by Zack Taylor, Assistant Professor, Dept. of Political Science, Western University
Torontonians have heard a lot about their city’s finances in the past 18 years since amalgamation. Every year, as the operating budget is debated and ultimately brought into balance, councillors and residents argue over the reasonableness of property tax increases and necessity of spending increases and cuts.
The amalgamated city’s first mayor, Mel Lastman (1997–2003), famously promised a three-year freeze on residential property tax increases. Starved of revenue at birth, the City was repeatedly bailed out by the province. In his second term, Lastman was forced to bring in large tax increases.
His successor, David Miller (2003–2010), staked everything on the premise that the City didn’t have a spending problem; in fact to meet its obligations it needed to spend more. Rather, he argued, the City had a revenue problem. And so over his tenure he brought in modest property tax increases and introduced new sources of revenue, most notably the Municipal Land Transfer Tax. He also increased reliance on user fees by shifting solid waste management off the property tax and onto a user-pay bin system in 2008. Although substantial efficiencies were found every year, he also resorted to balancing the operating budget with unsustainable sources: a mix of ad hoc provincial grants and raids on reserve funds.
In 2010, Torontonians elected Rob Ford as mayor. Ford argued that the City's real problem was not access to revenue, but spending. His first budget froze residential property taxes. Later budgets brought in property tax increases, boosted user fees, and found efficiencies by cutting or reducing many services. In the end he was compelled to increase property taxes and bring in a special property tax levy to pay for the Scarborough Subway.
Four years later, John Tory was elected mayor, promising a moderate fiscal policy: property tax increases would occur at the rate of inflation and fiscal rectitude would rule the day. And so in 2016 we are looking at a proposed residential property tax increase of between two and three per cent, plus some kind of a general surtax or special levy for major capital transit projects.
Almost 20 years after amalgamation, now is a good time to take stock of the City’s finances. I’m going to focus on a very basic question: If we adjust for inflation and population growth, by how much have the overall budget and property taxes really increased? Is the Toronto story one of profligate spenders and runaway budget growth, or is government simply keeping pace with growth and declining purchasing power?
Let’s get ‘real’: Adjusting for inflation
First, a bit of terminology. Economists define inflation as an increase in price levels over time. In essence, the purchasing power of money decreases as prices increase. Statistics Canada regularly reports on this, publishing a Consumer Price Index that expresses the value of money in any given year in relation to a reference year. A nominal price is expressed in current dollars; a real price is expressed in constant dollars. Put another way, real prices have been deflated, or adjusted for inflation, so that they represent constant purchasing power over time.
The inflation rate I will use to ‘deflate’ the budget is Statistics Canada’s monthly Consumer Price Index for the Toronto region for January of each year. This includes change in the cost of food, fuel, and shelter prices, and reflects the fact that Toronto’s shelter costs have increased at a higher rate than the national average. Inflation averaged 2% over the 1998–2016 period.
StatCan’s Toronto region annual inflation rates, 1998–2016.
Now let’s look at the overall size of the gross operating budget from 1998 to 2016, comparing the nominal and real amounts. The ‘real’ prices are expressed in constant 1998 dollars. Nominally the budget increased from $5.6 billion to over $10 billion. That looks like a lot—indeed, it is an increase of 79% over 18 years, or an average of 3.3% per year.
Take out inflation and we see a different picture. In constant 1998 dollars, the budget increased during the Miller mayoralty to a little under $7 billion and plateaued during the Ford and Tory years. The ‘real’ increase is relatively modest: 27% over 18 years, or an annual average of 1.3%. Once we adjust for inflation we see that Tory’s tight fiscal policy represents a continuation of Ford’s rather than a return to Miller’s expansionary policy.
The City of Toronto’s gross operating budget, expressed in nominal and real terms. (Real = 1998 dollars.)
Adjusting property tax revenue for inflation
So much for the gross budget. Battling over the percentage increase in the residential property tax is most visible part of the annual budget process, so let’s now consider how residential property tax revenues have changed over time.
Residential tax increases, 1998–2016. Note that post-2013 the property tax increases include the 0.5% Special Scarborough Subway Levy.
Lastman and Ford both started their tenures promising relief to residential taxpayers. Lastman was forced to bring in hefty increases in his second term to fill the gap. Miller’s and Tory’s budgets have included residential property tax increases in the 2–4% range (including the Special Scarborough Subway Levy introduced in 2013). Nominally, total property tax collected (from both residential and nonresidential property) increased from $2.6 billion to $3.99 billion, or by 49%.
So what happens if we adjust total property tax revenue collected for inflation? Something quite interesting, actually. In 1998 dollars, total property tax revenues increased by only $190 million over the 18 years—a cumulative increase of just 6%. Now, you may ask, how could the gross operating budget increase by 29% in real terms, while property tax revenue increased by only 6%? The answer is simple: over time, the City has reduced its reliance on the property tax by tapping other revenues, including user fees and the much maligned Land Transfer Tax.
Total property tax revenue collected by the City of Toronto, expressed in nominal and real terms. (Real = 1998 dollars.)
