THE FISCAL (MIS)FORTUNES OF CANADA ’ S GLOBAL CITY REGIONS by Thomas J Courchene

1. THE FISCAL (MIS)FORTUNES OF CANADA’S GLOBAL CITY REGIONS by Thomas J Courchene School of Policy Studies, Queen’s Senior Scholar, IRPP tom.courchene@queensu.ca MPA 844 / ECON 881 Winter Term 2012

2. OUTLINE I: Canada’s GCRs in Comparative Perspective A: GCRs as the Dynamic KBE Motors II: Fiscal Powers of Canada’s CGRs A: Expenditure Assignments in Global PerspectiveB: Tax Powers in Global Perspective C : Assessment III: Federal-Municipal Relations A: Sharing The Federal Gas Tax B: The Harcourt Report on Cities/Communities C: Cities and Open Federalism IV: Provincial-Municipal Relations A: The Greater Toronto Charter B: Accessing Provincial Taxes V: Toward a New Municipal Reality A: Democracy and Accountability B: Only for GCRs? VI: Cities, Energy, NAFTA, and the $CA: Opportunities B: Challenges

3. I: Canada’s GCRs in Comparative PerspectiveA: GCRs as Dynamic KBE Motors: 1 • The Information Age (a combination of globalization and the knowledge/informatics revolution) is leading to the economic, political and democratic ascendance of Canada’s GCRs. • On the globalization front, GCRs are the new dynamic economic engines and export platforms are spearheading the integration of their provinces and regions in NAFTA space and beyond. • On the knowledge front, (and given that human capital is at the cutting edge of competitiveness and well-being) it is in the GCRs that one finds the requisite dense concentrations of human capital, R and D, high-value-added services, etc. that allows GCRs to become the integrating and coordinating networks in their regional economies and national nodes in the networks that drive trade, growth, trade, innovation and ultimately productivity. • International research shows that a doubling of a city’s population leads to a 4-5% increase in productivity (Y per capita) (Strange, 2003) • Caveat: With the resurgence of resource and commodity prices, Canada’s rural areas have made a comeback

4. I: Canada’s GCRs in Comparative PerspectiveA: GCRs as Dynamic KBE Motors: 2 Richard Florida’s “creative human capital theory of growth” Industries will be attracted to those cities that will fare best in terms of the Florida’s three T’s—Technology, Talent and Tolerance. Canada ranks high in the 3rd T, but trails in the other two. Therefore, cities can create environments that will allow the 3 Ts to interact and create a learning environment. (see attached table, where Talent is % of pop with U degree, Technology is high-tech concentration, and Tolerance includes Mosaic index (% of foreign born), Bohemian Index (% of artistically creative citizens) as well as the Gay Index. Ontario’s Institute of Competitiveness and Prosperity Roger Martin and James Milway show that Ontario’s gap with the US is an URBAN gap and is related to the weakness in Technology and Talent

5. I: Canada’s GCRs in Comparative PerspectiveA: GCRs as Dynamic KBE Motors: Conclusion • Conference Board’s “Hub Cities” • The growth in Canada’s 9 large cities that serve as provincial or regional “hubs” (Vancouver, Edmonton, Calgary, Saskatoon, Regina, Winnipeg, Toronto, Montreal and Halifax) “drives an even faster rate of growth in smaller communities within the same province or region.” They conclude: A strategic needs-based approach to hub city investment would also yield a bigger economic impact than the per capita funding approach used in the federal government’s 2005 budget which allocated a gas tax rebate to Canadian communities on a uniform per capita basis • SUMMARY • The bottom line is our collective futures depend on how Canada’s GCRs fare relative to US and Global GCRs. • Unfortunately, the reality is that our CGRs appear to be performing well beneath of their potential. • The role of the following is to highlight the fact that our GCRs are fiscally weak in comparative international context, and constitutionally jurisdictionless in the Canadian context.

6. II: Fiscal Powers of Canada’s GCRs A: Expenditure Assignments in Global Perspective • Figure 1 shows that Canadian cities have fewer responsibilities than many cities (2,000 euros per capita in Toronto, 1,750 for Montreal vs 7,000 euros in Amsterdam) • Unitary state GCRs have larger spending than federal GCRs, except in administrative federations (Germany, Austria) where the local level implements/administers most of laws legislated by upper levels (Laender and National). • Why does decentralization in Canada essentially mean “power to the provinces”? Are we truncating the operations of the principle of subsidiarity at the provincial level, when experience elsewhere (and the information revolution) suggests that we could bring the delivery of many more public goods and services much “closer to the people”? • Is this constitutionally determined in the sense that cities are creatures of the provinces and have no independent constitutional role.

