MuniPoli 101: Let’s Talk About Tax, Baby

St. John’s is facing a budget shortfall and the City can’t run deficits. If aspiring councillors don’t want to raise taxes, they must specify which services they’ll cut.

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As the municipal election—as well as the climate—heats up, I want to help residents of our fair city understand the issues in front of them more fully. Here’s the civics lesson you never got in school. Get ready for Municipal Issues 101 as we dive into the nitty gritty of what your council will have power to do (or not do) once you, dear reader, elect them.

First up: The Budget.

How Do City Budgets Work?

Each December, the City delivers a document that outlines its priorities and plans for expenditure for the coming year. The December budget is the operating budget, or how the City plans to finance the stuff that it does. In this budget, an amount is also set aside for capital expenditures, called the capital-out-of-operating budget

Infrastructure spending on a smaller scale (road repairs, equipment replacement, etc.) comes through the capital-out-of-operating budget: actual, physical stuff that you can touch. This budget usually gets voted on in the late winter/early spring. Larger capital projects—for example, the new Mews Centre—are usually financed through a combination of partnerships with other levels of government and borrowing.

To put it in household terms: the operating budget pays your heat bill, capital-out-of-operating buys plaster to patch that hole in the wall, and major capital expenses is the loan you took out to purchase your vehicle.

The City is required by provincial legislation to deliver a balanced budget. Unlike provincial or federal legislatures, there is no option to run a deficit. The City can borrow for specific large (usually multi-year) capital projects, but cannot borrow for its day-to-day operations. 

66.7% of revenues in the 2021 budget come from property taxes. Given that the books must be balanced, this means that any new expenditure will result in an increase in the mil rate unless savings are found elsewhere.

Savings! Efficiencies! The City just needs to find them! Sure, but after the brutal municipal austerity budget of 2016 and subsequent public outcry, the City did a program review that trimmed almost all available fat. Anything that remained after those initial cuts has been sliced off through continuous improvement processes implemented in years since. There is precious excess to trim, which means that maintaining property tax rates comes at the expense of services, and increasing services increases the tax burden.

Any way you slice it—see what I did there?—these are the things a newly-elected council will have to weigh, in tandem with an overall decline in assessments.

Assessments? What are those? Every two years, the City evaluates how much your home would have theoretically gotten on the market. The base date for the assessments is set at a fixed date; this year we have a new assessment cycle for which the base date is January 1, 2020. Your assessment is not meant to reflect what you could get for your house today, but rather what you might have gotten for it over a year ago. The overall valuation of properties in St. John’s impacts how much money the City brings in, assuming the mil rate remains unchanged. 

Here’s where we get into the really juicy stuff: let’s talk about taxation, baby.

Mulling Over the Mil Rate

The City gets its powers to take your money through the Municipal Taxation Act, a piece of provincial legislation (which is therefore outside the City’s powers to change). The Act allows the City to set two mil rates: commercial and residential. These correspond to property valuation only and don’t pay any heed to the owner’s ability to pay—which is to say this system is fundamentally regressive. (There is a 25% reduction for seniors in receipt of the guaranteed income supplement, which may be stretching the City’s legal authority. But considering how bad a look it would be for the Province to prevent the City from giving a small break to low-income seniors, I think that’s likely safe for the moment.)

The Province also pays no grants in lieu of property taxes to the City—unlike the vast majority of provincial capitals nationwide. All things considered, it’s safe to say that the Province is severely limiting the City’s finances—and therefore the ability to serve its residents effectively.

To wrap your head around the mil rate where it currently sits, think $7.70 for every $1000 of property valuation. If you like math, you do it like this:

Home value / 1000 X 7.7

For comparison’s sake, I’ve checked into a couple of other municipalities in the Atlantic region. On a $269,000 house (the average sale price in 2019) in St. John’s, you’d pay out $2071.30 in property taxes, plus $620 in water taxes—a revenue-neutral fee that covers the costs of getting water to your home—for a total of $2691.30. In Halifax, you’d pay $2878.30 for a residential property of the same value. In Moncton, it would be $4437.69. 

Commercial rates are higher than residential, in part because circa 2009, the City—after consulting the Board of Trade—blended the business occupancy tax and the commercial realty tax. Those were the tax on running a business in a space and the tax on owning a space in which a business was run, respectively. By blending the taxes, the idea was that property owners renting spaces to business owners would pass on the business occupancy tax portion to their tenants in the form of rent, as landlords of rental homes pass on their taxes to tenants. (This is also one of the main arguments underpinning the lack of political will to address the vacancy allowance, which reduces the commercial tax rate by half when a business is vacant—effectively removing the business occupancy portion of the commercial tax. That’s a bigger topic than we have space for today, but one worth revisiting at a later date.)

So, to recap: the City gets most of its money from property taxes, which are regressive. This is a new assessment year; property assessments are down, which means that the City’s revenues will also be down and the budget won’t be balanced—as it is required to be—unless cuts are found to match, or the mil rate increases.

The New Council’s Budgetary Balancing Act

To come back to the math: if your assessment goes down, and the mil rate stays the same, guess what happens? Bingo: you pay less tax. Awesome, right? Well, not if you like your snow removed and garbage picked up in a timely fashion. 

But if assessments are down, say, 5 percent, can’t the City increase the mil rate 5 percent to match?

Yes! Unless: lower valued properties, which one might generally infer are owned by people with less means, hold their value more strongly than those at the higher end of the valuation spectrum. In this scenario, a $200,000 house may have stayed static in value or even gone up, while a $500,000 house has likely gone down significantly. Even though the overall trend is downward, a correcting increase in mil rate to balance the lower assessments would result in poorer people paying more and richer people paying the same as—or even less than—before.

That being said, you know who are also harmed most by cuts to services? You guessed it, people with lower incomes! For example, an on-board survey of Metrobus riders showed that most had an income below the poverty line. Cuts to that service impact people without access to other options most severely. This plays out in a similar pattern for most services the City offers.

TL;DR—poor people get screwed no matter which way you slice it.

It is nevertheless important to remember that taxation provides a population with economies of scale that individuals cannot achieve alone. Maintaining a personal vehicle costs a lot, but throwing in on an effective public transit system doesn’t. If I owned a plow and hired a person to clear only the 30 feet of road in front of my house, it would cost a lot and not be very useful to anyone, including me. Chipping in on the City owning the equipment and hiring the staff gets all the roads in our city cleared for all to use.

It’s up to voters to decide how they want their council to handle the question of how to make up the budget shortfall, but I suggest that as voters we need to be specific. If aspiring councillors come out in favour of holding the mil rate, ask them exactly what services they will choose to cut, and don’t let them get away with vague mumblings about efficiencies.

These are tough choices, no doubt—but choices that have to be made. Candidates up for the job need to be able to tell voters exactly how they plan to make these decisions.

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