Do Municipal Governments Need More Tax Powers? A Background Paper on Municipal Finance in Alberta

Abstract

Local governments in Alberta have faced considerable and variable challenges over the past 60 years. For example, the rapid population and economic growth during the 1950s, ’60s and ’70s created exceptional demands for schools, schooling and municipal infrastructure; demands exceeding those of the last 30 years. Local and especially municipal financing has relied heavily on the property tax throughout. Questions are being asked today about whether the property tax is sufficient for municipal government. Our historical analysis provides insights into the fiscal situation of Alberta’s municipalities that can assist in addressing those questions. The main findings are highlighted here. We conclude that current demands, though considerable, are not creating stress on the property tax as a source of municipal revenue. • The property tax burden in Alberta during the past decade is the lowest that it has been over the past 60 years. Presently, property taxes are about 3.5 per cent of personal income. They were as high as seven per cent during much of the 1960s and averaged in the four to five per cent range from 1950 to 2000. Local and provincial school taxes were responsible for most of the fluctuations in the property tax burden. Municipal property taxes ranged from two to three per cent of personal incomes and recently amounted to about 2.5 per cent, a level typical of that over the past 20 years. • Investment in local infrastructure has over the past 30 years been at half the rate of that of the previous 30 years. Only since 2006, with the assistance of provincial capital grants, has infrastructure spending shown upward movement. Capital spending lagged population growth for many years and probably contributed to a deterioration of infrastructure. • Municipal current or operating expenditures (about three-quarters of the total) have been a declining share of personal incomes since the late 1980s and, since 2000, are a smaller share than observed since the early 1950s. • Since the mid-1990s, municipal total expenditures (current plus capital) have represented a smaller percentage of personal incomes than in any years since 1953. • The cost of financing municipal debt has decreased from 20 per cent of municipal expenditures in the mid1980s to about four per cent today. Other categories have remained comparatively stable. • Government grants to municipalities were greatly reduced from 1993 to 2004 but have since increased and now amount to about 19 per cent of total revenues. • Over 90 per cent of municipal own-source revenues come from property taxes, investment income, and the sales of goods and services. Over the past 30 years, sales generated about one-third of the total. The property tax share has increased from 47 per cent to 55 per cent; essentially absorbing the declining contributions from investment income. • Since the 1960s, municipal long-term debt has declined from 20 per cent of personal income to four per cent. Financial assets of municipalities amount to eight per cent of personal income. Since 2000, Alberta’s municipalities have held net financial assets; that is, they have been net lenders. Overall, Alberta municipalities are in a solid, even favourable financial position. Debt and debt-servicing costs are low, the burden of municipal property taxes has remained stable at a moderate level for many years, and the total property tax burden in Alberta is (and has been over the past decade) lower than at any period in the past 60 years. The Finances of the Cities of Edmonton and Calgary Much of the interest in municipal finances has to do with the situations of “big cities.” An overview of the finances of Calgary and Edmonton provides insights into the Alberta “big city” circumstances. Comparisons between 1996 and 2011 give some historical perspective. Major observations are: • Property taxes account for about 40 per cent of city revenues. • Approximately one-half of property taxes are funded by non-residential property. That is, residential property taxes fund about 20 per cent of city services. • Calgary and Edmonton had, at $3,435, equal per capita revenues in 2011. Those amounted to 7.1 and 8.6 per cent of the personal incomes in the two cities. These percentages show that municipal governments in the big cities are (relative to income) larger than the typical Alberta municipal government (5.9 per cent). • Transportation, protection (police, fire, EMS), environmental services (e.g., water, sewage, waste), recreation, and general government (legislative and administrative) account for 80 per cent of city expenditures. Spending by cities on social programs (e.g., health, social welfare, social housing) is less than five per cent of the total. • Outlays for capital assets represented 40 per cent of total outlays in 2011. This is up from 20 per cent in 1996. • City property taxes represent a greater percentage of personal incomes in 2011 than they did in 1996 but, because of the declining importance of school property taxes, the total property tax bill in Calgary has increased modestly (from 3.7 to 3.95 per cent of personal income) and has decreased slightly in Edmonton (from 4.2 to 4.06 per cent). • The per capita city debt is $3,065 per person in Calgary and $2,430 in Edmonton. Those amounts are equivalent to 6.4 and 6.1 per cent of personal incomes. Compared to 1996, that percentage is almost unchanged in Calgary but is up from 4.6 per cent in Edmonton. Since 1996, Calgary and Edmonton have experienced the challenges of coping with growing populations and of catching up after low rates of infrastructure investment in the 1990s. Despite those demands, city property taxes (at 2.8 per cent of personal income in Calgary and 3.0 per cent in Edmonton) have increased somewhat between 1996 and 2011, but have done so in an environment where the total (city and school) property tax burden has hardly changed. Debt has risen relatively in Edmonton since 1996, but the city debt is the equivalent of just over six per cent of personal incomes in both cities and is essentially unchanged in Calgary. Both cities appear to be on solid financial footings and coping well with the recent challenges.