What Roles, Responsibilities, and
Financial Tools for Local
Governments?
Enid Slack
Institute on Municipal Finance and Governance
Munk Centre for International Studies
University of Toronto
Presentation to the Round Table on Renewing Local
Governance in Atlantic Canada
Moncton, June 9, 2008
Outline of Presentation

Expenditures:
 Theory of expenditure assignment
 Municipal roles and responsibilities in Canada
 Municipal expenditures in other countries

Revenues:
 Theory of revenue assignment
 Municipal revenues in Canada
 Municipal revenues in other countries
 Which financing tools for which services?

Conclusions: comparing theory and practice
2
Theory of Expenditure Assignment

Guidelines to divide government expenditure
responsibilities among federal, provincial, and
local governments:
1.
Federal government should have primary
responsibility for stabilization policy and income
distribution policies; local governments should
focus on the allocation function – delivering
goods and services and determining how funds
will be raised
3
Theory of Expenditure Assignment
Services should be delivered at the level of
government closest to the individual citizen for
economic efficiency (“subsidiarity” principle).
Exceptions occur where there are:
2.


economies of scale
externalities
4
Theory of Expenditure Assignment
3.
4.
Finance follows function – assign expenditure
responsibilities first and then revenue raising
powers
Balance expenditure assignment and revenue
assignment
5
Composition of Total Expenditure by Local General Government,
Canada (2005)
Housing
3%
Regional planning and
development
2%
Other expenditures
1%
General government services
10%
Debt charges
4%
Protection of persons and
property
17%
Recreation and culture
12%
Environment
17%
Resource conservation and
industrial development
2%
Education
0%
Social services
9%
Health
3%
Transportation and
communication
20%
6
Distribution of Municipal Expenditures,
Canada, 2005
CANADA CANADA
INCL.
EXCL.
ONTARIO ONTARIO
Transportation
Fire and police
Water, sewers, garbage
Health, social services, housing
Parks, recreation, culture
General government
Debt charges
Planning and development
Other
20%
17%
17%
15%
12%
10%
4%
2%
3%
22%
17%
18%
3%
15%
12%
5%
3%
5%
7
Trends in Municipal Expenditures:
Canada

Which expenditures have increased as % of
total expenditures from 1990 to 2005?


Protection (fire and police), housing (mainly in
Ontario), environmental (water, sewers, garbage),
social services (mainly Ontario)
Which expenditures have decreased as % of
total expenditures from 1990 to 2005?

Transportation (not in Québec), debt charges
8
19
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
05
Percentage of Total
Expenditure
30
25
300
20
250
15
200
10
150
100
5
0
Percentage
Constant
(1997) $ Per Capita
Figure 4.1: Capital Expenditure of Canadian Municipalities,
1988-2005
400
350
50
0
Year
Dollars
9
Municipal Functions

Municipalities in all provinces provide:







Water and sewers
Roads and streets
Solid waste collection/disposal
Parks and recreation
Planning
Policing (except territories and not all
municipalities in every province)
Fire protection (not all municipalities)
10
Municipal Functions

Municipalities in some provinces are also
responsible for:






Courts of law
Public transit
Health services (small expenditures)
Social expenditures (but not generally social
assistance)
Housing
Tourism and promotion
11
Municipal Functions
# services
where exp.
per capita
> $10
Newfoundland
PEI
Nova Scotia
New Brunswick
Québec
Ontario
Manitoba
8
9
11
10
14
17
11
# services
where exp.
per capita
> $10
Saskatchewan
Alberta
BC
Yukon
NWT
Nunavut
11
16
12
12
14
15
12
Mandatory versus Discretionary
Services





All municipalities provide services regardless of
whether they are mandatory
What is mandatory varies by size of municipality
within provinces (e.g. policing)
More permissive legislation
Standards of service are the issue (e.g. water,
sewers, fire, waste disposal, building inspection,
day care, housing for the elderly)
Standards have increased over the last 10
years; provincial funding has not
13
Distribution of Local Government
Expenditures, Selected Countries (%)
General admin.
Public safety
Education
Health
Social sec./welfare
Housing
Rec. and culture
Fuel and energy
Agriculture
Mining, mfg., const.
Transportation
Other economic
Other
Total
US
UK
13
9
38
7
3
3
3
11
0
0
5
0
7
100
4
12
29
0
33
5
3
0
0
0
5
1
8
100
Fra.
11
2
20
2
18
24
8
4
0
0
4
0
8
100
Spain
7
4
18
21
5
11
6
0
3
1
7
3
14
100
Neth.
9
3
18
3
23
20
6
0
0
0
7
0
11
100
Den.
4
0
13
16
57
1
3
0
0
0
0
5
0
100
Swe.
2
0
4
87
0
0
0
0
0
0
0
0
7
100
Italy
Bel.
6
0
1
0
68
1
1
0
2
1
6
2
11
100
21
0
35
6
4
0
13
0
0
0
0
6
15
100
14
Theory of revenue assignment

Guidelines for revenue assignments:
1.
Federal and provincial governments should levy
broad-based taxes (e.g. income and sales)
2.
Small local governments should focus on user
charges and benefit taxes especially taxes on
immobile factors (e.g. property tax, motor vehicle
taxes); additional local taxes for large local
governments (depending on services)
15
Theory of revenue assignment

Guidelines for revenue assignments (cont’d):
3.
Taxes should be borne by residents of same
jurisdiction where benefits are enjoyed (minimize
tax exporting)
4.
Local taxation (at least local tax rate setting)
promotes efficiency
5.
Intergovernmental transfers are appropriate to
address spillovers, equalization
16
Composition of Revenue by Local General Government,
Canada (2005)
Federal government, specific
purpose transfers
2%
Provincial and territorial
governments, specific purpose
transfers
13%
Property and related
taxes, revenue
53%
Provincial and territorial
governments, general purpose
transfers
3%
Other revenue from own sources
1%
Consumption taxes, revenue
0%
Investment income
5%
Sales of goods and services
22%
Other taxes, revenue
1%
17
Municipal Revenues, Canada, 2005
CANADA
Property Taxes
User Fees
Provincial Grants
Investment Income
Other Revenues
53%
22%
16%
5%
4%
18
Trends in Municipal Revenues:
Canada

Which revenues have increased as % of total
revenues from 1990 to 2005?