7. Figure 1: Global City Regions1 Per Capita Expenditures in OECD, Various Years (euros) Source: Based on OECD data and financial statements from the cities concerned. Reprinted from Chernick and Reschovsky 2006, figure 3.6.

8. II: Fiscal Powers of Canada’s GCRs B: Tax Powers in Global Perspective • Table 1 shows that the Anglo countries rely primarily on property taxes -- Australia (100%), Canada (92.7%), USA(73%), and unitary state UK (99.5%). Is there something important here about the difference between communitarian capitalism and individualist capitalism? (Or between civil law and common law countries?) Sweden’s cities have 100% income taxation (along with most Nordic countries), with federal Germany not far behind. • Casey Vander Ploeg (Canada West) provides a comparison between Canadian and US cities. From Tables 2A and 2B, Seattle and Denver have access to an incredibly large range of own source taxes and shared taxes compared with Calgary and Edmonton. • Table 3 presents an overview of the Denver and Edmonton tax profiles, where nearly 90% of Edmonton taxes come from property while about 70% of Denver’s come from sales taxes. • The result of this greater revenue access appears in Figure 2, where Denver’s growth in tax collections clearly dominate that for Edmonton (upper panel), and where the growth in per capita spending capital spending dominates that for Calgary (lower panel)

9. Table 1: Local Tax Sources in Selected OECD Federations and Unitary States Tax source as a proportion of total Local taxes as local tax revenues a % of GDP Income Sales Property Other Federations  Australia 0.0 0.0 100.0 0.0 1.1 Canada 0.0 1.5 92.7 5.7 3.3 Germany 79.1 5.7 15.0 0.2 2.8  Switzerland 84.3 0.3 15.4 0.0 5.2 United States 6.3 21.0 72.8 0.0 3.5 Unitary states  Denmark 93.6 0.1 6.3 0.0 15.8 France 0.0 10.2 50.6 39.1 4.7  Hungary 0.1 76.6 22.6 0.7 1.7 Italy 12.9 14.9 17.3 54.9 4.9 Japan 47.2 20.8 31.1 1.0 7.2 Netherlands 0.0 37.1 62.8 0.0 1.2 Spain 26.4 35.4 34.6 3.5 5.7 Sweden 100.0 0.0 0.0 0.0 15.8 Turkey 27.7 30.1 2.3 39.9 4.7  United Kingdom 0.0 0.0 99.5 0.5 1.4 Source: Based on data from the OECD. Reprinted from Chernick and Reschovsky 2006, table 5

10. Table 2A: Municipal Tax Tools in Calgary, Edmonton, Denver and Seattle LOCAL TAXES IN PLAY Calgary and Edmonton Denver Seattle Property tax Property tax Property tax Business tax (property Franchise and utility taxes Franchise and utility taxes based) General retail sales tax General retail sales taxes Franchise and utility Sales tax on lodging Sales tax on events Sales tax on restaurants/alcohol Sales tax on gambling Sales tax on alcohol off-sales Sales tax on bars and pubs Sales tax on vehicle rentals Sales tax on car rentals Sales tax on aviation fuel Gross receipts business tax Sales tax on entertainment events Motor vehicle excise tax Employee head tax Real estate excise tax Auto Ownership tax Source: Casey Vander Ploeg (2005) “Rationale for Renewal: The Imperative Behind a Big City Partnership” Canada West Foundation

11. Table 2B: Municipal Tax Tools in Calgary and Edmonton, Denver and Seattle TAX SHARING Calgary and Edmonton Denver Seattle Provincial fuel tax State fuel tax State liquor tax State tobacco tax State fuel tax State vehicle registration tax State lodging tax State lottery revenue tax  State insurance premium tax State general retail sales tax State leasehold excise tax   State hazardous waste tax State utility tax State timber taxSource: See Table 2A State solid waste tax

12. Table 3:Tax Revenue Profile, Edmonton and Denver, 2000 Total municipal tax revenue % Edmonton  Property tax (general residential and commercial) 71.8 Property tax (square footage business tax) 16.9 Property tax (local improvement taxes) 5.1 Franchise and utility taxes 5.6 All other taxes 0.6 Denver General retail sales tax 63.5 Property tax 21.1 Employment head tax 6.4 Selective sales tax on hotels and lodging 4.7 Franchise and utility taxes 3.1 All other taxes 1.2 Source: See Table 2A

