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We can’t say we weren’t warned. We can say, however, we weren’t fully warned.
Campaigning for mayor of Toronto in last year’s election, Olivia Chow was honest enough to say she would raise Torontonians’ taxes if elected, but not quite honest enough to say how much, beyond that any increase would be “modest.”
Now the city’s proposed budget for 2024 has been revealed, and it seems the mayor was being far too modest about what she defines as modest. Toronto homeowners are looking at an increase in property tax of at least 10.5 per cent, nearly four times the average annual increase over the previous 25 years.
Plus there’s a kicker: Unless the federal government ponies up another $250-million, on top of its current annual subsidy to the city of roughly $1-billion, that 10.5-per-cent residential property tax increase will climb to 16.5 per cent.
The city paints the demand as simply its due, compensation for the costs of providing refugee support services. But there’s no doubting the politics underlying it. As the long-time Liberal strategist Scott Reid put it, “The entire 416 has become Chow’s de facto tax hostage.”
Well, look. It’s true that property taxes in Toronto are relatively low, compared with other cities in the province. And it’s true that property tax revenues have lagged behind inflation for many years, falling from 60 per cent of the city’s own-source revenues in 2006 to just over 40 per cent today.
Last, it’s true that the city is looking at a deficit, if nothing is done, on the order of $1.8-billion, more than 10 per cent of its budget. Unlike the federal and provincial governments, Toronto cannot simply take on debt indefinitely. So unlike those other levels of government, it will have to make some hard choices. Or at least choices.
But is this necessarily the right choice? Taxation is not theft, but it does mean taking people’s money from them by force. Before they decide to take so much more of our money, at a time when household budgets are already strained, the people who govern us are obliged, at the least, to show there was no better alternative.
Two alternatives, in particular, come to mind: spending less, or raising more revenues from other sources.
Toronto’s property-tax rate could jump 10.5%. How are municipal rates calculated and what do they pay for?
The city’s spending is far from out of control – again, unlike some other levels of government one could mention. Between 2017 and 2022, per-capita spending increased by roughly 2 per cent a year, after inflation.
But while much of the city’s budget is devoted to core-essential, pure-public-good items like police, fire and paramedic services, one item sticks out as ripe for change. Transit accounts for 14 per cent – one dollar in seven – of Toronto’s operating spending, but less than 8 per cent of its revenues. Maybe we’re not ready to tackle transit subsidies in principle, but must it be subsidized quite so heavily?
Well into the 21st century, does it make sense that the Toronto Transit Commission is still run on largely the same lines it was at its founding, more than a century ago – as a top-down, system-wide, all-encompassing state monopoly? Other municipal transit systems, such as in London (England, not Ontario), open routes to competitive tender by private operators. As long as we’re making hard choices, couldn’t that be one we at least looked at?
But it’s on the revenue side that fresh thinking is really required. The eve of a possible 16.5-per-cent increase in property tax is perhaps a good occasion to ask: Why property taxes, of all taxes? Why do cities, Toronto in particular, rely so heavily on such a wonky system of taxation to fund their activities?
Traditionally, taxes are graded according to three criteria: simplicity, efficiency and fairness. The property tax performs well on none of these. It is not only complex to assess – need I remind anyone of the market value versus unit value versus actual value assessment controversies? – but opaque, arbitrary and confusing as well.
Neither can it be defended on efficiency grounds. One definition of efficiency would be: Does it leave market decisions unaffected, without inducing people to make or avoid investments they would not otherwise make or avoid? But the property tax affects people’s decisions in all sorts of ways, starting with the decision of whether or not to buy a house: A house that looked affordable at the old rate of tax may not look quite so affordable now.
A property tax might also be considered efficient if it were related to the cost of the municipal services a household consumed – if it served, effectively, as a price. But the value of your house, the basis of property tax, bears only the vaguest relation to the value of the services you consume.
Last, property taxes fail the test of fairness. It might be supposed that the bigger and more valuable the house, the richer its owner – and therefore the more of the tax burden they should bear. But ability to pay is much more closely correlated with income than wealth. And wealth may have nothing to do with income. A widow living in the same house she has lived in for 40 years may have a lot of wealth, on paper, but have very little in the way of disposable income.
We’re trying to bend the property tax to two purposes at once – the cost of services, and ability to pay – with the result that neither is served. Wouldn’t it be better if each objective were assigned its own instrument? To cover the marginal cost of the services a household consumes, rely where possible on user fees. (Emphasis on the “where possible.” Water and electricity are eminently user-feeable. Police and fire are not.)
The most obvious candidate here: road tolls. Drowning in congestion, Toronto should be looking at road tolls already, joining other cities like London, Stockholm and, most recently, New York – just to make the place more livable, I mean. But if it also helps out on the fiscal front, so much the better. (A previous attempt at road tolls by former mayor John Tory was blocked by the province.)
And to pay for the rest? Why not a municipal sales tax? Sales taxes get a bad rap on fairness grounds – poor people spend much more of their incomes than rich people – but it’s easy to correct for this: Just rebate the cost of the tax to the poor, as we do, successfully, with the GST/HST. And sales taxes are among the most efficient – or least inefficient – taxes there are.
The idea has been discussed in Toronto political circles for years; most recently, in a report prepared by city staff last year. It has been dismissed just as regularly by the province, which is part of the problem: Cities should not have to ask another level of government’s permission to decide what taxes to collect, or not.
But it’s a perfectly plausible option. Indeed, the sales tax began in Canada as a municipal levy – Montreal had one in 1935 – before the provinces moved in on it. Though no Canadian city currently imposes one (Vancouver looked at it a few years ago), they are common enough south of the border, including New York, Chicago and Seattle.
It needn’t be set up as an entirely separate, stand-alone tax, with all of the machinery that implies. It could be piggy-backed on top of the federal-provincial Harmonized Sales Tax. But it should be very clearly the city’s tax, at a rate set by the city and collected only within its boundaries. The point should not be simply to give the city an additional source of revenue, but to give it its own source, for which it is accountable not to other levels of government, but its own citizens.
So whereas most proposals envisage the municipal sales tax as a modest supplement to existing revenue sources, set at 1 per cent or less, I think it makes more sense as a replacement for existing revenue sources. To replace the property tax, in particular, would require raising about $5-billion. (To replace, in addition, federal and provincial subsidies – to make the city truly independent and accountable – would take another $4-billion and change, but that may be a bridge too far.)
The province’s share of the HST, at 8 per cent, raises roughly $35-billion a year. As Toronto (the city proper, not the larger Greater Toronto Area) accounts for roughly one-quarter of the province’s GDP, that suggests a municipal tax of about four or five percentage points would do the trick. As it happens, that’s about equal to New York City’s sales tax, at 4.5 per cent. Chicago’s is 1.25 per cent (plus a 1.75-per-cent county sales tax). Seattle’s is 2.35 per cent.
Would a federal-provincial-municipal HST, at 17 per cent or 18 per cent, be too unwieldy? European equivalents, known as value-added taxes, average 21 per cent, and range as high as 27 per cent (the minimum allowed is 15 per cent). Even in the U.S., state and local sales taxes can add up to more than 10 per cent. And we would have got rid of the property tax, with all of its complexity, inefficiency and unfairness.
Maybe all this sounds impossibly radical. But a 16.5-per-cent property tax increase is pretty radical. Toronto can paper over its fiscal crisis with short-term fixes. Or it can use it to make fundamental changes, of a kind that will permanently improve not only its finances, but its attractiveness as a place to live, work and do business. Be bold, Toronto! For once in your life, be bold!
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