Roadblocks to Municipal Growth: Competition for investment most often comes down to what cities have to offer and experts say senior governments have to find ways to download taxation powers, writes Sheila Pratt.

June 04, 2003

Sheila Pratt
CanWest News Service

Wednesday, June 04, 2003

EDMONTON – The city of Phoenix looked north and saw an enticing target: Edmonton’s budding high-tech sector. In mid-winter, the Sunbelt city sent an economic development officer calling on Micralyne president Chris Lumb in his state-of-the-art lab in Edmonton. After all, if you’re trying to entice a cutting-edge, micro-technology business to the U.S., the weather is an obvious starting point.

Mr. Lumb’s company, with about 100 employees, makes tiny electronic and mechanical systems for precision instruments used widely from the automotive industry to bioanalysis. It’s the kind of new economy company the federal government wants to encourage.

Mr. Lumb listened patiently to the sales pitch: Phoenix is in the heart of the U.S. market (Mr. Lumb has only one significant Canadian customer) and the high-tech mecca of Silicon Valley and competitive tax rates.

Fortunately for Edmonton and the Canadian economy, Mr. Lumb didn’t bite. He stayed put mainly because Edmonton has exactly what his company needs — a world-class university, a highly trained labour force, reasonable tax rates and a good quality of life.

This episode, played out in many cities these days, doesn’t always end so happily for Canada, but it illustrates some important factors about the country’s economy.

Competition for investment dollars, especially in the knowledge economy, operates globally and comes down to what do cities have to offer, not regions or provinces. If Canadian cities can’t compete on the global level, the country will pay the price, losing business to more attractive urban areas, and it will be unable to attract new investment to keep the economy growing.

A coalition of voices, from economists to big-city mayors, is calling on the federal government to recognize cities as engines of the economy and start reinvesting in urban areas. Banks, boards of trade, social agencies and others agree the country needs a new urban agenda. A Liberal caucus task force acknowledged last fall that traffic gridlock, poor transit, substandard services, inadequate housing, poverty, aging sewers and bad roads are hurting the country’s competitive position.

Without revitalized cities, Canada will see lagging economic development and a lower standard of living, says the TD Bank.

The infrastructure deficit — the repairs and upgrading needed in our cities after a decade of cuts and deferred maintenance — is an urban crisis, says the Federation of Canadian Municipalities.

The federation estimates it will take an injection of $4.2 billion a year for five years for Canada’s cities to repair aging roads and sewers, and provide affordable housing for fast-growing populations. That’s a far cry from the $3 billion over 10 years offered by Finance Minister John Manley in his latest budget.

Federation president John Schmal notes that from 1998 through 2002, for example, 60 per cent of Canada’s employment growth took place in the 10 largest urban regions, with 43 per cent coming from the three hot markets of Toronto, Montreal and Calgary.

Toronto’s gross domestic product alone is estimated at $98 billion for 2001, 10 per cent of Canada’s GDP, says a Toronto Board of Trade report entitled Strong City, Strong Nation. Keeping that city strong is critical to the well-being of the national economy, says board president Elyse Allan.

Ms. Allan says the federal government is still stuck in the old view of regional economic development “when in fact it is cities that will drive the country” and attract the investment.

She says cities need an immediate five-year plan to repair crumbling roads and transit systems. They need better tax tools, though that does not mean a higher tax load, she says.

Mr. Schmal says a new fiscal deal is crucial if cities are to compete. “Municipalities are teetering on the brink of fiscal unsustainability,” he says.

To balance their books in the 1990s, provinces cut funding to cities for roads, housing and policing. Some provinces also downloaded social services on the cities. Overall, transfers to cities decreased to 16.9 per cent of revenue from 22.4 per cent, says the federation. It was a drastic “do more with much less” scenario.

Cities also have a narrow tax base, mainly property taxes, while senior governments have tax tools ranging from income, sales and gasoline taxes, to resource royalties to hotel taxes. Cities get only seven cents for every 93 cents in taxes collected by the senior governments.

That imbalance is a major obstacle, says Roger Gibbins, head of the Calgary-based Canada West Foundation.

Canada needs a national debate on how to redistribute tax powers to direct more revenue to municipalities, he said. Such a “new financial partnership” need not lead to a higher tax load. But it means giving cities tax tools that better reflect local economic growth

In the U.S., cities have access to a wider range of taxes. For instance, Phoenix gets a share of the state’s income tax, vehicle licence tax and a share of gas taxes for street construction.

Canadian cities, by contrast, derive about half their revenue from property taxes. The rest is government grants and fees. Property taxes, however, are fairly static and do not adequately reflect economic activity as do sales tax and income tax.

From 1996 to 2001, federal revenue increased by 25 per cent, provincial revenues by 25 per cent and municipal revenues by only 14 per cent.

The municipalities federation is lobbying for a share of federal gasoline tax or income tax. The federation praised recent promises by Liberal leadership front-runner Paul Martin to hand over a portion of the federal gasoline tax to cities for infrastructure upgrades.

Some provinces have taken small steps in this direction. Alberta, for instance, cut millions in transportation grants to cities in the early 1990s. But in the mid-1990s, the province gave Edmonton and Calgary grants based on a share of the gasoline tax. Manitoba gives per-capita grants to municipalities from income tax collected and British Columbia gives a share of its retail sales tax to municipalities. But no province has given cities the power to set their own gasoline tax or a sales tax.

“So far, the biggest hurdle to a new urban agenda is getting the federal and provincial governments to cede control of revenue,” says Derek Burleton, senior economics analyst at the TD Bank.

Toronto’s Ms. Allan cautions a new urban agenda isn’t just about new powers. It also means more co-operation between governments because infrastructure doesn’t just mean more buses and fixing potholes.

Federal immigration policies, for instance, can lead to substantial costs in urban areas. Education is also a key part of an urban economic strategy, and that’s a provincial responsibility.

Edmonton’s Micralyne president, Mr. Lumb, makes that point directly. “We could not build our business in a city that did not have a high quality university.” The company was a spinoff from university research and half its staff of 100 hold degrees from the University of Alberta.

He says the best way to build an economy is to develop business locally. But, he says, efforts are hampered by imbalances.

“You have two levels of government that are extremely wealthy financially, because they’ve ceased to provide for the cities. But they haven’t freed cities to be masters of their own destiny.”

Special Report – Stalking the Northern Tiger

© Copyright 2003 The Ottawa Citizen