What Roles, Responsibilities, and Financial Tools for Local Governments

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

• Enid Slack
• Institute on Municipal Finance and Governance
• Munk Centre for International Studies
• University of Toronto
• Presentation to the Round Table on Renewing Local
  Governance in Atlantic Canada
• Moncton, June 9, 2008

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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
• 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

• 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

• Finance follows function assign expenditure
  responsibilities first and then revenue raising
  powers
• Balance expenditure assignment and revenue
  assignment

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Distribution of Municipal Expenditures, Canada,
2005
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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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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
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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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Theory of revenue assignment

• Guidelines for revenue assignments
• Federal and provincial governments should levy
  broad-based taxes (e.g. income and sales)
• 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 (contd)
• Taxes should be borne by residents of same
  jurisdiction where benefits are enjoyed (minimize
  tax exporting)
• Local taxation (at least local tax rate setting)
  promotes efficiency
• Intergovernmental transfers are appropriate to
  address spillovers, equalization

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Municipal Revenues, Canada, 2005
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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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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 dont 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 cant 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

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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