FINA Committee Meeting

37th PARLIAMENT, 1st SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Thursday, May 23, 2002

¿

0945

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. Jack Layton (President, Federation of Canadian Municipalities)

¿

0950

¿

0955

The Chair

Mr. Fred McMahon (Director, Centre for Globalization, Fraser Institute)

À

1000

À

1005

The Chair

Dr. Loleen Berdahl (Acting President and CEO, Canada West Foundation)

À

1010

The Chair

Ms. Enid Slack (Individual Presentation)

À

1015

À

1020

The Chair

Mr. Charlie Penson (Peace River, Canadian Alliance)

Ms. Enid Slack

À

1025

Mr. Charlie Penson

Ms. Enid Slack

Mr. Jack Layton

À

1030

Mr. Charlie Penson

Mr. Jack Layton

Mr. Charlie Penson

Mr. Jack Layton

The Chair

Ms. Pauline Picard (Drummond, BQ)

À

1035

Mr. Jack Layton

Ms. Pauline Picard

Mr. Jack Layton

À

1040

Ms. Pauline Picard

Mr. Jack Layton

Mr. James Knight (Chief Executive Director, Federation of Canadian Municipalities)

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

À

1045

Mr. Jack Layton

À

1050

Ms. Enid Slack

The Chair

Mr. Fred McMahon

The Chair

Mr. Fred McMahon

À

1055

Dr. Loleen Berdahl

Mr. Bryon Wilfert

Á

1100

The Chair

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP)

Mr. Jack Layton

Á

1105

Mr. Lorne Nystrom

Ms. Enid Slack

Mr. Lorne Nystrom

Ms. Enid Slack

Mr. Jack Layton

Mr. Lorne Nystrom

Mr. Fred McMahon

Mr. Lorne Nystrom

Mr. Fred McMahon

Á

1110

Mr. Lorne Nystrom

Dr. Loleen Berdahl

Mr. Lorne Nystrom

Dr. Loleen Berdahl

Á

1115

The Chair

Ms. Maria Minna (Beaches—East York, Lib.)

Á

1120

Mr. Jack Layton

Ms. Enid Slack

Ms. Maria Minna

Á

1125

Mr. Fred McMahon

Á

1130

The Chair

Ms. Maria Minna

Mr. Fred McMahon

Ms. Maria Minna

The Chair

Ms. Maria Minna

The Chair

Mr. Charlie Penson

Mr. Fred McMahon

Á

1135

Mr. Charlie Penson

Mr. Fred McMahon

Mr. Charlie Penson

Dr. Loleen Berdahl

Mr. Charlie Penson

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

Á

1140

Mr. Fred McMahon

Mr. Gary Pillitteri

Mr. Fred McMahon

Mr. James Knight

Á

1145

The Chair

Mr. Charlie Penson

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 103

l

1st SESSION

l

37th PARLIAMENT

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EVIDENCE

Thursday, May 23, 2002

[Recorded by Electronic Apparatus]

¿  (0945)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Good morning, everyone.

    Pursuant to Standing Order 108(2), pre-budget discussions, we have with us this morning representatives from the Canadian Federation of Canadian Municipalities, Mr. Jim Knight and Mr. Jack Layton; from the Fraser Institute, Mr. Fred McMahon; from the Canada West Foundation, Dr. Berdahl; and as an individual, Dr. Enid Slack.

    Welcome. We'll have about a 10-minute presentation from each of you before a round of questioning. I propose we do it in the order that we have on the agenda.

    Is it going to be you, Mr. Knight, or Mr. Layton who presents?

    Mr. Layton, go ahead, sir.

    Mr. Jack Layton (President, Federation of Canadian Municipalities): Good morning, members of the committee, and thank you once again for the opportunity to spend some time with you speaking about the situation facing our municipalities, our cities in particular. Once again, congratulations for having these forums where we can address topic areas in a fairly freewheeling fashion. I think it's a model that should be considered by other governments in their preparation for budgets. In fact, we'll take it back to our city and see if we can't do something similar, rather than crafting the budget and then putting it out for the people to react to, as it were. So thank you for the opportunity.

    In addition, the concern around the cities, in a way that you would have put a special time aside for that, is in and of itself an important step, because I think there was a time when some might have said, well, cities are a provincial matter; why would we want to be discussing the situation facing urban Canada at a federal meeting or at the level of the federal government?

    We at the Federation of Canadian Municipalities believe it is a very timely discussion to be having, because our cities are in a very difficult situation at the moment. In my five or ten minutes I'm going to try to underline some of the key aspects of that and to outline as well some of the proposals we have for addressing the problems we're facing.

