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THE FISCAL (MIS)FORTUNES OF
CANADA’S GLOBAL CITY REGIONS
by
Thomas J Courchene
School of Policy Studies, Queen’s
Senior Scholar, IRPP
[email protected]
MPA 844 / ECON 881
Winter Term 2012
OUTLINE
I: Canada’s GCRs in Comparative Perspective
A: GCRs as the Dynamic KBE Motors
II: Fiscal Powers of Canada’s CGRs
A: Expenditure Assignments in Global Perspective
B: Tax Powers in Global Perspective
C : Assessment
III: Federal-Municipal Relations
A: Sharing The Federal Gas Tax
B: The Harcourt Report on Cities/Communities
C: Cities and Open Federalism
IV: Provincial-Municipal Relations
A: The Greater Toronto Charter
B: Accessing Provincial Taxes
V: Toward a New Municipal Reality
A: Democracy and Accountability
B: Only for GCRs?
VI: Cities, Energy, NAFTA, and the $C
A: Opportunities
B: Challenges
I: Canada’s GCRs in Comparative Perspective
A: GCRs as Dynamic KBE Motors: 1

The Information Age (a combination of globalization and the
knowledge/informatics revolution) is leading to the economic, political
and democratic ascendance of Canada’s GCRs.

On the globalization front, GCRs are the new dynamic economic
engines and export platforms are spearheading the integration of their
provinces and regions in NAFTA space and beyond.

On the knowledge front, (and given that human capital is at the cutting
edge of competitiveness and well-being) it is in the GCRs that one
finds the requisite dense concentrations of human capital, R and D,
high-value-added services, etc. that allows GCRs to become the
integrating and coordinating networks in their regional economies and
national nodes in the networks that drive trade, growth, trade,
innovation and ultimately productivity.

International research shows that a doubling of a city’s population
leads to a 4-5% increase in productivity (Y per capita) (Strange, 2003)

Caveat: With the resurgence of resource and commodity prices,
Canada’s rural areas have made a comeback
I: Canada’s GCRs in Comparative Perspective
A: GCRs as Dynamic KBE Motors: 2
Richard Florida’s “creative human capital theory of growth”
Industries will be attracted to those cities that will fare best in terms
of the Florida’s three T’s—Technology, Talent and Tolerance. Canada
ranks high in the 3rd T, but trails in the other two. Therefore, cities
can create environments that will allow the 3 Ts to interact and create
a learning environment. (see attached table, where Talent is % of pop
with U degree, Technology is high-tech concentration, and Tolerance
includes Mosaic index (% of foreign born), Bohemian Index (% of
artistically creative citizens) as well as the Gay Index.
Ontario’s Institute of Competitiveness and Prosperity
Roger Martin and James Milway show that Ontario’s gap with the US
is an URBAN gap and is related to the weakness in Technology and
Talent
I: Canada’s GCRs in Comparative Perspective
A: GCRs as Dynamic KBE Motors: Conclusion

Conference Board’s “Hub Cities”
 The growth in Canada’s 9 large cities that serve as provincial or
regional “hubs” (Vancouver, Edmonton, Calgary, Saskatoon, Regina,
Winnipeg, Toronto, Montreal and Halifax) “drives an even faster rate
of growth in smaller communities within the same province or
region.” They conclude: A strategic needs-based approach to hub
city investment would also yield a bigger economic impact than the
per capita funding approach used in the federal government’s 2005
budget which allocated a gas tax rebate to Canadian communities on
a uniform per capita basis

SUMMARY
The bottom line is our collective futures depend on how Canada’s
GCRs fare relative to US and Global GCRs.
Unfortunately, the reality is that our CGRs appear to be performing
well beneath of their potential.
The role of the following is to highlight the fact that our GCRs are
fiscally weak in comparative international context, and constitutionally
jurisdictionless in the Canadian context.
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II: Fiscal Powers of Canada’s GCRs
A: Expenditure Assignments in Global Perspective

Figure 1 shows that Canadian cities have fewer responsibilities than
many cities (2,000 euros per capita in Toronto, 1,750 for Montreal vs
7,000 euros in Amsterdam)

Unitary state GCRs have larger spending than federal GCRs, except in
administrative federations (Germany, Austria) where the local level
implements/administers most of laws legislated by upper levels
(Laender and National).

Why does decentralization in Canada essentially mean “power to the
provinces”? Are we truncating the operations of the principle of
subsidiarity at the provincial level, when experience elsewhere (and the
information revolution) suggests that we could bring the delivery of
many more public goods and services much “closer to the people”?

