Do Local Governments Need Alternate Sources of Tax Revenue? An Assessment of the Options for Alberta Cities

35 Pages Posted: 18 Oct 2014

See all articles by Melville McMillan

Melville McMillan

University of Alberta

Bev Dahlby

University of Calgary

Date Written: September 16, 2014

Abstract

Somehow, in recent years, advocates for increased spending on services and particularly infrastructure in Canadian cities have succeeded in promulgating the idea within public policy circles that municipal governments are unreasonably constrained in their revenue-generating abilities. The general crux of their case argues that property taxes, the most substantial source of municipalities’ own-source revenue, are a poor solution, and that cities should be given the power to levy sales taxes, or income taxes. In fact, closer analysis shows that property taxes are the best available solution for municipalities to raise funds for services and infrastructure, presuming governments can make the necessary case to citizens to justify greater spending. However, in the interests of improving government accountability, there is logic in the provincial government vacating the property tax space, funding education from general revenues and instead reducing municipal transfers, while leaving the extra tax room for municipalities to use.

One powerful charge against property taxes has been that they are unresponsive to fast-growing demands on a city’s obligations: that in a place like Alberta, where frequent economic and population booms can be robust and rapid, the expansion of the property tax base lags sorely behind the strains of a growing city, where a sales or income tax would not. But this is simply untrue: in Calgary, arguably the most boom-prone city in the country, the property tax base has grown 70 per cent faster than personal income in the last 19 years; between 1994 and 2012, while nominal personal income per capita doubled in the city, the per capita total equalized property assessment grew 3.5 times. And, property tax revenues have kept pace with Alberta’s economic growth. Between 1994 and 2011, personal income per person in Alberta increased 2.17 times, but per capita property tax increased 2.73 times in the province overall.

It is also untrue that cities in Alberta are today shouldering a larger burden — for social services, for instance — than they have historically, another argument used by those advocating for a wider array of municipal taxing powers. Relative to income, municipal expenditures are, in today’s era, as low as they were in the 1950s. The portion of revenues that Alberta’s cities have been spending on social welfare, health and non-school education is actually markedly less than it was in the 1950s and 1960s.

One typical criticism of municipalities’ reliance on property taxes that does hold up to some scrutiny is that they can be regressive — that is, property taxes can rise even for homeowners who may not be seeing commensurate increases in their incomes. But this is less of an argument against property tax than it is an argument in favour of making special recommendations to ease the tax burden on low-income homeowners, something Alberta has already taken steps toward doing, and can continue to improve upon.

A likely reason that some consider property taxes to be insufficient for raising municipal revenue is that the rate-setting process is highly transparent and political: homeowners see and feel annual hikes quite keenly, and governments are publicly held to account for their taxing decisions. Yet local sales taxes have the potential to create more economic distortions — cross-border shopping and migration — while administrating income and sales taxes at the municipal level could be unwieldy and costly. There is considerable room, given the continual and relatively low rates of Alberta’s property taxes, for municipalities to raise more funds by simply raising property tax rates. Local governments will, of course, have to make a persuasive case to taxpayers that any tax hikes are justified, but that — rather than utilizing revenue tools that are less transparent — is precisely how responsible governments should function.

Keywords: Tax revenue, municipal governments, alberta government, property taxes, income tax, sales tax

JEL Classification: H71, H7, H70

Suggested Citation

McMillan, Melville and Dahlby, Bev, Do Local Governments Need Alternate Sources of Tax Revenue? An Assessment of the Options for Alberta Cities (September 16, 2014). SPP Research Paper No. 07.26. Available at SSRN: https://ssrn.com/abstract=2510925

Melville McMillan

University of Alberta ( email )

Edmonton, Alberta
Canada

Bev Dahlby (Contact Author)

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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