politics The Property Tax Myth of Campaign 2014

The leading candidates promise they can keep property taxes around or below inflation. Here's why that promise is either irresponsible or the product of wishful thinking.

On the mayoral campaign trail, it has become an accepted truism through sheer force of repetition: Toronto cannot afford a property tax increase beyond the rate of inflation.

But this has more to do with addressing what (some) people want to hear rather than reflecting the true state of Toronto’s financial needs. The reality is, it’s difficult to imagine any of the three leading mayoral candidates can keep their property tax promises while also making responsible financial and investment decisions for the City’s future.

Here’s why that’s the case.

The three frontrunners each make similar property tax promises. Doug Ford promises that property tax revenue will increase below the rate of inflation, John Tory says his increases will be within the rate of inflation, which is assumed to be around 2 per cent, and Olivia Chow gives herself some wiggle room—up to 3 per cent, depending on inflation and the City’s needs. A 1-per-cent property tax increase brings in about $25 million for Toronto’s $9.6-billion operating budget.

Importantly, an inflationary property tax increase only maintains the City’s ability to pay for existing services. Unlike income or sales taxes, where revenue increases with economic growth, property taxes need to be adjusted each year to account for inflation.

For this reason, a property tax increase at less than the rate of inflation would require some combination of “efficiencies,” service cuts, decreased budget pressures, or other revenue increases to make up the difference.

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The leading mayoral candidates have made other commitments when it comes to revenue: they have promised not to implement new taxes such as a sales tax or congestion fee, pledged a TTC fare freeze for their first year in office, promised not to adjust development charges, and promised to flatline or decrease user fees. Olivia Chow has promised to make a change in the land transfer tax that would generate $20 million more annually, while Doug Ford has promised to slash the tax by 60 per cent by the end of his term in office. To replace that much revenue would require an 11-per-cent property tax increase.

Taken together, this set of policies from the leading three candidates sends a simple message to the electorate: that Toronto can cope with its budget pressures using existing tools, that residents are overtaxed and cannot afford further increases, and that improving the city is simply a matter of electing a capable manager as mayor.

So let’s look at the budget the next mayor will have to manage, and the choices they will have to make for future budgets to address Toronto’s needs.

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While previous budgets began with larger opening pressures, the 2014 budget (which contained a budget pressure half this size) cautions this is not a good scenario. As City staff write in a budget document [PDF, page 36], “Based on these estimates the City will be challenged to find efficiencies and other cost savings or revenue changes to address the resultant pressure.”

Toronto’s outgoing city manager, Joe Pennachetti, has repeatedly said there are limited efficiencies and savings to be found in the budget.

And Toronto’s surplus is much less likely to save the budget this year. While recent surpluses have ranged from $200 million to $350 million, this year’s is projected to be $1.2 million.

While the final number often turns out to be better than staff’s original estimates—they like to build in a buffer—there are cost pressures that suggest this year might be difficult. Court Services is projected to bring in $27 million less than projected [PDF]. As of the end of May, the City had issued 47 per cent fewer parking tickets than they had at that time in 2013, and 59 per cent fewer compared to 2012. The City also faces $8 million less than expected from TTC ridership (a figure that will be partially offset by lower than expected diesel fuel costs).

Then consider that the TTC has requested $19 million in additional funding for 2015 [PDF] to improve lacklustre bus service and crowding standards. Council could defer this funding, but it would only delay the inevitable and avoid the problem that Toronto’s surface transit is underfunded. For his part, Doug Ford—who has repeatedly voted to slash bus service—has promised he would invest $30 million in 2015, not just $19 million. He has not indicated where he will get the money. Olivia Chow supports the TTC plan, and says funding will come from an increase in the land transfer tax to homes that are sold for more than $2 million.

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Then there’s the police services contract, of which the current version expires at the end of 2015. The police force represents the single biggest line item, and the rate of its growth has exceeded that of other major divisions. But the police force still had about 450 approved positions unfilled at the end of 2013, and will expect some of these to be filled. Increasing the force by 100 positions costs approximately $10 million.

