What Roles, Responsibilities, and Financial Tools for Local Governments?

1. What Roles, Responsibilities, and Financial Tools for Local Governments? Enid Slack Institute on Municipal Finance and Governance Munk Centre for International Studies University of Toronto Presentation to the Round Table on Renewing Local Governance in Atlantic Canada Moncton, June 9, 2008

2. Outline of Presentation • Expenditures: • Theory of expenditure assignment • Municipal roles and responsibilities in Canada • Municipal expenditures in other countries • Revenues: • Theory of revenue assignment • Municipal revenues in Canada • Municipal revenues in other countries • Which financing tools for which services? • Conclusions: comparing theory and practice

3. Theory of Expenditure Assignment • Guidelines to divide government expenditure responsibilities among federal, provincial, and local governments: • Federal government should have primary responsibility for stabilization policy and income distribution policies; local governments should focus on the allocation function – delivering goods and services and determining how funds will be raised

4. Theory of Expenditure Assignment • Services should be delivered at the level of government closest to the individual citizen for economic efficiency (“subsidiarity” principle). Exceptions occur where there are: • economies of scale • externalities

5. Theory of Expenditure Assignment • Finance follows function – assign expenditure responsibilities first and then revenue raising powers • Balance expenditure assignment and revenue assignment

7. Distribution of Municipal Expenditures, Canada, 2005

8. Trends in Municipal Expenditures: Canada • Which expenditures have increased as % of total expenditures from 1990 to 2005? • Protection (fire and police), housing (mainly in Ontario), environmental (water, sewers, garbage), social services (mainly Ontario) • Which expenditures have decreased as % of total expenditures from 1990 to 2005? • Transportation (not in Québec), debt charges

10. Municipal Functions • Municipalities in all provinces provide: • Water and sewers • Roads and streets • Solid waste collection/disposal • Parks and recreation • Planning • Policing (except territories and not all municipalities in every province) • Fire protection (not all municipalities)

11. Municipal Functions • Municipalities in some provinces are also responsible for: • Courts of law • Public transit • Health services (small expenditures) • Social expenditures (but not generally social assistance) • Housing • Tourism and promotion

12. Municipal Functions

13. Mandatory versus Discretionary Services • All municipalities provide services regardless of whether they are mandatory • What is mandatory varies by size of municipality within provinces (e.g. policing) • More permissive legislation • Standards of service are the issue (e.g. water, sewers, fire, waste disposal, building inspection, day care, housing for the elderly) • Standards have increased over the last 10 years; provincial funding has not

14. Distribution of Local Government Expenditures, Selected Countries (%)

15. Theory of revenue assignment • Guidelines for revenue assignments: • Federal and provincial governments should levy broad-based taxes (e.g. income and sales) • Small local governments should focus on user charges and benefit taxes especially taxes on immobile factors (e.g. property tax, motor vehicle taxes); additional local taxes for large local governments (depending on services)

16. Theory of revenue assignment • Guidelines for revenue assignments (cont’d): • Taxes should be borne by residents of same jurisdiction where benefits are enjoyed (minimize tax exporting) • Local taxation (at least local tax rate setting) promotes efficiency • Intergovernmental transfers are appropriate to address spillovers, equalization

18. Municipal Revenues, Canada, 2005

19. Trends in Municipal Revenues: Canada • Which revenues have increased as % of total revenues from 1990 to 2005? • Property taxes and user fees • Which revenues have decreased as % of total revenues from 1990 to 2005? • Intergovernmental transfers fell across Canada but not in Québec (still a smaller % of total revenues)

20. Other Municipal Revenues in Selected Provinces • Land transfer tax: Nova Scotia, Québec, permitted in Manitoba, Toronto • Amusement taxes: Nova Scotia, Manitoba, Saskatchewan, BC • Hotel taxes: Nova Scotia, Saskatchewan, Alberta, BC, Québec, permitted in Manitoba • Poll tax: Newfoundland, parcel tax in BC • Development charges: BC, Alberta, Saskatchewan, Ontario, Yukon, NWT

21. Other Municipal Revenues in Selected Provinces • Revenue sharing (income tax, fuel tax, VLT/casino revenues, fine revenues): Manitoba • Provincial fuel tax sharing: BC, Alberta, Ontario, Québec, Manitoba • Vehicle registration tax: Toronto

22. Distribution of Local Government Revenue Sources, Selected Countries (%)

23. Which revenue tools for which expenditures? • Answer depends on the nature of services being delivered: • Services with private good characteristics • Services with public good characteristics • Services that generate externalities • Services that redistribute income

24. Which revenue tools for which expenditures? • Services with private good characteristics: • Possible to identify beneficiaries and exclude those who don’t pay • Examples: water, sewers, garbage collection and disposal, transit, recreation, parking • User fees to pay for at least a portion of the cost • User fees lead to efficiency because they provide information to public sector on how much users are willing to pay; ensure that citizens value what public sector provides at least at its marginal cost

25. Which revenue tools for which expenditures? • Services with public good characteristics: • Collective benefits enjoyed by local residents but which cannot be easily assigned to beneficiaries • Examples: police and fire protection, local roads, neighbourhood parks, street lighting • Cannot charge for these services; need some form of benefit-based taxation e.g. property tax • Property tax is a good tax for local government – property can’t move; connection between tax and benefits of local services

26. Which revenue tools for which expenditures? • Services that generate externalities: • Benefits of service spills over municipal boundaries • Examples: major roads, social services, major cultural facilities, public transit • Results in under-allocation of resources • Could be financed, in part, by a provincial transfer (conditional, matching)

27. Which revenue tools for which expenditures? • Services that redistribute income: • Examples: social assistance, social housing, social services • Should be funded by ability to pay taxes (e.g. income tax)

28. A Mix of Taxes • Range of expenditure responsibilities • Services used by commuters/visitors • Revenues that grow with the economy • Tax distortions may offset each other • Increase municipal flexibility in adapting to local circumstances

29. Role of Intergovernmental Transfers • Inter-jurisdictional externalities – conditional, matching transfers • Equalization – unconditional transfers based on fiscal need and/or fiscal capacity • Minimum standards – conditional, non-matching transfers • Fiscal gap – unconditional transfers

30. Financing Capital Expenditures • User fees • Property taxes • Development charges • Borrowing • Tax increment financing • Intergovernmental transfers • Public-private partnerships

31. Concluding Comments: Theory and Practice • For the most part, basic rules of expenditure assignment are followed in Canada: • Federal government is responsible for transfers to individuals, defence, justice system, etc. • Provincial governments are responsible for hospitals, post-secondary education, etc. • Municipal governments are responsible for local roads, water, sewers, solid waste disposal, public transportation, etc.

32. Concluding Comments: Theory and Practice • BUT: • Municipalities in some parts of the country make expenditures on social services and social housing • Not clear that there is a balance between expenditure assignment and revenue assignment (is there a fiscal imbalance?)

33. Concluding Comments • As much as possible, local governments should raise the revenues they spend • User fees should fund services where beneficiaries can be identified e.g. water, sewers, waste collection • Local taxes should fund services that provide collective benefits to the local community • Local governments would benefit from a mix of taxes • Intergovernmental transfers should be used for equalization, spillovers