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Calgary C-Train's Light Rail System leaves the city centre on Friday, January 28, 2010.

It may well be the defining dilemma of local politics in this grinding post-recession period: While rapidly growing North American cities confront vast infrastructure needs, municipal budgets are increasingly stretched to the breaking point. For many urban politicians, this decade's economic doldrums have posed a stark choice – slash municipal services or find novel ways to raise revenue.

The ultimate decision reveals much about how local leaders view the long-term city-building mandate of municipal government.

Toronto Mayor Rob Ford, for example, has long insisted his city has far more revenue than it needs. Having frozen or cancelled several major infrastructure projects in the past year, he's now determined to rescind a $300-million-a-year land transfer tax. He has already persuaded council to cut $100-million in other revenues since taking office last fall, including a $64-million vehicle registration fee.

By contrast, Calgary Mayor Naheed Nenshi is pushing for a national transit strategy because he argues that property taxes will never be sufficient to cover large-scale urban infrastructure, such as new LRT lines.

And that's not the only solution on offer in Western Canada's economic capital. Transformation Calgary, a new civic advocacy group founded by George Brookman, a former president of the Calgary Stampede, and Brian Felesky, vice-chair of Credit Suisse Canada, want Ottawa and Alberta to allow the City of Calgary to add 1 per cent to the GST levied inside the city limits, with proceeds – $350-million per year – used to build and operate new arts and recreational facilities.

The clincher is that Calgarians would have to approve the measure, and they'd also have the right to cancel it if they're not pleased with the progress.

Such dedicated funds and local approval are key, observed Canada West Foundation senior policy analyst Casey Vander Ploeg, author of The Penny Tax, an April, 2011, study that makes the case for their solution. "When you earmark revenue, the value proposition becomes much clearer."

Yet new taxes, rarely a popular proposition, would seem to be an especially challenging proposition at a time when the markets are falling and talk of recession fills the airwaves. Not surprisingly, Calgary editorialists don't care for the idea, nor, indeed, does Mr. Ford.

Still, Mr. Vander Ploeg notes that Canada's overall tax burden has dropped sharply since the mid-1990s, from 37 per cent of GDP to 31 per cent now. Mr. Felesky adds that when Prime Minister Stephen Harper cut two points off the GST, he invited the provinces to make use of that additional tax room.

"That opportunity was expressly opened up by the federal government," he said. "We'll do it on a local basis."

Following the money: Where cities get their cash

Local sales tax

In 2006, voters in Fargo, North Dakota, (pop. 105,000) gave their blessing to a time-limited 1-per-cent local sales tax, with the proceeds earmarked for infrastructure projects, such as new roads, flood barriers and sewage treatment facilities. The tax expires in 2029. Fargo may be isolated but it's hardly alone. Across the United States, cities and counties collect sales taxes to help fund municipal activities. Rates vary from a few basis points to over 7 per cent, and many must be approved through local ballot initiatives, according to a recent study by the Canada West Foundation. About two-thirds of these proposals pass muster with voters. Overall, U.S. cities derive about an eighth of their income from sales taxes. In Canada, the figure is just 1.4 per cent.

Local income tax

Struggling to fill a $600-million-plus fiscal pothole, Chicago Mayor Rahm Emmanuel last week shot down speculation that he might look to a local income tax. But such measures are hardly unusual. For decades, New York City has levied a personal income tax of 2.9 to 3.6 per cent. According to the U.S. Tax Foundation, dozens of other U.S. municipalities and counties – including San Francisco, Philadelphia, Denver and Baltimore – also collect income tax.

Grants and transfers

After a long hiatus, the Toronto Transit Commission is now building a new subway line thanks in part to the fact that governments in Ottawa and Queen's Park were running surpluses in the past decade and had money to spend on big-ticket projects. Across Canada, in fact, 25 per cent of all municipal revenues come from such federal and provincial transfers which include such things as the federal gas tax and infrastructure funds), making cities vulnerable to shifts in political and fiscal priorities. Transfers plummeted in the 1990s but bounced back somewhat until the recession. These days, some provinces are more generous than others. Saskatchewan transfers a percentage of the provincial sales tax to cities – $216-million last year – while Manitoba hands over $242-million. An Ontario law allows municipalities to use any provincial budgetary surpluses for infrastructure, but that windfall disappeared after 2009.

Parking taxes

The City of Montreal last year introduced a levy on off-street parking spaces, which is expected to bring in $20-million. Greater Vancouver also has a 21-per-cent tax on commercial parking fees. In both cases, the proceeds fund transit. Outside Canada, many large cities in the United States, Europe and Australia tax parking directly or indirectly, says Victoria Transport Policy Institute analyst Todd Litman. "Such reforms can provide double dividends by raising revenues and helping to achieve other planning objectives such as reducing traffic congestion, air pollution and sprawl."

Targeted levies

Toronto City Council in 2007 approved a pair of new levies – a land transfer tax and a vehicle registration tax – after a lengthy debate during which other proposed revenues, such as sales taxes on liquor and cigarettes, were rejected due to a concern about unintended consequences (for example, black market sales). Other cities, however, routinely impose various targeted levies, such as a hotel occupancy charge, meant to help defray municipal expenses associated with high visitor traffic. Others include billboard taxes, lottery or gaming levies and various corporate fees.