We need to hear some realistic financial proposals from Toronto mayoral candidates

Originally published on TVO.org.

Toronto’s incumbent-free mayoral byelection on June 26 offers a good opportunity for candidates to propose some realistic ideas about how the city can both achieve its ambitions and pay its bills. The temptation for candidates will be to resort to old nostrums or divert attention to small ideas in an attempt to avoid getting down to brass tacks.

The old nostrums have been that there are piles of waste at city hall that can be cleaned up in order to release money to improve services and cut taxes. It’s an appealing idea and been offered up lots of times — but somehow it never seems to come true. It’s such an appealing idea that every few years an external study of city finances is undertaken, usually by a big accounting firm, and after every bean has been counted, the results are disappointing. A few items on the margins are found and easily dealt with, and there are recommendations like reducing library hours evenings and weekends that are washed away when it turns out those are the hours that matter the most to users.

What is a real conversation like? It starts with recognizing the real limits that exist for Canadian cities. First, they are prohibited by law from running budgetary deficits. This is a longstanding prohibition, because cities used to run themselves into bankruptcy from time to time, and provinces, which are responsible for cities under Section 92 of the Constitution Act, had to bail them out. It may still be a reasonable limitation for many cities, but not for the large ones like Toronto with highly capable and experienced municipal-finance departments.

The real problem for large cities like Toronto is that they have insufficient sources of revenue because they cannot levy income and sales taxes, as the federal and provincial governments can. Income and sales taxes are highly productive revenue sources, and they grow with the economy. Cities are limited to property taxes and other property-related instruments, such as development charges on new building projects. Property tax is a good tax, relatively stable, but it doesn’t grow with the economy. Development charges are productive for cities with high-growth areas but less significant for slower-growing or static places.

Consider a city thinking about building a new convention and event centre to attract regional business. It may be vying with other cities trying to do the same thing. In the competitive process, it might have to offer up tax relief, a so-called property tax holiday for any number of years after completion, development-charge discounts, or construction concessions in site access and accommodation. During construction and once the centre is open, people in the city would benefit from more jobs, more customers in restaurants and stores, and more tourists. But the government-revenue benefits from those things would accrue in income taxes (more jobs) and sales taxes (restaurants, stores, and tourist attractions), both of which go to federal and provincial governments, not in property taxes to the municipal government. In some ways, that new centre might cost the city more in policing, fire services, and infrastructure.

Cities like Toronto have generally done a good job in making the revenue sources they have work, except when it comes to such big-ticket items as transit and housing and, increasingly, big infrastructure projects to deal with climate-change issues like flooding.

Look at these transit costs (per kilometre and without vehicle costs):

• Subways: $300 million underground, $200 million at grade
• Light rail: $200 million underground, $40-$60 million at grade
• Bus rapid transit: $10-$50 million, depending on using current roads or building new ones

The Toronto region is looking at adding 1,200 kilometres of transit, across various modes, over the next few decades. Even with the most economically realistic mode mix, that is $5 billion to $10 billion a year.

Housing is the same expensive story. Every city in Canada has long waiting lists for public affordable housing; in Toronto, the number is approaching 200,000. Building new supply is expensive: excluding land costs, which vary from city to city and within cities by neighbourhood, a two-bedroom unit in a high rise costs $275,000; in a stacked townhouse, it costs $150,000; and in a townhouse, it costs $115,000. Multiply those costs against the demand for affordable housing, and you are again into the billions of dollars per year.

In just these two major areas, Toronto has costs that require billions of dollars each year. For comparison, the 2023 operating budget of the City of Toronto is about $17 billion, and capital expenditure is about $5 billion per year ($50 billion over the next 10 years). The operating budget covers just the day-to-day provision of hard and soft services, much of it in wages.

For those big infrastructure items, the city has to depend on provincial and federal governments, whose responsiveness is sporadic and episodic. Those governments have different interests, time lines, budgetary pressures, and political ideas, and aligning them with city needs doesn’t work reliably.

Canada’s big-city mayors have known this for decades. From time to time, they’ve picked up the challenge of finding new tax sources that are reliable. The preferred model has always been to get a share of a tax that another level of government levies. One success was getting a share of the gasoline tax from the federal government. There have also been requests to get a share of income or sales tax, a 2007 example of the latter being when the Stephen Harper government reduced the GST by two points, and Toronto mayor David Miller requested that a per cent be directed to cities. But this approach has not been very successful, as it asks one government to take the heat of levying and collecting the tax while the cities get the benefit of the revenue. Nobody really likes paying tax, and governments don’t get popular levying tax. So why would a government happily hand over the revenue after taking the political heat?

Transferring tax points is a different matter. In the Harper GST example, it might have made sense for the federal government to say it was going to abandon the points but allow willing cities to take them up, as long as the city formally decided to do so. The city would have to decide to levy the tax, and the federal government would offer to collect it through the GST mechanism and transfer the resulting revenues. The federal government would get credit for reducing the GST, and the city would take the political heat for taking it on but would benefit from the new revenue. The credit accruing to the federal government might be short-lived: it transferred tax points to the provinces for health care, but the provinces soon ignored the technicalities and were back at the trough for even more transfer money. If you get the room to levy the tax, you actually need to levy it.

Materiality is also important when a candidate talks about new sources of revenue. Will the proposed fee or tax raise enough money to significantly meet the costs of new housing or transit? In Toronto’s recent past, there has been talk of a hotel tax (pre-COVID), a parking sales tax, and a vehicle-licence tax. But each would raise less than $100 million a year, or one-third of a kilometre of a subway line. The tax/fee needs to raise meaningful money, not cost too much to collect (preferably piggybacking on an existing mechanism), be equitable, and be sustainable.

There are few things more likely to induce sleep than a discussion of constitutions and fiscal federalism, but a mayor must reckon with both to be successful. Looking for waste on the fringes or thinking about making good friends with the provincial or federal governments (which hasn’t solved the problem for previous mayors) is like wishing for a miracle.

It’s probably more practical to understand the reality of the situation and consider the steps needed to meet the challenge. These would include working with other big-city mayors in an intentional and concerted way to advocate for stable finances. Canada’s big-city mayors are elected citywide and typically win more votes than any prime minister or premier, who, after all, are just elected in their local riding. (Toronto mayors since amalgamation have all received more than 300,000 votes. The most Justin Trudeau has earned in his Papineau riding was 26,000; for Doug Ford in Etobicoke North, the number was 19,000.) These mayors individually, and even more so collectively, have a strong bully pulpit and electoral clout that they rarely employ, seemingly reluctant to bite the hand that feeds them.

As we consider the credentials of a mayoral aspirant, they might want to demonstrate their track record on speaking out powerfully, working with others, building effective coalitions, leading tough collaborative campaigns, and being successful. Promises to do so in the future won’t mean much if there is no evidence from the past.

Understanding municipal finance is critical. Even more important is proposing ideas on how to deal with the fiscal straitjacket cities are in. The time for the old fiscal fairytales is over.