Can GTA Municipalities Raise Property Taxes? An Analysis of Tax Competition and Revenue Hills

This paper is part of the IMFG Papers on Municipal Finance and Governance series. For a full list of papers, please visit http://bit.ly/2ylAa2D.Municipalities in Canada exhibit a reluctance to raise property taxes, because residents resist paying higher taxes and politicians and municipal staff fear that higher taxes mean that property owners will move to jurisdictions with lower tax burdens. Two empirical questions related to property taxation by local governments in the Greater Toronto Area (GTA) are addressed in this paper. First, have municipalities raised their property tax rates to the point at which they are likely to lose tax revenue? In other words, will further tax rate increases lower the size of the tax base? Second, how important is tax competition between municipalities in the GTA? To answer the first question, we estimated changes in the size of the tax base in response to an increase in the average effective tax rate for Toronto, the regional municipalities of the GTA, and their principal area municipalities from 1977 to 2005. We found that for a few municipalities, a further increase in the tax rate might reduce the size of the tax base, but most municipalities would not experience that decline. To answer the second question, we tested the presence of tax-competition effects among the municipalities as well as, more unusually, the presence of tax-base effects between the residential and commercial/industrial property classes. The findings show that there is some evidence of tax competition among GTA municipalities. We conclude that, while it is worth considering supplementary sources of municipal revenues, the property tax is a good local tax and has the capacity to meet the fiscal needs of the GTA to a greater extent than it does now.Institute on Municipal Finance and Governanc