Lawrence Solomon
National Post
May 16, 2002

This is the second in a five-part series on what should be done about our cities. Part Two: Lower taxes, not federal aid, is the way to help cities grow.

For more than two centuries, politicians and the public viewed cities as parasitic organisms that feed off the natural resources of the countryside. They didn’t fret that major city industries like finance and communications were burdened by extraordinary taxes, or that the democratic rights of city residents were stifled through under-representation in provincial and federal legislatures.

Suddenly, just about everyone – from the prime minister to provincial leaders to mayors, from the captains of industry to the heads of non-profit organizations – has come to see cities as great engines of the economy. Canada’s cities have been getting the short end of the stick, everyone now agrees, a deficiency that must be remedied for the good of our entire society.

All true. Most of our country’s wealth is produced in cities, and much more, still, would be created if the policies enacted by our governments discriminated less against city businesses and city residents. Yet somehow, the reforms proposed by most of the city’s new champions pay short shrift to the need to unburden urban industries or to empower urban residents. Instead, the reform effort overwhelmingly concentrates on one area – how to get more tax money into the hands of municipal governments, as if cities owe their greatness to governments and not to the efforts of their citizens.

TD Bank’s recent study – A Choice Between Investing in Canada’s Cities or Disinvesting in Canada’s Future – is a case in point. While this often sensible document makes many valid points – property taxes are inherently flawed, urban infrastructure needs to be renewed – it chiefly grapples with the different means by which city governments can raise money. And it unabashedly laments the failure of city governments to keep up with senior levels of government in heaping new taxes on their citizens. "Between 1995 and 2001, local government revenues edged up by a total of only 14%," the report decries. "This was only a fraction of the gains of 38% and 30% reaped at the federal and provincial levels, respectively, and actually represented a drop in real per capita terms."

The report – which generally praises U.S. cities for their greater taxing powers and their ability to garner more state and federal aid – downplays the fact that, by many measures, Canada’s cities have outperformed U.S. cities. Nor does it consider the possibility that our cities’ recent tax restraint, a measure forced on city governments by city electorates, has many benefits. As the latest census shows, people are now flocking to Canada’s cities. They come seeking economic opportunities; they come seeking excitement and personal freedom. They don’t come seeking higher taxes. "The paltry increase in the municipal take" that the TD Bank so disdains not only represents the will of the people, it bolsters the ability of city industries to compete and helps them compensate for the unlevel playing field that governments have forced on them. According to a recent Toronto Board of Trade survey, an astounding 56% of city businesses would consider leaving the city if property taxes increased significantly.

Ironically, the TD report well understands the harm that comes of high urban taxes. Businesses flee the city for low-tax outskirts, from which they continue to serve their city customers. The loss of city businesses lowers the city’s tax revenues, leading the city to raise taxes on the remaining businesses to pay for the costs of maintaining the city’s roads and other infrastructure. "A vicious cycle has been launched," TD says, "forcing municipalities to hike downtown property tax rates and other levies, which in turn prompts more urban flight."

Exactly. Yet TD and others who would protect the city reflexively argue for tax hikes, knowing how poisonous they would be to city economies, out of some blind belief that a bigger city government would nevertheless be better. They equate a more powerful government with an empowered citizenry, when the reverse is more often the case.

Many also decry the powerlessness of cities, and dream of constitutional change that would give cities the taxing powers they need to solve their problems. Then arguing from this position of weakness, city advocates plead for tax monies from senior levels of government – a share of the gas tax, a share of the income tax, a share of the sales tax, outright grants, anything that would boost municipal coffers.

Reality check: It is the cities that are the economic powerhouses, despite their lack of constitutional clout. Cities can right their house, entirely within their existing powers, not by special pleading but by exercising the powers that many of them already have, or can easily obtain.

Instead of desperately seeking all manner of additional sources of tax monies, cities could simply staunch the bleeding of their existing tax base, by stopping the vicious cycle that TD and others so accurately describe. For starters, they can give city businesses an offer they can’t refuse – lower taxes, an opportunity to control their costs, and an advantage over their suburban competitors in serving urban customers. City governments can accomplish this merely by tolling all commercial vehicles, whether or not they are owned by city businesses, for their use of city streets. In the case of Toronto, such a user-pay system, using satellite technology that is now in wide use by the trucking and taxi industry, would raise hundreds of millions of dollars per year in user fees, much of it from the 110,000 commercial vehicles that enter Toronto each morning and leave it each afternoon and evening. The city could then use most or all of that money to lower the absurdly high taxes that Toronto businesses now pay. Toronto businesses would generally save more in taxes than they pay in tolls, giving them a reason to stay in the city. Many former Toronto businesses that set up shop outside Toronto, thinking they could service Torontonians without paying for the use of Toronto roads, would have an incentive to return. The vicious cycle would become a virtuous cycle as returning businesses bolstered the city’s tax base, lowering taxes across the board.

That cities can look after themselves doesn’t mean that the federal and provincial governments should continue to discriminate against cities. But the way to help does not involve putting cities on the dole – the request of Toronto Mayor Mel Lastman, who thinks that free money from senior levels of government would answer his city’s problems. The TD Bank, to its credit, understands that free money leads to unaccountable, counterproductive relationships. Most others do not, especially if the free money comes with commitments for long-term funding. Unfortunately, free money would be particularly harmful if it could be relied upon for many years to come. In much the same ways that foreign aid has undermined Third World economies, that domestic transfers have debilitated the Maritime economy, and that federal grants have robbed our Aboriginal communities of their future, putting cities on the dole would soon strip cities of their entrepreneurial advantages and their sense of community, as municipal governments became expert at courting their federal and provincial paymasters instead of their own citizens.

To improve the economic capabilities of cities and end some of the many inequities, senior levels of government can start by eliminating taxes that target city industries and city residents. The federal government can abolish the hidden surtax city residents must pay through their phone bills, for example, and the capital tax that primarily targets city industries such as the financial industry. Provincial governments also have discriminatory taxes – such as Ontario’s tax on amusements, which primarily affects city establishments.

City governments are justified in wanting tax reform. They are not justified in doing nothing in its absence. These engines of the economy should just get on with it.

Next week: Toronto wants another million residents. Is that too much? Or too little?

Other articles in this series:
Lawrence Solomon’s Next City Part One:
Globalization equals urbanization
Lawrence Solomon’s Next City Part Three:
One million more Torontonians
Lawrence Solomon’s Next City Part Four:
Learning the wrong lessons from U.S. cities
Lawrence Solomon’s Next City Part Five:
Advice to cities: take control of your province

Related articles on tolls by Lawrence Solomon:
Toll roads v. the Canadian Accident Association
London’s green streets
Toll skeptics be damned: London’s rolling
The toll on business
The take from tolls
Don’t tax, toll: Presentation to the Canadian Home Builders’ Association
London unjammed
Toll today’s roads, don’t build more
How the free road lobby led us astray
Toll road commentary
Road safety
How to cut highways’ human toll