Taxes were on the tip of
Toronto Mayor David Miller’s tongue last month, when he accepted victory following his easy re-election to a second term in office. Emphasizing his demand for a 1¢ share of sales taxes raised in the city by senior governments, he defiantly announced that Toronto “won’t take no for an answer.”

Despite the fact that both federal Finance Minister Jim Flaherty and provincial Finance Minister Greg Sorbara promptly said just that — no — Miller’s renewed demand for fiscal fairness enjoys broad support from the city’s business community. But in the view of business, the taxes most in need of new thinking are excessive local levies, which are widely blamed for steadily draining jobs and investment from the city.

Businesses in Toronto pay $1 billion more in property taxes than they would if they were located in adjacent suburbs, according to the Toronto Office Coalition, a group of the city’s largest landlords and tenants. “We are the only jurisdiction in the developed world in which property taxes are expected to pay for things such as social services and 95% of transit,” coalition chairman Juri Pill said when releasing the group’s latest study. He warns that excessive property taxes are crippling the city and creating “egregious urban sprawl.”

The problem, first highlighted by the Toronto Board of Trade more than a decade ago, is that tax rates on commercial and industrial properties within city limits are about twice of those in outlying suburbs, a perfect recipe for metropolitan job sprawl. And, indeed, the city has experienced a net loss of 100,000 jobs over the past 15 years, a period marked by the almost complete collapse of the manufacturing industries that drove Toronto’s postwar suburban growth. In contrast, manufacturing and job growth in outlying suburbs such as Mississauga and Markham have boomed over the same period.

The job-killing effect of the property tax gap is now “beyond a shadow of a doubt,” according to TD Bank Financial Group economist Don Drummond. “For public relations purposes, you rarely, if ever, hear a company bringing that up in its location decisions. But you know it’s a factor,” he says. The local property tax structure “doesn’t make any sense” and “wreaks havoc on any concept of public transit. You’re basically urging people to move to places where public transit doesn’t go.”

Disinvestment has acquired a powerful social dimension as well, with the suburban neighbourhoods hardest hit by plant closings increasingly afflicted by poverty and crime. Even as central Toronto enjoys a construction boom that has sent housing prices to record levels, property values in many neighbourhoods are either lagging or declining.

All governments must “do their bit” to halt the tax-driven job sprawl in the Toronto region, says Drummond. But most observers look to the province to lead the effort — not only because it has the fiscal capacity to do so, but also because its own tax policies are most distorted. Particularly notorious is the provincial property tax levied in support of education. Although all residential property owners pay the tax at a standard rate, businesses pay the same tax at wildly different rates, depending on where they are located.

Toronto businesses would save $300 million a year if they paid education taxes at the same rate as their suburban rivals, says Pill.

And even though Mayor Miller is more interested in a tax shift that would help the city pay for almost $700 million in social services off-loaded by the province, the campaign to equalize business property taxes enjoys wide support across the province; the Ontario Chamber of Commerce has joined with the Toronto Board of Trade to demand that rates be equalized.

Even if those lobbyists are successful, that reform will close only half of the tax gap that currently diverts investment out of Toronto. The city’s own commercial and industrial tax rates are equally punishing. Although the Miller regime has implemented a modest, incremental shift of the local tax burden off businesses and onto residents, speedier relief could well emerge as a condition of any new deal the mayor manages to negotiate with senior governments. IE