November 24, 2016
This backgrounder provides highlights of the report “The City of Toronto’s Immediate and Longer-Term Revenue Strategy Direction”, from the City Manager and Deputy City Manager & Chief Financial Officer, which the Executive Committee will consider at its December 1, 2016 meeting.
The report outlines the principles for selecting potential revenue options, the social and economic impacts of selected options; provides a framework for the application of incremental revenues; and identifies implementation considerations.
New Revenue/Taxation Options
- In early 2016, the City retained the consulting firm KPMG LLP (“KPMG”) to undertake the Revenue Options Study. The June 2016 KPMG report provides quantitative and qualitative analyses of each of the revenue options, to lay the groundwork for policy considerations. Subsequently, KPMG undertook additional economic and social impact assessments on certain revenue options, as explained below.
- This report provides the results of further analysis regarding those options that appeared to have the least social and economic impact and the most potential to address either the City’s 2017 budget and/or the 2018 budget outlook and long-term capital requirements.
- The analysis includes consideration of the potential short and long term social and economic impacts of each option on the businesses and residents of Toronto, implementation and administration challenges, and the status of the legislative and regulatory restrictions and limitations.
- The six factors that were used to assess the various revenue options in achieving an optimal tax regime for the City include: tax incidence/fairness, efficiency, policy fit, minimizing negative economic impacts, revenue quality, and legislative authority.
- Based on an evaluation using the six factors, staff identified the following revenue options for further consideration:
||Requiring Major Provincial Policy Change
|A. Taxes on Real Property
- Property Tax
- Municipal Land Transfer Tax (match Provincial policies)
- Parking Levy
|B. Specialty Taxes
- Alcoholic Beverage Tax1
- Personal Vehicle Tax
- Third Party Sign Tax2
- Parking Sales Tax
- Hotel Tax
- Municipal Income Tax
- Municipal Sales Tax
|C. User Fees
- Road Pricing / Expressway Tolls3
- When all the factors are considered, the City is left with a limited set of practical options for significantly expanding its revenue base in 2017. These significant measures include property tax, land transfer tax, and reinstatement of the vehicle tax. A parking levy is not recommended due to its poor scoring on key criteria.
- More modest tax revenue options with longer implementation lead times, which require provincial legislative or regulatory changes, include an alcohol tax and/or hotel tax.
- Expressway tolling has the potential to be a significant new capital funding source at rates that would be expected to have only modest social and economic impacts.
- Other high revenue options – sales tax sharing and income tax authority – require major provincial policy changes.
- In the current City staff report to Executive Committee, the revenue options recommended for consideration by the Budget Committee, as part of the 2017 budget process include:
- Introducing a dedicated property tax levy for capital;
- Allowing the commercial and industrial property tax rates to rise at the maximum allowed 50 per cent of the residential property tax rate increase;
- Harmonizing Municipal Land Transfer Tax (MLTT) rates with the Ontario Land Transfer Tax (LTT) rates, including the new graduated rate;
- Harmonizing the MLTT First-Time Homebuyer (FTHB) rebates with Ontario LTT FTHB rebates, including the new Canadian citizenship and permanent residency test;
- Changing the MLTT FTHB rebate eligibility criteria to include a maximum value of consideration; and
- Introducing an above inflationary increase to the Third Party Sign Tax.
- The report recommends that Council consider the re-introduction of the personal vehicle tax of up to $120 annually per four-wheeled vehicle, direct the Deputy City Manager & Chief Financial Officer to report back to Executive Committee in January 2017 on tax design and implementation authorities, and forward this matter to Budget Committee for consideration as part of the 2017 budget process.
- The report recommends that Council request the Province move ahead with
a) legislative and/or regulatory reform to enable in 2017:
- Hotel and short-term rental tax;
- Clear authority to require the collection of taxes by intermediaries, such as for alcohol or tobacco taxes and hotel and short-term rental accommodation taxes;
- The imposition and collection of alcohol tax at LCBO stores; and
- Tolling of roads under the jurisdictional ownership of the City.
b) Legislative reforms and/or agreements for application in future budgets (2018 and beyond) include:
- Graduated residential property tax rates;
- Parking sales tax;
- Municipal income tax; and
- Sharing of the Harmonized Sales Tax (HST) with municipalities.
