City manager says Toronto needs new taxes

City's top bureaucrat Joe Pennachetti at odds with Mayor John Tory, wants authority to negotiate with province for more revenue tools

With council once again struggling to plug a big hole in the city’s operating budget, Toronto’s top bureaucrat says he wants permission to ask the province for the power to implement new taxes.

City manager Joe Pennachetti made the surprise statement on Friday morning, outside a budget committee meeting where councillors debated plans to fill an $86-million shortfall in the 2015 operating budget. The gap was created after the Ontario government decided to phase out a $150-million social housing fund, but at the start of every budget season the city scrambles to find millions of dollars in order to balance the books.

Toronto relies on property taxes as its main source of revenue, a strategy that Pennachetti told reporters isn’t sustainable. In order “to build a city into the future,” he said, the municipal government will eventually need to additional taxes.

“We are probably the only city of three million residents or more in the world that funds all of its services from property taxes,” said Pennachetti, a highly respected civil servant who is retiring in April. “There’s no sales taxes, no income tax, etc. There has to be change at some point in time in order for us to get through all of the growing pressures that we have – from transit, to housing, to all the social services that we now have to fund.”

Under the provincial City of Toronto Act, Toronto doesn’t have the power to institute a sales or income tax. But the city is about to begin talks with the province about amending the act, and Pennachetti said he would need “strong direction” from council to negotiate new tax powers. He said he hoped council would give him that mandate as part of the 2015 budget process, which wraps up next month.

Councillor Shelley Carroll (Ward 33 – Don Valley East), a member of the budget committee, signaled she was ready to take up the cause and promised to bring forward a motion at next Friday’s budget meeting asking for a report on new revenue streams. It would include a direction to examine reinstating the hugely controversial vehicle registration tax, which brought in $50 million year but which council killed in the first days of Mayor Rob Ford’s administration.

In 2013 councillors summarily rejected a whole slate of revenue tools as part of the long-running transit debate, but Carroll is hopeful her colleagues will be more receptive this time around. She believes there’s growing recognition among politicians and residents that big cities need more than property taxes to fund vital services.

“That is how they pay for these expenses in New York City, that is how they pay for them in Chicago. And those are our peers,” she said.

Mayor John Tory, who during last year’s election pledged to keep taxes at or below the rate of inflation, would likely oppose any attempt to introduce new revenue tools, however. Soon after Pennachetti spoke to the media, Tory’s spokesperson issued a statement rejecting the city manager’s assessment.

“We need to keep the city affordable – families are struggling,” said Amanda Galbraith. “[The mayor] is on record saying no to vehicle registration tax. The city has no power to institute a sales tax and we have no plans to do either.”

Even if council endorsed new taxes and the province agreed to amend the act, it’s likely no new revenue tools would come into effect until at least 2017, leaving the city with few tools to balance the 2015 and 2016 budgets.

In order to bridge the $86-million gap in 2015 city staff have put forward a plan to borrow the money from the city’s investment fund and put it towards the operating budget.

The plan would mean that the city would have to find $25.3 million in savings or new revenue this year, and $45 million each successive year until 2018. That’s on top of the funds needed to make up annual opening budget pressure, which is projected to be around $400 million in both 2016 and 2017. The proposal would also take the city extremely close its self-imposed debt ceiling, leaving little room for unforeseen borrowing needs.

Pennachetti acknowledged Friday the plan – which has never been attempted in Toronto before – was “creative,” but both he and Mayor Tory have said it’s a fiscally prudent solution.

But Councillor Gord Perks (Ward 14 – Parkdale – High Park) argues that the borrowing scheme merely delays having to deal with the provincial funding loss.

“The only thing this strategy does is tell Torontonians you don’t have to face the facts for another two years,” he said.

The councillor advocates raising property taxes instead. The draft 2015 budget already proposes a 2.75-per-cent property tax increase, including a .5-per-cent levy for the Scarborough subway. Perks proposes increasing the rate an additional 2.4 per cent this year, to 5.15 per cent, and an additional 1.7 per cent in 2016. That would permanently fill the gap left by the provincial funding cut.

In the long term, Perks agrees with Carroll and Pennachetti that new revenue sources are needed. “One day, council will wake up to the fact that Torontonians are grown up enough to pay for the services they receive,” he said. | @BenSpurr

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