Is this constitutionally determined in the sense that cities are creatures
of the provinces and have no independent constitutional role.
Figure 1: Global City Regions1 Per Capita Expenditures in
OECD, Various Years (euros)
Source: Based on OECD data and financial statements from the cities concerned. Reprinted from Chernick and Reschovsky 2006, figure 3.6.
II: Fiscal Powers of Canada’s GCRs
B: Tax Powers in Global Perspective

Table 1 shows that the Anglo countries rely primarily on property taxes
-- Australia (100%), Canada (92.7%), USA(73%), and unitary state UK
(99.5%). Is there something important here about the difference
between communitarian capitalism and individualist capitalism? (Or
between civil law and common law countries?) Sweden’s cities have
100% income taxation (along with most Nordic countries), with federal
Germany not far behind.

Casey Vander Ploeg (Canada West) provides a comparison between
Canadian and US cities. From Tables 2A and 2B, Seattle and Denver
have access to an incredibly large range of own source taxes and
shared taxes compared with Calgary and Edmonton.

Table 3 presents an overview of the Denver and Edmonton tax profiles,
where nearly 90% of Edmonton taxes come from property while about
70% of Denver’s come from sales taxes.

The result of this greater revenue access appears in Figure 2, where
Denver’s growth in tax collections clearly dominate that for Edmonton
(upper panel), and where the growth in per capita spending capital
spending dominates that for Calgary (lower panel)
Table 1: Local Tax Sources in Selected OECD Federations
and Unitary States
Tax source as a proportion of total
local tax revenues
Income
Sales
Property Other
Local taxes as
a % of GDP
Federations
Australia
Canada
Germany
Switzerland
United States
0.0
0.0
79.1
84.3
6.3
0.0
1.5
5.7
0.3
21.0
100.0
92.7
15.0
15.4
72.8
0.0
5.7
0.2
0.0
0.0
1.1
3.3
2.8
5.2
3.5
Unitary states
Denmark
France
Hungary
Italy
Japan
Netherlands
Spain
Sweden
Turkey
United Kingdom
93.6
0.0
0.1
12.9
47.2
0.0
26.4
100.0
27.7
0.0
0.1
10.2
76.6
14.9
20.8
37.1
35.4
0.0
30.1
0.0
6.3
50.6
22.6
17.3
31.1
62.8
34.6
0.0
2.3
99.5
0.0
39.1
0.7
54.9
1.0
0.0
3.5
0.0
39.9
0.5
15.8
4.7
1.7
4.9
7.2
1.2
5.7
15.8
4.7
1.4
Source: Based on data from the OECD. Reprinted from Chernick and Reschovsky 2006, table 5
Table 2A: Municipal Tax Tools in Calgary, Edmonton,
Denver and Seattle
LOCAL TAXES IN PLAY
Calgary and Edmonton
Property tax
Business tax (property
based)
Franchise and utility
Denver
Property tax
Franchise and utility taxes
General retail sales tax
Sales tax on lodging
Sales tax on restaurants/alcohol
Sales tax on alcohol off-sales
Sales tax on vehicle rentals
Sales tax on aviation fuel
Sales tax on entertainment events
Employee head tax
Auto Ownership tax
Seattle
Property tax
Franchise and utility taxes
General retail sales taxes
Sales tax on events
Sales tax on gambling
Sales tax on bars and pubs
Sales tax on car rentals
Gross receipts business tax
Motor vehicle excise tax
Real estate excise tax
Source: Casey Vander Ploeg (2005) “Rationale for Renewal: The Imperative Behind a Big City
Partnership” Canada West Foundation
Table 2B: Municipal Tax Tools in Calgary and Edmonton,
Denver and Seattle
TAX SHARING
Calgary and Edmonton
Provincial fuel tax
Source: See Table 2A
Denver
State fuel tax
State tobacco tax
State vehicle registration tax
State lottery revenue tax
Seattle
State liquor tax
State fuel tax
State lodging tax
State insurance
premium tax
State general retail
sales tax
State leasehold excise
tax
State hazardous waste
tax
State utility tax
State timber tax
State solid waste tax
Table 3: Tax Revenue Profile, Edmonton and
Denver, 2000
Total municipal tax revenue
Edmonton
Property tax (general residential and commercial)
Property tax (square footage business tax)
Property tax (local improvement taxes)
Franchise and utility taxes
All other taxes
71.8
16.9
5.1
5.6
0.6
Denver
General retail sales tax
Property tax
Employment head tax
Selective sales tax on hotels and lodging
Franchise and utility taxes
All other taxes
63.5
21.1
6.4
4.7
3.1
1.2
Source: See Table 2A
%
Figure 2: Growth in Per Capita Taxes (upper panel) and Capital
Spending, Edmonton (Calgary) and Denver, 1990-2000
II: Fiscal Powers of Canada’s GCRs
C: Assessment
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Best practice elsewhere would call for greater fiscal
autonomy for GCRs
Beyond the above differences, Canadian cities tend to have
weak mayor systems and they lack the discipline of party
systems. Montreal is an exception here.
Canada’s lack of national political parties rooted in cities
(unlike the US) leads to a weaker political role for cities at
the center and a diminished interest in CGRs on the part on
the central government.
In terms of helping GCRs to come closer to their potential,
we turn first to the federal-GCR relationships, noting that
addressing the needs of the GCRs will probably have to
rely more on creative processes than on redesigned
structures
GCRs in Comparative Perspective
D: Toward Self-Determination for the GCRs
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Best practice elsewhere would call for greater fiscal autonomy for
GCRs (see later). Beyond the above differences, Canadian cities tend
