Reflections on Municipal Finance over Two Decades and Thoughts for the Future

“Budget bailout needed once again” could be a headline in a Toronto newspaper today. It is actually from the Toronto Star, December 8, 2004, around the time IMFG was founded. The story notes that Toronto’s budget troubles are the result of the “raw deal” the city gets from the provincial and federal governments, and calls for a new deal so that Toronto will be able to stand on its own.

Sound familiar?

Has anything changed since 2004? Yes and no. Yes, there have been some incremental changes. No, the structure of municipal finance has not changed. In 2006, the province passed the City of Toronto Act, 2006 which, among other things, gave Toronto some new revenue sources – land transfer tax, vehicle registration fees, hotel/motel taxes, taxes on vacant homes, and taxes on amusements, alcohol, and tobacco. Of these taxes, only the land transfer tax has brought in any significant revenues. The city implemented a vehicle registration tax and then abolished it in 2010. It still levies taxes on hotels and motels and, in the last couple of years, has implemented a vacant homes tax.

Are Canadian cities fiscally sustainable?

IMFG has published several papers over the last two decades about the fiscal sustainability of Toronto and other Canadian cities. Perhaps one of the most cited passages of our work over the last 20 years comes from a paper called Is Toronto Fiscally Healthy? that I wrote with André Côté in 2014:

Toronto’s fiscal condition can be likened to the health of an aging Maple Leafs defenceman: he may be a solid performer on the ice and well cared for by training staff, but he is increasingly expensive and in need of major knee surgery. In other words, the City’s fiscal health is sound by most measures, but it faces cost pressures and its aging infrastructure and investment needs present a huge financial challenge.[1]

We have found that Toronto and other Canadian cities are fiscally sustainable and score highly on many fiscal measures: cities balance their operating budgets because, of course, they are required to do so by provincial law. Property tax increases have been at or below the rate of inflation for decades, although cities across the country have imposed larger property tax increases since the pandemic. Expenditures, when adjusted for population increases and inflation, have remained flat, and municipal borrowing is generally below provincial limits in most cities.

We have concluded that the fiscal health of cities in Canada comes at the expense of their overall health: municipal infrastructure assets (water, sewers, transit, roads, recreational facilities) have been deteriorating and the quality of services is declining. We said this 10 years ago and the situation worsens each year. We have also repeatedly argued that cities need access to other revenue sources, such as income and sales taxes. That is still true today.

What challenges do cities face?

The way in which municipalities pay for services and infrastructure hasn’t changed much in the past 20 years, but the challenges they are facing have. Let me focus briefly on five: the infrastructure maintenance backlog, a shortage of affordable housing, climate change, cybercrime-related threats, and the impact of increased immigration targets and temporary residents.

Infrastructure in many cities is in a declining state of repair – the news this year included water pipe breaks in Calgary and Montréal, on top of perennial problems with transportation infrastructure (roads and expressways), public transit vehicles and equipment, municipal facilities (including libraries and recreation centres), and community housing. In Ontario, for example, approximately 45.3 percent of municipal assets in the province are not in a state of good repair, and the capital spending needed to bring them up to a state of good repair in 2020 is estimated at about $52 billion.

The lack of affordable housing is putting pressure on municipalities to provide more housing as well as to reduce development charges (which would lower revenues) and ease regulations. CMHC has estimated that Canada needs 3.5 million more housing units by 2030 in addition to those currently under construction to restore affordability. About half of the housing needed is in Ontario and British Columbia. And, of course, before any of this housing can be built, municipalities need the necessary infrastructure. The Federation of Canadian Municipalities has estimated the cost of municipal infrastructure for each new unit at approximately $107,000.[2]

Climate change is affecting city budgets in two ways. First, cities must respond to the increased frequency of extreme weather such as ice storms, heat waves, or tornadoes, which cause flooding, fires, and power outages and require cleanup and remediation. Second, cities must meet targets for reducing greenhouse gas emissions (GHGs) to limit global temperature increase. In Canada, we need to cut emissions by half over the next decade to reach net zero carbon emissions by 2050. Cities are a major source of emissions, and they need to increase their use of renewable energies, establish cleaner transportation systems, and retrofit existing infrastructure (buildings and facilities), among other measures.

Spending on cybersecurity is increasing at all levels of government and municipalities have already borne the impact of significant cyberattacks. In 2020, Saint John, New Brunswick, suffered a ransomware attack that brought down all its systems, including emergency dispatch. Rather than pay a costly ransom, the city chose to rebuild its systems from scratch. In 2023, a ransomware attack forced the Toronto Public Library system to suspend most library services for nearly four months. In 2024, a similar attack on Hamilton spared the city’s emergency and water services but affected many other systems. Municipalities, given their critical but vulnerable infrastructure, are projected to spend increasing amounts to both prevent and recover from cyberattacks.

The federal government increased its immigration targets to allow 500,000 new residents into the country annually by 2025 and the number of temporary residents has risen rapidly. Most immigrants and refugees move to large cities and need municipal housing, social, and other services to facilitate resettlement. Although immigration decisions are made by the federal and provincial governments, many of the costs are borne by municipalities. Cities in Canada argue that they do not have sufficient resources to meet the needs of immigrants and refugees.

