Over the past ten years, federal, provincial, and municipal governments have begun to invest much more heavily in Canada’s stock of urban public infrastructure. While this suggests a measure of progress in addressing the nation’s urban infrastructure liability, the fact remains that the funding gap reported by Canadian cities—the shortfall between needed infrastructure investments and the funding dollars available—remains very large. What is more, there is evidence to suggest that the gap continues to grow.
A review of current capital budgets of the seven largest western Canadian cities shows that the combined infrastructure need over the next ten years is reported at $63.0 billion, of which only $21.5 billion in funding is in place. This leaves a shortfall of $41.5 billion, or almost $4.2 billion annually. The great bulk of this funding shortfall is in areas traditionally funded through taxation, particularly transportation and parks, recreation, social, community, and cultural infrastructure.
The ability of western Canada’s cities to meet these huge infrastructure requirements is hampered by a singular and heavy reliance on the property tax. Real per capita growth in property tax revenue is well below growth in tax revenues seen federally and provincially, and property tax revenues relative to disposable personal incomes and GDP are at some of the lowest levels ever seen. The attendant lack of diversity in tax tools constitutes a serious disadvantage when it comes to infrastructure investment. To help place our cities on a more firm fiscal foundation, reforms are needed that include the introduction of new tax tools.
From this need, the idea of a small locally levied sales tax has emerged. This fresh, creative, and innovative option would enable western Canadian cities to get a better handle on their infrastructure funding challenges by broadening and enhancing the current set of municipal tax levers with a more economically robust tax source. Viewed simply, the tax would amount to a small, 1% value-added local sales tax that is piggybacked off the federal GST. Because the tax rate is often fixed and capped at one cent on each dollar subjected to the tax, many prefer to use a more colloquial term for the levy—the “penny tax.”
At first glance, the idea may seem to be more than a little problematic politically. But, much hinges on the features incorporated into a local penny tax—features that would build the most visible, transparent, and accountable tax in Canada. There is no reason to suspect that public support cannot be found for a penny tax that were voter-approved, with the tax rate capped, the revenues earmarked clearly for critical infrastructure investments, and any excess revenues rebated back to taxpayers in the form of property tax reductions. Support would also be strengthened if the tax were to automatically sunset after a prescribed period of time and governments were to provide voters and taxpayers with regular, comprehensive, and audited reporting on the usage of the tax revenue.
The critical rationale for supporting a penny tax option over other financial tools lies in the larger fiscal and policy context. Fiscally, a more diverse municipal tax system that included a local penny tax would result in better revenue growth for cities. Unlike the property tax, which attaches only to one aspect of the economy—real estate—a small local sales tax casts its net across the full range of goods and services in the local economy. A penny tax will allow cities to capture the effects of inflation and to retain a small but important portion of the economic growth occurring within the local region, and direct it to the infrastructure needed to accommodate that growth.
Demographically, a penny tax would enable cities to better cope with the rapid pace of urbanization and compensate for current patterns of population growth. Urban population growth—much of which now occurs not in the large “anchor” cities of our city-regions but in “metro-adjacent” municipalities just outside—meets up with a lack of diversity in municipal tax tools to press city finances. Without diversity, the burden of sustaining municipal services and the underlying infrastructure lands squarely on local property taxpayers as opposed to those who use the services and infrastructure. A small local penny tax helps ensure that all those coming into a city to use its services and infrastructure also help to pay for that infrastructure.
Economically, a small 1% penny tax has a minimal impact on tax competitiveness, particularly if the expenditures are dedicated to critical urban infrastructure, which is just as important to overall economic competitiveness as a competitive tax regime. Broad based value-added sales taxes are also among the most economically benign taxes possible.
Politically, because the penny tax is a local sales tax initiated and levied through local action it is unencumbered by top-down imposition—a particularly attractive option for cities. If local municipal interests in a certain infrastructure funding issue exceed the larger federal and provincial commitment, then the local interest can be given the tax tools and resources to push ahead.
The implementation of a penny tax would face some difficult challenges that require further exploration. First, linking the tax to the GST base raise some issues of administrative feasibility and the provinces would have to amend the enabling legislation that governs municipalities. Second, do sales taxes employed locally run the risk of producing economic distortions by shifting retail sales activity and consumer behaviour from one region to another. Third, now may not be the best time for a new municipal tax initiative—the economy that is restricting the fiscal capacity of the federal and provincial government to adequately fund infrastructure is the same economy that may not now need another tax imposed upon it.
While problematic, this report shows that these challenges are not at all insurmountable. A penny tax is conceptually possible, strategically desirable, administratively feasible and is timely innovation that can do much to boost our civic infrastructure investments.