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5. PROPOSAL FOR A MUNICIPAL INCOME TAX STUDY PROPOSITION D’ÉTUDE D’IMPÔT
MUNICIPAL SUR LE REVENU |
No Committee Recommendation.
Aucune
recommandation du Comité.
DOCUMENTATION
1.
Councillor
Cullen’s report dated 3 October 2010 (ACS2010-CMR-CSE-0023).
2.
Extract of Draft Minute dated 5 October 2010.
Corporate Services
and Economic Development Committee
Comité des services
organisationnels et du développement économique
and Council / et au
Conseil
3 October 2010 / le 3 octobre 2010
Submitted by/Soumis par : Councillor / Conseiller Alex Cullen, Quartier Bay
Ward
Contact
Person/Personne ressource : Alex Cullen
Councillor,
Bay Ward / Conseiller, quartier Baie
(613)
580-2477, alex.cullen@ottawa.ca
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Ref N°: ACS2010-CMR-CSE-0023 |
SUBJECT:
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OBJET :
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That Corporate Services and Economic Development Committee recommend to City Council that a study be undertaken to determine if a municipal income tax, as an offset to the property tax, is to the City's and to tax payers' advantage.
Que le Comité des
services organisationnels et du développement économique recommande au Conseil
que l’on entreprenne une étude afin de déterminer si un impôt municipal sur le
revenu, en tant que compensation pour l’impôt foncier, serait avantageux pour
la Ville et les contribuables.
Income taxes have previously been used as a source of municipal government revenue, developed by municipalities over a century ago as property taxes were considered to be regressive (i.e. not based on the ability to pay). The development of income tax as a provincial and federal tax followed the example set by municipalities - in the mid-1930's municipalities in Canada gained more revenue from income taxes than did the provincial governments and federal government. Municipalities in Canada lost their ability to tax incomes during World War II, when the federal government and the provincial government signed and implemented tax-sharing agreements in order to finance the war effort. However, there remain examples of municipal income taxation in the United States and in Europe.
In 1993 Ottawa-Carleton's Regional Council established The Ottawa-Carleton Fair Tax Working Group (chaired by Regional Councillor Alex Cullen) to prepare a submission to the Ontario Fair Tax Commission, on property tax reforms. Part of the work done by that Task Force was to examine the effects of transferring part of property taxation to income taxation in Ottawa-Carleton. The result of this work showed a more "progressive" (i.e. based on ability to pay) effect on residents in Ottawa than the current property taxation system e.g. lower income families paid less tax, higher income families paid more (the transfer point was for family incomes of $40,000-$50,000 in 1990 dollars).
In 2010 a group of interested citizens concerned about social equity and the limitations of property taxation prepared a proposal (see Document 1) for Committee and Council's consideration to study the issue of local municipal taxation. Councillor Alex Cullen is bringing forward that proposal for Committee and Council's consideration.
The proposal is that Ottawa City Council undertake a study to determine if a municipal income tax, as an offset to the property tax, would be to the City and to taxpayers’ advantage.
The reasons for proposing a study are twofold. The first is address increasing public concern over the inefficiency of the existing property tax system to cover the cost of a wide range of municipal services. Ottawa faces major service backlogs in such areas as waste water purification, sewer maintenance, and upkeep of social housing. The second is to offset the heavy reliance on the property tax system since it does not reflect the ability of many individuals to pay.
A study would allow City Council, in consultation with residents and businesses, to examine alternatives to the current system of taxation based on property. It would examine whether an income tax could serve to eliminate or reduce property taxes. It would also examine whether an income tax could be fairer for residents and businesses than the current tax system. If the results of the study show that an income tax would be a useful tool for the City, the City could then seek provincial authority to levy one.
No public consultation has been held in the development of this proposal. However, if adopted, public consultation would form part of the study process.
Although there is no legal/risk management impediment to implementing the recommendation in the report, as noted in the body of the report, currently there is no legislative authority for any municipality in Canada to impose a municipal income tax on its residents. Should Council ultimately approve the recommendation in the report and a study on the matter prove to be advantageous to the City and its taxpayers, legislative authority would need to be obtained to impose such a tax. City Clerk and Solicitor Department staff cannot at this time predict how long such negotiations with the Province and/or Federal Government might take and whether the City would ultimately be successful in obtaining the necessary legislative authority.
