City finance that depends on magic is a recipe for disaster

Recently, I’ve been witnessing something I’ve been hoping to see since I began writing about municipal finances over five years ago: a broad acknowledgment that our city (Winnipeg, Canada) does not have enough money to maintain and replace the infrastructure it owns. And this acknowledgment has come from many different sources: present and former council members, columnists in the local paper, and even the leading lobbyist for the infrastructure industry.

It’s clear that many of the people who used to think the city had a “spending problem” have come around. Our infrastructure deficit is now $8 billion, about $2 billion worse than five years ago. After five years of record infrastructure spending, we’ve fallen further behind than ever.

Obviously, we’re not spending enough to keep up.

Unfortunately, many have simply moved over to the “revenue problem” camp. Intent on finding more money, they’re now proposing all sorts of wacky schemes to avoid having to change anything about the current approach to infrastructure investment.

That’s why I actually guffawed when I heard an interview with CBC’s Marcy Markusa a few months ago, speaking with Enid Slack, director of the Institute on Municipal Finance and Governance at The Munk School of Global Affairs and Public Policy at the University of Toronto, about how cities can bring in more revenue.

(Maybe it wasn’t exactly a guffaw…. It could have been a chortle, or maybe a snicker? In any case, I definitely LOL’d.)

Marcy: Have you heard of any unique scenarios where they are keeping property taxes at a certain level, but they’ve found some other ways to generate revenues that might be sort of on the edge of being new?

Enid: (laughs) You mean magic? I don’t think that’s happening.

— January 19, 2024, interview on CBC Radio

Magic! It’s a solid choice of words because only in a world of magic does “more money” even exist. If you live in that world of magic, the Sorting Hat will put you into one of four camps:

Slytherites would like cities to have additional powers of taxation, like municipal income or sales tax. By creating new income streams, a city would have more income to fund its responsibilities.

Hufflepuffers believe it’s time for a redistribution of responsibilities between cities, provinces and the federal government. By taking away municipal responsibilities, more money remains on the table to fund what is left.

Ravenclawnigonians have a razor-sharp focus on the operating budget, expecting the solution to budget woes to lie in finding the right ratio of tax increases to service cuts.

Gryffindorinos think that building large-scale infrastructure projects to induce economic growth will give us the money we need in the future.

Maybe you identify strongly with one of these houses and look derisively upon the others. Maybe you find yourself identifying with more than one of these houses at the same time.

Regardless of which you fit into, please remember that these houses exist in the world of magic. In real life, there isn’t enough money to fund what we’ve built, so none of those approaches works. “How do we get more money?” is the wrong question.

Here in the real world, we non-mathemagicians recognize that there are no magic sevens (or any other number), which means giving additional taxation powers to a city won’t help. The truth is, there’s actually nothing preventing city councils from raising property taxes when the economy grows. And if we can’t afford a property tax increase, how will we magically afford a new sales or income tax? Sorry, Slytherites.

And it doesn’t matter whether a city, a province or the Feds are collecting it because all tax dollars ultimately come from one place: our pockets. So even if the province or the Feds take over some responsibilities, they’ll also have to cut services or raise taxes, on us, to pay for it. A bigger slice of an already too-small pie is no help at all. Nice try, Hufflepuffers.

So what? Just raise taxes already, say the Ravenclawnigonians. Go as high as we need to, then cut services for the balance. No big deal. Until we bother to ask how much, that is. Winnipeg’s infrastructure deficit over the next 10 years is calculated to be $8 Billion, or $800 million per year. That’s more than the city collects in property taxes every year. We’re going to need a lot more money.

But it’s not like there’s an extra $800 million a year sloshing around in the economy just waiting to be taxed. In fact, it seems like the opposite, since the province recently cut the gas tax because pickup truck owners couldn’t afford to buy butter.

Here’s where the Gryffindorinos chime in to suggest we should build a new road (or expand an existing one) in order to “grow the economy” to provide the taxable funds to meet our current budget needs. But what we built in the past didn’t accomplish that. And suggesting that we need more new growth to pay for the old growth is literally the mechanism for a Ponzi scheme.

The reality is that the city could raise the funds it needs using the tools it already has: property tax, which is, incidentally, the appropriate place to raise that money.

After all, cities provide critical life-sustaining services to residents: clean drinking water, sanitation, public safety, etc. And such critical services need a stable source of funds to ensure they are never disrupted.

Sales and income taxes are not those funds. They rise and fall with the cycles of the economy. Sure, they go up when times are good, but they also go down when times are not so good. And it wasn’t even four years ago that sales tax revenue took a drastic dive overnight, due to pandemic measures. Not exactly what we should be basing our ability to provide clean drinking water on.

So while some people may call these “growth” taxes, we can’t forget that they are also “decline” taxes, because they’re based on economic output (a measure of community income) which goes down as well as up.

But it’s not how much you make that matters, it’s how much you keep. So rather than have our most essential, life-sustaining services reliant on community income — which can vary wildly from year to year or even month to month — we should fund them from community wealth, which is much more stable over time.

And since more than three-quarters of Canada’s national wealth is held in real estate (77% as of 2022), the best way to tap that would be through some sort of tax on those properties. Like a…property tax.

But we’ve already established that the money isn’t there for that. There’s just too much infrastructure per person to maintain. So much so that cities throughout North America are struggling to provide even the most basic services. That’s how municipal finance works.

In Toronto, they’ve recently calculated that their 10-year infrastructure deficit is $26 Billion. That’s over 1.5 times the size of their annual operating budget, and 6% of the city’s 2020 GDP.

Toronto Mayor Olivia Chow responded, logically, that the numbers are so staggering that the city needs to think twice about building anything new, and that “we’re going to really fix what we have first.”

Commendable.

But here in Winnipeg, with our $8 Billion infrastructure deficit, which is over 3.6 times the size of our annual operating budget, and nearly 18% of the city’s 2020 GDP, we’re approving tens of millions of dollars of additional debt for overages on the construction of a new recreation facility in the suburbs, planning to spend billions more on two road expansions, all while closing pools and bridges we can’t afford to maintain.

How will we pay for it all?

Look, we’ve been asking “How do we get more money?” for over two generations now, and if the answer is “magic,” maybe it’s time to start asking different questions.

Perhaps starting with, why are we faced with “difficult decisions” every year, despite a growing population and therefore (one would assume) a growing economy? Why have our past investments not been sufficient? What kind of investments would be better? And what do we do now?

Asking those questions might actually get us to a real way forward.

Because true financial sustainability can’t rely on magic to save the day.