What Happened in Calgary
It’s been a tough few years for Calgary’s business community. Downtown vacancies caused by the flagging oil and gas industry have resulted in lowered property assessments, shifting the property tax burden across the rest of the city. Remember, property taxes are relative, they depend on both how much money the city budgets as well as the assessed value of properties. If all assessments doubled but the city budget stayed the same, property tax wouldn’t increase. Conversely, if the city budget doubled and assessments remained the same, taxes would double.
When Calgary’s downtown assessment base dropped, this meant that other non-residential properties picked up the slack, resulting in huge and untenable increases in property taxes. This, in turn, sparked protests from the city’s business community and ultimately, a cap on property tax increases paired with spending cuts by the City.
The image above shows one business’ property tax increase from one year to the next.
We could choose to view what happened in Calgary as a one-off, an anomaly that surely couldn’t happen here. Except it can, and we need to get ahead of the problem before it impacts our businesses and bottom-line. We’ve already faced a smaller version of this issue in recent years due to the sluggishness in our own downtown business sector.
What happened in Calgary indicates two fundamental issues to me, both of which could impact Edmonton; 1) an economy that is too reliant on one industry is left exposed if and when that industry falters and 2) an over-reliance on property tax can wreak havoc when assessments swing.
An Economic Snapshot: Edmonton and Calgary
When looking at Calgary’s struggles this past year, we have to ask ourselves if it’s really the current Calgary City Council’s fault that the assessment base shifted so rapidly. I think that the answer to that question is a definitive no. The major catalysts for Calgary’s woes were the sustained fall in oil prices, the increasing gap between higher world prices and Canadian oil, and the faltering of the Trans-Mountain pipeline expansion (TMX) which then led to a heavy hit to business confidence and exodus out of downtown. Calgary’s Council did try to get TMX approved, but with little leverage, it was unsuccessful. Because Calgary is so reliant on the oil industry a hit like this had huge ramifications for their non-residential tax base.
This isn’t Calgary’s fault though. It’s the fault of consecutive provincial governments in Alberta who sold us the myth that oil and gas would boom forever and didn’t take the necessary steps to diversify our economy sufficiently. The challenge for this provincial government is the same. They need to do more, in partnership with our cities, business community, and the federal government to diversify the economy. I’ve been encouraged by the UCP government’s commitment to long-term financial success in our province, but that success won’t happen unless serious steps are taken to shift our economy so there is less reliance on a single industry.
As it stands, 28 percent of Calgary’s GDP comes from natural resources (listed as Primary and Utilities above), which is dominated by oil and gas. This is an improvement from the 1980s when over 40 percent of its GDP was tied up in this sector. However, the 28 percent doesn’t tell the whole story. The natural resource sector also touches finance (about 19 percent of their GDP), construction (7 percent), and manufacturing (7 percent) among others. So when natural resources slip, it has knock-on effects throughout the economy. Over-dependence on any sector can cause problems but especially when that sector is as volatile as natural resources. In fact, energy (including oil and gas) is not included in many inflation counts because the prices are too volatile. You can imagine what this says about an economy dependent on them.
Edmonton’s economy is more diverse than Calgary’s with only 13.5 percent of our GDP coming from natural resources. However, that number is still higher than any other sector of our economy, notably beating out construction (10 percent), finance, insurance, and real estate (10.8 percent), and health and social services (8 percent). What’s more, the communities that comprise the metro Edmonton region and contribute to our collective economic competitiveness are also highly reliant on natural resources. The picture in Edmonton is better than in Calgary but we’re not out of the clear yet. Real work remains if we want to have a truly robust and diverse economy. This is why the work of Edmonton Global is key to driving innovation and diversification. And this is why the City of Calgary through its own economic development arm invested $100 million in their Opportunity Calgary Investment fund.
Diversify the Economy and Diversify Revenue
Economic diversification is important for cities no doubt. The hard part is that much of this diversification is the province’s responsibility. Diversifying our revenue streams is the second step. This also is a dubious ambition for cities – see Paying for Edmonton Part 1. Instituting more flexible revenue streams that rise and fall with the economy would allow us to save more in good times and provide relief in hard times.
As it stands, we can’t really do that. Property taxes, our main source of revenue, don’t rise and fall with the economy, although we can make budgeting decisions based on the economy. Since tax rates are based on what Council budgets divided by the total assessment, they are not flexible in the same way that something like income tax is for the federal government.
Edmonton and Calgary both depend on property taxes for about 50 percent of each of our city’s operating budgets. Calgary, however, relies more heavily on non-residential taxes which played a key role in the tax spike. This 50 percent of our total revenues is split roughly evenly between residential and non-residential properties in Edmonton. This indicates the first issue, that an over-reliance on property tax, can quickly blow up when the assessment base shifts. This happens because when the assessment base shifts, all else being equal, the tax burden shifts too.
So when one person’s property dips in value and another person’s stays the same, the other person will have to pay more since the budget is already set. When this happens on a large scale, as with Calgary, it means that a lot of people can end up paying significantly more without their property values or the City budget rising significantly.
Even after Calgary acted to cap the property tax increase for non-residential properties, it was left with a hole in its budget that needed to be filled. Calgary has cut $60 million so far from a number of services including transit, policing, and fire fighting. As reserves are used up this number may have to rise, or taxes will need to be “thawed” and subsequently increased. It’s vital to note, however, that this problem didn’t arise because Calgary City Council doesn’t care about the issue, rather it demonstrates an issue with the way our cities are built. Both in terms of our reliance on property tax and the natural resource economy, we are putting ourselves at greater risk. We need to build our city so that we can proactively adapt to the economy, and not react only when the pain has already been felt.
In cities where the economies are more diversified a slowdown in one industry doesn’t wreak havoc on the municipal budget since an individual industry is only a small part of the whole pie. In a city like Calgary, one industry’s troubles can do significant damage to the local economy. The fault here isn’t on today’s Council nor even on past Council’s. There is only so much a City government can do to influence the economy. Rather we must look to provincial and federal governments who were content to let Alberta remain dependent on oil and gas, knowing that if a day came when the industry slipped that all of Alberta would be affected.
The solution for our city isn’t to stop using property tax, but to employ a greater diversity of financing tools. Property taxes are arguably the most stable form of taxes, making them an important foundation for city-building. The issue isn’t with property taxes as a whole, merely how much we use them today.
Next week I delve into some of the ways that we can expand our revenue toolkit, lessen our reliance on property taxes and focus our expenditures more strategically.