None at present.
Should Council adopt this recommendation, staff would report to Committee and Council on the cost implications regarding the conduct of this study. Funds are currently not available within the City’s budget to undertake such a study. The costs of conducting such a study would need to be considered as part of the 2011 budget.
Document 1 – Background Information titled “Would Ottawa benefit from an income tax?”
Should City Council adopt this recommendation, staff would report to Corporate Services and Economic Development Committee on the costs of conducting such a study, to be considered as part of the 2011 budget.
Document 1
WOULD OTTAWA BENEFIT FROM AN
INCOME TAX?
Need for a Study
We propose that Ottawa City Council undertake a study to determine if a
municipal income tax, as an offset to the property tax, is to the city and to
tax payers’ advantage.
Our reasons for proposing a study are twofold. The first is address increasing public concern over the inefficiency of the
existing property tax system to cover the cost of a wide range of municipal
services. Ottawa faces major service backlogs in such areas as waste
water purification, sewer maintenance, and upkeep of social housing. The second is to offset the heavy reliance on the property
tax system since it does not reflect the ability of many individuals to pay.
A study would allow City Council, in consultation with residents and
businesses, to examine alternatives to the current system of taxation based on
property. It would examine whether an income tax could serve to eliminate or
reduce property taxes. It would also examine whether an income tax could be
fairer for residents and businesses than the current tax system. If the results
of the study show that an income tax would be a useful tool for the City, the
City could then seek provincial authority to levy one.
Background
The search for alternative funding of municipalities, including the
income tax, is related to an increasing concern about the wide range of
programs and services which local governments are required to administer due to
the downloading of social and educational services by senior levels of
government, the reshuffling of provincial-municipal responsibilities and
amalgamations.
The efficiency advantage of a tax on income, over a property tax, is
that it is easier to levy and decide deductions. The advantage, in terms of
fairness, is that not all people consume municipal services at the same rate
and therefore a tax on income is a more equitable way of assessing tax than a
property tax or fees for services.
At present, the personal income tax is not a significant source of
funding of municipal services in Canada unlike several countries in Europe and
some cities in the United States. The chief source of revenue for
municipalities in Canada is a tax on property. Other sources of revenue are
development charges, various forms of user fees, and transfers or grants from
other levels of government.
While the province of Manitoba allocates a little over 2% of personal
income tax revenue to its municipalities, the Manitoban model of revenue
sharing has not been picked up elsewhere in Canada. (1) Local governments are
currently not permitted to levy an income tax and the federal government has no
constitutional right to give cities access to new financing instruments.
Nevertheless, it is commonly accepted that access to alternative
revenue sources is essential to keep up with municipal service responsibilities
and public expectations. The financing of municipal services through a heavy
reliance on property tax, fees and grants is inappropriate, not only in terms
of funding capacity but also on the basis of equity or fairness.
Municipal Revenue Trends
The 1990’s and early 2000’s saw increased municipal expenditures due to
provincial downloading, lower provincial grants, and a corresponding increase
in own-source funding among municipalities across Canada.(2)
While the trend has left municipalities with more funding obligations,
municipal governments remain creatures of the provinces and are required to
meet provincially imposed standards with local sources of revenue.
The standards and services imposed on municipalities vary by province.
Ontario transferred funding responsibility for social housing and social
services. Quebec transferred major responsibility for funding public transit
and road maintenance to their municipalities. Ontario, over the past decade,
has had higher per capita municipal spending than other provinces. The higher
spending is due, in part, to the downloading of social services, which
generally are a provincial responsibility in other jurisdictions.
On the revenue side, reliance on property taxes and user fees has grown
while dependence on provincial grants has fallen. Property tax levels vary
considerably across the country. The property taxes of Ontario, on a per capita
basis, are among the highest in the country.
Revenue from property taxes is typically shared with school boards and
the provinces. Ontario, Manitoba, and Saskatchewan raise significant amounts of
revenue from property taxes for education.
