Over the summer, the Ford government announced the selection of a third-party auditor to investigate the finances of six municipalities — including Toronto — with an eye to clarifying the impacts of its recent housing legislation on city finances.
The multi-phase audit will examine the fiscal impacts of exempting affordable and inclusionary-zoning units, select attainable-housing units, and non-profit housing developments from municipal development charges, parkland-dedication levies, and community-benefits charges and also of reducing development charges for purpose-built rental units.
These fees, which municipalities levy on new homes, are ostensibly about making “growth pay for growth.” They are meant to fund both “hard” infrastructure (such as sewers and roads) and “soft” infrastructure (such as parks and libraries) associated with an influx of residents and homes. That all sounds reasonable. Viewed that way, reducing municipal fees for certain categories of housing may seem unfair. It might impair municipalities’ ability to fund this infrastructure, which could be strained by new housing developments and an influx of residents. Why shouldn’t new residents pay their fair share?
There are at least three problems with this characterization.
First, “growth paying for growth” implies that there’s a well-defined, optimal level of local infrastructure. In reality, there’s a wide divergence in terms of what different municipalities levy in fees. According to a 2022 study comparing municipal charges in the Greater Toronto Area, per-unit charges for low-rise development were $189,325 in Toronto, more than twice the reported charges for Burlington, Barrie, Milton, Oshawa, Clarington, and Bradford West Gwillimbury. Charges for high-rise development were $129,235 per unit in Markham, almost three times higher than in Oshawa. It’s hard to argue that necessary infrastructure in Markham is three times better than that in Oshawa.
If growth paying for growth is the goal, we need some sort of objective criteria for what growth actually requires. Is there an optimal amount of park space per housing unit? Ratio of population to hockey rinks? We can’t determine whether growth is paying for growth unless we can say definitively whether growth involves exhausting finite resources or just taking up slack, as can be the case with infill development in neigbourhoods that are losing population. This isn’t merely hypothetical: plenty of Toronto neighbourhoods are losing population as households age, meaning existing amenities, such as parks, may in fact be underutilized. It’s hard to claim that adding more units to a shrinking neighbourhood is pressuring greenspace, for instance.
Second, increasing the number of attainable or affordable housing units is an important public-policy goal. Yet until the recent legislation, many communities had traditionally levied development fees on such housing types, thus undermining that very objective. Below-market housing units built by social-housing agencies or non-profits are an important piece of social infrastructure; indeed, they’re funded in part by municipal fees. It makes little sense for cities to tax parks, so why should they tax the construction of shelter for vulnerable residents? If we’re willing to support these housing types financially, we shouldn’t turn around and demand fees for doing so.
Third, and perhaps most controversial: municipalities are underutilizing a far more important fiscal tool — property taxes. Property taxes remain municipalities’ primary revenue source, but they’re not popular. This places enormous pressure on local councils to keep residential rates low. In fact, residential property-tax rates are so low that they often aren’t enough to fund municipalities’ ongoing operating expenses. As a result, businesses (and, in some communities, high-rise renters and condo owners) tend to pay disproportionately high property taxes to make up the difference.
Despite the fact that property taxes are among the most efficient (that is, least distortionary) forms of taxation, municipalities often choose to fund priorities with taxes and fees on groups less likely or unable to vote in municipal elections (e.g., newcomers or businesses). The politics make sense — homeowners outnumber renters and business owners — but the economics don’t.
Shedding light on government finances is never a bad idea, even if it’s just to settle a simmering debate between the province and cities. But this debate is a symptom of deeper problems with municipal finance in Ontario. Hopefully, the audit’s findings will spur a hard but necessary discussion about how Ontario cities raise revenue and from whom.
Donate