to have weak mayor systems and they lack the discipline of party
systems. The lack of national parties rooted in cities (as in US) leads to
a weaker role for cities at the center.
But we ought to keep Andrew Sancton’s concerns in mind;
 After noting that “of course, our big city municipalities should be
freed from oppressive provincial regulation” and “of course [cities]
should have access to a diversified tax base” he adds:
 My position is that cities are far too important for municipal
purposes alone. Policies of federal and provincial governments have
always been crucial to the well-being of our cities and will continue
to be so. We cannot define constitutionally who is responsible for
what with respect to all the demands on government within our
cities. The governance of our cities will always be multilevel.
Therefore addressing the needs of the GCRs must include creative
processes as well as redesigned structures
III: Federal-Municipal Relations
A: Sharing the Federal Gas Tax
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The sharing of the federal gas tax was an important catalyst in that it
embarrassed many of the provinces to the point where they too shared
their gas taxes. Moreover, it lent momentum to the movement to allow
the municipalities greater tax autonomy.
But it was not the tax sharing that the GCRs wanted. They wanted a
derivation-based tax sharing, not an equal-per capita sharing where
they ended up subsiding the smaller communities.
If the political dictates are such that Ottawa has to share taxes on an
equal per capita (by province) basis, then it seems preferable for
Ottawa to transfer tax points (of GST or personal income taxes) to the
provinces. To be sure there is no guarantee that they will be passed
through to cities on a derivation basis, but the chances are higher.
Although a consensus appears to be developing in favour of
provincial-municipal tax sharing (on constitutional grounds), there was
one recent development that may open the way for greater federal tax
sharing sometime in the future, namely, the External Advisory
Committee on Cities and Communities (i.e., the Mike Harcourt Report).
III: Federal-Municipal Relations
B: The Harcourt Report on Cities/Communities
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The Harcourt Report notes that the Europeans are much more
advanced in terms of subsidiarity and it is convinced that the
governance arrangements now in place penalize the competitiveness
of our people and places
Key recommendation is for a Double Devolution. The committee
recommends shifting responsibilities and resources from the federal
government to the provincial and territorial governments, and then
from the provincial and territorial governments to the local level. The
double devolution should ensure that choices about how to raise and
use resources, including tax choices, move to the most appropriate
levels, where accountability to citizens is most direct.
This would presumably be based on the derivation principle
The Report would have had a much better reception had Paul Martin
still been in power, since Martin was intent on privileging cities and he
commissioned the Report in the first place.
III: Federal-Municipal Relations;
C: EI and Canada’s GCRs
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Next slide shows how that the EI program discriminates
against central and western cities
Likelihood that Toronto’s unemployed receive EI is less
than half than cities like Quebec City and St. John’s
Some relays to immigration, some to preferential entry and
benefit provisions and the extended benefits for high U
areas
This is part of our very generous east-west transfer system
when our trading system is increasingly north-south or
international
Another example of how rich cities tend to be viewed as
places to redistribute from, rather than enhance their
ability to thrive as global city regions.
Proportion Unemployed Receiving Regular Employment
Insurance Benefits, by Major City, Canada, 2004
Source: Battle, Mendelsohn, and Torjman 2006
III: Federal-Municipal Relations;
D: Cities and Open Federalism
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Cities (along with early childhood development, day care, K-12
education, etc) qualify for what I refer to as NI/PJ, areas that are in the
National Interest but fall within Provincial Jurisdiction.
Paul Martin used the federal spending power to privilege all of these
areas. However, Stephen Harper’s open federalism makes this
difficult, unless resort is made to creative and acceptable ways to
exercise the federal spending power.
However, the 2009 budget stimulus package did embrace shared-cost
“boards and mortar” infrastructure in provinces and municipalities
(bridges, water, etc), although it shied away from “mortarboards”
infrastructure (day care, k-12, etc.)
My view is that Ottawa must find acceptable ways to address those
issues that are critical to the national interest but fall under provincial
jurisdiction. A deux nations framework is one way, i.e., ROC “opts
in” to federally integrated programs whereas Quebec operates its
own programs with compensation(e.g., the CPP/QPP approach
applied more broadly).
IV: Provincial-Municipal Relations
A: The Greater Toronto Charter: 1

