A fresh breeze is creating a welcome shift in Toronto’s tax conversation this week, led by the city’s new manager and Mayor John Tory on his one-year anniversary.
City Manager Peter Wallace made his debut presentation on his first city budget on Tuesday and he turned the annual budget conversation on its head by essentially telling city councillors that they had to have an adult conversation about taxes and services.
In recent years, the budget process has led with the funding gap between expected increases in expenditures and revenues.
The budget conversation would then to turn how to bridge that gap, either through cutting back on services or increasing revenues.
Wallace wisely turned that process on its head. He said councillors should start out with what they want to accomplish for the city and then decide how to pay for it. Refreshing.
He also outlined how city council has approved capital projects without approving the funding to pay for them.
Today, in a speech to the Economic Club, John Tory upped the ante.
He acknowledged that the city currently has $17.9 billion in unfunded capital projects on the books for 2016 to 2025. He proposed a City Building Fund to address it.
He said: “I will be looking to my council colleagues and city staff to suggest other ways to grow this fund, so that we can move ahead aggressively with the kind of city we want to build. As a start, I will be proposing to City Council that we introduce a modest levy that will start in 2017 as the current Scarborough Subway levy concludes.”
He proposed that the City Building Fund would include revenues from a 0.5 per cent property tax increase each year for 5 years.
It would start in 2017.
Federal and provincial funds would be directed to it.
It would be dedicated to transit and housing.
The Mayor’s office estimates at the end of 5 years that would bring in $65 million. A good start, but still not enough to address the city’s pressing needs.
While it represented a good start to the annual budget season discussion to have the mayor lead with new revenue-generating proposals for the capital budget, his signal on the operating budget isn’t as heartening.
He is also proposing a freeze on discretionary spending and a call for ‘increased efficiency’. We have been here before, in the Ford years and the millions of dollars that went into the search for gravy in the core services review confirmed the city is not awash in frivoulous services.
Time to get back to basics.
The mainstay of Toronto’s revenues is property taxes. They make up the biggest share of city revenues, accounting for a third of the total in 2015. No credible conversation about funding Toronto’s services can exclude property taxes paid by businesses and individuals.
Unlike provincial or federal taxes, property taxes do not increase with economic growth, population growth, and inflation. They also don’t increase with property values. Each and every year, city councillors have to vote to increase property taxes just to provide the same level of services as they did last year. And, each year in which city revenues fall behind, the prior year’s decisions have a compounding impact on future years.
Last year, property tax revenue, excluding the 0.5 increase for the Scarborough subway, was increased by 1.5 per cent — well below the 3 per cent needed to keep up with inflation and population growth.
Just to maintain existing city services, revenues would have to keep up with the increasing number of Torontonians who access them and inflation.
A property tax increase that is less than half the rate of rising costs means that Toronto’s most reliable source of revenue will lag far behind actual needs. Public services will get worse, not better. Think about the reality of that next time you get on a crowded streetcar or subway.
A property tax increase of 4.5 per cent this year would start that process of regaining lost ground. It would compensate for council’s short-sighted decision last year and it would increase revenues by $170 million.
Toronto has another source of revenue that it could tap into immediately: it could reinstate the Vehicle Registration Tax. Councillor Shelley Carroll, a former city budget chief, says she now regrets her decision to vote to eliminate it. We estimate that could bring in $66 million per year.
But it doesn’t end there. As we showed in our paper Toronto’s taxing question last year, the city could draw on more of its revenue powers under the City of Toronto Act. These untapped powers provide the city with a menu of options that could raise more than $400 million annually.
Here’s how these options could work.
If the city asked patrons of live sports events, movies, and concerts to contribute an additional five per cent entertainment tax, that could raise $18 million a year for public programs.
A new tax on cigarettes could yield an additional $30 million a year. A new alcoholic beverage tax on sales from breweries and winemakers could yield an extra $77 million a year.
A 10-cent road toll on the DVP and Gardiner during peak hours that dropped to five cents during non-peak hours could raise an additional $78 million.
A flat tax on non-residential parking lots could raise $175 million a year.
The city needn’t leverage every single tax available, but pick one, pick a couple — it would make a difference to Toronto’s financial bottom line. It would signal a shift to more responsible governance if city council took up more of the special powers that it has been allotted. And it would contribute to a more sustainable funding base.
Peter Wallace did the City of Toronto a favour by calling out the elephant in the room: Toronto’s well-documented revenue problem.
That’s due, in large measure, to extreme tax aversion.
It’s 2015 and this growing city needs to get real about funding public service and infrastructure investments that will only make Toronto a better place to live.
So it’s nice to see the mayor join in the conversation, but he’ll need cooperation around city council in order to take it a few steps further to really make a difference. The events of this week just helped ensure Toronto’s annual budget debate won’t be the same old same old.
The budget winds are shifting. By just how much remains to be seen.
Sheila Block is a senior economist at Canadian Centre for Policy Alternatives’ Ontario office. Follow her on twitter: @SheilaBlockTO
*this post was updated at 4.30pm on Wednesday, December 2, 2015 to clarify the Mayor’s proposal.