A growing imbalance between municipal responsibilities and own-source
funding has called into question the fiscal sustainability of local government.
As a consequence, municipal governments have been exploring the potential for
new forms of taxation.
Taxation Principles and Options
It is generally agreed by tax experts that all forms of taxation should
reflect the cost of providing services, an ability-to-pay, simplicity,
fairness, stability, economic efficiency, transparency, and accountability. (3)
Options for municipal government which meet these requirements include
a personal income tax as well as consumption taxes such as a general sales tax,
a fuel tax, and a hotel or motel occupancy tax.
Access to a wider range of taxes gives municipalities’ greater
flexibility in meeting their expenditure responsibilities as well as in
responding to changing economic conditions, evolving demographics, and variations
in political priorities.
Reliance on the property tax to fund programs like social and housing
services is inappropriate for two basic reasons. The first, and most obvious,
is that the property tax was developed to provide services to property, not to
people. The second is the regressive nature of the property tax. There is not a
close link between income and property or home values.
Municipal Income Tax
The introduction of a municipal income tax in Canada has been recently
defended by some politicians and tax experts.
In the 1990’s, City of Ottawa Councillor Alex Cullen chaired the
Ottawa-Carleton Fair Tax Working Group. It was established by regional council.
(4) After study, the fair tax working group concluded that a municipal income
tax was a better way to pay for education since education was not directly
related to property. (5)
In 2000 and again in 2008, Harry Kitchen, an economist and municipal
tax expert from Trent University, said that there were two ways to administer
the income tax: by piggybacking provincial income taxes or by a separate
municipal income tax system. (6)
The advantage of linking a municipal income tax to the provincial tax
system is its simplicity, stability, and transparency. It would also be easily
harmonized with the provincial definition of income, the tax base, and
allowable tax credits.
The advantage of separate administration, on the other hand, is the
autonomy and flexibility it provides to a municipality. The disadvantage is the
establishment of an independent taxing system which would be more expensive to
administer.
According to Kitchen, a municipal income tax also has two additional
overall drawbacks, which may make it less desirable. The first is that federal
and provincial governments have recently lowered taxes to stimulate economic
development and may not look favourably upon the introduction of a municipal
income tax.
The second is a growing tendency, in Canada and other countries, to
lower reliance on income taxation in favour of consumption-based taxes since
the latter may create fewer distortions in the economy and are less difficult
to administer.
A benefit of a municipal income tax, on the other hand, is that it
shifts the balance of funding toward local government where services are increasingly
provided. Its yield reflects the state of the economy. It costs less if it is
linked to a provincial system of taxation.
Municipal Income Tax in Other Countries
Within countries of the Organisation for Economic Cooperation and
Development (OECD), property taxes are largely favoured by English speaking
countries and income taxes by other nations. (7)
In most European countries where a local income tax is employed, it is
the principal source of income. In Sweden, where the administration of social
services and housing is largely a municipal responsibility, a significant
proportion of the income tax paid by taxpayers is allocated to local
authorities rather than the national government.
The power to determine the tax base and the tax rate by local
authorities is available to only a handful of countries (e.g., New Zealand,
Portugal, and Spain). Some have the power to determine the local rate but not
the base. In others, both the base and the rate are determined by other levels
of government.
In the United States, several thousand local governments are capable of
levying their own income taxes although their powers are constrained by their
respective states. Unlike European countries, however, local governments still
obtain most of their funding through the property tax.
In the United States, there is a tendency to keep the administration of
different taxing authorities separate from each other. This is done to enable
taxpayers to know which level of government is taxing them. A unified tax
system is thought to reduce transparency and accountability in the tax system.
The Case of Ottawa
In Ottawa, there has been an expression of interest in a municipal
income tax by some councillors and the mayor. To date, however, there has been
no decision to undertake a review of the municipal tax system like that
undertaken recently by Halifax Regional Municipality (HRM). In that case, when
presented with the committee report, their council was not prepared to make the
change at that time.
Access to diverse tax tools could be beneficial to Ottawa. Like other
municipalities in Ontario, it is largely dependent on the property tax and
service fees as well as provincial grants.
