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Municipal headache

January 29, 2015

3-minute read

Municipal taxes. Their mere mention is enough to cause headaches for some. Throughout the year, we nearly forget that we help finance our own town or city. Then the tax bill pops up in our mailbox, and we open it with trembling hands, wondering about the magnitude of this year's hike. This letter can put an end to many households' home-owning project, mainly elderly and young families. Wages rarely follow the staggering rise in the price of real estate.

However, since the property tax is the only means municipalities have of collecting taxes, we are often stuck with some sort of tax-based urban planning. Indeed, municipalities have a vested interest in going down a path that will foster real estate speculation, to the detriment of the financial health of households and businesses located on their territory.

Hence, the property tax fails on at least two accounts: it does not respect the taxpayers' ability to pay and encourages cities to make planning decisions aimed at fostering real estate growth. There's also a third disadvantage: it partly disconnects tenants from municipal taxes. Even if rents take into account municipal taxes (and landlords are allowed to pass on 100% of increases), we still sometimes hear that municipal elections are strictly landlords' business, since they are indeed the ones receiving the tax bills.

What if we tried doing things differently?

Bearing these critiques in mind, IRIS published a study on municipal taxation. If property tax is not working properly and leads to excesses, can't we do anything else?

Throughout the world, cities can count on a variety of means to collect revenue from their residents. Cities in Scandinavian countries rely primarily on an income tax. Hungarian and Chilean municipalities collect a sales taxes that makes up for more than half of their tax revenue. As you can see, there are many different ways of filling municipalities' coffers. In OECD countries, the average composition is roughly 40% from income taxes, another 40% from property taxes and 20% from sales taxes. However, in Canada, as in all English-speaking countries as well as Israel, it's almost exclusively through property taxes that tax revenue is collected (97.4% in Quebec). There is room for a little rebalancing act.

We took as our starting point five guiding principles that should, in our opinion, govern taxation to ensure fairness: (1) protecting the autonomy of municipalities; (2) fostering solidarity between municipalities; (3) being as progressive as possible; (4) reducing real estate speculation; and (5) encouraging environmentally-friendly behaviour.

This is how we came to the idea of replacing the current taxation system with a tax collection structure (a) supported by a municipal income tax; (b) associated with a form of taxation that would take into account real estate value; and (c) incorporating some degree of green taxation. Our proposal is tax neutral, meaning that we are not attempting to increase or decrease tax revenue for municipalities. We're just trying to find a different way to get that revenue, one would be fairer than the approach currently used.

Even though tax revenue would be levied mainly by the provincial government, each town and city would still be able to determine its residents' taxation level. These sums would then be redistributed to cities: one part would go straight to the municipalities, another would be allocated through an equalization mechanism. Municipalities would decide themselves how to calculate equalization payments. Thence, the first two principles would be respected. Since taxpayers' bills would be based mainly on income, this option is also more progressive than when only assets are taken into account.

As for the fourth criterium, it can be met by diversifying the sources of tax revenue: since increasing the value of houses would no longer be the main driver of municipal taxation, tax-based urban planning would lose its appeal. Finally, through green utilities pricing, certain behaviours would be encouraged, others discouraged. The objective is not to bring more money into municipal coffers, but to create friendlier and more sustainable cities.

Can we implement all aspects of this proposal in the near future? Probably not. However, we can start thinking outside the box and question the framework we've been caught in for too long when it comes to our cities. We can do both better and differently, we just need to think and talk about it. Maybe that will help lighten our collective headache.

This article was written by Eve-Lyne Couturier, a researcher with IRIS—a Montreal-based progressive think tank.

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