allowed their involvement in operations instead of restricting their role to deciding broad policy matters. It also removed citizen control over major capital spending decisions by eliminating money by-laws. As with all highly centralized public structures, civic politicians quickly fell prey to the tightly organized provider monopolies that dominated the new organization. Spiralling debts and taxes plunked Winnipeg into the slow lane.

Cities also suffer collateral damage from bad policy imposed by senior governments. In Manitoba, the most notorious example remains rent control, the 70s brainwave that is collapsing the market value of apartment buildings. Falling rental property values have produced a shortfall of hundreds of millions of dollars in revenues for Winnipeg without compensation to the City.

Fiscal sideswipes like this compound a broader problem. Cities have the most diverse set of grass-roots responsibilities, including transit, infrastructure, waste collection, emergency services and clean water. Good public policy dictates funding as many as possible through user fees. However, so-called “public goods”, items that are difficult or impossible to tie back to specific users, like parks or roads, are now financed mainly through property taxes. High rates have penalized the densest parts of the city and accelerated downtown decay. Like other taxes raised beyond the optimum, high property rates eventually lower total revenues by compressing the value of land and buildings, a main reason for Winnipeg’s rock-bottom real estate prices. Adding insult to injury, the public education monopoly has increasingly sideswiped this revenue source by regularly increasing school taxes above the inflation rate.

This explains why local authorities have to grovel for infrastructure money from revenue-rich senior governments. That is the irony of Canadian politics: the most distant and unaccountable governments luxuriate in the revenue from modern tax levers like income and sales taxes. They then sprinkle down only crumbs to local communities, where the wealth that pays for services in the first place is produced.

Contrast this with the tools available to powerhouse European and American cities. New York City charges a 3% city income tax. All cities in Arizona receive 25% of the state sales tax. Of this amount, Phoenix receives 33% (based on population), a share worth $106 million. A separate city sales tax brings in $326 million. Both sources account for 45% of revenues. An upcoming paper on Canadian municipal finance by Harry Kitchen, a professor at Trent University, touches on the financing of German cities. With important responsibilities in health, education and social services come quality revenue mechanisms. Their biggest revenue source is a business tax or a levy on corporate profits. This is followed in importance by a constitutionally guaranteed 15% share of income and wage taxes. Property taxes are marginally important.

Ideally, political responsibility and revenue sources should devolve power back to the level of government closest to the people. This will not happen soon in Canada where power flows down from the remote centre, and constitutional change has proven difficult, if not impossible. But an enlightened provincial government could creatively pair the long overdue reform of the Unicity debacle with stronger revenue levers to place the Winnipeg urban area onto a fast growth track. Remember, the province has the power to create high-performance local government.

Fanciful? Not really. It’s eminently doable with some leadership and straight talk. Winnipeg could shed its reputation as a showpiece for disconnected local government and turn into a leader, countering the tide of brainless urban amalgamation and centralization.

Your house would be twice as valuable as it is now. And it would sit in a city uniquely positioned to prosper in the new, connected century.