A deficit in the City of Toronto's Operating and Capital Budget has been identified by the City Manager in 2016. To amend the deficit, five revenue tools have been proposed in order to balance the budget. The five revenue tools include (Property Taxes, Commercial Taxes, Hotel and Short Term Accommodation Taxes, Highway Taxes, and a tax on Alcohol). These five revenue tools will be analyzed for their value, costs, effects on groups and potential political effects. Post analyse the most appropriate mix of revenue tools will be proposed to amend the City of Toronto's Operating and Capital Budgets. This will ensure, the Operating budget will not consistently remain in deficit, and that enough funds are garnered to begin making headway in the many City Transportation projects part of the Capital budget.
Residential Property Taxes
Who Bears the Cost?
The property tax is imposed on individuals who own property that is used for occupation and not conducting business, because of this, home owners bear the cost of the residential property tax. According to Statistics Canada, the gap between home ownership rates and income groups has been increasing. “Home ownership rates vary with income level. Over the last 35 years, home ownership rates have declined among Canada's lowest-income group, whereas the rate has increased among higher-income groups” (Statistics Canada).
The average cost to own a single detached home in the city of Toronto ranges from $750 000 to just over 1 million, these property prices make it less likely for lower income groups to own residential property. The owners of homes in Toronto primarily fall under the middle income or higher income garnering category. Therefore, more middle income and higher income groups bear the cost of an increased residential property tax.
Progressive vs Regressive
Property tax is inherently regressive in respect to income. This is because the property tax takes a larger percentage of income from lower income households and individuals than any other income group. Despite a larger amount of middle income and higher income groups paying the residential property tax, it is the lower income home owner who is most negatively affected by an increased residential property tax.
Costs to Implement
Increasing residential property taxes will not cost the city of Toronto any revenue. Property taxes have consistently been the primary source of the city’s revenue, and the city already has already established the economic planning and framework needed to increase the taxes. This is evident as residential property taxes has been increased numerous times before, without any large expense to the city.
The residential property tax is a highly visible tax due to its transparency. Individuals who pay the property tax are made aware of the amount they must pay via billing. Rise in property taxes are also always covered by the media, giving the issue of rising property taxes more wide scale coverage. The increase of residential property taxes can be potentially met with resistance from the public who do not wish to see it rise.
The city of Toronto does maintain the authority to raise residential property taxes and has most recently approved a 2% increase in property taxes as of this year February.
Commercial Property Taxes
Commercial properties are properties used to conduct business activities. People who own businesses will be bearing the cost of the commercial property tax. The balance between the residential property tax and commercial property tax is swayed in the favor of residents as opposed to business owners. Businesses are currently paying more property tax than residents for their homes. According to the Real Property Association of Canada, “Toronto, Vancouver, and Montreal continue to post the highest commercial to residential tax ratios, all in excess of 4:1”.
The commercial property tax is similar to the residential property tax as it is also regressive, meaning lower income groups pay a larger amount of their income in taxes than higher income groups. In this case, small business owners are affected most heavily by this tax because it takes a larger proportion of their revenue than larger businesses.
Cost to Implement
It does not cost the city of Toronto anything to increase commercial property taxes.
Potential Political Effects
Increasing the commercial property tax may be met with refute from landlords and small time business owners who already feel they are paying too much in commercial property tax to maintain their business.
Commercial Property taxes are decided on by the municipal level of government, therefore the City of Toronto does have the authority to increase the tax.
Pay By Distance Tolls
The introduction of pay by distance tolls has been a topic heavily discussed by City Council during recent executive meetings. Pay by distance tolls will charge users of the Gardiner Expressway and Don Valley Parkway by their distance travelled as opposed to a flat toll rate. The groups who will bear the cost of this revenue tool are resident commuters, commercial truck drivers, and individuals from other municipalities who are commuting to Toronto. According to Mayor John Tory, the goal of implementing tolls is not only to garner much needed revenue but to have commuters from other municipalities pay their way for utilizing Toronto’s expressway and parkway.
Pay by distance tolls are regressive because it disproportionately affects commuters of lower incomes who cannot afford to pay the tax so frequently. In proportion to benefits received people pay more.
The implementation of tolls reduces aggregate efficiency because it encourages people who cannot afford to pay the toll so frequently to find alternate routes to get to their destination or perhaps not go at all. This puts restrictions on the lower income residents of Toronto, and is akin to privatization, in which the tolls enable people with higher income access to certain locations freely, yet restricts access to those who cannot afford to pay the toll.
It will cost the City of Toronto money to create toll booths on the Gardiner and Don Valley Parkway. However, the cost to create the toll booths will be significantly less than the revenue the toll booths will accumulate for the city to use toward rebuilding infrastructure and transportation projects.
The proposal of placing tolls on the Gardiner Expressway and Don Valley Parkway has been a topic publicly covered by the media. Therefore political effects can be negative because the issue is so transparent. The public can react negatively to the implementation of tolls, which can lead to more complaints being submitted to City Council and commuters using other routes and causing congestion in residential backstreets.
