How to make municipal tax reform as fair as possible

January 21, 2010

On January 26, the HRM Council will again address municipal tax reform proposals.  But the proposals are merely piece-meal changes.  We need to ask and answer fundamental questions about how municipalities raise revenue and develop an easier-to-implement and fairer alternative approach.
When asked whether he liked to pay taxes, American jurist Oliver Wendell Holmes
famously replied that taxes are the price we pay for civilization.  At the municipal level we see all around us the civilized and indispensible things our taxes buy: roads, recreation facilities, fresh water, and waste disposal to name only a few.  But taxes need to be fair.  By what principles do we judge this?
Economists have several criteria. “Efficiency” measures how lightly a tax interferes with our choices individually and collectively.  “Ease of administration” measures how much it costs governments to collect and individuals to comply with the tax.   
But most important among the criteria is “equity.” It is significant that equity was the
priority concern expressed by the public during the consultations held by the HRM Tax Reform task force.
“Equity” refers to the way the responsibility to pay taxes is shared among taxpayers, both in our ability to shoulder it, often dubbed “ability to pay,” and in the benefits we get from it. Households with higher incomes have greater resources at their disposal to cover taxes and should therefore take on a larger portion of these taxes than families who have trouble making ends meet.  
This is indeed the logic behind the progressive income tax existing at the provincial and federal levels, whereby the proportion of income paid in taxes increases with income. Through such a system, the community asks its members to contribute in relation to what they can give.  
Of course, left to our baser instincts, we all want more services for ourselves and to pay less tax.  But taxation, like civilization, is about community, not just individualism.
Obviously, taxes have to serve a purpose – taxpayers have to receive benefits from them. This is in fact the main argument behind the current proposal by City Hall’s Tax Reform Committee, although they construe it so narrowly as to render it meaningless. For the most part, they reduce it to direct availability of services near one’s dwelling. This obscures several dimensions, such as the fact that people spend most of their days away from their homes and that all commuters benefit from the traffic reduction enabled by the transit system, to cite two examples. More broadly, everybody benefits from healthy and well-functioning communities. We should ask for our tax-dollars to be well-spent, but that goes way beyond the narrow definition of services of the Tax Reform Committee.
What kind of tax provides the best mix of all of these criteria?  Property taxes of any type can be among the worst.  They are based on property values and those usually reflect people’s income only imperfectly.  On top of that, a user-pay system such as the Tax Reform Committee is proposing is among the most regressive.
The tax which achieves the highest level of equity and efficiency is an income tax, our tax system’s sole progressive tax. A progressive income tax is based on ability pay; it is relatively easy to implement and administer given the fact that the provincial government already does so already, and it is transparent – much more so than the process of property assessment.  
Unfortunately, Canadian cities cannot levy income taxes themselves.  But an administratively easy reform would be to lower property tax rates levied by HRM and
offset the loss in revenues with a comparable increase in the provincial income tax.  
These revenues would be rebated directly back to HRM.   
This tax shift could be for the HRM only or, even better, available to all municipal
governments.  Overall, HRM residents would pay no more tax than at present, but the tax would be progressive –it would meet the criterion of equity.
What are the advantages to a new component of provincial income tax transferred to the HRM?  It would simply add a line to the table calculating your provincial tax. It would allow HRM to move away from the tricky complexities of the property tax such as how accurate is your property assessment, how fair is the assessment in your neighbourhood, should your taxes rise when you make an improvement to your property or when property values in your area are rising faster than in HRM as a whole.   
We would no longer need continuous property re-assessments, appeals courts, and red tape related to property taxation, and the switch would cause almost no extra work for you or the provincial government.
This reform would also reduce the perceived unfairness between residential and business property taxes.  Business owners would see their property taxes fall, presumably by the same percentage as residential taxes.  While the ratio between the two would not change, the dollar drop in property taxes would be higher for those with the larger current tax bill.
Obviously, there are several details to iron out, for instance, guaranteeing that renters see a fall in their rents to reflect falling property taxes, the speed with which the reform is introduced, and the mechanics of raising additional revenues required by the HRM in the future.   
But a shift of municipal finance from the property tax to the progressive income tax
would be a move to real reform, instead of the inequitable system now being proposed to City Hall.
Mike Bradfield and Mathieu Dufour are economists with Dalhousie University.  Larry
Haiven is in the Management Department at Saint Mary’s University.  All three are
research associates of the Canadian Centre for Policy Alternatives – Nova Scotia.