Northern Economist 2.0

Friday, 5 January 2018

Thunder Bay Taxes Are Going Up Again!


It is municipal budget season in Thunder Bay and the inevitable process of thrust, parry and spin is well underway. First the thrust: the amount spent by the City of Thunder Bay obtained from the tax levy is going up by 3.6 percent.  Moreover, water and sewer rates as well as tipping fees at the landfill will be going up by three percent.  In an effort to forestall the inevitable complaints that these increases are too high, the resulting parry and spin on the part of the City appears to be as follows. 

The 3.6 percent increase in the tax levy will only be a 2.9 percent increase to existing ratepayers after factoring in assessment growth.  According to the budget chair: “This is a budget that stays the course in terms of not reducing services but maintaining investments while living within our means.”
Moreover, much of the increase is going to hire new full-time positions and vehicles for the Superior North EMS.  The paramedic service has seen call volumes grow substantially in recent years as a result of the aging population and the opioid crisis. As well, according to the budget chair, in an ideal world “we would stay below the level of inflation,” but there has been a reduction in provincial transfer payments.

The efforts by the City to justify a 3.6 percent increase in the levy – that is in tax financed city expenditure – are pretty standard.  Differentiating between existing ratepayers and “new growth” conveniently sidesteps the fact that in the end it is all tax revenue coming from city ratepayers.  Arguing that we are “investing” in services and living within our means needs to be considered within the context of whether the services are cost-effective as well as the fact the money is not from some kind of endowment but comes directly from city ratepayers.   

As for the paramedic service, it would be nice to see some kind of breakdown in statistics as to exactly what the sources of the increased demand are in terms of case mix and demographic breakdowns.  In an interview on CBC Thunder Bay radio this morning, the chief of the Superior North Emergency Medical Services also noted that the city has a large transient population that is a source of increasing demand.  This raises the question as to whether city ratepayers rather than the province should be on the hook to fund what is increasing regional demand for emergency health services. However, as noted above, the province is apparently not very interested in raising its grant contribution.

The most entertaining line was the one that ideally, we would see tax increases that stay below the rate of inflation.  The last four years have seen increases in tax revenue all above the inflation rate suggesting that this aspiration has yet to be achieved by the current city council.  Nevertheless, given that it is an election year one should have goals and dreams to campaign on.

Given that it is an election year, it is also important to take a longer term look at municipal finances – in particular I want to focus on Thunder Bay municipal own-source revenue – that is tax and user fee revenues and then provide some comparisons to basic economic indicators for the city. The data on total municipal tax revenue, residential and non-residential tax revenue, and user fees spans the period 1990 to 2016 and is from assorted past City of Thunder Bay Consolidated Financial Statements as well as from the Financial Information Returns (FIR) maintained for each municipality by the Ministry of Municipal Affairs and Housing.  For 2017 and 2018, I use current City of Thunder Bay budget summaries with the total for 2018 a forecast based on the tax levy increase of 3.6 percent. From Statistics Canada, I have the inflation rate - inflation is Ontario’s Consumer Price Index with 2002 as the base year – as well as median total tax filer income and annual employment for Thunder Bay. Population figures for Thunder Bay are from the Census of Canada.

One point with respect to City of Thunder Bay financial data is that the summaries and budget information over the last few years do not seem to provide the tax revenue breakdown between residential and non-residential revenue. I suspect the reason for this has less to do with economy of presentation and more to do with drawing attention away from the fact that the residential share of tax revenue has risen dramatically. While FIR does provide this information, unfortunately it only becomes available with a lag and 2016 is the last available complete set of FIR data. Overall, municipal finance data is rather opaque and difficult to use not just in Thunder Bay but Canada as a whole.  Cities could do better when it comes to being accountable to their ratepayers via concise, comprehensive and easy to use statistics.

For the period 1990 to 2016 (but forecast to 2018 for taxation revenue), Figure 1 plots taxation revenue and its two components – residential and non-residential taxation (commercial and industrial).  It then also plots user fee revenue (water & sewer and other fees) and then the total of taxation revenue and user fees. In 2016, tax revenues grew 2.2 percent with residential tax revenue growing at 3.8 percent and non-residential tax revenue actually declining 1.1 percent.  User fee revenue also declined 2.5 percent (despite rate increases the previous year). As a result, own source revenues in 2016 grew a modest 0.6 percent compared to 5.3 percent the year before.  If one looks only at total municipal tax revenue, it grew 5.7 percent in 2015, 2.2 percent in 2016 and based on recent estimates (and not FIR data) grew at 3.3 percent in 2017 and will grow 3.6 percent in 2018.

Figures 2 and 3 provide composition information for taxation revenue and total own source revenue for the period 1990 to 2016. When one considers only tax revenue, from a 50/50 split in 1990 the distribution by 2016 had evolved into a 70/30 split.  The residential ratepayer in Thunder Bay now provides the City of Thunder Bay with 70 percent of municipal tax revenue. When the picture is broadened to total own-source revenue, the residential ratepayer in 2016 provided about 46 percent of own-source revenue, the non-residential ratepayer 21 percent and user fees – which incidentally are paid by both residential and non-residential ratepayers -about 34 percent.  
 

Figure 4 plots the average annual growth rates for total taxation revenue as well as residential and non-residential tax revenue and user fees, alongside the growth rates for Thunder Bay’s population, employment and median total tax filer income and Ontario’s inflation rate.  The average annual growth rate for taxation revenue has been 4.1 percent but residential tax revenue has grown at 5.6 percent while non-residential taxes have been growing at 2.3 percent.  On average, both residential and non-residential taxes revenues have grown faster than either population (-0.2%), employment (-0.1%), inflation (1.9%) and median tax filer income (2.2%).  User fee revenue has also grown faster than all of these indicators at an average of 5 percent.

So, the 2018 municipal budget year is shaping up to be somewhat modest in terms of increases at least by historical standards.  Total tax revenue is anticipated to only go up 3.6 percent (as opposed to 4.1 percent) while user fee increases of 3 percent look pretty good compared to average increases of 5 percent.  But then, 2018 is an election year and I suspect that we will be in for some pretty steep increases in 2019 once the election dust clears.  If one goes back to the 2014 election, that budget year saw a 2.2 percent increase in municipal taxation revenue but they made up for it in 2015 with a 5.7 percent increase.

It probably is a smart strategy to moderate tax increases in an election year and then raise them steeply early on in the new mandate so that their memory fades by the time the next election rolls around. It may perhaps be seen as calculating and opportunistic behavior on the part of our municipal politicians but it seems to work. Thunder Bay residents keep re-electing the same people over and over again.