The report also recommends that:
- Council direct the City Manager, Deputy City Manager & Chief Financial Officer, and General Manager of Economic Development and Culture to consult impacted businesses as part of the Long-Term Financial Plan consultation process.
- Council request the Province to continue to support regional tourism in Toronto by maintaining or enhancing the annual funding, at the current funding level of $9.9 million, provided to Tourism Toronto as a Regional Tourism Organization.
- In determining the application of the funds raised, whether the revenue is more suitable for operating or capital purposes, staff consider a few factors including: the magnitude and stability of the revenue, whether the tax is new, and linkages to specific programs.
- Property tax is the City’s primary revenue source for municipal services.
- Toronto’s residential class tax rates are the lowest in Ontario. Toronto’s at-or-below inflation property tax increase strategy is keeping the City from accessing an important revenue option and moving the City further from the norm among other Ontario municipalities with respect to residential property tax.
- The report to Executive Committee recommends that Council endorse legislative changes and request the Province to move ahead with legislative reforms to enable graduated residential property tax rates for higher value properties and consider a dedicated property tax levy (of one per cent increasing to five per cent over five years) to fund capital improvements.
MLTT – Harmonizing with the Provincial Rate Structure
- On November 14, 2016 via its Fall Economic Outlook and Fiscal Review, the Province of Ontario announced reforms to address housing affordability in Ontario, including a doubling of its Land Transfer Tax (LTT) First Time Home Buyer Rebate from $2,000 to $4,000.
- The provincial changes also include increases to LTT rates for non-single family residential transactions and single family residential transactions over $2 million. In addition, it will introduce a Canadian Citizen or permanent resident eligibility test for its enriched FTHB rebate. These provincial reforms are scheduled to take effect January 1, 2017.
- The MLTT continues to be a critical part of the City’s budget strategy. Since its introduction in 2008, the MLTT has increased at an annual rate of about 18 per cent during a period that has coincided with very robust activity and price appreciation in the Toronto real estate market. The growth of the MLTT has made the City’s revenue base more susceptible to real estate market conditions.
- The City has authority under COTA to levy a MLTT and set tax rates, including new tax tiers for a graduated tax rate system and setting eligibility criteria for the FTHB rebate.
- The staff report proposed that Council refer harmonizing of the City’s MLTT with the Provincial rate structure to the Budget Committee for consideration as part of the 2017 budget process. This includes harmonizing the tax rates, the First Time Home Buyer Rebate, a Canadian residency eligibility test, along with a new eligibility criteria to include a maximum value of consideration above which a first time home buyer will not be eligible for the Rebate.
- These MLTT changes could contribute $75 million to the City’s 2017 Budget.
- A parking levy is a fixed charge levied on paid and unpaid non-residential off-street parking areas. It would be permitted under COTA, as long as it is not a sales tax .
- The KPMG Revenue Options Study estimated that a potential parking levy applied to off-street non-residential parking in Toronto would generate about $171 million to $535 million if an annual rate of $6.75/m2 to $20.25/m2 (equivalent to 50 cents to $1.50 per space per day) is applied (before exemptions and depending on the levy design).
- The report indicates that if Council approved a parking levy for 2017 as part of the budget process, there would be no revenue realized in 2017 due to the time to implement and high development costs.
- A parking levy is not recommended due to its highly variable and in some cases severe impact to the commercial and industrial property class.
- An alcohol tax in the form of a sales tax at stores and licensees is permitted under COTA, although currently COTA does not provide clear authority for the City to require third parties to collect taxes on the City’s behalf. Sales at stores (excluding alcohol licensees) such as the LCBO and Beer Store, small breweries, distilleries, wine retailers and certain grocery stores have the potential to raise about $15 million to $126 million a year based on a tax rate ranging from 1 per cent to 10 per cent.
