In the tradition of the fur traders of the Northwest Company, the Federation of Canadian Municipalities is holding their board meeting “Rendezvous” at the head of the Great Lakes in Thunder Bay from March 5th to 8th. It was difficult task trying to find an agenda on their website but no doubt they will be discussing the shortage of infrastructure funding as well as how their needs are not being addressed. Municipalities in Canada have been busy rebutting the perception that they are doing well given increases in property tax rates and increases in grant revenues.
The Canadian Federation of Independent Business has borrowed from the marketing efforts of Scotiabank with a report titled Municipalities are Richer Than They Think. The CFIB report argues that municipalities are overstating their woes when they claim that cities only receive eight cents out of every tax dollar collected given that they also receive grants from the provinces and federal governments, which they do not include in that figure. The CFIB says their share of Canadian government revenues once adjusted for this is closer to 15 percent. They point out that the total real per capita revenues for municipalities have grown substantially over time and their real operating spending has grown much faster than population.
The municipalities are naturally incensed and have responded that:
“The report neglects to mention that transfers from other governments can be taken away at any time and often require matching funds from local governments for projects that may or may not match local priorities. Our communities simply cannot go on asking local taxpayers to pick up the bill, especially when user fees and our property tax system are especially hard on families, seniors, and other middle and low income Canadians. Beneath all the CFIB’s spin, nothing in its report changes the simple fact that only 8 cents of the taxes Canadians pay are collected by local governments, while the other 92 cents are collected by federal, provincial, and territorial government…The fact is that federal and provincial governments have a monopoly on all the taxes that grow with our economy, including income and sales taxes, while local governments are forced to rely on a 19th century property tax system to pay for local services and any costs other governments choose to offload.”
Well, the municipalities are right in that the Federal and Provincial governments have a dominant position within the Canadian tax system but that is a result of the Canadian constitution, which makes them creatures of the provinces. Making them an equal partner with the other two levels will require constitutional change. Simply handing over new tax powers from the provinces at their discretion in a sense will be no different from the current situation whereby the transfers “can be taken away at any time…” Of course, engaging in constitutional change is a lot of work and the municipalities would simply prefer more money.
Should they get more money? Well, lets take a look at the revenue picture. The accompanying figure (Fig 1) plots the total percentage revenue growth for federal, provincial-territorial and local governments over the period 1995 to 2012. As well, the revenues for the municipal and provincial fiscal tiers are divided into both own source and transfer revenues. These revenue numbers are from the Federal Fiscal Reference Tables. As well, for comparison purposes there are growth rates for Canadian population, prices (the CPI) and nominal GDP over the same period.
When one looks at the three levels of government, revenues have grown the most at the provincial-territorial level, followed by the local tier and then the federal government. As well, in 2012, total local government revenues made up 21 percent of total government revenues in Canada – that is an even bigger number than the one used by the CFIB. Remember, local governments do not just get revenues from property taxes and intergovernmental grants. They also have a wide range of user fees. However, municipal own source revenue is about 12 percent of total Canadian government own source revenues - another number which this time is between those used by the municipalities and the CFIB.
It should be noted that spending net of transfers to other levels of government has followed a similar pattern to revenues. Between 1995 and 2012, federal spending (net of grants to other tiers of government) rose 44 percent while provincial government spending (net of transfers to local tiers) rose 114 percent and local spending rose 99 percent. The balance of the federation has definitely tilted in favor of the provincial-local tier of government. Together, they account for 70 percent of spending net of grants to other tiers.
So why are municipalities complaining? Take a look at Figure 2. After a long run of increases, local government revenue growth is slowing. Since 2010, total nominal grant revenues for local governments have declined while own source revenue growth has slowed. Overall, total local government revenues in Canada have fallen from 148.9 billion dollars in 2010 to 146.7 billion in 2012. Yet, over the period 2010 to 2012, federal government revenues have grown from 231.9 to 253.4 billion dollars while total provincial-territorial revenues have grown from 348.9 to 372.2 billion dollars. Interestingly, while total provincial-territorial revenue is up, their own grant revenue is also down from 75 billion in 2010 to 72.6 billion in 2012. It may be that despite their overall revenue increases, the provinces are passing their own transfer reductions disproportionately down to the municipalities. On the other hand, if its a choice between reducing grants to muncipalities or health care - well, municipalities are going to get it.
So, while I think that municipalities could be doing more to getting their costs and spending under control, the fact is that the last three years have seen a revenue squeeze for local governments in Canada when it comes to their transfers. It hurts more given the expenditure increases that have been based on the healthy grant increases of the period prior to 2010.