    First of all, as you all know, the Federation of Canadian Municipalities represents 1,000 municipal governments in Canada. We attempt to sort out, as between ourselves, the issues facing big cities, smaller communities, and rural municipalities, and try to find the common themes, recognizing that as a national government, when we're coming to you, you have to be able to respond to people from all across the country in all different kinds of communities. So what I'm suggesting to you today is based on the kind of consensus that we've been developing across the country in communities large and small.

    But as a finance committee, you need to stand back and look at the nation's finances and its economy with a broad lens. We've asked you to put in front of yourselves, as it were, an urban lens and to take a look at our cities from that perspective. I think you will have begun to notice, as we have, that we're in a very serious fiscal situation in our cities.

    Here are a couple of interesting facts: federal revenues have increased in the last five years about 38%; provincial revenues have increased about 30%; and municipal revenues have increased about 14% or 15%. This has to do with the fact that the tax revenues with which municipalities have to fund their services are primarily the property tax, and increasingly the property tax as all other levels of government have been dealing with their fiscal situations and have been cutting back on funding to things that once were funded and as costs have increased.

    In fact, municipal revenues now are 82% coming from their own sources. This is unique in the developed world. It used to be 77% from own sources, but in just the last few years it has gone up dramatically.

    Property tax has climbed all the way to 55% of our revenue sources now--very different from what you see in the United States or in Europe, where property taxes are a much smaller fraction of the revenue base of municipalities. In fact, in some cities, it's even higher than 55%.

    Property tax per capita has increased by 58% over the last decade in order to catch up with the cutbacks from other levels of government, and we're reaching a saturation level there.

    Our concern is that we're really not on a sustainable track. If you were to draw a graph showing the decline in involvement, in engagement, from federal and provincial governments with municipal budgets and compare that with the increase in costs, what you'd see is that eventually we're going to have such a gap there that we're going to start to see the impact in our own cities. In fact, I'd suggest we are seeing that impact now.

    If you look at such measures as congestion levels, smog resulting from the traffic congestion, reduction in transit service available to communities, homelessness and affordable housing problems, all of these indicators, sometime even potholes, as an indicator, per kilometre on our roads, you can see that Canadian cities are struggling to hold on to the status they once had.

    One could ask, why don't the cities just manage their affairs better? I think our cities have, over the last 10 years, been working very hard to do just that. They've been introducing economies rapidly. I think what we've found is that we're now down to essentially having to cut essential fundamental services. And we're falling behind on the basic infrastructure that cities need in order to be successful. We can no longer say, with the kind of confidence we always wanted to be able to assert, that our water systems are where they should be, our sewage systems are where they should be. In fact, in many cities we're still discharging sewage directly into the environment. This all has to do with this fundamental financial dislocation.

    Here's a number that shocked me when I saw it. I didn't realize it was this dramatic. In Canada, we spend--municipal government expenditures--about $785 per person per year; in the U.S., they're spending $1,652 on the same bundle of services per person per year. That's more than double. And as a professor of urban government for 30 years, I used to be able to say, thank God we're not like those American cities, and we could point to the news stories about what was going on in U.S. cities.

    I have to tell you, I'm now saying that I wish we could be like those American cities. I wish we were investing in our cities the way they decided to under Reagan, followed by subsequent governments of all political persuasions. They have recognized the need to invest in cities. I believe the federal government in Canada has begun to recognize that too and has begun the process of that investment, with some important early steps.

    We certainly want to salute those. I know they've been discussed at this committee over the years. We think they are a very important set of first steps and they've been well received by Canadians. And that's important, because it was a step into an arena that you might have thought was really not appropriate for federal investment. You stepped, as it were, across a certain kind of line that had been defined. And I think as you tested that water, you found the response was good.

    On affordable housing, albeit with problems with certain provinces--and we won't go into that right now, except to say, keep pressing on as you are doing--the Province of Quebec has joined in very quickly, B.C. has joined in, but we have certain rather large gaps.

    As well, this is only with a relatively small program, as we well know. The Prime Minister's task force underlined the need for a full-fledged affordable housing program of a magnitude very similar to what we have been recommending, at approximately $1.7 billion per year. Let's get this first test going, and then let's ramp it up as quickly as we possibly can.

    Secondly, on transit, I'm afraid we can only just see the toe approaching the water in that area with certain investments that have been announced in certain cities. But we need a national transit and transportation funding program in this country. All the other G-8 countries have one. We're remarkable by our absence in that field. I think this upcoming budget would be the time to take that step. The Prime Minister's task force suggested it. It was in the red book. It was in the Speech from the Throne. We're waiting to see it in a budget because we all know those other documents are nice, but a budget usually has cheques attached to it that we can actually spend.

