Time for an adult conversation about taxes

Opinion

Hey there, time traveller!
This article was published 14/09/2022 (735 days ago), so information in it may no longer be current.

Earlier this year, while cleaning out some old files, I found my property-tax assessment from 1993. I had just received my 2022 assessment, and my economist’s “Spidey” sense tingled. This mental itch kicks in when we economists compare costs and prices over time – we automatically adjust for inflation.

My 2022 property tax bill seemed too low. Once I licked the tip of my pencil and performed complex calculations, I found I was right — my property tax has risen by 46 per cent over this 30-year period, while general inflation has increased by 67 per cent. Time to do some investigation.

According to the City of Winnipeg’s multi-year budget (2020-23), presented to council in 2019, for the past two decades Winnipeg has pursued a deliberate policy of first freezing property taxes then initiating low annual increases. During the tenure of mayor Glen Murray, many expressed concerns that Winnipeg’s property tax was “uncompetitive”; the thinking at the time was high property taxes discouraged population growth and business investment.

So, over the 20-year period from 1998 to 2019, Winnipeg slashed its mill rate — the charge per $1,000 in property value — from about $33 to $13. By shifting the financial burden of running the city to various fees, reducing debt financing, allocating less to capital (infrastructure), cutting spending and taking a dividend from the water utility, the city has been able to cobble together diverse revenues to compensate for a declining contribution from taxes.

Currently, Winnipeg has the lowest average municipal taxes among 12 major cities. Compared to this benchmark group, Winnipeg also has low tax revenues from commercial and industrial properties. Consequently, this revenue constraint means our per-capita investment in urban capital has fallen precipitously and is now near the bottom of the comparison group.

Many fiscal challenges confront the next city council, but two are worth highlighting:

First, the low tax revenue has created a structural deficit. The projected growth in revenues from taxes and fees will not cover future costs, especially investments in crucial infrastructure. If tax increases are off the table, two options exist: debt financing, which council has rejected, or relying on provincial and federal support.

The recent announcement that Winnipeg will receive financial support from the federal and provincial governments for the $550-million second phase of the North End sewage plant upgrade illustrates this.

Now, even if the city were to increase its property tax, major infrastructure upgrades will always require support from the province and Ottawa. The point is that Winnipeg applied for sewage-plant upgrade support almost three years ago, and much more work remains. Costs for the current project have risen due to expansion of scope and the current inflationary environment, and we may not be able to go back to senior governments for major cash infusions anytime soon. Our fiscal future looks bleak.

The second concern is the rising cost of operations. Like all large organizations, salaries comprise the major expense for the city; protective services, police and fire especially, account for an increasing share of the budget, steadily outpacing the costs of other municipal workers.

Another cost driver is road repair and construction. We all complain about our poor roads and our two seasons – winter and construction — and the reality is that road maintenance consumes an ever-increasing share of the capital budget. However, this expenditure is a bit like running in place … we never get ahead.

Previous councils have avoided debt financing, adhering to the idea that this represents fiscal prudence. Debt financing works when the investments lead to lower costs and increased productivity, but even if council were to change its heart on debt financing, the moment may have passed, as rising interest rates compromise this source of funds.

For the past two decades, anyone running for mayor or council has avoided any hint we need to raise revenues, either through property-tax increases or by restarting an impact fee on development. This is foolishness. It is time that mayoral candidates treated voters to an adult conversation on how we are going to finance our future.

No virtue exists in penny-pinching if we fail to maintain core functions. Winnipeg will lose its competitive edge to other cities that are making serious investments that underpin urban quality of life. Quite simply, property taxes must increase, and by a lot.

Gregory Mason is an associate professor of economics at the University of Manitoba.