It’s budgeting season again, and counting the 2023 budget (which was completed early in the year) and the Lower Trent Conservation Authority budget (which was completed this week), my third time through the process this year. I’ve noticed a few approaches to budgeting that, while common, concern me.
Hold the Line
The first is the “hold the line on taxes” approach to budgeting. I think just most people know at this point that it isn’t realistic to avoid all tax increases, particularly in a time of major inflation, and yet there’s always some pressure from some residents to keep the increase as low as possible, if any.
It’s rarely helpful to compare public budgets with personal budgets, but consider for a moment if, in the face of rising grocery costs, you refused to pay more. Most of us know how to tighten our belts a little to save money: cut down on meats and cheeses, no alcohol or pop and chips, that kind of thing. But most municipalities are already dining on beans, there isn’t much fat to cut. What would happen if you decided that, rather than paying the increased costs for your basic staples, you just cut down on food entirely? You’re likely to starve.
The same thing happens to municipalities. Making cuts to services rarely saves everyone money. More often it moves the pain around: a lighter tax bill helps some people, but the lack of a service hurts others, and decreased internal capacity at the municipality usually means lower service levels for many, higher work loads for staff, and a void in the community that those services used to fill. Delayed projects, maintenance, and programs almost always come with a bigger cost the longer they are delayed, and the municipality is less resilient when it lets things go for too long. Unaddressed issues become crises, and if we’ve been starving our municipality in order to keep the budget down, we won’t be able to move quickly to address them. Ultimately, avoiding paying for something now just passes the buck to the future residents – like our kids. That’s not fair, or sustainable. And crises always affect the poorest the most; those who can’t afford to pay taxes really can’t afford to have taxes be too low.
Pick a Number
It is extremely common to hear calls for a particular number to limit tax increases to. It makes sense to want to have an upper limit that forces staff to think carefully about their expenditures and plans, so that they’re only asking for their most efficient and effective items. The trouble is, such numbers are arbitrary and subjective.
I asked some folks I know: “what percentage of tax increase are you comfortable with? How much is too much?” The answers varied, but usually fell between 3% and 5%. Nothing wrong with that answer; it seems to be what municipalities aim for. But when I followed up to ask “why that number?” there was no real answer. It’s an abstract, arbitrary number that just seemed to feel okay.
Earlier this year, we passed a 7% increase for our 2023 budget (at or below inflation, at the time). The sky did not fall, despite us exceeding the 5% that people seem to aim for. The difference between a 5% increase and a 7% increase for most households is a few hundred dollars, spread out over the year; for my tax bill, it would be a $50 difference. Most households would not notice; and indeed, once the budget passed I didn’t get a single bit of feedback about it. And yet, for some folks the idea of a 7% increase is enough to invoke rage or despair. I wonder if hearing outrage from residents is why politicians so frequently “pick a number” when budgeting; are we measuring the budget based on a vague sense of what people will be upset about? Or what feels good to us? Is that the measure of a good budget?
The right number shouldn’t be arbitrary. It should be based on the actual cost of maintaining explicit standards of service and infrastructure, and should include the cost of implementing the Strategic Plan. This is what staff usually seem to bring forward in the draft budget; then politicians try to knock it down to an arbitrary number, and staff do what they can to accommodate that. Sometimes they can do so successfully; usually we all pay more in the long run for not funding services adequately.
Spreading the Pain
If the budget starts with a sense of scarcity, or the idea that we can’t possibly raise taxes above the number we’ve picked, then it’s almost inevitable that we need to make cuts. This is where we really see people’s priorities: when the things we take for granted are suddenly threatened, or things that some people depend upon are referred to as “nice to haves” (i.e., expendable) by others. Few people are comfortable killing a program or service entirely, and there emerges a sense of fairness and a desire to “spread the pain around.”
I’ve seen this in myself, too. We had more applications for grants in aid this year than we had money for, so we had to be selective about where to award grants; at a certain point in the long and somewhat abstract deliberations, I found my mind becoming numb, and half-jokingly suggested we just cut them all down equally. Seems fair, right? Well, not really; some groups had asked for more than they strictly needed, while others could not accomplish their goals with less than the full amount they had requested. There are times when being a buck short ruins everything. We did the right thing, denying some requests outright, offering some grants smaller than had been requested, and offering some in full.
It does still surprise me, though, how much the sense of fairness comes up in such situations. On the Lower Trent budget we were given a number (by other members of the Board) lower than we could achieve without cutting internal capacity significantly. While we didn’t reach their desired number, they were quite satisfied that we had given something, since they were already making cuts in their own municipal budget and it wouldn’t have felt fair if they’d passed the Conservation Authority budget without cuts. I have no idea what was in their municipal budgets, but the idea of hamstringing an essential service for the sake of an abstract sense of fairness in an effort to reach an arbitrary budget number seems quite wrong to me.
Conclusion
I’ve learned a LOT about budgeting this year, from experience and research. I understand why people approach it this way, but I’m going to be more deliberate moving forward about avoiding these pitfalls. Things cost what they cost; our job is to accurately weigh what they’re worth, which is not always the same thing. And sometimes that’s much less intuitive than those gut feelings of fairness and the “right” number.
