By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
Saskatchewan is getting a reputation these days. In 2010, Saskatchewan posted the second highest economic growth in Canada, and the province also became a global newsmaker after goliath BHP Billiton tried a $40 billion take-over of Saskatoon-based Potash Corp. In 2011 and 2012, Saskatchewan is expected to lead the country in economic growth, outstripping both BC and Alberta. What’s more, Saskatchewan is the only province that managed to table a surplus budget for fiscal 2011/12. That’s right. Surplus.
These days, the sky is indeed the limit in Canada’s “Land of Living Skies.” And this applies politically as well as economically. Earlier this month, voters in Saskatchewan casted ballots in the province’s first-ever election occurring on a fixed date, and then saw fit to hand Premier Brad Wall’s Saskatchewan Party an unprecedented landslide. Wall’s “warriors” not only earned a higher share of the popular vote, they also managed to grow their seat count—a rarity for any government winning their second term.
All of this has generated some pretty big headlines for Saskatchewan—and the bragging rights that go along with them. Yet, slumbering away amidst all the noise is a “sleeper.” It’s a “sleeper” because it concerns policy, and policy just doesn’t sizzle like the cut and thrust of politics or the dollars and drama of the economy.
What is this policy? Well, the 2011 Saskatchewan budget fulfills a promise to share 1% point of the 5% provincial retail sales tax with municipalities in the province. This is a jump from the 0.75% points that the province had been sharing. Starting in 2011, municipalities in Saskatchewan will begin receiving grants equal to one-fifth of all provincial sales tax revenue.
Last year, Saskatchewan’s sales tax revenue sharing totaled $167 million. This year, it will jump to $217 million. By the next fiscal year, the municipal share could grow to $237 million. In 2011/12, Saskatoon is expected to get $37.8 million and Regina $33.5 million. In 2012/13, the pair should get $41.5 million and $37.0 million respectively.
Given the amounts in play, it’s not surprising that a lot of the commentary so far has focused almost exclusively on the cash. While the new funding is no doubt good news, there’s a lot more here to consider than just the coin. The big story behind this policy “sleeper” is that the province has more firmly linked current and future municipal grants to a stream of provincial revenue. This policy move affects more than the level of granting. It also speaks to a new way of administering grants.
The purpose behind provincial grants to municipalities is not to simply “grease the squeaky wheel.” Rather, grants are needed to ensure a measure of equity between municipalities, and to also provide a boost to the limited revenue generating capacity of the property tax. Grants help municipalities match their limited revenue sources with their broader expenditure responsibilities, and also help municipalities to cover the costs of providing infrastructure and services to outsiders—commuters, shoppers, truckers, conventioneers, tourists—that need the infrastructure and services but pay their property taxes elsewhere.
Two of the bigger problems with grants—and there are more than just two—concerns a lack of predictability and stability over the long-term. Grants have been variable, unpredictable, ad hoc, and even sporadic. A second problem has been an insufficient level of granting—particularly given the growth of Canada’s large cities—and insufficient growth in grant levels over time relative to need. None of this matches with the long planning horizons that infrastructure demands, not to mention the need of sustaining autonomy in local decision-making.
Explicitly tying grants to a specific stream or source of provincial revenue is one innovation that can resolve these long-standing problems. First, a system of tax revenue sharing will make grants more predictable and stable. As long as the tax revenue sharing formula is in place, municipalities have a good idea of the grants they can expect, and the revenues should remain stable over time. The historical experience of municipalities in Manitoba with grants compared to that of municipalities elsewhere is very instructive.
Throughout the 1990s, provincial support for municipalities was scaled back dramatically as provinces sought to bring their fiscal houses into order. But, municipalities in Manitoba were spared some of the huge cuts that occurred in most other provinces during the fiscal belt-tightening of the 1990s.
In Winnipeg, for example, operating grants in 1990 were $78.3 million, and that grew, year over year, reaching $115.8 million in 2000. By 2007, Winnipeg’s operating grants reached $140.8 million. Winnipeg was the only “big” western city that did not have its total grant amounts slashed during the 1990s. In fact, grants grew. Why? Because a good portion of Winnipeg’s grants were tied to provincial tax revenues.
Second, most federal and provincial tax sources are more responsive to growth. This means that their tax revenues automatically grow right alongside the economy without having to increase the rate of tax. When grants are tied to a responsive provincial tax source like the provincial sales tax, granting levels are almost guaranteed to grow over time.
This second advantage is critical. As noted above, the Saskatchewan sales tax sharing system will generate $217 million in 2011/12 and $237 million in 2012/13. That is a 9.2% rate of growth in one year. In the 2011 budget, the province estimates that nominal provincial GDP will grow by 9.0% over the same time period. Coincidence? Hardly. In tying grants to a responsive provincial tax source, the grants will grow as the economy grows. And, that’s a good thing.