All these challenges mean higher municipal expenditures. Cities are searching for new tax sources (such as the vacant homes tax, which was introduced a couple of years ago, or implementing a commercial parking levy in Toronto), but they are limited in terms of what is available under provincial legislation.[3] To bring in a substantial amount of new revenue, they need access to income or sales taxes, as we said 20 years ago, but these revenue sources are not currently permitted at the local level under provincial legislation.

Why can’t we do what other countries do?

I’m often asked how Canadian cities compare with other cities around the world. An IMFG  comparison of Toronto with seven other international cities[4] concluded that although Toronto has more fiscal autonomy than other cities (in that it relies less on intergovernmental transfers and more on own-source revenues), it has many fewer tax sources. Other cities, such as New York or Berlin, have access to income and sales tax revenues as well as some other tax sources. In the Nordic countries (unitary countries with no provincial governments), local governments are responsible for education and many health and social services. They levy income taxes, which are more progressive than property taxes, to pay for these redistributive services.

So, why not in Canada? Why don’t the federal and provincial governments provide the new fiscal deal that municipalities in Canada have been seeking for decades? Quite simply, they do not want to give up lucrative revenue sources such as income and sales taxes to another order of government. Meanwhile, cities don’t want to raise their existing taxes. And taxpayers don’t want to pay more taxes, although they do want more and better services. Where will that leave us in 20 years?

What does the future look like for municipal finance?

As I see it, there are two possible scenarios – one I like and one I don’t like. Let’s start with the one I don’t like so we can end on a positive note. The first is that we continue with the status quo of muddling through with incremental changes. Every year, cities will ask for a bailout from the federal and provincial governments and these governments will respond – or not, depending on their financial circumstances. Cities will continue making modest increases to property taxes and user fees and services and infrastructure will continue to deteriorate. Not a happy prospect.

The more optimistic scenario is that the federal and provincial governments will finally realize how important the success of cities is to their respective provinces and to the country. They will also realize that the foundations of municipal finance in this country, which date to the Baldwin Act of 1849, no longer fit the circumstances of municipalities today. They will sit down with municipalities and figure out who does what and how to pay for it. That may mean moving the responsibility and funding for some services (such as social services in Ontario) up to the provincial level or it may mean downloading some revenue sources to municipalities (such as income or sales taxes).[5] Downloading in this sense does not mean expecting the federal and provincial governments to raise more income or sales taxes on behalf of municipalities, but rather giving municipalities the option of piggybacking on federal and provincial taxes at rates they need to deliver services and infrastructure.  Municipalities (not the other orders of government) would take responsibility for setting the tax rates, although the other orders of government would administer the tax. For this scenario to work, however, tax rates should be set on a regional basis to avoid tax competition among neighbouring municipalities. This governance question is discussed in other papers prepared for our 20^th anniversary.

In the past, the different orders of government have occasionally aligned on municipal finance issues. One example is the gas tax transfer (now the Community-Building Fund), which transfers money to municipalities for transportation, an amount adjusted annually by the rate of inflation. Another, already mentioned, is the City of Toronto Act, 2006, whereby the province allows the city to levy revenues from additional sources. Were these decisions the result of good timing, an alignment of political parties, the availability of funds, or something else? We need to dig deeper into how these agreements came about to see if we can replicate them.

More sources of revenue for Canadian cities – it is not a new idea, but it is an essential one if cities are to be successful 20 years from now. All three orders of government need to come together to make it happen.

About the Author

Enid Slack, Director of the Institute on Municipal Finance & Governance, is one of Canada’s foremost experts in municipal finance, with over 40 years of contributions to this field.  She has published extensively on property taxes and governance and consults globally with organizations like the World Bank.  Enid received the Queen’s Diamond Jubilee Medal in 2012 for her work in cities.

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[1] Enid Slack and André Côté, Is Toronto Fiscally Healthy? IMFG Perspectives Paper No. 7, 2014, p. 19.

[2] Federation of Canadian Municipalities, “Backgrounder: New research—Canada’s housing challenge is also an infrastructure challenge,” 2024. https://fcm.ca/en/news-media/news-release/new-research-canadas-housing-challenge-also-infrastructure-challenge/backgrounder

[3] In two provinces – Quebec and Saskatchewan – the provincial government shares a percentage of sales tax revenues with municipalities. Tax sharing is not the same as local taxation, however, because the local government has no control over the tax base or tax rates. It simply receives a portion of provincial taxes; for this reason, the revenue is much the same as a transfer.

[4] Enid Slack, How Much Local Fiscal Autonomy Do Cities Have? A Comparison of Eight Cities around the World. IMFG Perspectives Paper No. 19, 2017.

[5] This is not a far-fetched idea in Canada – municipalities in Ontario levied municipal income taxes until 1936, when the province introduced its first personal income tax and took away municipalities’ ability to levy it.