Adjusting for a growing population
Now let’s make a further adjustment. The overall cost of delivering many services presumably increases as the population grows. To get a true sense of how much government and property tax revenue have grown since amalgamation, we must adjust not only for inflation, but for population growth. Based on Census and Ontario Ministry of Finance estimates, we know that Toronto's population increased from about 2.5 million in 1998 to approximately 2.87 million in 2016—an increase of about 14%.
Estimated annual population of the City of Toronto, 1998–2016. Interpolated from Census population counts and Ontario Ministry of Finance estimates.
So what happens if we adjust the gross budget and property tax revenue totals to account for population growth? I have done this by dividing each figure by an estimate of the City’s population in each year. This yields per capita amounts that are adjusted for both inflation (i.e., expressed in 1998 dollars) and for population growth. The result certainly belies the rhetoric. On a per capita basis and adjusted for inflation, property tax revenue has remained the same throughout the 18-year period. In fact, property tax revenue per capita is marginally less now than it was in 1998. In interpreting this chart, it is important to remember that solid waste management was transferred from the property tax-supported operating budget to the rate-supported budget in 2008. This reduced pressure to raise property taxes while taking away an expense that would otherwise be in the gross operating budget. The operating budget grew despite the shift of solid waste to user fees. In 2015, user fee funding of solid waste management totalled $272 million, or the equivalent of a 10% residential property tax increase.
The gross operating budget and total property tax revenues collected per capita, adjusted for inflation and population growth (1998 dollars)
While total property tax collected has remained flat on a per capita basis, the gross operating budget has grown. After holding steady in the $2,200 per capita range in the Lastman era, it climbed to about $2,700 by the end of Miller’s second term. Under Ford’s watch it decreased to $2,500, where it more or less remains today. Without breaking out expenditures by category, however, we cannot assess where the increases and decreases occurred.
So what should we conclude from this? First, City residents need to be more informed when they observe the public jousting over the operating budget. The property tax must be raised each and every year just to keep up with inflation and population growth. A “zero” property tax increase means that the City ends up with less money to spend in real terms, forcing it to do the same (and often more, given population growth) with less resources.
Second, populist rhetoric about runaway property tax increases simply isn’t true. On a per capita, inflation-adjusted basis, the City has consistently raised about the same amount of property tax year over year since amalgamation.
Third, it would appear that in both real and real per capita terms the amount raised and spent by the megacity increased during the Miller years, and that this has been partially rolled back under Ford and Tory. How and why this occurred is beyond the scope of what can be discussed here. Hidden within crude totals are shifts due to changing economic conditions and social needs, and also alterations to provincial mandates and grant formulas. Also, as the new City faced complex and costly challenges, higher expenditures in the mid-to-late 2000s were to some degree compensation for artificially low spending levels during the Lastman years.
Most importantly, this points to the need for a more holistic understanding of the City’s budget. We must transcend the narrow politics of residential property tax increases and think about the budget as a global funding model to achieve public objectives. Getting that mix right in relation to the distribution of burdens and benefits created by revenues and expenditures is the key task. Continuing to frame other revenue sources simply as ways to avoid raising the residential property tax only distracts public officials and the general public from what should be the basic goal: determining how the City can most efficiently mobilize public resources—of all kinds—to do the most good.
Dr. Zack Taylor is an Assistant Professor of Political Science at Western University. He teaches courses on local government, urban politics, and local public finance.
Caveats and sources
Some important caveats should be made. Is it reasonable to express total property tax revenue on a per capita basis when a large proportion of property tax is paid by non-residential property owners? A perhaps unsatisfactory answer is that isolating revenue from residential taxpayers would be difficult, and probably cannot be done with publicly available information. But there are other good reasons for taking this shortcut. As it is residents—people—who live, work, and vote in this city, the amount of money spent per resident is not irrelevant to them. To the extent that employees of Toronto-based firms live in the city, business taxes are partially passed on to them in the form of foregone wages. There is also a policy relationship between residential and non-residential tax rate increases: for over a decade, commercial and industrial rate increases have been pegged to residential rate increases.
One could also criticize the adjustment processes. Why, for example, should food and shelter costs be included in the CPI deflator? My answer is straightforward: Even if you try other options—national CPI, or CPI minus shelter—the overall trends are about the same. What is captured here is the amount of property tax collected in relation to residents’ purchasing power. Are annual population estimates interpolated from semi-decennial census counts likely to be accurate? One can certainly debate census undercount and other sources of error, but these are the only consistent population counts available.
The budget numbers are taken from summary documents for each year posted on the City’s website. The 2016 values are taken from the proposed budget tabled in December 2015. Note that the property tax increase percentages shown are for the residential property class only. The value of the “blended” property tax increase, which includes the lower increases for the nonresidential and multi-residential classes, would be lower. Only the residential increase is discussed because it is the most politically contentious. The Toronto-region CPI deflator is taken from Statistics Canada’s public CANSIM database, Table 326-0020. The annual population figures are interpolated from the census population counts for 1996, 2001, 2006, and 2011, and the Ontario Ministry of Finance’s population estimate for 2016.
Last updated February 2, 2016.