It’s a good thing because the great bulk of economic activity is generated in our cities and larger urban centres. Yet, the great bulk of the tax revenue generated by that growth accrues not to the local city hall, but to federal and provincial coffers. Tax revenue sharing ensures that a portion of local economic activity is injected back into our municipalities and helping them fund the infrastructure and services necessary to accommodate growth.
Laurent Mougeot is the CEO of the Saskatchewan Urban Municipalities Association (SUMA), and has worked with municipal governments for more than 30 years. He is also a member of the Canadian Institute of Planners (CIP), a member of the Institute of public Administration of Canada (IPAC), and a member of the Saskatchewan Institute of Public Policy (SIPP). Mougeot knows that this policy is more than just about the money.
“The beauty of the formula is that it is predictable,” says Mougeot. “It’s also de facto tied to the economy.”[1]
There is another added benefit. When municipal grants for operations and infrastructure are tied to the fiscal fortunes of the province, there is less need to continually “negotiate” future granting levels, develop new programs, and add to the “red tape” that already exists. Tax revenue sharing helps keep a lid on all the bickering, complaining, finger-pointing, and blaming that has become so pronounced in provincial-municipal relations. The “whining, wrestling, and wrangling” of two adversaries is replaced by an environment market by a stronger sense of partnership. For more on that idea, turn to Rationale for Renewal: The Imperatives Behind a New Big City-Provincial Partnership.
In Part II, we’ll take a brief tour through the major tax revenue sharing systems in place across western Canada, and see how the new Saskatchewan sales tax revenue sharing policy stacks up.
Click here to read Part II of “Saskatchewan-style Tax Sharing is no “Sleeper”.
References
1. Quote obtained from “Sask. municipalities set for influx of cash“, printed in the Saskatoon StarPhoenix and Regina LeaderPost, August 4, 2011
By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
In 2005, I was handed my biggest challenge as a Senior Policy Analyst with the Canada West Foundation. That challenge was to travel the globe—via the Internet of course—and answer a relatively simple question. How do world class cities finance, fund, and provide urban infrastructure? My global travels took me to cities across the US, western Europe, southeast Asia, and Australia.
The purpose of the quest was to get a handle on innovative solutions to the infrastructure funding issue, and it ended with the publication of “New Tools for New Times.” That piece still stands as one of the Foundation’s largest research studies to date, and it ate up well over a year of my professional life. Between its covers, you can find over 100 traditional and innovative tools for financing, funding, and delivering municipal infrastructure, complete with descriptions of how they work and where they have been put to work.
Across Canada, it’s estimated that our villages, towns, and cities have an infrastructure funding shortfall of some $123 billion. And, that’s just the amount needed to repair, renew, rehabilitate, and replace existing infrastructure assets. There could be up to another $115 billion needed to construct new infrastructure to accommodate growth. (See the study entitled “The Coming Collapse of Canada’s Municipal Infrastructure” by the Department of Civil Engineering at McGill University and the Federation of Canadian Municipalities).
Grand total? A cool $240 billion.
That’s a lot of cabbage. It amounts to about half of the federal net debt, or about $30,000 for each and every family of four in Canada.
Because the amount is so large—mammoth really—the search for workable solutions must go beyond the traditional approaches of the past. The sheer size of the infrastructure funding challenge puts a premium on new, fresh, creative, and innovative ideas and approaches. This “innovation imperative” is underscored by yet another sobering reality. Given the recent economic upheavals and the state of most government budgets, tax dollars are in relatively short supply. Budgets across the land remain in deficit.
Saskatoon City Manager Murray Totland is “right on the money” in a recent interview with the Insight Saskatchewan newsletter. Totland argues that “It’s going to be difficult just to fund our way out of this. The numbers are so staggering. Innovation is going to play a role.”
When it comes to innovation, whether it is inventing new technologies locally or adapting and adopting innovative approaches developed elsewhere, one thing is very clear. Innovation, as a process, does not occur in a vacuum. Innovation comes as the result of information exchange—interaction.
That’s the purpose behind “Let’s TOC.” Here, you will find not just a steadily building repository of innovative ideas and practical examples, but the opportunity to engage in constructive discussion and dialogue with a broad range of infrastructure practitioners on the latest and most promising innovative infrastructure ideas.
Resolving Canada’s municipal infrastructure challenge is going to take more than a new grant program. It’s going to take more than “tinkering” or “fiddling” with the status quo. It’s going to take more than “piddling” on the periphery. It’s going to take fresh ideas, creativity, and the capacity to innovate.
If there is any good news behind the $240 billion challenge, it is that the innovation “menu” is both wide and long, and includes everything from tax incremental financing, revenue bonds, community bonds, and smart debt to rational pricing models, strategic capital asset mangment, local option taxes, trenchless technologies, small scale wastewater treatment, grey-water recycling, pooled purchasing, rainwater harvesting, and “on-farm” water purification. And, those are just the appetizers.
