As a former colony and dominion of the British empire, Canada has inherited a number of practices and traditions that developed and evolved in Great Britain. Canada’s parliament—based on the Westminster system—is but one example.
A less well-known but not unimportant “hang-over” from Canada’s colonial days is the heavy reliance of our local governments on the property tax as a source of funding.
While the idea of a broad-based and locally-levied sales tax like a penny tax may be somewhat foreign in the Canadian context, the same does not hold for local governments in most other nations. Local governments in western and eastern European countries, the US, and southeast Asia employ a wide variety of taxes—everything from income taxes, payroll taxes, general sales taxes, and selective sales taxes on specific goods and services.
The International Experience
According to the Organisation for Economic Co-operation and Development (OECD), local governments in the Scandinavian trio of Sweden, Norway, and Finland obtain virtually all of their tax revenue from personal income tax, which also comprises about 70% of local tax revenue in Switzerland. In Luxembourg, local governments get almost all of their tax revenue from corporate income tax. Payroll taxes represent over 60% of local taxes in Austria.
Local governments in Hungary get almost 70% of their tax revenue from a broad-based general sales tax, which also generates between 5% to 10% of local tax revenue in the US, Japan, and Italy. Local governments in most nations also collect at least some selective sales tax revenue, including Canada. Local governments in Canada get 2% of their tax revenue from selective sales taxes, which are levied primarily on utilities such as electricity and natural gas. However, these taxes are used much more heavily in other countries such as France, Korea, and Italy.
To be sure, local governments in all OECD nations collect property tax. But dependence on this tax source varies widely, from a mere 1% of local tax revenue in Switzerland to 90% in New Zealand, 96% in Canada, and 100% in Australia, Ireland, and the UK. The tax profile of local governments in the Commonwealth of Nations—formerly the British Commonwealth— stands in stark contrast to local governments elsewhere.
Germany—which too is a federal state—is one of the most interesting examples of tax diversity at the local level. About 50% of all local tax revenue in Germany comes from personal income tax, 25% from corporate income tax, 15% from property tax, 5% from a general sales tax, and 2% from selective sales taxes.
My point here is not that Canada’s local governments be given access to each and every tax source they desire, nor should government necessarily increase taxes. My point is that there is no fundamental law of the universe that dictates our local governments be so singularly dependent on just one tax source. Other options are available. And, allowing voters in a city to decide themselves whether they want to pay a small sales tax to improve local infrastructure is not a crazy idea.
The US Experience
Local governments in 36 US states—counties, municipalities, school districts, and special districts that deliver services across municipal or county lines—are allowed and often do levy some form of general or broad-based sales tax. In fact, about 22% of all local tax revenue in the US comes from sales taxes.
Most of these taxes are strictly regulated by the state constitution or state legislation, which stipulate the conditions under which they may be used, and the maximum rate that can be levied. Local governments in Mississippi can only have a general sales tax rate of up to 0.25%, while those in Alabama can levy a general sales tax of up to 8.0%.
The idea of a penny tax for municipal infrastructure takes off from a similar tax used in Oklahoma City to fund recreation and cultural infrastructure, the Special Purpose Local Option Sales Tax (SPLOST) used by local governments in the state of Georgia.
In Georgia, counties and municipalities that wish to establish a SPLOST tax first prepare a list of projects to be funded by the tax. This list, and a proposal for up to 1% SPLOST, are then put on the ballot at a regularly scheduled local election. If approved, the tax comes on, the projects proceed, and government follows up with regular reports on the tax, including the amount of revenue collected, the projects completed, and those still in progress.
After six years have elapsed, the tax automatically sunsets—it comes off. To reinstate the tax, a fresh list of projects must be identified, and another proposal for SPLOST submitted to voters in a referendum.
As noted already, many of these referendums are successful. And yes, they succeed even in jurisdictions with a reputation for being virulently “anti-tax.” That includes places like Cobb County, Georgia where the March 25, 2011 SPLOST referendum—passed.
The Canada West Foundation’s research on local finance and infrastructure has been international in scope. The search for optimal infrastructure funding tools should not be restricted to historical Canadian practice. There is much to learn and appreciate from the approaches taken in other countries. A small, local, and voter-approved penny tax is one such innovation that could do much boost our infrastructure investments.
By: Casey Vander Ploeg, Senior Policy Analyst