3.2. Changing Authority to Generate Revenue
‘Municipal revenue’ is a misnomer. It’s more of a group sport.
Provincial law defines municipal authority to raise revenue, and amendments, new laws and regulations move the goalposts demarcating the local ability to pay, capacity to save and scope to self-fund. Changing goalposts are the legal context for understanding financial trends and revenue health heading into the pandemic - context missing from most writing about what caused shortfalls and the limited range of options for rectification. To understand the provincial role in shaping local revenue capacity, it is necessary to first look at how the revenue powers extended changed over time - independent from how municipalities make use of it to generate revenue from own sources. From there, we will be in a position to assess whether crisis prevention, robust financial planning and general flexibility are built into the Ontario Government’s municipal revenue model, and if not, the contributory role provincial lawmakers played in seeding revenue problems by hemming in municipal capacity to generate and save.
This timeline summarizes the legislative and regulatory context for Ontario municipalities' revenue actuals from 1990-2020.
Takeaways:
Minimal Change in Municipalities’ General Power to Raise Revenue, Net Loss
Enhancements to general revenue-raising authority were piecemeal, light on yield and heavy on the cost of administration. Losses were bigger, and since they targeted the property tax, both internal operating flexibility and potential yields shrank over the 30-year period.
Arguably the biggest change in municipal revenue in the 20th century before 1990 was municipalities’ loss of the power to tax income and personal corporations in the lead-up to WW2, so it’s important that shrinking power to tax real property at locally-determined rates and on locally-determined bases be seen as continuing a long term trend of eroding municipal tax bases and withdrawing powers to tax.
To the left you’ll see a machine-generated text analysis of the Municipal Act highlighting words that are negatively correlated with ‘tax’ to highlight how tenuously it furnishes municipalities with their remaining access in 2022. The terms with a strong inverse relationship include ‘exercise,’ ‘control’ and ‘powers;’ other words relate to how the power to tax might be used, or not in this case: ‘force,’ ‘close,’ ‘restriction’ and ‘amendments.’
Revenue Incentives to Spend for the Province
In all cases except Prudent Investor Status, the power that grew was the power to recover costs and the bases on which it grew aligned with the objectives of the government in power. For example, cut provincial operating expenses in the case of Provincial Offenses Act administration and allow municipalities to retain fine, and then penalty, revenue, stoke the supply of green energy through new municipal sales and licensing authorities for renewable power sources and increase funding for tourism promotion from non-residents through municipal licensing remittances for short-term accommodations.
Liberal Preference for Narrowly-Applicable Enhancements
Municipalities that gained substantive ground did so by exception through 'one-off' pieces of legislation and regulations enacted by Liberal governments. Contrary to popular belief, the City of Toronto Act, 2001 contains zero new powers to tax; it itemizes prohibited taxes and, therein, leaves the door open for the City to research, request and negotiate access to unrestricted taxes. Provincial regulation - and implied support - are required before anything on the 'negative list' can be monetized. For example, road tolls are not restricted, but without enabling regulations, the City does not have the authority to use them. Unlikely to change given the value of Toronto's suburbs in provincial elections, tolls highlight that separate legislation was symbolic recognition that the City is distinct within the municipal sector, but that has no bearing on the local-provincial relationship which remains intact.
Regulatory amendments changed the methodology York Region could use for calculating transit development charges and regional airport authorities for London, Ottawa, Thunder Bay and Toronto were required to use to pay surrounding municipalities more in lieu of property tax. Regulatory exceptions enhancing revenue supply imply that general powers are insufficient to handle the scale of investment required for servicing high-traffic, multi-modal transport hubs - useful framing for municipalities that want more revenue depth in earnest.
Actual Effect is Contrary to Stated Intent
In 1989, the first development charge legislation codified how to calculate the incremental capital costs of new development such that ‘growth paid for growth.’ The tendency for the four changes from 1990-2020 to decrease the scope of recoverable costs meant that a public subsidy was required to enable growth, (financially or in terms of service level adjustment).
Asset management was the centrepiece of the Ontario Government’s municipal finance focus in the mid-2010s. The unstable development charges regime is a check on the terms on which the province is interested in building municipal capital planning capacity, since it’s predicated on the availability of well-defined funding options to cover investment needs and, almost every term, it changed the rules.
More recently, the legal names given to revenue instruments misrepresent the authority they confer on municipalities and contradict their impact. For instance, the Transient Accommodation Tax gives municipalities the power to retain reasonable costs of collection and administration, not tax short-term rentals. The Community Benefits Charge undercuts community benefits from densification, replacing a negotiated contribution with a capped rate - 4% of land value - payable before permit issuance.
Though outside the study timeframe, another example has since unfolded. Passed on November 28, 2022, one month after it was introduced in the legislature, Bill 23 carries this tradition forward, titled the “More Homes Built Faster Act, 2022.” Almost every synopsis of it highlights its “stated intent” in relation to increasing the supply of affordable housing, quickly moving on to invalidate any expectation that it will result in increasing the supply of affordable housing.