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Municipalities for the 21st Century

More and more of our future as Canadians will be built at the local level. Our speed at innovating on the ground - in practices, in financing and in partnerships - will be one of the keys to Canada's success in a very competitive world.

Paul Martin, Minister of Finance for Canada, to the Federation of Canadian Municipalities, Hamilton, Ontario, May 31, 2002

The first decade of the New Millennium is now history and, it is fair to say,  things are not going well. The world is heating up environmentally and politically and economic problems are brewing in emerging and First  World nations. An important factor in   these difficulties involves the collateral consequences of centralization, globalization and new technologies for ordinary well-being.  Worse, the problem appears to be  baked into the infrastructure and culture of  modern economies.   Globalization means industries must be innovative and efficient to survive. In turn, this means that investments in education, research and technological development are perceived as  the only way nations can prosper.

Paradoxically, the ability to produce goods and services with fewer and fewer people - or with workers performing simple functions because so much intelligence is incorporated in machines and processes - diminishes the proportion enjoying well-remunerated, secure employment.

Even in First World nations, people are being driven into part-time or service work, call centres and telemarketing. Outside of the wealthy class, there are few winners in this story. Wages and working conditions are sagging because goods and services must be sold into markets where  real incomes are stagnant  or falling.

In 2011, on the brink of yet another recession, politicians and pundits continued to ignore the fact that two centuries of `progress and development' has had an uneven record in terms of general well-being.   US President Jack Kennedy assured us in the 1960's that difficulties  were temporary and that they would vanish as soon as the `rising tide' rose sufficiently to lift all the boats.

Fifty years later it is clear that the tide is running the other way.

At the same time, industrialization and capitalism have achieved extraordinary results for a few.  In the USA, the top 1% - perhaps three million - Americans have as much wealth as all other Americans combined. In the face of such statistics, how can the rest of us hope to even survive?  On the surface the problem involves the way corporations and governments respond to signals that economies are moribund.  Trickle down strategies, downsizing, efficiency, better leadership, more investment, better educations ... continue to be trotted out as recommended solutions.

Why would such obviously flawed responses continue? I suggest that the problem is not that the world's `emperors have no clothes' - i.e., are so intellectually or morally deficient that they are failing to respond to political and economic signals. The problem is that they own so much and possess such sophisticated machineries that the rest of us are have become economic non-entities.  Statistically the middle class has been losing ground since the 1970's when wealth-distributing mechanisms began falling behind the regressive consequences of new technologies and political  initiatives.

This cannot be solved with United Way campaigns or rescue missions getting the homeless through cold nights. Nor can it be solved with yet more personal or public debt.  What is required is a re-balancing of supply/demand capabilities. Yet politicians and CEOs continue to respond to symptoms of demand failure with calls for cheaper labour, more automation, more globalization and - most notably in the USA -  more tax breaks for wealthy 'job creators'.

These are the stratagems that got us into this predicament.  Almost a century ago, Henry Ford knew better than to trust the prospects of the fledgling automobile industry to Adam Smith's invisible hand. Against the advice of his peers, Mr. Ford started paying workers enough money that they could purchase the automobiles coming off of assembly lines.

For the better part of a century, such initiatives - and the work of trade unions - improved supply/demand relationships sufficiently to spawn the first middle class the world has seen.  On a theoretical level, we understand the issue well enough.  Every economics course includes a discussion of the fallacy of composition - the assumption that micro-economic calculations about what is good for companies are good for the whole made of such elements.  As Dr. Ursula Franklin observed in the CBC's 1989 Massey Lectures, this fallacy is embedded in the way we do business.

The proponents of technology in the 1840's were very enthusiastic about replacing workers with machines. But somehow I find no indication that they realized that while production could be carried out with few workers and still run to high outputs, buyers would be needed for those outputs.

In spite of such experiences and intuitions, micro-economic thinking continues to have us by the throat. Politicians and CEO's strive mightily to improve profitability by eliminating employments whenever technologies or outsourcing permit.  The resulting erosion of consumer demand gives their calculations even more perceived credibility.  Like canoeists alarmed by the sound of rushing water, we have been paddling with increasing vigour towards the falls.

To avoid such an ironic fate, we need to recognize

  • the need for countervails to globalization, technological development and the single-minded agendas of multinational corporations;
  • that these countervails are unlikely to be implemented by corporate CEO's or conservative politicians;
  • that we all live in municipalities;
  • that repairs must flow from the bottom up.

What can municipalities do?  On the surface, nothing seems possible because municipalities have no constitutional standing or legislative jurisdiction.

However, they could petition their provincial overseers for changes in the way municipalities are financed.  Changes have been occurring, but almost always in the wrong direction. Sounding like corporate CEO's, provincial politicians have been reciting efficiency mantras and experimenting with tax cuts, user-pay regimens and service clawbacks.  During the 1990's, Ontario's 760 municipalities were reduced to 440 through amalgamations intended to 'improve efficiency and eliminate redundancy'. The surviving municipalities then suffered an blizzard  of downloaded responsibilities and reduced or eliminated grants.