Property taxes and user fees
Which revenues have decreased as % of
total revenues from 1990 to 2005?

Intergovernmental transfers fell across Canada
but not in Québec (still a smaller % of total
revenues)
19
Other Municipal Revenues in
Selected Provinces





Land transfer tax: Nova Scotia, Québec,
permitted in Manitoba, Toronto
Amusement taxes: Nova Scotia, Manitoba,
Saskatchewan, BC
Hotel taxes: Nova Scotia, Saskatchewan,
Alberta, BC, Québec, permitted in Manitoba
Poll tax: Newfoundland, parcel tax in BC
Development charges: BC, Alberta,
Saskatchewan, Ontario, Yukon, NWT
20
Other Municipal Revenues in Selected
Provinces

Revenue sharing (income tax, fuel tax,
VLT/casino revenues, fine revenues):
Manitoba

Provincial fuel tax sharing: BC, Alberta,
Ontario, Québec, Manitoba

Vehicle registration tax: Toronto
21
Distribution of Local Government
Revenue Sources, Selected Countries (%)
US UK
Fra.
Spain Neth. Den. Swe. Italy
Bel.
Local tax revenues:
-Income & profits
-Payroll
-Property
-Goods & services
-Other
34
5
0
73
16
5
14
0
0
100
0
0
47
0
4
52
11
34
37
26
0
36
35
3
10
0
0
63
38
0
51
93
0
7
0
0
75
100
0
0
0
0
34 n.a.
8
84
0
0
22
0
26
16
45
0
Non-tax revenues
Central gov’t grants
32
34
13
73
19
34
9
54
14
76
8
40
6
20
14 n.a.
53 n.a.
100
100
100
100
100
100
100
Total revenue
100
100
22
Which revenue tools for which
expenditures?

Answer depends on the nature of services
being delivered:




Services with private good characteristics
Services with public good characteristics
Services that generate externalities
Services that redistribute income
23
Which revenue tools for which
expenditures?

Services with private good characteristics:




Possible to identify beneficiaries and exclude
those who don’t pay
Examples: water, sewers, garbage collection and
disposal, transit, recreation, parking
User fees to pay for at least a portion of the cost
User fees lead to efficiency because they provide
information to public sector on how much users
are willing to pay; ensure that citizens value what
public sector provides at least at its marginal cost
24
Which revenue tools for which
expenditures?

Services with public good characteristics:




Collective benefits enjoyed by local residents but
which cannot be easily assigned to beneficiaries
Examples: police and fire protection, local roads,
neighbourhood parks, street lighting
Cannot charge for these services; need some
form of benefit-based taxation e.g. property tax
Property tax is a good tax for local government –
property can’t move; connection between tax and
benefits of local services
25
Which revenue tools for which
expenditures?

Services that generate externalities:




Benefits of service spills over municipal
boundaries
Examples: major roads, social services, major
cultural facilities, public transit
Results in under-allocation of resources
Could be financed, in part, by a provincial transfer
(conditional, matching)
26
Which revenue tools for which
expenditures?

Services that redistribute income:


Examples: social assistance, social housing,
social services
Should be funded by ability to pay taxes (e.g.
income tax)
27
A Mix of Taxes





Range of expenditure responsibilities
Services used by commuters/visitors
Revenues that grow with the economy
Tax distortions may offset each other
Increase municipal flexibility in adapting to
local circumstances
28
Role of Intergovernmental Transfers




Inter-jurisdictional externalities – conditional,
matching transfers
Equalization – unconditional transfers based
on fiscal need and/or fiscal capacity
Minimum standards – conditional, nonmatching transfers
Fiscal gap – unconditional transfers
29
Financing Capital Expenditures







User fees
Property taxes
Development charges
Borrowing
Tax increment financing
Intergovernmental transfers
Public-private partnerships
30
Concluding Comments: Theory and
Practice

For the most part, basic rules of expenditure
assignment are followed in Canada:



Federal government is responsible for transfers to
individuals, defence, justice system, etc.
Provincial governments are responsible for
hospitals, post-secondary education, etc.
Municipal governments are responsible for local
roads, water, sewers, solid waste disposal, public
transportation, etc.
31
Concluding Comments: Theory and
Practice

BUT:

Municipalities in some parts of the country make
expenditures on social services and social
housing

Not clear that there is a balance between
expenditure assignment and revenue assignment
(is there a fiscal imbalance?)
32
Concluding Comments





As much as possible, local governments
should raise the revenues they spend
User fees should fund services where
beneficiaries can be identified e.g. water,
sewers, waste collection
Local taxes should fund services that provide
collective benefits to the local community
Local governments would benefit from a mix
of taxes
Intergovernmental transfers should be used
for equalization, spillovers
33