Since the province of Ontario does not currently permit municipalities
to levy an income tax, a study could identify the extent to which the current
property tax system can finance municipal services and whether an income tax
would be more efficient, either by itself or in conjunction with the property
tax.
The study could equally address the controversy surrounding the
fairness of the property tax. At the moment much of the criticism is anecdotal.
Renters pay more than homeowners. Homeowners report that they are taxed beyond
their ability to pay or are assessed unfairly. And some retired people face
hardship in paying the tax because of fixed or reduced income.
In addition, it is asserted that landlords (and therefore, renters),
particularly landlords with small holdings, pay more property taxes than
homeowners of equivalent size.
When the study is completed, the city would share the findings with
local residents and business. If the study concludes that it would be
advantageous for Ottawa to have an income tax, the City could then request
permission from the province to levy one. It could also seek support from other
Ontario municipalities for such authority to levy an income tax.
Footnotes:
1. Enid Slack, Provincial
Municipal Fiscal Transfers in Canada, Munk Centre for International
Studies, University of Toronto, 2007. Also, Tax Reform Committee, Halifax
Regional Municipality, Municipal Taxes in
Canada and Around the World, October, 2009,
http://www.halifax.ca/taxreform/documents/TaxesAroundTheWorld.pdf
2. Information for this section is drawn from Harry Kitchen, Financing City Services: A Prescription for
the Future, Atlantic Institute for Market Studies, 2004.
3. Halifax Regional Municipality, Report
of the Tax Reform Committee, Council Report, June, 2009.
4. Alex Cullen, Memo to Regional
Council, Ottawa-Carleton Fair Tax Working Group Report-Appendix II, 1993.
Also, Alex Cullen, Income tax is only
fair way to pay for education, Ottawa Citizen, July 3, 1993.
5. He also noted that a municipal income tax was not new to Canada. In
fact, the use of the tax had been a common practice prior to the introduction
of income taxation by the federal government in 1917. In 1941, municipalities
formally gave up their right to levy income tax measures under a wartime tax
rental agreement.
6. Harry Kitchen, Municipal
Finance in a New Fiscal Environment,
C.D. Howe Institute Commentary, The Urban Papers, 2000. Harry Kitchen, Spend and Tax: Improving the efficiency and
accountability of taxation in HRM, Atlantic Institute for Market Studies,
2008.
7. The Chartered Institute of Public Finance and Accountancy, Reviewing the Case for a Local Income Tax,
Balance of Funding Review Steering Committee, London, 2004.
PROPOSAL FOR A MUNICIPAL INCOME TAX STUDY
PROPOSITION D’ÉTUDE
D’IMPÔT MUNICIPAL SUR LE REVENU
ACS2010-CMR-CSE-0023 City Wide/à l'échelle de la Ville
Councillor
Cullen explained the difficulty with the municipal finances and dependency on
property tax. He advised that a number of people suggest that Ottawa look
at other sources of revenue that is more reflective to the City’s economy and
taxpayers ability to pay, which could be through a municipal income tax
system. In the 1930s, the Councillor informed Committee that
municipalities had income taxes and derived more revenues than the
provinces. Unfortunately that power was removed from municipalities as a
result of war tax sharing agreements between the federal and provincial
governments. A number of citizens, following how this municipality is
able to deliver their services and fund them, approached him and suggested that
Council consider the notion of re-introducing a municipal income tax.
Councillor Cullen touched on his time as Chair of the Ottawa-Carleton Fair Tax Working Group in 1993, which was established because the government of Ontario was reviewing its tax system through the Ontario Fair Tax Commission. A simulation was conducted with the cooperation of Revenue Canada for shifting a significant amount of property tax off the property tax base, onto the income tax in the City of Ottawa. They took $268 million (the contribution for education purposes) and ran that based on the income tax files that were submitted by residents of Ottawa-Carleton to see what the effect would be. The result concluded that more than two-thirds of households would have tax decreases in the middle and low income categories and less than one-third would have seen tax increases. He concluded that administratively it would be shifting from one form of taxation to another and adding a schedule to the form. Residents could calculate the property income tax payable, apply the rate that would be in the schedule against the property income tax payable, which would generate the municipal income tax.