Alan Broadbent, a key force in the drafting of the Toronto Charter sees
the underlying challenge as follows:
“There is a huge number of issues where the city is the key point of
delivery, where it has greater knowledge and experience, or where it
can exercise the flexibility and responsiveness that leads to better
delivery…. But the city cannot structure its own solutions, because
these solutions must pass the test of acceptability by a level of
government with less specific knowledge, experience, or motivation”

The Greater Toronto Charter (Tableau 1) was drafted to redress this
deficit of money and power. While this reads more like a blueprint for a
Canadian citistate (à la Bremen, Berlin and Hamburg in the German
federation). Moreover, in the age of the ascendancy of GCRs it is
anomalous in the extreme that PEI can wield more fiscal and political
power than can Montreal or Toronto. Note that the Charter is not an
official document of the city of Toronto
IV: Provincial-Municipal Relations;
A: The Greater Toronto Charter: 2
1.
2.
The Greater Toronto Region form an order of government that is a full partner of
the Federal and Provincial Governments of Canada.
The Greater Toronto Region, and its municipalities, be empowered to govern and
exercise responsibility over a broad range of issues, including.
child and family services; cultural institutions; economic development and marketing; education;
environmental protection; health care; housing; immigrant and refugee settlement; land-use planning; law
enforcement and emergency services, recreation revenue generation; taxation and assessment;
transportation; sewage treatment; social assistance; waste and natural resource management; and water
supply and quality management , with the exception of those matters as are mutually agreed upon with
other levels of government that are best assigned to another level.
3.
4.
5.
The Greater Toronto Region have the fiscal authority to raise revenues and
allocate expenditures with respect to those responsibilities outlined in 2.
The Greater Toronto Region be governed by accessible, democratic governments,
created by their citizens and accountable to them for the exercise of the
government’s full duties and responsibilities.
The Greater Toronto Region continue to fulfill its obligation to share its wealth,
innovation and other assets with the rest of Canada, through appropriate
mechanisms developed in concert with other levels of government.
IV: Provincial-Municipal Relations
A: The Greater Toronto Charter: 3
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Note that the responsibilities in the Charter relate in large measure to
efficiency matters. Hence it would be important for income distribution
issues to be handled by the upper levels of government. In this regard
Canadian cities are much better positioned than US cities to pursue
their competitive futures because areas like Medicare, elderly and child
support are national programs linked to citizenship, not to place.
Indeed, were EI altered to confirm more to insurance principles, Ottawa
might be enticed to embark on a negative income tax for adults. This
would allow even greater leeway for GCRs to focus on efficiency
issues.
While this reads more like a blueprint for a Canadian Citistate, it is
representative of the issues that GCRs have to deal with. Smaller
communities would not have the territorial scope and professional
expertise.
These areas would represent a change both in structures and
processes, the latter because many of the roles would be concurrent.
Arguably, the Charter is more of a bargaining tool than an action plan
IV: Provincial-Municipal Relations
B: Accessing Provincial Taxes
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Canada has an enviable record of provincial piggy-backing
on federal taxes. The time may well be ripe to transfer this
tradition to the municipal-provincial level. Presumably this
is what the Harcourt Report had in mind.
The obvious candidates are the PIT and the PST (after
conversion to a GST format).
Initially the cities should settle for fixed shares of a broadbased tax shared on a derivation basis. After all, it took
nearly forty years for the provinces to get rate-and-bracket
freedom under the PIT. Tax rate flexibility can come later.
Where the cities could have some initial rate flexibility is in
terms of the transfer of the set (probably subset) of morenarrowly-based taxes that are currently available to Seattle
(shown earlier in Figures 2A and 2B).
IV: Provincial-Municipal Relations
B: Accessing Provincial Taxes, continued

These tax transfers need not represent additional city revenues because their
role will also be a) to reduce reliance on the property tax especially for the
growing set of services that have little relation to property, and b) to replace
the 40% of city revenues (in the GTA) that currently come from provincial
grants, conditional or otherwise. Over time, however, they will grow.

