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Benjamin Dachis is a senior policy analyst at the C.D. Howe Institute.


Across Canada, 2015 is shaping up as a key year for cities looking for new ways to raise money, through taxing powers or other revenue tools. But what powers should cities have? What principles should guide decisions? One practical principle is that the people who use a municipal service should be the people who pay for it.

Vancouver-area cities tried, and failed, to seek the power to levy an extra sales tax to finance public transit. Now they must look to new ideas to deal with economy-stifling congestion. The Alberta government plans to introduce major changes to municipal taxation powers by the fall. Ontario is looking at whether cities have the right mix of taxation powers; the province is looking at the powers both for Toronto, which has had special taxation powers since 2007, and Ontario's other 443 municipal governments.

Provincial governments, in the main, decide which tax powers municipalities have. Municipal councils then decide what to do with any new powers they gain. And provincial governments could learn from recent attempts to expand taxing powers.

Governments in Canada have fallen into the tax debate trap epitomized by the phrase, "Don't tax you, don't tax me, tax that man behind the tree!" It is politically attractive to not ding too many voters at once, but that approach raises problems. First, taxes that are paid by a few people don't raise much money. Second, those taxes that few people seem to pay may have unintended consequences.

Toronto's experience with its land transfer tax, introduced in 2008, is a cautionary tale about this tax trap. The political appeal of the land transfer tax was that existing residents wouldn't have to pay it. However, existing homeowners felt the economic effect. Home buyers tend to have a set budget, and higher taxes meant less money for the seller. When the land transfer tax came in, the immediate result was a drop in single-family home prices in Toronto relative to nearby suburbs. As well, sales of low-cost, single-family homes in Toronto have fallen more than higher-priced homes. What people pay in land transfer taxes is part of many closing costs, along with a down payment, and matters a lot for those buying at the lower end of the market.

A similar problem applies to taxes such as development charges. Development charges that a business notionally pays result in home buyers spending more on a house. The key lesson is that taxes that seem to target businesses or few people may end up harming others.

The results of the transit referendum in Vancouver show the other end of the spectrum. Widely applied taxes, such as a harmonized sales tax, are often the best means to finance social services, especially for senior governments. But pity the politician who tries to raise that idea.

Cities should focus on providing services directly to users – and make them pay accordingly. That means cities should have broader authority to charge road tolls. As vehicles become more fuel-efficient, fuel taxes will not cover the cost of building and maintaining roads. Tolls that increase at rush hour and drop when there is little demand could cover costs and curb congestion at the same time. Such tolls could work in cities across the country.

Metro Vancouver mayors committed to introducing road tolls before the recent referendum. Calgary commissioned a major report suggesting that the city could introduce tolls on a single lane of its major highway; such a toll would give drivers the choice of paying for congestion-free travel if the benefit were worth the cost. Toronto can already levy road tolls. If the Ontario government expanded that power to all cities, it would allow for regionwide road tolls.

This year is likely to go down as the year your provincial government will give your municipal government new ways to tax you. But those governments should only allow taxes that are linked to benefits for the people who pay them.

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