Under the City of Toronto Act, 2006. The city has the right to tolls its own highways. However to do so, they must submit a proposal to provincial government and obtain permission. On this matter, The City of Toronto Act, 2006 specifically states:
Restriction re toll highways
41. The City does not have the power to designate, operate and maintain a highway as a toll highway until a regulation is made under section 116 that applies to the proposed toll highway.
Section 116 of the act lists seven regulations of which the Provincial Government can choose to have the City adhere to in order to implement tolls on their highways. One of these regulations, is to consult with the Ministry of Municipal Affairs and Housing regarding the designation of tolls on the highway.
Hotel and Short Term Accommodation Tax
People staying in hotels or renting short term accommodations will be the ones bearing the cost of this tax, if implemented. Groups this may include are international tourists, individuals travelling for business, and people visiting Toronto from neighbouring municipalities. This revenue tool is great in the sense that it may garner more revenue from foreign groups as opposed to domestic citizens.
Taxation on hotel accommodations are a regressive tax because it is akin to a user fee. Groups staying in the hotel accommodation may be charged the same tax, however, the tax will disproportionately affect lower income groups more.
The introduction of a hotel and short term accommodation tax would not alter aggregate efficiency.
It does not cost the City of Toronto any monetary funds to implement this tax.
If a hotel tax is implemented, the city may experience criticisms from the public and other officials who think creating new taxes acts a diversion to the real issue of raising property taxes. Toronto statistically has the lowest property tax rate in the province amongst other cities.
Currently the city of Toronto does not have the authority to implement a hotel tax under the City of Toronto Act. In order to obtain the authority, the city would have to submit a proposal to the provincial government and have it approved.
This chart lists the possible annual outcome of implementing various revenue tools, the hotel tax is included.
The consumer bears the cost of a tax on alcohol. The alcohol tax acts similarly to a sales tax in which the effects on lower income groups would be greater as they make less income and alcohol would then become less affordable for them as opposed to higher income groups.
An alcohol tax is regressive, and people pay more money in proportion to the benefits received.
An alcohol tax may reduce aggregate efficiency because lower income groups may not be willing to purchase alcohol as much due to the price thus potentially decreasing economic revenue.
The administrative cost to implement an alcohol tax is approximately 18 million. This estimated figure is based on the average cost to implement a sales tax. This figure is based off a study conducted by the City of Toronto, analyzing possible revenue tools.
The city could potentially have a hard time reaching an agreement with alcohol retailers like the Beer store, LCBO and small retail businesses. According to a revenue options study conducted by the city, the Canada Revenue Agency offers a solution to the issue of collecting an alcohol tax from large retailers. The study specifically states, “The Canada Revenue Agency (“CRA”) could potentially be engaged through a service agreement to collect the sales tax on behalf of the City for an annual fee. This would significantly reduce implementation timelines and ongoing administrative costs” (City of Toronto, Revenue Options Study 2016).
Under the City of Toronto Act, the city has the right to place a tax on alcohol.
Based upon the analysis of the five revenue options, I have decided which revenue tools would be most appropriate to balance the City of Toronto’s operating budget and the 33 billion dollar capital program.
Balancing the Operating Budget
To balance the Operating budget, both residential and commercial property taxes should be increased. Currently Toronto pays the least amount of property taxes in Ontario, yet is the largest and most populated city. The City of Toronto has a lot of expenses and our property taxes are too low to accommodate them sufficiently. Argyle Media Group, a reputable media company, surveyed approximated 300 respondents on the topic of the City of Toronto’s financial health.
Despite the sample size being very small, 61% of respondents believed that property taxes were too low. Respondents were quoted saying, “Property taxes are not high enough, it’s immature and reckless” as well as “City is always putting unfounded projects forward, refuses to increase property taxes for political reasons even though that’s obviously the best option for increasing revenue”. Due to the small size and nature of the survey, it cannot acts as a sole reflection of the citizens of Toronto’s views on property taxes, however, it provides insight into the possible idea that citizens do not mind paying more property taxes if it benefit the city’s financial health. Property taxes have consistently made up the majority of Toronto’s operating budget, therefore, increasing the largest revenue source is the most appropriate tax recommendation.
Pie graph depicting where the where the City draws revenue from. As seen above the largest section of the the graph, shaded green is property taxes.
Balancing the Capital Budget
To balance the city’s long term capital budget, the appropriate revenue tools would be the implementation of a toll tax on highways and an alcohol tax. The city’s capital budget mainly consists of transportation and infrastructural initiatives, in which the city plans to enhance the TTC, Smart Track, Gardiner Expressway Rehabilitation Project and Port Lands Flood Protection. Placing a toll tax on the Gardiner and Don Valley Parkway can garner a potential annual income of 89 to 397 million, and a tax on alcohol has the potential to garner 21-151 million annually. These statistics were derived from the City of Toronto’s Revenue Options Study, 2016 and therefore are accurate estimates. Cumulatively the revenue from both of these options can provide the necessary extra funds to propel the capital budget initiatives forward. Furthermore, because the capital budget initiatives are heavily focused on transportation, it seems fair to garner the revenue needed to enhance Toronto’s transport systems from the people whom utilize it, via tolling on the highway.
Implementing a Hotel and Short term accommodation tax has been rejected because the City currently does not have the right to implement such a tax under the City of Toronto Act.