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Toronto City Hall on April 3.Fred Lum/the Globe and Mail

It’s the big bang of Toronto city hall’s financial dreams: a local sales tax that could raise hundreds of millions of dollars annually and go a long way toward tackling a massive fiscal hole.

Municipal sales taxes are common in many foreign cities but not in Canada, and a successful rollout may pave the way for other cash-strapped Canadian municipalities to follow suit. But a sales tax also carries risks. And before the idea could even become a reality in Toronto, the Ontario government would have to give its permission.

Premier Doug Ford has for years argued that Toronto’s problem is spending too much, not raising too little money. A spokeswoman for Mr. Ford did not answer the question last week of whether the province was open to considering such a tax, instead issuing a statement that spoke generally about keeping costs down for people.

Still, Toronto city staff recently included the sales-tax possibility in their analysis of the city’s long-term financial picture, which identified a $46.5-billion funding gap over the next 10 years. City council will debate the staff report, and the possibility of asking the province for the power to levy a sales tax, at its next meeting on Wednesday.

Although Toronto’s budget hole is bigger, many Canadian municipalities are struggling to pay their bills as responsibilities grow even while revenue sources remain unchanged.

No Canadian city has its own sales tax. Municipalities in Quebec are rare in getting a portion of provincial sales-tax revenues and Vancouver City Council earlier this year called for study into the possibility of the province similarly transferring some of its sales-tax revenue to the city.

At its annual conference in May, the Federation of Canadian Municipalities passed a resolution calling for a process by which “new direct taxation powers” for cities can be assessed.

Budget woes are not solely a problem of the biggest cities. Burlington, west of Toronto, is home to about 205,000 people and faces an infrastructure backlog that Mayor Marianne Meed Ward said has tripled to $500-million in recent years.

“The time has come for a new municipal funding framework,” she said, adding that she was agnostic on the specific mechanism through which more money could flow to cities.

“We can’t continue to run modern cities on the property-tax base, and fund all of the things that we’re asked to fund through the property-tax base. There has to be a different formula, and that is both a nationwide and a provincewide discussion right now.”

In Toronto, according to staff analysis, a sales tax could raise about $800-million annually. Alongside a municipal income tax, it is one of the big-ticket possibilities floated by staff. But city manager Paul Johnson said in a late-August presentation to Mayor Olivia Chow’s executive committee that a sales tax was the more immediately preferable of the two.

“Our recommendation to you ... is to focus on sales tax because of the framework that would allow us to move in that direction faster,” he said. “But it is not to take income tax off the table.”

Municipal staff have left open whether there should be a specific-to-Toronto tax or whether the city should get a slice of the provincial tax revenue.

Toronto currently has no revenue tool linked to growth, which helps explain the incongruity of a city that has boomed so long being so broke.

Coun. and budget chief Shelley Carroll likes to illustrate the problem using the example of pop star Taylor Swift’s six concert dates planned for late next year. When fans pour into Toronto, little of their spending will boost the coffers of city hall, which may actually lose money on the events because of increased policing and transportation costs.

“It’s going to be a six-day bonanza … we’re not going to get dime one,” she said.

Toronto is considering new taxes to take on increasing fiscal pressure

Ms. Carroll argues that a sales tax could not only capture economic growth but also help replenish city reserve funds during good times, giving it a more robust buffer when downturns occur. Critics counter that new revenue will vanish into an operating budget that has grown 45 per cent over the past five years.

Other potential complications include making the city dependent on a fluctuating revenue source. A number of U.S. cities that have municipal sales taxes have faced additional financial struggles since the pandemic began, with fewer commuters coming into the downtown and spending correspondingly down.

A sales tax could also risk encouraging shoppers to take their business elsewhere. For that reason, Enid Slack of the University of Toronto’s Institute on Municipal Finance and Governance suggests such a tax be as geographically wide as possible.

“We need to think about this in terms of a regional tax rather than a city tax,” she said.

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