Toronto, like many Canadian cities, faces a growing number of challenges — changing demographics, increased income inequality, increasingly complex expenditure demands, growing social service needs, and deteriorating infrastructure, to name the most notable. At the same time, the city’s revenue sources have remained largely unchanged — property taxes, user charges, the land transfer tax, occasional provincial and federal grants for infrastructure projects, and a hodgepodge of relatively small revenue sources including licences, permits and fees.

This growing divergence between expenditure needs and revenue sources means the services and infrastructure that residents are demanding from their local government cannot be delivered with existing revenues. Yet, all too often, the only solution we hear is budget cuts across the board.

In a new paper published by the Institute on Municipal Finance and Governance, we make a case for a bolder commitment — giving cities like Toronto access to more taxes, to bring them in line with many large U.S. and European cities.

Although the property tax is a good tax for local governments and could be increased in many Canadian cities, additional taxes would give cities more flexibility to respond to local conditions. For example, an employee-based personal income tax (often referred to as a payroll tax) would tax commuters who work in the city and use city services but live outside the city and might not otherwise contribute to the cost of those services.

Similarly, a sales tax where it is feasible would tax commuters and visitors. Additional taxes mean that large property tax increases could be avoided, an important benefit for taxpayers who are asset rich but income poor and who would otherwise have difficulty meeting their property tax obligations.

User fees are another important source of revenue and equally as important, they play an important role in altering economic behaviour. Properly designed fees enable citizens to make efficient decisions about how much of a service to consume and governments to make efficient decisions about how much of the service to provide. Underpricing (or failing to charge for) services can lead to overconsumption and an ensuing demand to spend more than is necessary on very costly infrastructure.

For large Canadian cities like Toronto, personal income taxes have the potential to bring in a significant amount of revenue. Fuel and motor vehicle taxes could be earmarked for public transit and transportation. For small and medium-sized municipalities, however, new taxes may not be appropriate because they may not generate sufficient revenues to justify the tax. They may have to rely more heavily on transfers from provincial governments.

Regardless of the revenue source, however, it is important that a clear link be established between those making spending decisions and those selecting the appropriate revenue source. A direct link leads to more accountable governments and a greater willingness on the part of taxpayers to pay because they know where their tax dollars are being spent.

In line with permitting cites to have access to additional taxes, they must also be responsible for setting their own tax rates. In this way, accountability to local taxpayers would be enhanced by linking taxes to services. This does not preclude cities from piggybacking new taxes onto the provincial tax with the province collecting the revenue and remitting it to cities. In fact, it would be cheaper to administer.

While it is difficult to implement new taxes, the consequences of not doing so may be worse. Many cities around the world have access to revenues from sources such as income, sales, hotel, fuel and motor vehicle taxes. It’s time for Toronto to have access to some of those taxes as well.

Harry Kitchen is professor emeritus at Trent University and Enid Slack is director of the Institute on Municipal Finance and Governance and adjunct professor at the University of Toronto’s Munk School of Global Affairs. Their upcoming paper, “New Tax Sources for Canada’s Largest Cities: What Are the Options?” will be released by the Institute on Municipal Finance and Governance on Nov. 23.