Tools for Fair Taxation Columbia Institute

1. Tools for Fair TaxationColumbia Institute Webinar 29 October 2013

2. Issue outline • Statistical background – what the data tell us about local government finance in Canada • Fairness in the context of other tax objectives • Property taxes as a source of local government revenue • Alternatives to property taxation • Market-like charges and fees • Benefit / cost capture taxes • Fuel taxation; development charges;land transfer taxes • General tax bases • Sales, payroll, personal income, corporate income

11. The data say: • Government outlays in general have been shrinking as a share of GDP in Canada • Taxation has been shrinking as a share of GDP at all three levels of government • By far the largest decline has been Federal • Own-source revenue has been shrinking as share of GDP at all three levels • Again, Federal decline is most dramatic • Non-tax own-source revenue has been stable at local and provincial level; has dropped substantially at the Federal level • Transfer payments both Federal-provincial and Provincial-local were cut substantially in the late 1990s but have partially recovered since • Local property tax revenue has declined as a share of GDP

12. And … • Responsibility for public capital has been shifting steadily from the Federal Government to Provincial Governments and from Provincial Governments to Local Governments • Bond and Debenture debt of local government as a share of GDP has been dropping steadily since 1976 • Decline from 7% of GDP to 3% of GDP

13. Tax fairness in perspective • Tax system goals • Paying for public services • Influencing economic behaviour • Redistribution • A broader perspective on fairness • Taxes in isolation or the fiscal bargain • Income-related vs. regressive / progressive • Intergenerational fairness – especially for capital expenditures • Does fairness depend on what you’re spending the money on?

14. Property tax in local finance • What makes property tax a good local revenue source? • Related to services to property • Virtually impossible to avoid • Supports differences in public services levels between jurisdictions • Virtually no short-term boundary issues • Longer-term boundary issues will tend to be capitalized in property values

15. What’s wrong with the property tax? • Residential property tax is broadly related to income and/or wealth, but is also strongly related to age and family size – it is essentially a consumption tax on housing • [Note that same issues do not pertain to the commercial and industrial property tax – they really should be seen as two taxes, in the same way that corporate and personal income taxes are seen as separate taxes.]

16. What does that mean for tax policy? • What you are using the tax to pay for matters. • Property tax works best when it funds community-based and community-enhancing services and services to property • Education, health and social services in particular raise issues of appropriateness • Does not deal at all effectively with cross-boundary issues • Services used by non-residents

17. Revenue raising opportunities for local governments • Property taxes • Directly and indirectly, provincial governments rely heavily on property taxes to fund provincial public services • Direct reliance – property taxes continue to fund elementary and secondary education even after provincial assumption of responsibility for funding • “Cost sharing” of provincially determined services • Across Canada, provincial governments’ direct and indirect use of property and property-related tax bases accounts for 45% of provincial

19. Use-related charges: • User charges • Market-based or market-related charges for use • Concerns about distributional effect • Concerns about exclusionary effect • Deal effectively with trans-border issues • Impact on behaviour • Adjust pricing structures to encourage use • Attach prices to activities that give rise to costs • User charges for broad public services tend to be highly regressive – the level of expenditure tends not to vary with income, so the impact relative to income goes down as income goes up

20. Who does (or pays for) what? • By far the largest available source of additional revenue for local governments is the property tax -- getting provincial governments out of the business of local property taxation • “Who does what?” exercises have been based on a private-market concept of accountability that ignores both fairness and delivery effectiveness issues.

21. Some findings on distribution: • Illustrative distributional analyses done as a contribution to the transit funding debate • Illustrates key issues with user charges • Provides for a reality check on our common understandings of what is “good” (progressive) and “bad” when the total fiscal bargain is considered.

27. Winston Churchill would have said it best if he had ever talked about property taxes • To paraphrase • ‘The property tax is the worst source of revenue for local governments, except for all the others.