Municipal income tax could help cities fund services: Canadian policy group

How would you feel about paying another level of income tax?

That’s the pitch from the Canadian Centre for Policy Alternatives, which says it would be a way for municipalities to collect potentially millions more in much-needed revenue.

Senior economist David Macdonald explains the idea is to let city governments access the Canada Revenue Agency, which could tack on a one per cent municipal income tax to certain brackets.

“The modest proposal is to allow cities access to income taxes, allow them to access the basic mechanisms of income taxes, so that instead of being heavily reliant on property taxes, they can diversify their revenue base, and access income taxes if they want,” he told CityNews.

“It is potential access with some flexibility. If they wanted to focus more on higher income earners paying more in taxes, that’s something they could opt for, although it would raise less than modifying a broader bracket that applies to more people. [More people] would raise more money, but more people would pay it.”

Macdonald says the idea comes as cities, especially over the last decade, have been “squeezed” for cash. Every year, city council debates how much to raise property taxes, which in turn, offers limited increases in revenue.

“They see big programs downloaded from higher levels of government. City governments are becoming quite large. We’ve got seven cities in Canada that are bigger than the smallest territory, in terms of total expenditures — these are big sub-national governments, but they don’t have the same tools as provincial and territorial governments in terms of raising revenue,” he explained.

Macdonald believes the City of Vancouver alone could net a further $100 million annually if it could collect a one per cent tax on annual incomes over $56,000.

“The other big issue with property taxes is they’re politically impossible to raise adequately in terms of continuing to fund services.

“For instance, from 2019 to 2022, the revenue from property taxes only went up 7 per cent. But if cities had been charging income taxes or had access to income taxes, instead of going up 7 per cent, the revenue from income taxes would have gone up in some cases 50 per cent.”

Macdonald explains the relying on property taxes for revenue is inherently challenging, because despite property values rising, “the revenue brought in by the city says identical.”

“That is how property taxes are designed in Canada, which is that even if property values go up, so the value of homes go up 10, or 20 per cent, the city doesn’t see 10 or 20 per cent more revenue, the tax rate goes down to completely offset it,” he explained.

Prior to the 1930s, it was fairly common for cities in Canada to leverage person income taxes as revenue streams, Macdonald said.

“Those powers were abandoned in the 1930s and early 1940s, in part because of the war effort, and they were never returned. And so if anything, these are powers that cities used to have, you know, about a century ago, but they haven’t really had since the Second World War.