Tomb

It was a sight to stir the heart of any community activist and all who raise their voice to make governments accountable. A cadre of 700 taxpayers with their homemade slogan T-shirts stormed city hall during last month’s budget open house. Yet the tax revolt failed to stir much of anything except some coffee creamer, because the property tax system turns the annual city budget rite into good theatre with potential tax revolters and penitent politicians centre stage.

Alberta’s municipal finance system is to blame. It allows Calgary to muddle through as long as the province fills its begging bowl each year, but leaves the city simultaneously crumbling and sprawling and always failing to meet the potential of a wealthy, complex urban society.

Like most venerable institutions that have gone wrong, many must share the blame for the problems of municipal finances and property taxes. Municipal leaders have hard decisions to make and property tax payers have hard facts to accept before provincial governments can be asked to change the property tax system and give municipalities other ways to raise money, such as — wait for it — a sales tax.

All of the changes our municipal finances need exist everywhere but Canada, New Zealand and Australia. Economists and academics have discussed them at length. Even as the time for action is sliding past, change is unlikely. Changing a tax system inspires a soul-sucking fear of a voter backlash in all politicians.

Calgary is about to restart the economic and political cycle that brought us to the point where city council raised taxes in the middle of an economic boom. In the early ’90s, after a time of growth, moderate tax increases and stable provincial grant revenue, Alberta’s economy tanked. Calgary’s provincial grants disappeared as Alberta cut its budget. City council bowed to the tune of the times by refusing to increase property taxes significantly despite reduced revenues and squeezing the budget to pay down debt. Calgary was behind in building the infrastructure and services needed to deal with the last boom when the building all but stopped.

Today, money is pouring into the city’s capital budget from Calgary’s share of the federal and provincial governments’ fuel taxes and the provincial Municipal Sustainability Initiative — a two-year-old provincial grant program that delivered $143 million in 2008 and promises more next year.

Calgary can build things with the windfalls from the federal and provincial governments. Calgary cannot use the money to catch up on the other costs of growth — more police, firefighters, bus drivers, paint for bridges and crash barriers, and more lawn mowers, to name a few. This is why your property taxes went up this year and will continue to go up for many years.

Even as Calgary starts to catch up on its infrastructure at last, the Canadian economy, and possibly Alberta’s, is tanking. The transfer payment begging bowl may go empty again. The Municipal Sustainability Initiative is the province’s current answer to every municipal request for more funding or tax powers. The Initiative’s money, while promised for 10 years, still must be approved in the annual provincial budget. When times get tough for the province, cutting or ending municipal grants would be a tempting salve for any future provincial budget deficits.

The Canada West Foundation has spent years delving into the finances of Western Canada’s biggest cities to see what is right and what needs to be fixed. The Foundation’s most recent report, Problematic Property Tax, looks at property tax and whether it is up to the job of building and maintaining our cities.

The report lays out a case for changes in the municipal financial system, even as its author, Casey Vander Ploeg, admits it’s a tough sell. “The problem is everyone tends to take a short-term look at it. If it doesn’t solve short-term problems, they’re not interested in them.”

Few experts suggest that property taxes be eliminated. Property taxes are valuable as a stable tax base for municipalities, and they create a connection between home ownership and the services that enhance home value. Consider the value of a Mount Royal mansion fronted by a muddy track, with no drinking water and next to an open sewer trench.

The first issue is what caused our recent proto-tax-revolt. Just like families, the provincial and federal governments estimate what revenue their income and sales taxes will bring in and then make a budget accordingly without changing their tax rates every year. When the economy grows, more money will roll in to help pay for growing services.

Cities do the opposite. They write budgets and then set a tax rate that when applied to the property assessments will produce enough revenue to pay for expenses. Imagine if your family could make up a budget and then simply dip into a bank account to cover all the expenses. Despite annual taxpayer grumbling, the city does keep a lid on things because of what comes next. Council has an open house, 700 angry people show up, council craps its collective pants, and does a hatchet job on the budget to reduce the tax rate.

