Column – Financial Post – "Fiscal Imbalance", Cities, Toronto

January 6, 2006 by · 1 Comment 

Consumption tax cure for revenue ‘gap’


Gap-osis has become an all too common and embarrassing syndrome. A government in one jurisdiction allows its expenditures to exceed its revenues, then blames its deficit on “under-funding” by a senior level of government. The asking government claims there is a “gap” between the total tax paid by people who live within its jurisdiction and the amount ultimately spent there. Asserting that it is the “engine that drives” the economy, the asking government demands its “fair share” of tax revenues.

Canada’s gap-osis poster boy has most certainly become Ontario Premier Dalton McGuinty who — with the politically correct approval of the province’s Progressive Conservative and NDP parties — has been demanding a share of federal tax revenues to make up for a $23-billion “gap.”

However, gap-osis is also running amok at the municipal level in Toronto. City councillors, welfare advocates, the Toronto Board of Trade: None are able (i.e., willing) to escape a politically advantageous gap-osis affliction. In addition to more autonomy for Toronto council, they have all been demanding provincial cash to close a gap between the provincial taxes paid by “Torontonians” (by which they mean everyone living in or around the City of Toronto) and the provincial funds spent in Toronto (by which they mean only the city).

What is more, the city’s demands are actually more justifiable than the province’s when one considers the narrowness of the city’s tax base and the breadth of the province’s.

As a result, with the province too strapped to continue shelling out provincial revenues to municipalities that are spending more than they take in, McGuinty has been put in an embarrassing situation: He cannot very well argue that diverting provincial revenues to municipalities is wrong while arguing that diverting federal revenues to Ontario is right.

McGuinty’s problem has unmistakably influenced the province’s newly introduced Bill 53, which facilitates governance and financing reforms for the City of Toronto. The bill is purportedly the result of consultations and research, commenced in 2004, to ensure a fiscally sustainable and accountable governance of the province’s largest city. Yet it has long been obvious that the most effective way to make a government spend in a responsible, sustainable and accountable way is to ensure that it pays for those expenditures with its own revenues, and raises those revenues responsibly, sustainably and accountably.

Since the election of 2003, my party has proposed a set of municipal finance reforms that acknowledge the effectiveness of that approach. Specifically, we propose that municipal property taxes be eliminated and replaced, in each municipality, with a consumption tax. In particular, we propose that each municipality be permitted to impose, within its boundaries, a municipal premium collected as part of the Provincial Income Tax (PST). Municipal taxes, hence municipal spending, would be kept low by market forces. Each municipality would determine its own premium with knowledge that, if the premium is raised too high, customers and businesses will be encouraged to do their shopping and selling out of town.

Similar proposals have more recently found their way into recommendations by non-partisan entities, such as the Toronto Board of Trade. Yet, despite the broad appeal of these proposed reforms, the McGuinty government has decided to proceed with legislation that aims to resolve its own political dilemma by exposing taxpayers to the possibility of even more irresponsible, unsustainable and unaccountable taxing and spending by the government of Toronto.

By titling Bill 53 the Stronger City of Toronto for a Stronger Ontario Act, 2005, McGuinty has made a transparent attempt to bolster his bid for federal cash. He is suggesting that he walks his Ottawa talk about a “stronger province of Ontario for a stronger Canada.” However, the bill does little to improve the lot of taxpayers. It does not remedy municipal reliance on property taxes, which are both economically unsound and unjust. It does not impose any checks or balances on excessive municipal taxation or imprudent municipal spending.

Rather, the bill functions primarily to reduce the likelihood of further demands by Toronto for provincial revenue. Once Bill 53 is passed, any Toronto demands for provincial revenues can be met with a response from McGuinty that the city does not need provincial funds. He will argue that, unlike other municipalities, Toronto now wields some of the province’s taxing power, such that the city now has a broad enough tax base to satisfy its own budgetary needs.

Given that McGuinty wants federal cash even though the province’s taxation powers are already quite broad, it will be a hypocritical response. However, that response may function to quiet the city’s council. With Toronto quieted, McGuinty will be able to continue playing the gap card with Ottawa without Toronto calling him on his hypocrisy.

Paul McKeever is the leader of the
Freedom Party of Ontario.