Debates among provincial and federal politicians about jurisdictions and responsibilities have been further blurring boundaries.  As a result, taxpayers often do not know whether the hand in their pocket is attached to a federal or provincial arm, but the fingers can often be traced to municipal councils.

With the 2003 election of Liberal Prime Minister Paul Martin and Premier Dalton McGuinty, municipal funding became the conversational flavour of the day. On January 23, 2004, eastern Ontario mayors formed MUND: Municipalities United for a New Deal, to lobby for a new funding formula.

One possibility (now a 2% fait accompli in some municipalities) involved sharing gasoline tax revenues. The federal government talked about eliminating the GST on municipal purchases. An uneasy truce occurred. The importance of municipalities is regularly acknowledged but praise is not legal tender. To be sure, the City of Toronto recently negotiated a `City Charter' granting powers not permitted in The Municipal Act. (Montreal, Winnipeg, Vancouver and Saint John already enjoyed `City Charter `status).

In the meantime, downloading continues, infrastructure problems are worsening and the employments sustaining property tax streams are drying up.

This has already had consequences.   On April Fools day, 2008, City of Belleville Mayor Neil Ellis floated the idea of a municipal tax upon purchases by patrons of drive-through restaurants. Not only would this provide additional local revenue, Mayor Ellis thought that it would reduce pollution.

A more ominous result was the 2010  election of Mayor Rob Ford in Toronto on a promise to avert a fiscal crisis by 'eliminating a gravy train among municipal employees';  a gravy train that turns out to have existed only in Mayor Ford's imagination.  Toronto's fiscal shortfall will have to be solved in familiar ways - tax increases or service clawbacks in the guise of retiring, firing or laying-off employees.

Every municipality faces similar difficulties  - best understood as the 'downloaded consequences' of federal and provincial decisions to nurture urbanization, specialization and globalization. For such reasons, rethinking municipal revenue streams has much to recommend it.  Municipalities, perhaps through the Association of Municipalities of Ontario (AMO), could petition for a Municipal Sales Tax upon transactions and value adding activities occurring within their boundaries.

The resulting revenue would be adjusted in tandem with property taxes to meet municipal budget requirements.


If this seems provocative, it is worth noticing that municipalities already collect  de facto sales taxes in the form of commercial property taxes.  Indeed, until 1998, businesses paid a Business Occupancy Tax. (On Jan 1, 1998, the BOT was folded into the commercial property tax so that it could become a lien against property.) Under a MST model,  this tax could be abolished.  This would immediately diminish business start up costs and eliminate a relentless overhead item during difficult times.

A side benefit of a MST model is that commercial taxes are characterized as businesses paying for municipal services consumed in the course of their activities. Such claims are, at best,  hypocritical. All business costs are embedded in the price of goods and services. The only time businesses pay any overhead cost is when they are failing - and failing to pass costs to customers.

Repairing this confusion would improve community relationships. Business owners see themselves as super citizens, paying taxes as both residents and business owners.  So persuaded, they descend upon municipal councils with proposals and demands whose costs will be passed to ratepayers. Under the MST proposal, municipalities be less likely to encourage new developments devaluing historical (i.e., downtown) businesses just so the community will look progressive.  The resulting overhead burdens are also often needlessly expensive in terms of energy consumption and resource depletion.  Rationalizing such activities would lower MST rates because increased purchasing power would generate more revenue. The alternative would be to lower residential taxes. A delightful choice to have to make!

For the sports minded, a MST financing model would enlarge the notion of competition to include cities and towns. This would be a game everyone could participate in and benefit from.

How would the MST work?  Along with a straightforward tax (perhaps 3%) on retail sales,  municipalities would collect MST from manufacturers selling products out of the region utilizing calculations employed to collect the GST (now HST).  Unlike the HST, the MST would not be recaptured further along the chain. Instead, businesses would pay MST on value-adding activities in subsequent municipalities.  This would generate a new reason to rationalize - or eliminate - spurious economic activities.

The distribution network is both the conduit and the bottleneck through which goods and services make their way. A MST would dramatize the need for distribution system efficiencies.  In addition

  • A MST revenue stream would make`buy locally' initiatives more interesting and cost effective.
  • A MST revenue stream would dramatize the consequences of outside-the-community, cross-border purchasing and underground economies.

Finally, a municipal sales tax model would underscore the importance of clean, safe communities. Maintaining infrastructure and services means that monies must be raised ... with residential taxes the guarantor of last resort. By highlighting the consequences of underground and out-of-community transactions, a municipal sales tax would energize community life.

If ordinary people are to survive globalization and the agendas of multinational corporations,  local economies must be strengthened. A Municipal Sales Tax would be a good  start.