13. Figure 2: Growth in Per Capita Taxes (upper panel) and Capital Spending, Edmonton (Calgary) and Denver, 1990-2000

14. II: Fiscal Powers of Canada’s GCRs C: Assessment • Best practice elsewhere would call for greater fiscal autonomy for GCRs • Beyond the above differences, Canadian cities tend to have weak mayor systems and they lack the discipline of party systems. Montreal is an exception here. • Canada’s lack of national political parties rooted in cities (unlike the US) leads to a weaker political role for cities at the center and a diminished interest in CGRs on the part on the central government. • In terms of helping GCRs to come closer to their potential, we turn first to the federal-GCR relationships, noting that addressing the needs of the GCRs will probably have to rely more on creative processes than on redesigned structures

15. GCRs in Comparative PerspectiveD: Toward Self-Determination for the GCRs • Best practice elsewhere would call for greater fiscal autonomy for GCRs (see later). Beyond the above differences, Canadian cities tend to have weak mayor systems and they lack the discipline of party systems. The lack of national parties rooted in cities (as in US) leads to a weaker role for cities at the center. • But we ought to keep Andrew Sancton’s concerns in mind; • After noting that “of course, our big city municipalities should be freed from oppressive provincial regulation” and “of course [cities] should have access to a diversified tax base” he adds: • My position is that cities are far too important for municipal purposes alone. Policies of federal and provincial governments have always been crucial to the well-being of our cities and will continue to be so. We cannot define constitutionally who is responsible for what with respect to all the demands on government within our cities. The governance of our cities will always be multilevel. • Therefore addressing the needs of the GCRs must include creative processes as well as redesigned structures

16. III: Federal-Municipal RelationsA: Sharing the Federal Gas Tax • The sharing of the federal gas tax was an important catalyst in that it embarrassed many of the provinces to the point where they too shared their gas taxes. Moreover, it lent momentum to the movement to allow the municipalities greater tax autonomy. • But it was not the tax sharing that the GCRs wanted. They wanted a derivation-based tax sharing, not an equal-per capita sharing where they ended up subsiding the smaller communities. • If the political dictates are such that Ottawa has to share taxes on an equal per capita (by province) basis, then it seems preferable for Ottawa to transfer tax points (of GST or personal income taxes) to the provinces. To be sure there is no guarantee that they will be passed through to cities on a derivation basis, but the chances are higher. • Although a consensus appears to be developing in favour of provincial-municipal tax sharing (on constitutional grounds), there was one recent development that may open the way for greater federal tax sharing sometime in the future, namely, the External Advisory Committee on Cities and Communities (i.e., the Mike Harcourt Report).

17. III: Federal-Municipal RelationsB: The Harcourt Report on Cities/Communities • The Harcourt Report notes that the Europeans are much more advanced in terms of subsidiarity and it is convinced that the governance arrangements now in place penalize the competitiveness of our people and places • Key recommendation is for a Double Devolution. The committee recommends shifting responsibilities and resources from the federal government to the provincial and territorial governments, and then from the provincial and territorial governments to the local level. The double devolution should ensure that choices about how to raise and use resources, including tax choices, move to the most appropriate levels, where accountability to citizens is most direct. • This would presumably be based on the derivation principle • The Report would have had a much better reception had Paul Martin still been in power, since Martin was intent on privileging cities and he commissioned the Report in the first place.

18. III: Federal-Municipal Relations; C: EI and Canada’s GCRs • Next slide shows how that the EI program discriminates against central and western cities • Likelihood that Toronto’s unemployed receive EI is less than half than cities like Quebec City and St. John’s • Some relays to immigration, some to preferential entry and benefit provisions and the extended benefits for high U areas • This is part of our very generous east-west transfer system when our trading system is increasingly north-south or international • Another example of how rich cities tend to be viewed as places to redistribute from, rather than enhance their ability to thrive as global city regions.