As Vander Ploeg puts it, “For the city of Calgary to increase the revenue produced by property tax, they have to make a political decision and intentionally and deliberately increase the tax rate, and that is tantamount to political suicide.” Fear always trumps temptation. The result is decades of tax increases too small to cover the big ticket items.

Two other issues with property taxes point to the need to expand the types of taxes municipalities can use. Not all service users pay taxes. All the people who visit, commute into Calgary or come to access services not available in their own, smaller centre use Calgary’s services and infrastructure for free. As a regional centre, this can add up for Calgary.

Not all homes are taxed equally. If identical homes and properties existed in Sunnyside and Tuscany, the Sunnyside owner would pay more taxes even though the Sunnyside home costs Calgary less to service. The market assessments consider property in central neighbourhoods to be more valuable, so taxes are higher. Calgary’s tax base lags behind its growth because the taxes paid by new neighbourhoods do not cover the costs of servicing far-flung subdivisions.

There are a number of issues that need to be addressed to make property taxes fairer and more effective. The key being a business’s property tax rate is three-and-a-half times higher than a homeowner’s rate, even though it places far less demand on a city’s infrastructure. Unlike income or sales taxes, a business has to pay property taxes regardless of whether it is flourishing or going broke.

The answers to these municipal finance problems and inequities as recommended by the Canada West Foundation and other experts range from the improbable to the downright impossible. The Alberta government is not interested in giving municipalities more financial powers. The province does not trust its municipal puppets to manage their money any more than it does school boards and health boards. To make cities work better, all of the ideas listed below should be phased in over time in a balanced fashion that keeps any property tax increases reasonable.

The Alberta and federal fuel tax transfers should be made permanent with nothing more than the broad objectives that the money be used for municipal infrastructure – roads, transit, water or sewer. Alberta transfers five cents per litre on all the fuel delivered to bulk and retail gas stations in Calgary for use on roads and transit systems. Canada sets aside $1 billion, $2 billion next year, from its $10-per-litre gas tax for cleaner municipal infrastructure across the country. The federal money is turned over to the provinces and then handed out according to agreements between the individual provinces and Ottawa.

The transfers give Calgary a source of revenue that grows as the city grows and allow commuting suburbanites to help contribute more and sooner for city services. The Alberta fuel transfer should be made permanent, as the federal government has promised to do. The federal transfer should also be a simple transfer based on the fuel deliveries to each municipality; although the constitution requires it still be sent through the provincial middleman.

Most economists and urban policy types agree that before municipalities look to the provinces to solve their financial woes, they can be part of the solution by increasing home owner property taxes. Tax revolters will storm city hall, but the facts show that Calgarians have it good when it comes to property taxes. Economic growth and the small increases in property tax rates have caused property taxes to decline compared to the economy and household incomes. Vander Ploeg’s research finds, “Calgarians were paying much more property taxes relative to their income in 1990 than they are today.”

All the experts agree on removing or reducing the property tax inequity between homeowners and businesses. If there are dissenters out there, they are well hidden. If the next recommendation is implemented, some of the lost revenue will be made up by other taxes that are fairer to businesses.

And now, the best for last. Alberta should give municipalities the power to levy a sales tax of up to two per cent on all goods and services sold in their municipality. The city will not have to change the tax rate every time it wants to expand its infrastructure and services to meet the city’s needs. Visitors to the city will also be making a contribution for the services they use when they spend money in the city.

It will not fly in Alberta’s current political environment, but sales taxes are used by municipalities all over the world, including in the land of the free, to give cities flexibility in paying for the utilities and services essential to everyday life.

In the end, there is a positive for our maligned property tax. City Council will be glad of its property tax base if Calgary’s economy is heading for rocky times. Just as property taxes do not grow as fast as an economy, they do not crumble in tough times either. Let us hope the same can be said for our overused roads for the next decade.

Hamish MacAulay is a governance consultant for small organizations when he is not explaining to his elderly neighbours that property taxes and user fees for recycling and garbage pickup are not highway robbery.