    Lastly, you have invested in infrastructure through a number of programs over the years. The problem with those programs, as welcome as that investment is, is that they tend to be short term, whereas the municipal investments we need to make are long term. A sewer line, a water treatment plant, a transit line--these are all long-term phenomena.

¿  (0950)  

    We need an infrastructure investment program that has a longer duration to it. We would urge you to consider that sort of a structure or restructuring of the infrastructure program. Again, the Prime Minister's task force has picked up on this and underlined it, and we support it.

    We are looking in the longer term--not for this budget coming up, because we think it's going to take a lot more thought--at certain other kinds of initiatives. For example, it's been suggested that municipalities actually have additional taxation powers of their own. This is very common in Europe and more common than perhaps many Canadians realize in the U.S., where 6,100 municipal governments have various forms of sales tax. Actually, 3,000 municipal governments in the U.S. have forms of income taxation. It's not just one or two.

    Moving in that direction would have to be done on a very careful, long-term basis and would clearly involve all orders of government in the discussions. We can't wait for that sort of solution to address the urgent needs we have now. We are prepared to work with you to think these longer-term proposals through, and we want to engage Canadians in a discussion about that. In fact, in some ways they're out there ahead of us, with the Toronto Dominion Bank most recently and their reports calling for initiatives along these lines. The Conference Board is looking into it, and just two days ago Anne Golden was speaking about the need to look at these new strategies.

    Finally, there are some very innovative things we have done together and can look at doing in the future. The Green Fund is a very interesting concept, where funds are transferred to the association of municipalities, to be funnelled for very specific purposes to municipal governments on a best practice basis. It's a real success story, as many people agree, and certainly contributes to the national government's other goals around greenhouse gas reductions, etc.

    In addition, we've noticed and found that across the developed world, municipal financial institutions have been set up. We have an excellent one in B.C., considered a world best practice, where municipalities together pool their credit accessibility and thus achieve high levels of credit rating, with some backing from the provincial government. It's never had to be called upon, but it's there and it gives a sense of security. We might be able to look at something like that nationally if it has worked in B.C.

    We have in our more detailed paper, which you'll have a chance to read over the next period of time, some ideas along those lines, so that we can access the creditworthiness of our excellent municipal government record in managing their budgets. Let's access that creditworthiness and put it to work.

    These are just some of the suggestions we have. You'll see that the document in front of you is labelled as a draft. The reason is that we do need to go through our processes at the FCM in order to put our final stamp on it. We have our major convention coming next week in Hamilton. Many members of the cabinet and many representatives from all parties will be there, and we'll be able to put our final stamp of approval on it subsequent to that meeting and do any final refinement of the figures.

    Thank you very much. I look forward to the discussion this morning.

¿  (0955)  

    The Chair: Perhaps at that time, you might forward the finalized copy or confirm to the clerk. Thank you very much.

    Now we'll go to the Fraser Institute, with Mr. McMahon.

    Mr. Fred McMahon (Director, Centre for Globalization, Fraser Institute): First, let me thank you for the invitation to come here. I'm substituting for our director of fiscal studies, Jason Clemens, who at 30 years of age could give you more statistics than I'll learn in my whole lifetime.

    I want to apologize for not bringing enough copies of the presentation. I will mail them to the committee. Called The Corporate Capital Tax: Canada's most Damaging Tax, it was released last week, and the committee might consider it written for it.

    Because committees like this can sometimes get bogged down in details, just let me remind you that taxes are important. Both the structure and the overall weight of taxes are important. Those nations with the leanest tax rates have a great leg up on growth over other nations.

    About 15 years ago Ireland dramatically cut, and in many ways simplified, its tax code. Literally overnight it went from a high-tax nation to a low-tax nation with tax cuts far more brutal than anything Ronald Reagan or Margaret Thatcher had done. About 15 years ago--and these are really shocking numbers--Canada's per capita GDP was two and a half times that of Ireland. Today Ireland's per capita GDP is 25% greater than Canada's. Canada going from two and a half times per capita GDP to falling behind the poor man of northern Europe is quite remarkable, and most of that story, although not all of it, is tax cuts, particularly taxes on corporations.

    The other part of the story in Ireland is a change in union psychology. Unions went from demanding the highest possible wage each year to actually looking at and trying to encourage greater corporate profits, because the unions came to realize that corporate profits were what attracted investment.

    Today most of my discussion will focus on the corporate capital tax, which at this point in time is Canada's most damaging tax.