One thing I always remember, having been in council, is that mcap is supposed to regulate the assigned value of the overall total value of properties in the municipality, (the total being 100 %, ) and that the increases needed were actual amounts, not percentages. So with the standard increase in values of properties outpaces the inflation rate, there is no reason to use a percentage to describe increases in the taxes charged. If your home was up in value by 25%, then the percentage amount levied could actually be lowered if the plowing cost etc had not increased as quickly, The actual tax rates are always expressed as a % of the assigned value of the property. Hold the line is in absolutes, as to the municipal costs.. Values of properties always increase faster then the inflation rate.
Thanks Steve, that’s important context. The percentage amount I’ve seen people refer to is with regard to a percentage increase of the entire budget; we are presented with a draft budget that includes a note that says “this represents a __% increase over last year’s budget.” But yes, the amount of taxes collected is an absolute amount — the total amount of the tax levy portion of the budget — regardless of property value, so when property values go up the mill rate goes down to arrive at the same (or similar) amount.
One of my growing pet peeves in this process is that people seem to have a lot to say about any tax increase, but not much to say about the enormous increase in the value of their home. House prices have gone up in double digits every year for the past several years, giving any of us fortunate enough to have a home a vastly increased amount of equity (in some cases double or more); and yet a much smaller increase in tax levy still inspires a lot of people to complain deeply about taxes being unfair. We actually work very hard to ensure that taxes are fair; markets, on the other hand, do not care about fairness in the slightest. Our perceptions about taxation and government in general are fascinatingly (and frustratingly) irrational.
Taxes should never be tieded to the price of a house or property, that price is only there once you sell. we all need to live somewhere. maybe taxes should be only tied to the property when we sell. most people will never sell.
Thanks for commenting Gerard!
To be clear, property value is how someone’s share of the total property tax levy is determined, not the actual amount that they paid. MPAC calculates the total value of all properties in the municipality, as well as the value of each individual property. If there was $1M in property in the municipality, and you owned $500k of it, you’d pay half of all taxes. In reality there’s somewhere around $30B in property in Brighton, and most of us have $400k-$800k of it, so we each pay a tiny portion of the total tax levy. So long as the tax levy doesn’t increase much, neither will the absolute amount that you pay; if everyone’s home gains equity equally, then your share of the total tax levy won’t increase.
There was recently a proposal for a home value tax based on the total value of a home, only targeting those over a certain threshold (I think it was originally $1M+), that would only be collected as a “windfall tax” when the home was sold. It was designed to address generational fairness: people who bought homes a long time ago have gained incredible wealth in home equity, while younger people have no hope of purchasing a home today and so cannot gain that equity and wealth. The windfall tax would redirect some of the wealth that some homeowners have simply by virtue of when they got into the housing market, toward programs that can help people who didn’t have that advantage. I think it’s a neat idea.
For some time now, MPAC has been putting off its regular reasessment exercise. With the recent rises in property values, MPAC’s eventual reassessments will give rise to a massive municipal windfall (ie. massive tax increases) unless municipalities are inclined to, or coerced into, reducing their mill/tax rates so as to maintain normal revenue increases.
Thanks for commenting David!
There are two VERY common misconceptions here, that I used to share (and probably repeated a lot) before I learned this year that they were false:
First, that rising property values do not necessarily lead to higher tax payments. The mill rate is always adjusted downward when the total property value goes upward, whether that’s through rising property values or through growing the assessment base (i.e., more homes built, etc). If the total budget were to stay at the same amount year to year, but property values continued to climb, we would see the mill rate decline every year. Similarly, if the total budget were to stay the same for some reason, but the assessment base were to grow significantly, we would all pay less. But of course, inflation alone causes the budget to grow every year, and a growing assessment base leads to significantly higher costs (i.e., the cost of infrastructure is high enough that new neighbourhoods don’t actually pay for themselves, which is why we also have development charges, and we still end up coming behind). So the budget always grows, even if we don’t have new services; but we can never raise more money from taxes than we need for the budget. We aren’t allowed. So no windfalls for us; any excess will result in reducing the mill rate.
Second, it is the provincial government that is holding off on updating the assessment; MPAC would do it today, if they were allowed. MPAC and municipalities have been lobbying the provincial government for years to allow MPAC to update the assessment, and just a few weeks ago our council was briefed by MPAC and another agency about how inaccurate our assessment roll is becoming because of the delay. Anyone who made major renovations during the pandemic (which was a LOT of us) are paying less taxes than we should right now, which means that anyone who didn’t is paying more than they should right now. If it isn’t accurate, it isn’t fair. And there is no technical or logical reason why the province isn’t allowing the assessment update to happen. My best guess, and this seems to be the consensus of anyone who works with this issue, is that the province doesn’t want to be blamed for changes in anyone’s property tax bill. I think it’s related to the first misconception above: a lot of people (most?) think that the reassessment will make their bills go way up. Maybe Ford thinks so too? It was mentioned in our briefing as “I’m not sure that they understand how this works.” That’s been my general impression about this provincial government for some time now, and if you go to any municipal conference you’ll see that impression in bold font: the province controls most of what municipalities do, seems to want to be in charge of everything, and doesn’t seem to understand how any of it actually works. They’ve set us up for failure, over and over again. It’s worthy of a post in itself, or even a series! But theirs is the hand that feeds us, so I hesitate to bite too hard.