At this time, the Committee heard from the following delegations who spoke in support of the study:
· Jenny Gullen, People for a better Ottawa
· Margaret Nelson, Eastern Branch of the Ontario Association of Social Workers
· Helen Saravannahmotto
Councillor Monette highlighted that there was no cost associated to the study and asked if staff could provide an estimate. Marian Simulik, City Treasurer advised that staff could not provide a cost estimate at this time but advised that they are currently inquiring what Halifax spent on their study that lasted approximately three years and included significant public consultation.
In response to another question from the Councillor, Ms. Simulik advised that should the Committee approve the report, the intent would be to include it in the 2011 budget as a pressure and Council could make their determination to fund it at that time. She also explained that the process for developing the budget is that staff only add new items into the budget that have already been approved by Council, therefore they would not add something that has not yet been considered by Council.
Councillor Wilkinson advised that having a study done in Ottawa would not get a municipal income tax given that it has to be done at the provincial or federal levels. She noted that the Association of Municipalities of Ontario (AMO) have been working on sources of revenue for municipalities as has the Federation of Canadian Municipalities (FCM) and suggested that the report be forwarded to them for review. She read the following motion:
That the proposal be forwarded to AMO and FCM to investigate the impact of a municipal income tax and report to their members.
Chair Jellett clarified that the intent of the motion would be that CSEDC forward the report to the two associations. Councillor Wilkinson agreed, adding that there would be a request to look into this study and report back to Committee.
Councillor Desroches opined that this could be interpreted by the public and the Province for a request of a new tax. He indicated that the province has a dire financial outlook and fighting to bring the deficit and debt under control and suggested that to implement such a program could backfire and be perceived as a new tax that would add to the current tax regime. He suggested that this should be rejected given that there is no funding identified in the budget. Also, Ottawa is paying high dues to FCM as they are already looking at the taxation issue and the complexity of tax assessments as well as transfers to municipalities so they are already representing Ottawa on several fronts in terms of taxation and revenues for the municipalities.
Councillor El-Chantiry agreed with Councillor Desroches, noting that Halifax spent alot of time and money on a similar study and nothing has changed. If there are any changes, he advised that they have to be done collectively with the approval of the provincial and federal government.
Councillor Cullen reiterated that this an old tax that would replace a property tax, which would reduce the taxes for two-thirds of the residents. The revenue received, which is approximately $1 billion in property taxes, would be based on the ability to pay and that will be more reasonable for residents. The Councillor indicated that the municipal income tax system thrives in parts of the United States and Europe and those citizens find it more appropriate to finance municipal services than through a property tax system that is inadequate to meet the task. He appreciated Councillor Wilkinson’s motion to forward to AMO and FCM and would be happy to support it in addition to this report.
Councillor Deans advised that property taxes are limited and difficult for residents, especially seniors and those who live on fixed incomes. The notion of looking at a more progressive form of taxation for property tax is desirable and something to look at but she agreed with Councillor Wilkinson that it is not the municipality’s jurisdiction, therefore would support her motion.
Chair Jellett also agreed that it is not the City’s jurisdiction but also noted that he did not support sending this to FCM or AMO as they are already doing the work.
After discussion, the Committee voted on the following motion:
Moved by M. Wilkinson,
That the
proposal be forwarded to AMO and FCM to investigate the impact of a municipal
income tax and report to their members.
LOST
YEAS (4): Councillors R. Bloess, D. Deans, M. McRae and M. Wilkinson
NAYS (5): Councillors G. Brooks, E. El-Chantiry, B. Monette, S. Desroches and
R. Jellett
Committee then voted on the report recommendation.
That
Corporate Services and Economic Development Committee recommend to City Council
that a study be undertaken to determine if a municipal income tax, as an offset
to the property tax, is to the City's and to tax payers' advantage.
LOST
YEAS (0):
NAYS (9): Councillors R. Bloess, G. Brooks, D. Deans, E. El-Chantiry, M. McRae,
B. Monette, M. Wilkinson, S. Desroches and R. Jellett
Councillor
Cullen inquired if the report would rise to Council. Rick O’Connor, City
Clerk and Solicitor advised that this report would rise to Council the
following day with no recommendation.