Municipal public services – including libraries, transit, water and sanitation services, and community centers – help ensure everyone can have a better quality of life, regardless of how much money they earn. In fact, by making services widely accessible to everyone, cities and towns play a critical role in building fair and sustainable communities.
However, many of the revenue tools that municipalities use to fund these vital services are considered regressive. Lower- and middle-income households pay a higher share of their income in these taxes and fees than those with high incomes. Municipalities need greater access to progressive revenue sources that shift costs onto those who can most afford to pay.
- Did you know: A tax or fee is considered “regressive” when lower-income earners pay a larger share of their income than those with higher incomes.
How are municipalities financed?
The largest sources of municipal revenue are property taxes, user fees, and transfers from other levels of government. Municipalities also raise smaller amounts of revenue from other sources, including permits, fines, and development charges.
Unlike other levels of government and most businesses, municipalities aren’t allowed to run deficits to cover operating expenses. Municipalities can borrow money for capital costs, such as building a community center, which helps better distribute the cost among current and future residents in the community. However, municipal borrowing capacity is limited by the provinces.
A municipality’s ability to use a revenue tool depends on provincial rules, which vary from one province to the next. For example, all municipalities can levy basic property taxes, but not all can levy land transfer or other taxes.
Ultimately, Canada’s cities and towns would benefit from reducing their reliance on property taxes and user fees, and increasing access to more progressive revenue sources, as other municipalities around the world have done.
- Did you know: Most municipalities around the world have reduced their reliance on property taxes and user fees.
Property tax
The largest single source of municipal revenues is the property tax. Property taxes are regressive, as lower- and middle-income families spend a higher proportion of their income on property tax than higher-income families. Canada has some of highest rates of property tax in the world, while most European and American cities rely much more on income and sales tax.
Income and sales tax revenues relied on by senior levels of government automatically increase with a growing economy, but property tax revenues don’t rise when property values go up. Municipalities have to adjust property tax rates annually if they want the revenues to keep pace with costs triggered by inflation and economic growth.
- Did you know: Property tax revenues don’t rise when property values go up.
User fees
User fees are the second-largest source of revenues generated by Canadian municipalities, and are charged for goods and services such as public transit, water, parking, and recreation. Municipalities facing political pressure to keep property taxes low sometimes increase user fees as an alternative to taxation. This can have unintended consequences, and ignores the wider benefits of public services to the community as a whole.
Take the case of transit. Hiking fares to avoid tax increases hurts lower-income individuals more – they are more likely to ride transit and will spend a larger percentage of their income using the service than those with higher incomes. Everyone reaps the environmental and economic benefits that come from having an affordable and reliable transit system, whether they use it or not.
Some municipalities try to structure property taxes and user fees to make them less regressive, recognizing that increased inequality harms their community. They subsidize services to keep fees down, or provide rebates and relief programs to those with low or fixed incomes.
- Did you know: Some municipalities structure property taxes and user fees to make them less regressive.
Grants and transfers
Grants and transfers from the federal and provincial governments are another important source of revenue, but can vary significantly from province to province. This revenue can be very progressive if the funds are generated by income taxes, which are the most fair and equitable form of taxation in Canada. Most grants and transfers serve specific purposes, and are often only available for capital projects. Provinces may transfer funds for operating expenses when they download delivery of a service to a municipality, but usually the transfer only covers part of the cost.
“Progressive taxation – not simply more taxation – is the key to the financial success of the provincial and municipal orders of government.” (Municipalities Newfoundland and Labrador, 2014)
The next section reviews nine fiscal tools. We look at them in terms of how they are used, where they are available, their relative fairness, and the impact they have on making local finances more sustainable.
Fairness matters
Canadian cities and towns are facing a growing gap between rich and poor that threatens the health and equality of our communities. Extensive research shows that as income inequality increases, the social, physical, and economic well-being of everyone in society declines. Municipalities that want to build fair and sustainable communities should ask the following questions when considering revenue and budgeting options:
Who pays more?
If lower-income individuals pay a greater proportion of their earnings than those with higher incomes, the revenue source is considered regressive. Progressive taxes, fees, and charges are based on ability to pay, ensuring that those who can afford to pay more, and helping to balance income inequality.
Who benefits?
Investing in services to benefit everyone, or targeting benefits to vulnerable individuals can help strengthen communities. Take recreation programs: offering programs with no or low fees will help low-income earners participate, but also benefits others by supporting communities that are healthier and more inclusive.
What are the unintended consequences?
Some options can have a complex set of consequences, both positive and negative. Casinos are a good example. Although they can generate revenue and increase local tourism, they can hurt small businesses and add to social and addiction problems. This strains the capacity and budgets of municipal health and social services. It’s critically important to give thoughtful consideration to all the impacts of a revenue source.