I’ve heard often from Edmontonians who aren’t happy about their property taxes. To some degree, this is normal. However, in recent years, the volume of citizens concerned about taxes has increased. People, particularly seniors and businesses, are worried about how they’re going to afford property taxes both now and in the future.
This is indicative of a larger struggle within the City of Edmonton over our financial situation, particularly because our budget is so dependent on property taxes. We’re not in crisis yet and we don’t want to be, so solutions are needed now. That’s why this blog will be the first in a series of five about our financial situation as a city.
This effort is a continuation of my blog from August about the importance of better budgeting, specifically priority-based budgeting.
In this series, I’ll be writing about how we finance right now, the surprisingly important role of education taxes, Calgary’s fiscal woes, alternative financing options, and finally, a reflection on the partnership between Edmonton and the provincial government. I believe these blogs come at a particularly fitting time given that the provincial government is mulling its fiscal health in light of the recent MacKinnon Report.
The Backbone of our Budget
Unlike the provincial and federal governments, Edmonton’s financing powers are much more restricted. Edmonton’s ability to govern and finance is determined by the Municipal Government Act (MGA), its associated regulations and the Edmonton City Charter.
Until recently, all municipalities were governed by the MGA, from Alberta Beach to Calgary, from Smoky Lake to Edmonton. Recognizing the increased responsibilities that Edmonton and Calgary face as Alberta’s two biggest cities, the province negotiated the Big City Charters. These charters give Edmonton and Calgary increased powers on top of those in the MGA. While the initial city charters and subsequent amendments left much to be desired, they were at least mild recognition of the scale of the challenges and associated costs for big cities.
How We Budget
Edmonton has two budgets; an operating and capital budget. You’re probably more familiar with the operating budget which pays for things like police, bus drivers, filling potholes and snow clearing. The operating budget is fairly consistent year to year which makes planning predictable. The operating budget is funded by a variety of sources, which can be seen below.
The capital budget, on the other hand, deals with actual things like buses and recreation centres and is “lumpy” year to year due to the nature of big purchases happening all at once. The capital budget is funded differently from the operating budget, with a portion being funded by provincial and federal government grants. Debt also plays a significant role in the capital budget but cities don’t take on debt the way the federal and provincial governments do. Edmonton can only use debt for capital projects and not operating expenses. Even when we do use debt we must have an identified funding source for annual debt payments. When the feds or province wants to debt finance operating costs they have no such restrictions, which is why they often run deficits. Edmonton, in fact, has a more conservative debt management policy than our provincial masters require.
How We Raise Revenue
Under the MGA and City Charter, Edmonton has a limited number of financing options. We can’t employ income taxes, corporate taxes, or consumption taxes of any kind. We do, however, have the ability to tax property, both residential and non-residential, and to create certain property tax subclasses. The ability to make residential subclasses with different rates, for multi-family as an example, is relatively unlimited, but is more restricted for non-residential properties.
There is also a limit on the spread between residential and non-residential tax rates. Aside from property taxes, we can levy user fees for services like transit, local improvement taxes for infrastructure like sidewalk renewal, as well as franchise fees for services like utilities. We can also employ investments, off-site levies, frontage taxes, and business taxes among other smaller options. Financing from other orders of government comprises less than 5 percent of our operating budget and just over 35 percent of our capital budget. We also have reserves and endowments funds that generate interest which we can use for both operating and capital projects.
The City of Edmonton is also extremely fortunate to be the owner of its own environmental solutions and utility company, EPCOR, which pays us a huge, $160 million dividend every single year. Imagine what it would mean for taxes and/or services if we didn’t have that.
Assessing The Problem
Looking at our existing toolkit, it’s no wonder that we’ve become so reliant on property taxes. Even as funding is slashed and political responsibilities rise, either because they have been downloaded (social services) or because they have become increasingly relevant (climate change), we have not seen a substantial increase in financing powers. For instance, cities in Alberta are not allowed to levy sales taxes, income/payroll taxes, tolls, or taxes on emissions.
So, how we finance is actually quite limited. While there are other financing options available to our city, we are largely dependent on provincial legislation to expand our financial powers, and both the province and federal government to provide dependable granting opportunities. Ultimately, however, while I think that grants from other orders of government are important in the short-term, the only long-term solution is an increase in our financing capacity and a change in how we approach service delivery.
How Inefficient Growth Hurts Everyone
How we finance our city is inextricably linked to how we build our city. The denser we are, the less it costs to service our city per capita, whether that means building and maintaining infrastructure or providing services like snow clearing. There are ways in which higher density costs more, to be certain, but on balance greater density means lower costs per person. Inefficient growth has led Edmonton to become a very land large city with a population density 1/44 of Vancouver’s. There is also evidence suggesting that upward economic and social mobility is significantly boosted by greater density.
Edmonton’s population density in the 1940s
Edmonton’s population density today
Looking at population density, it’s easy to understand why running a city like Edmonton costs more than running a city like Vancouver. If Edmonton continues to expand rapidly outwards, we will not only eat up the surrounding farmland and green space, we will also be creating a more costly city which all Edmontonians end up paying for, both now and far into the future. So when citizens demand efficiency they need first to demand more efficient land use.
Offering a service or producing a public good becomes cheaper when it is done at an increasing scale. The cost of a kilometre of road is essentially fixed, say $3 million, but that cost per person becomes lower and lower as more people live in the same area. Cost per person, in this case, is felt by citizens in the form of taxes and fees. A city achieving greater economies of scale in the form of greater density means that you pay less for the same investments and services, although higher density could also necessitate higher quality (read: more costly) public infrastructure.
Attaining more efficient growth doesn’t mean everyone has to live in an apartment, just that our city must offer denser living choices. This won’t happen by decree, we can’t “will” density into being. It happens through developers offering more diverse housing choices, including apartments, duplexes, and the like, and more demand from Edmontonians for those choices. Supply and demand feed off each other, but it starts with citizens. As a City, that means we ought to set the rules to permit greater density so that working out supply and demand is as easy as possible. From there, it’s up to Edmontonians to decide what their city is going to look like down the road, with every small decision. Our city plan is facing this challenge as it imagines a city of 2 million people and a shifting economy. You can read more about that here.
Next week – why education should be funded by corporate taxes, not property taxes.
Written with support from Sam Goertz.