In the meantime, there is no need for the cities to wait for a handout. They have
many untapped/underutilized revenue sources—much greater reliance on user
fees/benefit taxation, proper pricing of local public services, etc. Moreover, as
Joe Berridge has noted:
Toronto is one of the few cities in the world that still operates these services
[electricity, water, garbage, transit] as mainline businesses. The ability to
use the potential of the very substantial asset values and cash flows of these
municipal businesses is perhaps the only financial option to provide the cityregion with what it is unlikely to be obtainable from other sources: its own
pool of reinvestment capital … with remarkable leverage potential, both from
public-sector pension funds and from private sector institutions.
V: Toward a New Municipal Reality
A: Democracy and Accountability
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While cities historically may be places where democracy
flourished, the Canadian reality is very different
Understandably citizens will not become excited about
local democracy and accountability as long as cities are at
best administrative units. Much better to join with the city
fathers and engage in rent-seeking from the provinces
However, with political autonomy, enhanced responsibility
and increased fiscal flexibility, the stage will be set for
much more meaningful citizen engagement and more
accountability, in a word, more democracy.
And along with the implementation of the principle of
subsidiarity will be greater asymmetry as different cities
flex their creative forces in their own ways, i.e., much the
same as is happening at the provincial level. This will be
efficiency enhancing in both static and dynamic terms.
V: Toward a New Municipal Reality
B: Only for GCRs?
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The above analysis was cast in terms of GCRs. But many
of the features of the analysis would surely benefit all
cities.
Moreover, it may be difficult to privilege GCRs relative to
other cities.
In Apples and Oranges? Urban Size and the MunicipalProvincial Relationship, the Canada West Foundation
proposes a “best-of-both-worlds” solution: Create a regime
for GCRs but then link it to an opt-in framework that is
flexible enough to enable those municipalities that desire
greater autonomy or new fiscal tools in certain areas to
adopt them, but a framework that does not require smaller
communities to abandon the security of their current
arrangements.
VI: Cities, Energy, NAFTA, and the $C
A: Opportunities
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With the high energy prices and now the likelihood of
carbon pricing, long-distance off-shoring/outsourcing will
decline and supply chains will be curtailed.
Arguably this means that the US market will become larger
for Canadian exporters, and also for foreign firms to see
Canada as a location to sell into NAFTA economic space.
And our linkages to the US economy will become even
closer if and when we join the US in a C&T system.
Canadian cities could do very well in this environment
Ontario’s Prosperity Institute views the Windsor-Quebec
City corridor as having the potential to rival any megaregion anywhere. This is a great opportunity for Montreal
and Toronto alike. But for this to occur, two conditions are
necessary. …..
VI: Cities, Energy, NAFTA, and the $C
B: Challenges
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The first challenge is to ensure that the border remains
open, accommodative and secure. But for the US,
Homeland Security trumps trade. Mulroney’s comment on
the 10th anniversary of NAFTA is apt: “For our internal
borders to remain free, our external borders must be
secure.” In other words, if we accommodate the US away
from the border, they are more likely to accommodate us
at the border.
The second in more controversial: Canada is not an
optimal currency area. Our currency area is too small to
accommodate at the same time a global resource/energy
powerhouse (including Quebec) and a world class
manufacturing nation (also including Quebec). The loonie
is a Petro currency and we are victims of the famous
Dutch Disease -- $C appreciation clobbers manufacturing
VI: Cities, Energy, NAFTA, and the $C
B: Challenges 2
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The Dutch Disease and exchange rate uncertainty generally will
create havoc for Montreal as a GCR, and it will deter foreigners from
using Canada as a site for accessing NAFTA.
My solution is a fixed rate in the short term and eventually a North
American Monetary Union, anchored on the greenback. But this
proposal has no supporters. Apparently, Canadians are happy to
effectively tie the price of our currency (the most important price in
the economy) to the price of oil (the most volatile price on the globe).
This degree of volatility and uncertainty cannot make economic
sense for a manufacturing/services exporting nation.
I had hoped that Ontario would be on side, since it has the most to
lose from another spell of the Dutch Disease. But I was wrong.
I am now pinning my hopes on Quebec because it is nicely balanced
between being at the same time a manufacturing and a
resources/energy province, and it will want both to prosper.
In the long run, a common NA currency would play a key role in
ensuring that Montreal will achieve its potential as a GCR.