19. Proportion Unemployed Receiving Regular Employment Insurance Benefits, by Major City, Canada, 2004 Source: Battle, Mendelsohn, and Torjman 2006

20. III: Federal-Municipal Relations; D: Cities and Open Federalism • Cities (along with early childhood development, day care, K-12 education, etc) qualify for what I refer to as NI/PJ, areas that are in the National Interest but fall within Provincial Jurisdiction. • Paul Martin used the federal spending power to privilege all of these areas. However, Stephen Harper’s open federalism makes this difficult, unless resort is made to creative and acceptable ways to exercise the federal spending power. • However, the 2009 budget stimulus package did embrace shared-cost “boards and mortar” infrastructure in provinces and municipalities (bridges, water, etc), although it shied away from “mortarboards” infrastructure (day care, k-12, etc.) • My view is that Ottawa must find acceptable ways to address those issues that are critical to the national interest but fall under provincial jurisdiction. A deux nations framework is one way, i.e., ROC “opts in”to federally integrated programs whereas Quebec operates its own programs with compensation(e.g., the CPP/QPP approach applied more broadly).

21. IV: Provincial-Municipal RelationsA: The Greater Toronto Charter: 1 • Alan Broadbent, a key force in the drafting of the Toronto Charter sees the underlying challenge as follows: “There is a huge number of issues where the city is the key point of delivery, where it has greater knowledge and experience, or where it can exercise the flexibility and responsiveness that leads to better delivery…. But the city cannot structure its own solutions, because these solutions must pass the test of acceptability by a level of government with less specific knowledge, experience, or motivation” • The Greater Toronto Charter (Tableau 1) was drafted to redress this deficit of money and power. While this reads more like a blueprint for a Canadian citistate (à la Bremen, Berlin and Hamburg in the German federation). Moreover, in the age of the ascendancy of GCRs it is anomalous in the extreme that PEI can wield more fiscal and political power than can Montreal or Toronto. Note that the Charter is not an official document of the city of Toronto

22. IV: Provincial-Municipal Relations; A: The Greater Toronto Charter: 2 • The Greater Toronto Region form an order of government that is a full partner of the Federal and Provincial Governments of Canada. • The Greater Toronto Region, and its municipalities, be empowered to govern and exercise responsibility over a broad range of issues, including.child and family services; cultural institutions; economic development and marketing; education; environmental protection; health care; housing; immigrant and refugee settlement; land-use planning; law enforcement and emergency services, recreation revenue generation; taxation and assessment; transportation; sewage treatment; social assistance; waste and natural resource management; and water supply and quality management , with the exception of those matters as are mutually agreed upon with other levels of government that are best assigned to another level. • The Greater Toronto Region have the fiscal authority to raise revenues and allocate expenditures with respect to those responsibilities outlined in 2. • The Greater Toronto Region be governed by accessible, democratic governments, created by their citizens and accountable to them for the exercise of the government’s full duties and responsibilities. • The Greater Toronto Region continue to fulfill its obligation to share its wealth, innovation and other assets with the rest of Canada, through appropriate mechanisms developed in concert with other levels of government.

23. IV: Provincial-Municipal RelationsA: The Greater Toronto Charter: 3 • Note that the responsibilities in the Charter relate in large measure to efficiency matters. Hence it would be important for income distribution issues to be handled by the upper levels of government. In this regard Canadian cities are much better positioned than US cities to pursue their competitive futures because areas like Medicare, elderly and child support are national programs linked to citizenship, not to place. • Indeed, were EI altered to confirm more to insurance principles, Ottawa might be enticed to embark on a negative income tax for adults. This would allow even greater leeway for GCRs to focus on efficiency issues. • While this reads more like a blueprint for a Canadian Citistate, it is representative of the issues that GCRs have to deal with. Smaller communities would not have the territorial scope and professional expertise. • These areas would represent a change both in structures and processes, the latter because many of the roles would be concurrent. • Arguably, the Charter is more of a bargaining tool than an action plan

24. IV: Provincial-Municipal RelationsB: Accessing Provincial Taxes • Canada has an enviable record of provincial piggy-backing on federal taxes. The time may well be ripe to transfer this tradition to the municipal-provincial level. Presumably this is what the Harcourt Report had in mind. • The obvious candidates are the PIT and the PST (after conversion to a GST format). • Initially the cities should settle for fixed shares of a broad-based tax shared on a derivation basis. After all, it took nearly forty years for the provinces to get rate-and-bracket freedom under the PIT. Tax rate flexibility can come later. • Where the cities could have some initial rate flexibility is in terms of the transfer of the set (probably subset) of more-narrowly-based taxes that are currently available to Seattle (shown earlier in Figures 2A and 2B).