Personal Vehicle Tax (PVT)
- The City staff report states that a $120 annual PVT would yield an annual revenue of $100 million for the City. If the PVT was approved as part of the 2017 budget process, the 2017 revenue would be about $80 million assuming April 1 implementation. Costs for implementation and ongoing administration would be relatively low.
Third Party Sign Tax (TPST)
- The report recommends that Council refer the TPST to the Budget Committee for consideration as part of the 2017 budget process.
- The TPST currently generates about $10.8 million a year.
- In September, the Planning and Growth Management Committee commented that due to changes in sign inventory over the last few years, it would be time to review the tax and determine whether it could generate additional revenue.
- An above-inflationary increase in tax would be needed to generate additional revenue above the current level. If Council approved an increase of 25 per cent as part of the 2017 budget process, the 2017 revenue is estimated to be about $2 million for part-year implementation.
- Of all the traffic tax options, expressway tolling is considered to be the most effective in terms of traffic management and revenue generation. This finding is based on the preliminary results of the Transportation Study, which the City conducted on tolling options for the Gardiner Expressway and Don Valley Parkway.
- Preliminary results indicate that in order to recover the rehabilitation and maintenance costs of the Gardiner Expressway and Don Valley Parkway, along with tolling system development and operating costs, a toll of approximately $1.40 per trip or $0.14 per kilometre for a minimum of 30 years would be required.
- Should Council decide to implement expressway tolling, a toll which recovers the cost of the Gardiner project (about $1.40 per trip) would free up $2.6 billion in total funding (including $1.85 billion in debt) currently contained in the City’s approved 10-year capital plan. A toll of up to $2.00 per trip would generate just under $5 billion expressed in today’s dollars over 30 years.
- Potential implementation of a toll would necessitate consideration of possible social and economic impacts, as well as implementation challenges.
Parking Sales Tax
- A potential parking sales tax could take the form of a fixed percentage applied to the cost of commercial paid parking. A parking sales tax of five per cent to 20 per cent is estimated to generate from $30 million to $120 million.
- Implementation of a parking sales tax may be difficult due to the cash nature of some parking operations, raising the cost of collection and enforcement.
- A parking sales tax is currently not permitted under COTA, and would also require the authority to compel vendors to collect and remit the tax.
- A hotel tax is a tax on the rental of a room for the purpose of short-term overnight accommodation, typically applied as a percentage of the cost of a room night sold, or as a fixed charge per room per night. The report considered a tax on both hotel rooms and short-term rentals, e.g. Airbnb.
- KPMG estimated that a 4 per cent City hotel tax could raise approximately $40 million annually, approximately 2 per cent to replace up to $20 million the existing voluntary 3 per cent Destination Marketing Program contribution to Tourism Toronto, and 2 per cent or $20 million in net new annual revenue to the City, assuming the Province continues its $10 million annual grant to the Regional Tourism Organization (Tourism Toronto).
- If successfully applied to the short-term rental market, total combined revenue potential for a tax on hotels and short-term rentals is estimated at about $22 million a year.
- A hotel tax would place an incremental burden on the rapidly changing hotel industry, an important employer, and potentially impact the City’s tourism and convention business
- Potential revenue measures will be tabled at a series of public consultations that started in November 2016 and will continue into 2017. In addition, staff have been contacted by or reached out to representatives of commercial and retail business owners, the Greater Toronto Hotel Association, car rental and car sharing organizations, motion picture screening companies, and others who raised concerns and considerations related to some of the potential taxes and how they may impact the various stakeholders.
- Through the consultation process, the City is seeking input on some challenging questions about how it can manage expenses, raise revenue, optimize City assets and manage finances in order to best achieve the City’s strategic priorities and objectives. The findings from the public consultation process will inform staff and Council in developing the City’s Long-Term Financial Plan, and help give Toronto the financial roadmap it needs to achieve its aspirations and goals.