Thursday, February 2, 2012

Municipal Tax Reform

Mayor O'Keefe and others have been calling for a "new fiscal arrangement" with the provincial government.  It is easy to get cynical about politicians fighting over tax revenue: they want credit for spending, but don't want to get blamed for tax increases.  But the mayor's proposal has merit as a means of reducing income inequality.

The main sources of tax revenue for the City of St. John's are property taxes and the water tax.  The  residential property 1.06% of the assessed value of that property per year. The water tax is a constant $615 per residence.

According to a report by Statistics Canada, property taxes are among the most regressive taxes that Canadians pay.  This means that property tax tends to make up a larger share of income for the poor than for the rich.  The reason is quite simple:  a family living in a $400,000 home tends to have an income more than twice as large as a person living in a $200,000 home, but pays only twice as much tax.  The water tax is even worse in this regard: it's a flat rate independent of the income of the home owner.

In contrast, the main provincial taxes tend to be progressive.  Income taxes are progressive because the tax rate increases with income (with some exceptions).  Sales taxes tend to somewhat regressive, but less so than property or water taxes. It follows that reducing tax collection by the city and increasing collection by the province should shift the tax burden from the poor to the rich.

This observation motivated a trio of Halifax based economists to write an article in support of introducing a municipalities income tax to be raised by the provincial government.

Another idea: abolish the water tax and replace it with a larger property tax.  This would immediately reduce the tax burden on our poorest citizens.

A third idea:  institute a progressive property tax.  There is no fundamental reason why property tax should be a fixed percentage of the homes value - the percentage could increase with the value of the house, similar to income taxes.  A progressive property tax was recently introduced in Singapore, but doesn't seem to exist anywhere in Canada.

As a bonus, these policies provide a tax incentive to build more affordable housing.

1 comment:

Anonymous said...

What I like about this is the simplicity of making the system work for people rather than the other way around.

Something of the proposal also seems like a call for decentralisation? While there would still be multiple layers of tax, the local (municipal) would be more active in decision making, no?