While municipal finance issues have received relatively little attention in Canada over the past 50 years, recent reductions in provincial grants, realignment of provincial-municipal funding responsibilities and growing emphasis on amalgamating municipalities have altered the fiscal environment in which municipalities now operate. This has emerged at the same time as cities and regions have become increasingly important in the competitive global economy. To enhance this competitiveness and to permit cities to develop and grow in a healthy and vibrant manner, provincial and municipal governments will have to pay more attention to efficiency and accountability arguments in designing and implementing municipal finance instruments including property taxes, user fees and access to new tax sources.

For property taxes, this should include uniform assessment (same percentage of market value) of all commercial, industrial and residential properties. As well, differential property tax rates should be used to reflect variations in the cost of servicing properties that differ in type or location. Changes should also be made in the property tax treatment of residential vis-a-vis commercial/industrial properties. Commercial/industrial properties are taxed at higher rates than residential properties, yet the available evidence suggests that the latter receive the majority of local benefits. More closely aligning property taxes with services received could reduce the number of distortions and inequities and improve the commercial/ industrial sector's ability to be more competitive.

User fees could also benefit from changes in their structure and use. Ultimately, the objective in setting fees should be the achievement of a clear link between benefits received and fees paid. If correctly set, user fees are efficient and accountable because consumers can determine whether the benefits from the service are worth the cost of the service. Fairness is achieved because those who consume public services pay for them, just as someone who benefits from purchasing milk or a movie ticket pays for it. Concern about the tax burden on lower income individuals is more equitably and efficiently handled through income transfers from the provincial government or through local social assistance programs targeted to specific groups than though setting user fees at a level below the cost of the service or not using them at all. User fees are relatively easy to implement for water and sewer services, public transit, solid waste collection and disposal. Economic arguments also exist for extending user fees to public recreation and libraries and could be made for some policing and fire protection services although the political reality of extending them to the latter is remote.

In addition, solid economic arguments exist for the implementation of provincial legislation permitting municipalities to introduce new taxes as a supplement to property taxes. Access to a municipal fuel tax (piggybacked onto the provincial fuel tax) makes considerable economic and political sense, especially in large urbanized areas with severe traffic congestion. Not only would it be relatively efficient and fair, it would likely be politically acceptable if revenues were used to fund local transit and transportation expenditures. Similarly, a local sales tax (piggybacked onto the existing provincial tax) with rates set locally would satisfy the criteria for approximating a benefit based approach to municipal taxation. A municipal income tax, on the other hand, has less appeal especially where municipalities are not required to fund major income distributional services and services where it is important to have national or provincial standards.

While the economic arguments for the above changes make considerable sense, these suggestions have never received much political support. In part, this may be attributed to the provinces' reluctance to relinquish control over municipalities and an unwillingness to permit municipalities to have access to additional tax sources currently in the provincial domain. Failure to reverse the unfavourable treatment of non-residential versus residential properties may be a direct result of the fact that people vote, businesses don't. The highly visible nature of the residential property tax has served as a significant deterrent against increasing its rate and lowering the rate on non-residential properties. Refusal to introduce efficiency considerations into the pricing structure of many user fees or to expand their use has been defended on the grounds that user fees are regressive. Of course, this claim is no more relevant than the claim that milk prices and movie tickets are regressive.

Given past political resistance, is there any reason to believe that this will change? While the answer is uncertain, the probability of securing these changes may now be greater than ever. The growing role of cities and regions in the global economy and the recent trend towards greater reliance on own-source revenues and larger municipalities have increased the importance of provinces and municipalities working together in redesigning existing municipal revenue sources and in giving municipalities access to new tax sources.

Harry Kitchen is a Trent University economics professor who specializes in municipal government finance and structure. This is a summary of a paper he wrote for the C. D. Howe Institute. The full version is available at www.cdhowe.org