    Before going there, let me make another note, though. This committee does not have to make tax-neutral recommendations. Canada's overall tax burden is now about 40%. The United States' overall tax burden is about 30%. We are above the OECD average. We can go down in our overall tax burden and we should, because again it's not just structure but the overall weight of taxes.

    I do want to urge the committee to take a serious look at the corporate capital tax. This government has actually done some good things on the fiscal front. It finally balanced the budget. Taxes have been coming down at least for the last couple of years, though we think they went up far too high to cure the deficit. The government has done good things in its capital gains tax reform. It could really take another large step toward straightening out Canada's tax code by tackling the corporate capital tax.

    Corporate capital tax was initially set up largely to make sure that all corporations paid some form of tax. The reason for this, of course, was that Canada's tax code had gotten quite complex, and there are any number of tax lawyers to find ways around things. So the corporate capital tax was established to make sure that all corporations paid some sort of tax.

    However, as the technical report on taxation from 1997 notes, corporations do not pay taxes. Let me quote it to you:

Businesses ultimately do not bear taxes--they simply pass them on to others: to customers in the form of higher prices, to suppliers and labour through lower costs and wages, and to those who supply capital through lower returns. Business taxes are thus borne directly or indirectly by individuals.

À  (1000)  

    You aren't taxing the big bad corporations through the corporate capital tax; you are taxing all of us. And because the corporate capital tax is one of the most inefficient taxes possible, with a marginal economic cost of probably 1.5 or higher, from various studies, as opposed to an economic cost of around 0.5 or 0.7 for income tax, and corporate income tax as well, it is simply a waste of economic efficiency and taxpayers' money to continue to impose this high-cost tax.

    A recent study by Coopers Lybrand shows it increases the cost of capital, it discourages greater levels of capital in financial institutions, and it acts as a barrier to investment, because any time you put in investment, you're liable for taxes.

    Taxes are judged by three criteria; efficiency, fairness, and simplicity. I've already talked about the lack of efficiency of the corporate capital tax with a very high marginal economic cost. As for fairness, it is completely unfair. It overtaxes companies that are high in capital, which is in fact something we need to accrue to improve our standard of living and Canada's lagging productivity growth.

    While it has picked up over the last year, as everybody on this committee is aware our productivity growth over the last decade has been horrible. The corporate capital tax is a hindrance to productivity growth because it's a hindrance to investment in capital.

    Finally, in the category of simplicity, while it appears simple on the surface, because of the many different ways of looking at taxes, the exemptions and so on, it becomes quite a complicated tax. The C. D. Howe Institute has now therefore come up with an interesting idea of a business value-added tax. We could also move to consumption taxes. But as I say, this committee has no need to be tax neutral. It's time to get rid of this tax, which simply slows Canada's economic growth and therefore makes us all poorer in the long run.

    Thank you.

À  (1005)  

    The Chair: Dr. Berdahl, go ahead, please.

    Dr. Loleen Berdahl (Acting President and CEO, Canada West Foundation): First of all, thank you very much for the opportunity to present to you today. When I flew out of Calgary, the city was covered in snow, so it was very nice to arrive to the tulips.

    As you may know, the Canada West Foundation is a non-partisan public policy research institute dedicated to research focused on western Canada. For this reason, my presentation today is really going to focus on western Canadian opportunities and challenges.

    That said, I think it's very likely that similar issues are present in the other 70% of Canada, but I'm speaking from a research base of western Canada, which is why all my comments are western.

    In 2000-01, as part of our Building the New West Project, Canada West engaged in a year-long research and citizen engagement exercise, exploring steps that must be taken to ensure long-term regional prosperity. In doing so and through the process, we identified five key priority areas that really need to be considered for long-term regional prosperity.

    The first is finding the tools to build, maintain, retain, and attract human capital. Here we're talking about making sure we have the appropriate workforce for the years ahead, including increasing the engagement of aboriginal peoples in the regional economy and attracting immigrants to western Canada, as well as looking at issues of training, education, and innovation.

    Our second priority is economic diversification, finding ways to move the region beyond its natural resources economy, which is where we seem to be quite firmly placed.

    Our third priority is transportation infrastructure, maintaining and building our freight transportation system, including our roads, rail, ports, and air systems.

    Our fourth priority is to ensure viable, competitive cities; and our last priority is to work on tools for regional cooperation.

    Our research strongly suggests that all these five priority areas serve as a foundation for regional prosperity and in many ways work together. Today I would like to encourage the Government of Canada to be active participants in each of these areas, but given the time constraints on my presentation, I'm only going to focus on two of these areas--that is, cities and regional cooperation. I did, however, bring the entire framework report for you in English and French, so you can read the others if you like.

