Kevin Libin: Why a backward approach makes city taxes go higher

Media Appearances, Taxation, Frontier Centre

Come next year, Edmontonians will see their municipal taxes increase 4%. In Regina, home owners will get dinged an additional 4%, too. Vancouverites will pay 2% higher taxes next year. Calgarians can brace for a 4.5% increase. In Saskatoon, there’s a 3.86% tax hike on the horizon. And in Montreal, the total municipal tax bill …

Come next year, Edmontonians will see their municipal taxes increase 4%. In Regina, home owners will get dinged an additional 4%, too. Vancouverites will pay 2% higher taxes next year. Calgarians can brace for a 4.5% increase. In Saskatoon, there’s a 3.86% tax hike on the horizon. And in Montreal, the total municipal tax bill is up 4% this year over last.

Yawn. Big deal. Municipal tax hikes happen all the time. In most cities, denizens have come to accept them as an annual tradition, as arduous and inevitable as Lent or Yom Kippur. Still the question is: why do we accept them so apathetically? Canadians give no other level of government such easy licence. Federal and provincial politicians would be mad to think taxpayers would shrug at a raise in income or corporate taxes by several percentage points year after year after year. Only, it seems, in our cities – where the average family drops roughly 10% of its tax dollars – do we take a bigger yearly grab for granted.

Actually, we take the entire upside-down approach that municipalities use for taxes for granted. At the federal and provincial level, the system generally works like this: economists project incoming government revenue, and legislators decide how to spend it, where they can afford to increase funds, and where they must make cuts. In the city, it’s done the other way around, says Jack Mintz, chairman of the University of Calgary’s School of Public Policy.

"They first determine their revenue need . they divide by the market value [of city properties], and that gives you the mill rate," he says. "So the whole thing is based on spending in the first place."

Generally, Mr. Mintz says, municipal politicians take it as given that because they are limited in the tools they have to raise revenue, primarily by taxing property, they are a special case. Income taxes and corporate tax revenues grow with the economy even without tax hikes. Then again, income and corporate tax revenues also fall, as do royalties and gambling and liquor revenues, leaving higher levels of government to make difficult cuts or fall into deficit, something cities don’t have the ability to do either. This, says Mr. Mintz, is an argument for why municipal taxes might – might – have to grow at the rate of inflation and population growth. But it doesn’t explain why, for example, Edmontonians face a 4% tax hike in a year when inflation in Alberta has hovered at barely 1% and 2010’s population growth estimates are even less than 1% this year.

It’s happening across the country. Between 2000 and 2009, total property tax soaked up by Canadian municipalities soared by 50%. Astonishingly, this was happening even as transfers to municipal governments from the provinces and Ottawa spiked by 63% over the same period, according to Statistics Canada data. Even as the cities were being showered with cash from their bigger brothers and sisters, they squeezed taxpayers even tighter. Of course, property taxes hikes are a lot harder to pay if your family’s income hasn’t changed; a 2005 Stats Can study found property taxes in Canada to be particularly regressive – with low-income earners spending as much as five times the proportion of their income on them than high-income earners.

But this seemingly growing and unquenchable thirst for ever greater revenues is no great mystery if you have any vague sense of how governments operate. At a level of government where services most directly impact voters – whether it’s filled potholes or traffic calming measures for posh neighbourhoods – most councilors just can’t resist indulging their constituents, says Ric McIver, a former Calgary alderman and recent mayoralty candidate.

"When you’re elected and you’re talking to the local media every week or every day, you’re always trying to leave the impression that you’re, and I quote, ‘doing something,’" he says. "Well, doing something always costs money."

It also frequently means getting unionized workers to do it: Calgary’s City Hall, for instance, recently created a city-wide, city-run, union staffed recycling program, despite the fact that numerous private contractors had already been providing the service more cheaply (it drove the entrepreneurs out of business).

And the more services a city promises its ratepayers, the more card-carrying labourers it takes to provide it, and the more vulnerable the city becomes to wage demands: Generally speaking, transit workers, snow ploughers, garbagemen, firefighters and police officers can create bigger difficulties in citizens’ daily lives through disruptive job action than workers at the federal or provincial level. Some municipal jobs are simply without comparative benchmarks in the private sector – there are no private police forces or fire brigades – leaving few checks on climbing public wages. And the fact that unions are among the most active donors in city elections helps keeps their political bosses in a generous mood. Little wonder that a 2008 study by the Canadian Federation of Independent Business found that the average municipal public worker earned more than 14% higher wages and benefits than the average private sector employee.

"Our system is set up for the providers, not the taxpayers," says Peter Holle, president of the Frontier Centre for Public Policy, which recently launched an online database allowing users to compare the finances of Canadian municipalities.

Cities, it would seem, are just stuck with eternally bloated spending demands.

Except, they’re not.

Ronald Jensen, ran the public works department in Phoenix, Arizona for 25 years. Not once during his time there, he says, did the city need to raise property taxes. That’s because he made sure Phoenix measured the cost of every service it provides – the cost per mile of street sweeping, the cost of depreciating and maintaining a fleet of vehicles – and allows private contractors to offer cheaper bids on every service. Most of the time, surprisingly, the city union is the low bidder on the contract, but only because public workers have internalized the culture of competitiveness and began offering incentives to workers to cut costs and improve delivery.

"We operate like a business, and a lot of cities don’t operate like business," says Mr. Jensen, a former president of the American Public Works Association.

If city councils did operate, truly, like a business, they might emulate the model used in New Zealand, where some councils simply hire a CEO to be accountable for finding the most efficient way to run the city, with councilors acting strictly as a board of directors, uninvolved in the resource-intensive and politically charged minutiae of operations.  It might make for an interesting experiment in Canada, too. But if Mr. Jensen learned anything from the Phoenix model, it’s that good ideas that challenge the vested interests at City Hall – where bureaucrats gain power and prestige by expanding their departments and councilors get it by pandering to voters and unions – don’t spread easily.

"It becomes about ‘what’s in it for me,’" he says. What’s best for taxpayers? That’s just not a priority.