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

Institute on Municipal Finance and GovernanceMunk Centre for International StudiesUniversity of Toronto

Presentation to the Round Table on Renewing Local Governance in Atlantic Canada

Moncton, June 9, 2008

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

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Theory of Expenditure Assignment Guidelines to divide government expenditure

responsibilities among federal, provincial, and local governments:1. 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

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Theory of Expenditure Assignment

2. 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

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Theory of Expenditure Assignment

3. Finance follows function – assign expenditure responsibilities first and then revenue raising powers

4. Balance expenditure assignment and revenue assignment

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General government services10%

Protection of persons and property

17%

Transportation and communication

20%Health3%

Social services9%

Education0%

Resource conservation and industrial development

2%

Environment17%

Recreation and culture12%

Housing3%

Regional planning and development

2%Debt charges

4%

Other expenditures1%

Composition of Total Expenditure by Local General Government, Canada (2005)

Distribution of Municipal Expenditures, Canada, 2005

CANADA INCL. ONTARIO

CANADA EXCL. ONTARIO

TransportationFire and policeWater, sewers, garbageHealth, social services, housingParks, recreation, cultureGeneral governmentDebt chargesPlanning and developmentOther

20%17%17%15%12%10%

4%2%3%

22%17%18%

3%15%12%

5%3%5%

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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

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Figure 4.1: Capital Expenditure of Canadian Municipalities, 1988-2005

0

5

10

15

20

25

30

Year

Per

cen

tag

e o

f T

ota

l E

xp

end

itu

re

0

50

100

150

200

250

300

350

400

Co

nst

an

t (1

99

7)

$ P

er C

ap

ita

Percentage Dollars

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)

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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

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Municipal Functions# services where exp. per capita > $10

# services where exp. per capita > $10

NewfoundlandPEINova ScotiaNew BrunswickQuébecOntario Manitoba

89

1110141711

SaskatchewanAlbertaBCYukonNWTNunavut

111612121415

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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

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Distribution of Local Government Expenditures, Selected Countries (%)

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US UK Fra. Spain Neth. Den. Swe. Italy Bel.

General admin.Public safetyEducationHealthSocial sec./welfareHousingRec. and cultureFuel and energyAgricultureMining, mfg., const.TransportationOther economicOtherTotal

139

387333

1100507

100

41229

033

53000518

100

112

202

1824

8400408

100

74

1821

511

603173

14100

93

183

2320

600070

11100

40

131657

13000050

100

204

87000000007

100

6010

681102162

11100

210

35640

1300006

15100

Theory of revenue assignment Guidelines for revenue assignments:

1. Federal and provincial governments should levy broad-based taxes (e.g. income and sales)

2. 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)

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Theory of revenue assignment Guidelines for revenue assignments (cont’d):

3. Taxes should be borne by residents of same jurisdiction where benefits are enjoyed (minimize tax exporting)

4. Local taxation (at least local tax rate setting) promotes efficiency

5. Intergovernmental transfers are appropriate to address spillovers, equalization

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Property and related taxes, revenue

53%

Consumption taxes, revenue0%

Other taxes, revenue1%

Sales of goods and services22%

Investment income5%

Other revenue from own sources1%

Provincial and territorial governments, general purpose

transfers3%

Federal government, specific purpose transfers

2%

Provincial and territorial governments, specific purpose

transfers13%

Composition of Revenue by Local General Government, Canada (2005)

Municipal Revenues, Canada, 2005

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CANADA

Property Taxes

User Fees

Provincial Grants

Investment Income

Other Revenues

53%

22%

16%

5%

4%

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)

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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

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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

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

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US UK Fra. Spain Neth. Den. Swe. Italy Bel.

Local tax revenues:-Income & profits-Payroll-Property-Goods & services-Other

Non-tax revenuesCentral gov’t grants

Total revenue

3450

73165

3234

100

1400

10000

1373

100

4704

521134

1934

100

37260

36353

954

100

1000

63380

1476

100

51930700

840

100

75100

0000

620

100

3480

222645

1453

100

n.a.8400

160

n.a.n.a.

100

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

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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

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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

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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)

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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)

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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

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

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

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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.

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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?)

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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

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