Title: What Roles, Responsibilities, and Financial Tools for Local Governments
1What 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
2Outline 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
3Theory 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
4Theory 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
5Theory 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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7Distribution of Municipal Expenditures, Canada,
2005
8Trends 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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10Municipal 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)
11Municipal 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
12Municipal Functions
13Mandatory 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
14Distribution of Local Government Expenditures,
Selected Countries ()
15Theory 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)
16Theory 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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18Municipal Revenues, Canada, 2005
19Trends 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)
20Other 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
21Other 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
22Distribution of Local Government Revenue Sources,
Selected Countries ()
23Which 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
24Which 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
25Which 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
26Which 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)
27Which 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)
28A 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
29Role 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
30Financing Capital Expenditures
- User fees
- Property taxes
- Development charges
- Borrowing
- Tax increment financing
- Intergovernmental transfers
- Public-private partnerships
31Concluding 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.
32Concluding 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?)
33Concluding 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