When the Ontario Fair Tax Commission handed its report to Floyd Laughren in December of 1993, it reported that “local government finance issues were raised more often in the commission’s public consultation process than all other tax issues combined.” It went on to say, “The system of local government finance is so complex and arcane that it is incomprehensible to most Ontario residents.” It is fair to say that after more than a decade of reforms the situation is only a little better.

Financing local government is a problem everywhere, but it is especially serious in Northern Ontario, where the boom-bust cycle of the resource industries created dozens of sprawling little towns with shrinking populations. The root of the problem is that the system was designed for the 19th century. Our Fathers of Confederation had no idea what the 21st century Canada would look like.

Trains were the coming thing in 1867. There were no automobiles. Sewer systems were still exciting. Chlorinated water was unheard of. You could drink safely from most streams. Outhouses were standard, hospitals were deadly, schools were minimal and doctors made house calls.

There were no income taxes and no GST. Colonial governments survived by selling off timber and mineral rights, peddling land to immigrants, and collecting tariffs. Is it any surprise they came up with a system that doesn’t fit the 21st century?

The problem today is an outdated fiscal system. More than 80 per cent of the services were delivered locally. Local school boards, local hospitals, and local roads were local responsibilities.

Local governments depended on the property tax to pay for the services they provide. Although property tax rates have risen, economists Harry Kitchen and Enid Slack have shown that the cost of municipal services have been growing faster. There is now a massive fiscal imbalance between the province and local governments.

Today, municipal governments pay for transportation (roads and transit), protection (police and fire), environment (water, sewers, and solid waste), and social services. They are involved in public health, social housing, recreation and culture, and planning and development. During the 1990s, the Harris government made a bad situation worse by downloading social services and uploading revenue sources. No wonder bridges and water systems are crumbling. Local government has the responsibility, the province has the revenue

Northern communities are having an especially hard time. Mines, mills, and logging operations are often on provincial land. Municipalities can’t tax provincial land. Even rural farming municipalities in the south have economically productive farms as part of their tax base.

Farming communities grew because farmers plowed income back into their farms expanding the tax base. Mining companies and the province simply took money out of the North. For at least 50 years mining communities have been asking the province to adjust the tax base, with little success.

Provincial politicians are a problem. No wonder Ontario mayors, led by Toronto’s mayor David Miller, are begging for a share of the sales tax. (They are also begging for a share of the gasoline tax.) They have a good case. Compared to American and European cities, they have fewer ways to raise money. Some can levy income taxes, others have a sales tax, or a gas tax.

Ottawa doesn’t want to hand out money to cities and towns for three good reasons. First, municipalities are a provincial responsibility. Second, even if Ottawa turned a share of the GST over to the towns the province could simply claw it back by cutting grants.

Squabbling senior governments are a problem. The third reason not to give money to municipalities is the power of local voters. Local politicians are sensitive to political pressure when it comes to taxation. Voters always like to believe they can have roads, sewers, and snow plows without paying for them. Local councils are pressured to lower taxes for good reason. Taxes really are high because mentalities have to pay for too much with the property tax.

Northern voters are a problem too. Local governments in the North are not innocent. They should have more revenue sources or fewer responsibilities. But they run a property tax system that is inefficient and hurts northern development.

Why do municipalities tax buildings?

One important principle of taxation is that you get less of what you tax. It is human nature. Northern cities need more construction and more investment in homes and commercial buildings. So why tax buildings? Northern cities also need to encourage people to live closer to each other because it is very expensive to service a small population on a lot of land. Both principles tell us it would be wise to shift taxes from buildings to land. Land can’t run away or fall down. Buildings do.

Taxing improvements is especially foolish for mining communities. Mining companies often avoid taxes by tearing down unused surface buildings or moving facilities underground. Towns lose revenue and buildings that might be used to start new businesses become uneconomic. Councils that don’t understand taxes choose bad taxes.

Why do municipalities tax jobs?

Municipalities say they want more businesses. So why do they tax industrial and commercial land more heavily than homes? The answer is purely political. There are more homeowners than business people. Homeowners vote to make commercial and industrial owners subsidize their services. Northern communities are worse than most this way.

The North should have one tax rate for all types of property. If industrial or commercial owners need extra garbage collection, street-cleaning or other services they should only pay for what they use through commercial user fees.
If Northerners had the courage to make these two changes northern communities would be much more attractive to businesses.

Why don’t municipalities maximize property values?

Economist Henry George had a simple rule when it came to municipal taxation: local governments should try to maximize property values. The value of a piece of property depends on the community and what the community does. The local government is doing its job when it adds value to property! After all, the value of property is just a measure of how much people want to live nearby.

This insight leads to a simple rule for city councils. Never approve a project unless it increases the value of the land and future taxes by more than it costs. Or conversely, always approve a project if it increases the value of the land and future taxes by more than it costs.

Unfortunately, municipalities are “creatures of the province” under the constitution. The province doesn’t allow municipalities to use the Henry George Rule. They can’t collect fair value for what they produce. When taxpayers pay the bills, landowners usually get the capital gains. As a result, the councils invest less than they should, and communities are less attractive than they would be. This is a problem only the province can fix.

Good taxes and schools

Convenient schools contribute to the value of your property. They also contribute to the workers' earnings and productivity. Logically, schools should be partly paid for from property taxes and partly from income taxes. As the number of children falls the school tax should decline and the share paid from income taxes should rise. After all, when there aren’t enough workers' wages will rise. An aging northern population should see falling school taxes.

Both taxes are provincial responsibilities. What is taught in northern schools is also a provincial responsibility. For some reason the province seems to have no interest in training northerners to run Northern Ontario. How many of our children can tell a fir tree from a pine tree? Or understand how paper is made? How many understand international metal markets? Because northern Ontario doesn’t receive any income tax revenue and can’t control its education system, the North can’t invest to maximize northern productivity.

A different mindset for tax collectors

The rule for doctors is “do no harm.” The rule for tax collection is to do as little harm as you can. Taxes on industrial buildings reduce employment. Taxes on fuel reduce pollution. It would make sense to shift the tax burden from land improvements to pollution but it can’t be done. A carbon tax would be provincial. The land tax is local except for schools. This is another problem only the province can address.

The North needs the province to sort out the entire dysfunctional tax system for the whole region. Don’t tinker, FIX IT!

Here in Northern Ontario we have additional issues. A special approach is needed for our resource economy, where minerals are finite, and communities vulnerable. Some of the taxation windfall from high commodity prices must be invested in building sustainable resource communities.

“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
J.B. Colbert, Finance Minister to Louis XIV