#smallbiz has role in municipal finance reform

Originally published in Vancouver Sun.

There will be a lot of talk about taxes among delegates at the 2013 convention of the Union of B.C. Municipalities (UBCM) taking place in downtown Vancouver this week. British Columbia’s local government representatives and others in attendance will debate whether to approve a range of new taxation proposals that municipal leaders can take to the provincial government.

The hefty 107-page report — titled Strong Fiscal Futures — was privately hailed by one politician as a “game-changer” proposal for local government. Authored by a select committee on finance consisting of three B.C. mayors, a regional district councillor, two senior local government bureaucrats and a consultant, the report provides a thorough examination of how jurisdictions around the world raise tax revenue.

The report also outlines what the committee perceives as the systemic challenges B.C. municipalities face, and provides the provincial government with a shopping list of tax reforms.

It is a safe bet that convention delegates will support local government efforts to lobby the province for these “revenue tools.” But what is missing in this report?

To the committee’s credit, they have flagged a number of genuine challenges with the current taxation model; property taxes can be “sluggish” with respect to economic change and growth. When economic times are good, the coffers of senior levels of government brim with new tax revenue. Local governments, however, do not get an equivalent bounce in tax revenue when the economy grows.

When it comes to local small businesses, property taxes can truly feel like a blunt instrument, as they have no bearing on the profitability of the business itself. Neighbouring businesses on similar-sized properties may have wildly different balance sheets, yet each have to pay the same amount of property tax — typically at rates several times their residential equivalents.

At a fundamental level, the committee makes a point with which small business operators can agree. Property tax is not only a weak fiscal tool for encouraging economic growth; it provides municipalities with little incentive to support local businesses at all. It therefore might be worth seeking out a “fairer” property tax that improves responsiveness to economic growth, as the report suggests.

But small business owners would stop short of supporting calls for new taxes outright, which the Strong Fiscal Futures report implies are needed for infrastructure and transportation projects, as well as “external cost drivers” around policing costs and other public policy objectives.

Never assume that local governments are too poor to provide essential services. They have many other tools besides property tax to raise revenue, such as user fees for utilities, business licences, parking tickets and fines, development cost charges (DCCs), building permits and the rental of recreation facilities, to name a few. Revenue from DCCs alone has increased an astounding 798 per cent over the past decade, and transfers from senior levels of government have increased 273 per cent.

Instead of proposing even more taxes, local governments must first demonstrate their own fiscal restraint — especially around labour agreements and executive pay — to make a compelling case to the provincial government for finance reform.

While the UBCM committee report admits “solutions need to involve both the revenue and expenditure sides” of the finance equation, it otherwise downplays years of overspending on generous employee pay and benefit packages.

Catch a B.C. mayor in an unguarded moment, they might tell you that the increasing cost of police and fire services is a huge financial hurdle. Many local government officials will also admit that the “whipsawing” phenomenon during labour negotiations has led to settlements a private sector worker can only dream of.

Wages and benefits on average make up more than 55 per cent of the operational spending of local government. It is the proverbial elephant in the room, which is driving up the cost of local government and your property taxes.

The Strong Fiscal Futures report would be far more persuasive if it were to acknowledge this obvious challenge, perhaps by suggesting a review of the bargaining procedure and salary scales by a third party.

This could be a good role for B.C.’s Auditor General for Local Government, Basia Ruta.

The report also makes a number of references to local government helping to grow the economy. The fact is that governments do not grow the economy. In B.C., small business operators and their employees do it for them. Therefore, why not invite small business to the table in a meaningful way?

The report will be debated on the floor of the UBCM convention and will easily win the support of the majority of delegates, who think more tax money is the solution to their fiscal challenges. However, with just a few friendly amendments, Strong Fiscal Futures could be an even better blueprint for strengthening B.C.’s local government finances.

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Mike Klassen is director of provincial affairs, British Columbia, for the Canadian Federation of Independent Business, and is a member of the BC Small Business Roundtable.