- The City of Toronto Act (COTA) that was proclaimed as law on January 1, 2007 and provides the City with broad and permissive taxation authorities commensurate with its size, responsibilities and status as an order of government.
- Council adopted the Long-Term Financial Direction report at its meeting June 7. That report indicated that the City needs to develop a multi-year revenue strategy that examines ways it can optimize revenue generation from existing and new sources. It also recommended the development of a multi-year expenditure management plan and asset optimization plan.
- At the February 17 special budget meeting, City Council directed staff to engage an external consultant to perform an updated assessment of the revenue potential of certain new taxes permitted under the City of Toronto Act, 2006 (COTA).
- The last time Council broadly considered new tax options was in May 2013 in the context of providing advice to Metrolinx regarding its transportation growth strategy.
- The Updated Assessment of Revenue Options also responds to Council direction to look at the feasibility of establishing a Municipal Land Transfer Tax (MLTT) Stabilization Reserve Fund and the advisability and feasibility of harmonizing the City's MLTT rate structure with the Province's Land Transfer Tax.
- The Assessment of Revenue Options updates those specified permitted revenue options previously studied in a 2007 report by Hemson Consulting, as well as certain other taxes as directed by Council currently not permitted under COTA.
New revenue/taxation options
- The consulting firm KPMG LLP ("KPMG") was retained to undertake the Revenue Options Study.
- The KPMG report provides quantitative and qualitative analyses of each of the revenue options, which will lay the groundwork for policy considerations. In addition, KPMG was requested to report on the use of the MLTT and two other revenue options in other jurisdictions: carbon tax and Uber registration fee.
- The revenue potential figures in the KPMG report are estimates based on existing research and available data.
- Table 1 below is excerpted from the study and lists the revenue options, summarizes the range of net revenue potential based on the rates indicated, whether the tax is currently permitted under the COTA and the estimated time to implement.
- Staff propose that revenue alternatives be considered in terms of who they impact and how (incidence), related costs (efficiency), ability to reinforce desirable behaviours (policy fit), impacts on business activities (economic distortions) and revenue growth/stability (revenue quality), in each case relative to an equivalent marginal property tax increase.
- Revenue options under the COTA that have been implemented include the Municipal Land Transfer Tax (MLTT), Personal Vehicle Tax (subsequently rescinded) and Third Party Sign Tax. Revenues from these taxes have been allocated to the operating budget.
- The variability of alternative revenues in comparison to property taxes exposes the City to future operating budget shortfalls when revenues decline.
- Alternative revenues may be viewed negatively by the public if there are no noticeable changes directly related to City services.
- A possible strategy to address these issues is to allocate new tax revenues to specific capital projects or programs.
- The City has currently identified $29 billion in unfunded capital projects.
Existing revenue options
- Property tax is the City's primary revenue source for municipal services.
- As a share of the City's total budgeted own-source revenue, property tax has dropped from 60 per cent in 2006 to 49 per cent in 2016.
- Overall revenue growth has been supported by increases in utility rates for water and solid waste, transit fares and other user fees, and the rapid growth of MLTT revenues.
- Limiting residential property tax increases to the rate of inflation has translated into an overall property tax increase that is actually less than inflation (tax rates for non- residential properties are increased at one third the rate of the residential property tax class).
- The KPMG report discusses property tax as an alternative or benchmark against which to test the new revenue options.
- The external consultant's report indicates that Toronto's municipal property tax rate is the lowest in comparison with those in the Greater Toronto and Hamilton Area (GTHA).
- Toronto's residential property tax burden (the percentage of residential property tax on household income) is also among the lowest in the GTHA.
Municipal Land Transfer Tax – Harmonizing with the Provincial rate structure
- Council directed staff to review the differences between the City's and Province of Ontario's rate structure for land transfer tax.
- The City currently has somewhat lower tax rates and a higher First-Time Home Buyers' Rebate when compared to the Province.
- Based on the 2015 actual MLTT data, the differences reduced the City revenue by approximately $68 million ($43 million from the lower rates and $25 million from the higher First-Time Home Buyers' Rebate).
- The MLTT has been a source of tremendous revenue growth for the City since its implementation, a period that has coincided with very robust activity and price appreciation in the Toronto real estate market.
- The MLTT has a relatively narrow incidence, applying to approximately 70,000 transactions a year and with a very high individual transaction cost at almost $10,000 for a $700,000 home.
Establishing a MLTT Reserve Fund
- Council directed staff to report back on the feasibility of establishing a Municipal Land Transfer Tax Stabilization Reserve Fund funded through excess MLTT revenues that exceed the annual budgeted revenue.
- Currently the City budgets a portion of MLTT revenues as a contribution to the capital program. If revenues fall short of expectations, this contribution would be reduced commensurately – avoiding a direct operating budget shortfall.
- Currently higher-than-budgeted MLTT revenue contributes to the corporate surplus, which is allocated according to the Corporate Surplus Management Policy, whereby 75 per cent of the surplus is allocated to the Capital Financing Reserve Fund.
- Staff have indicated that an appropriately sized capital budget allocation remains the best way to make full use of MLTT revenues while reducing the risk of revenue variability resulting in a direct operating budget impact.
- New taxation options identified in the KPMG study will be considered as part of the Long Term Financial Direction report in the fall of 2016.
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Media contact: Wynna Brown, Strategic Communications, 416-392-8937, firstname.lastname@example.org