25. IV: Provincial-Municipal RelationsB: Accessing Provincial Taxes, continued • These tax transfers need not represent additional city revenues because their role will also be a) to reduce reliance on the property tax especially for the growing set of services that have little relation to property, and b) to replace the 40% of city revenues (in the GTA) that currently come from provincial grants, conditional or otherwise. Over time, however, they will grow. • In the meantime, there is no need for the cities to wait for a handout. They have many untapped/underutilized revenue sources—much greater reliance on user fees/benefit taxation, proper pricing of local public services, etc. Moreover, as Joe Berridge has noted: Toronto is one of the few cities in the world that still operates these services [electricity, water, garbage, transit] as mainline businesses. The ability to use the potential of the very substantial asset values and cash flows of these municipal businesses is perhaps the only financial option to provide the city-region with what it is unlikely to be obtainable from other sources: its own pool of reinvestment capital … with remarkable leverage potential, both from public-sector pension funds and from private sector institutions.

26. V: Toward a New Municipal RealityA: Democracy and Accountability • While cities historically may be places where democracy flourished, the Canadian reality is very different • Understandably citizens will not become excited about local democracy and accountability as long as cities are at best administrative units. Much better to join with the city fathers and engage in rent-seeking from the provinces • However, with political autonomy, enhanced responsibility and increased fiscal flexibility, the stage will be set for much more meaningful citizen engagement and more accountability, in a word, more democracy. • And along with the implementation of the principle of subsidiarity will be greater asymmetry as different cities flex their creative forces in their own ways, i.e., much the same as is happening at the provincial level. This will be efficiency enhancing in both static and dynamic terms.

27. V: Toward a New Municipal RealityB: Only for GCRs? • The above analysis was cast in terms of GCRs. But many of the features of the analysis would surely benefit all cities. • Moreover, it may be difficult to privilege GCRs relative to other cities. • In Apples and Oranges? Urban Size and the Municipal-Provincial Relationship, the Canada West Foundation proposes a “best-of-both-worlds” solution: Create a regime for GCRs but then link it to an opt-in framework that is flexible enough to enable those municipalities that desire greater autonomy or new fiscal tools in certain areas to adopt them, but a framework that does not require smaller communities to abandon the security of their current arrangements.

28. VI: Cities, Energy, NAFTA, and the $C A: Opportunities • With the high energy prices and now the likelihood of carbon pricing, long-distance off-shoring/outsourcing will decline and supply chains will be curtailed. • Arguably this means that the US market will become larger for Canadian exporters, and also for foreign firms to see Canada as a location to sell into NAFTA economic space. • And our linkages to the US economy will become even closer if and when we join the US in a C&T system. • Canadian cities could do very well in this environment • Ontario’s Prosperity Institute views the Windsor-Quebec City corridor as having the potential to rival any mega-region anywhere. This is a great opportunity for Montreal and Toronto alike. But for this to occur, two conditions are necessary. …..

29. VI: Cities, Energy, NAFTA, and the $C B: Challenges • The first challenge is to ensure that the border remains open, accommodative and secure. But for the US, Homeland Security trumps trade. Mulroney’s comment on the 10th anniversary of NAFTA is apt: “For our internal borders to remain free, our external borders must be secure.” In other words, if we accommodate the US away from the border, they are more likely to accommodate us at the border. • The second in more controversial: Canada is not an optimal currency area. Our currency area is too small to accommodate at the same time a global resource/energy powerhouse (including Quebec) and a world class manufacturing nation (also including Quebec). The loonie is a Petro currency and we are victims of the famous Dutch Disease -- $C appreciation clobbers manufacturing

30. VI: Cities, Energy, NAFTA, and the $C B: Challenges 2 • The Dutch Disease and exchange rate uncertainty generally will create havoc for Montreal as a GCR, and it will deter foreigners from using Canada as a site for accessing NAFTA. • My solution is a fixed rate in the short term and eventually a North American Monetary Union, anchored on the greenback. But this proposal has no supporters. Apparently, Canadians are happy to effectively tie the price of our currency (the most important price in the economy) to the price of oil (the most volatile price on the globe). • This degree of volatility and uncertainty cannot make economic sense for a manufacturing/services exporting nation. • I had hoped that Ontario would be on side, since it has the most to lose from another spell of the Dutch Disease. But I was wrong. • I am now pinning my hopes on Quebec because it is nicely balanced between being at the same time a manufacturing and a resources/energy province, and it will want both to prosper. • In the long run, a common NA currency would play a key role in ensuring that Montreal will achieve its potential as a GCR.