Then consider that the two mayoral candidates leading the polls, John Tory and Doug Ford, have committed to the Scarborough subway extension and its accompanying property tax increases. That will add 0.5 per cent to the property tax total in 2015, and 0.6 per cent in 2016. Doug Ford’s additional day-one promise to drop 15 per cent of the land transfer tax would cost an additional $52 million in revenue.

Then realize $86 million of this deficit is caused by the loss of provincial TCHC funding, a problem the City deferred for a year by using one-time funding. This is a pressure that’s over and above typical year-to-year difficulties, and will be another $43 million in 2016.

The creative accountants out there may be wondering if the City can’t just have some fun with its capital budget in order to make up the difference. But the pressures on the capital side, from which the City pays for large, multi-year projects and takes on debt, are even greater than on its operating budget.

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With so many items deferred and unfunded, it would be irresponsible to continue down that path.

Without a healthy surplus on which to rely, there could be the temptation to go to reserve funds. This would also be irresponsible, as it’s an unsustainable way to fill ongoing budget pressures that are partially caused by an unwillingness to raise taxes (and partially caused by a funding imbalance with the province, but that’s a structural argument for another day.)

If Toronto were overburdened with taxes, then the property-tax-at-inflation idea would make more sense. But Toronto’s property taxes are by no metric high relative to the city’s peers.

In a U of T study on Toronto’s finances published this year [PDF], co-authors Enid Slack and Andre Cote found that “residential property taxes are low and have been growing slowly.” Other findings include that Toronto has a revenue problem, not a spending problem, and that the city faces mounting infrastructure pressures.

Toronto households pay by far the lowest property tax mill rate in the region, but this isn’t the best measure since house prices and income vary. Instead, this chart from the U of T report shows that Toronto’s property taxes are affordable on an average-income basis:

This is in part because inflation has outstripped property tax increases by 5 per cent since 2000, and Toronto has increasingly shifted the burden to user fees and sought efficiencies in order to minimize property taxes.

According to Pennachetti, those days are over. In the 2014 budget process he told council that greater-than-inflation property tax increases will have to be “considered” in 2015 and future budgets.

Even Frank Di Giorgio (Ward 12, York South-Weston), Rob Ford’s budget chief in the second half of his term, has said that it’s “unreasonable” to expect property taxes to increase below the rate of inflation without meaningful service cuts being made.

There are other pressures on the property tax that make it difficult to achieve increases at or below the rate of inflation. Changes implemented by the Ford administration create more of a burden on “capital from current,” which means that 21 per cent of the capital budget will be funded from operating funds such as property taxes—double the current amount. Both John Tory and Olivia Chow have also committed to further reducing the ratio of commercial property taxes to residential property taxes, meaning that residential property tax increases will have to be greater over the next few years to make up the difference.

All of this is before the candidates’ spending plans are added up. The most extensive of these are Doug Ford’s and John Tory’s optimistic transit plans, which demonstrate the candidates’ approach to the City budget: by making unrealistic promises and telling people what they want to hear, they show as much disrespect for voters as they do for basic math.

Olivia Chow’s platform is the most fiscally responsible of the three leading mayoral candidates, although her competition make that distinction particularly easy for her to win.

However, none of them have been forthright about Toronto’s needs and the difficult choices it faces in addressing them responsibly. This may make it easier to win a campaign, but it makes it more difficult to draw on the political will to do the right thing when serious issues arise.

For the past four years, Toronto’s political discourse has suffered from a lack of honesty about what the City needs to do in order to grow responsibly. The 2014 campaign represented an opportunity to move beyond those politics, but instead, expedient political choices kept candidates—with the exception of David Soknacki and Ari Goldkind, neither of whom has polled above 6 per cent—from campaigning with the honesty Toronto deserves from its leaders.