    First, starting on the cities side, as you are undoubtedly well aware, Canada is an urban nation, and our long-term quality of life and prosperity will benefit from a more explicit recognition of this fact from federal and provincial governments alike.

    The recent interim report of the Prime Minister's caucus task force on urban issues provides an excellent overview of the many challenges facing Canada's cities and offers a number of useful ideas, including the idea of a federal urban lens, which I think is a very needed lens to be examining federal activity.

    There are, of course, numerous opportunities for federal urban programs, and I support the government's consideration of many of these options. That said, though, I would like to encourage the federal government to see its role more in light of stimulating an urban dialogue in Canada and in considering more fully the urban impacts of federal policies.

    Grant funding to cities provides an issue-by-issue solution to problems but does not necessarily result in ensuring the long-term capacity of governments--federal, provincial and municipal--to address local urban challenges. For this reason, we need to deal with the short-term problems, but we also need to be certain to return to the underlying issues of roles, responsibilities, and resources.

    I would also like to urge tremendous flexibility in any federal funding that is provided to urban areas. Each city has its own challenges and strengths and its own priorities. I believe a federal funding strategy that allowed communities to indicate their own priorities would be superior to one that is highly centralized. It may be that Vancouver wishes to focus on urban transportation issues, Calgary on developing its arts community, and Winnipeg on downtown revitalization. If grant funding from the federal government could be flexible enough to accommodate such diversity of priorities, it would be most effective. I realize this can be very challenging to accommodate in the existing federal departmental model, but I believe it's an idea worth pursuing.

À  (1010)  

    The second point I want to talk about with you today is the idea of regional cooperation. In our work on the Building the New West Project, a consistent theme began to emerge. The four western provinces would be well served if they increased their efforts to work together on a number of policy issues. Working together would allow the four provinces to deal with transprovincial issues, to develop areas of specialization, and to develop efficiencies and reduce duplication.

    There are challenges to western Canada's being able to do this. The region lacks the institutional capacity to plan regionally. The region is very vast, geographically. And of course there is a need to ensure that regional cooperation does not come at the cost of a healthy level of provincial competition. However, our research and consultation strongly suggests that there is considerable public interest in finding areas to work together and sufficient justification for doing so. In a large and diverse country such as Canada, a regional approach simply makes sense.

    Now, what does this have to do with the federal government? Why am I raising regional cooperation to a federal committee? Given that the federal government is so integral to many of the policy issues facing western Canada, I believe regional cooperation would be best served by some form of federal engagement. This engagement should come through Western Economic Diversification.

    I would like to suggest that the Government of Canada consider expanding or modifying the mandate of WD beyond economic diversification to include a broader regional engagement and voice. How this might be defined is not clear, but it would reflect the reality of WD's role in the region.

    The reality is that, as valuable as WD's economic diversification programs might be, the region looks to WD primarily as a regional voice in Ottawa and as Ottawa's presence in the region. I think building off of this strength would benefit western Canada and the federal government alike.

In conclusion, I would like to reiterate that I believe the Government of Canada could provide sufficient support and leadership in each of the five priority areas I noted earlier. Human capital, economic diversification, and transportation infrastructure, like regional cooperation in cities, are areas where the federal government can make a very positive impact. For this reason, I strongly encourage you to consider each of the five priority areas in your preparation for the next federal budget.

    Thank you.

    The Chair: Thank you very much.

    Our final presenter is Dr. Slack.

    Ms. Enid Slack (Individual Presentation): Thank you very much. I would also like to thank the committee for inviting me here this morning to speak to you.

    I'm an economic consultant in Toronto specializing in municipal finance. I also teach a course in municipal finance at the University of Toronto.

    The benefit, or the “dis-benefit”, of being last in a group is that you probably have already heard some of the things I am going to say, but I think it underscores them to you.

    In the time I have, I thought I would pose three questions and try to answer them. First, why should the federal government take an interest in cities? Second, what are the fiscal challenges facing cities? Third, what needs to be done?

    Why should the federal government take an interest in cities? One of the most obvious reasons is that most Canadians live in cities. You're all aware of the latest census, the 2001 census, that said almost 80% of Canadians live in urban centres of 10,000 people or more, just over 64% live in the 27 census metropolitan areas, and over half live in four major urban regions: the Golden Horseshoe in southern Ontario; Montreal and the environs; B.C.'s lower mainland and southern Vancouver Island; and the Calgary-Edmonton corridor. So that's the first reason: most Canadians live in cities.

    The second is that Canada's competitive advantage is directly related to the success of its cities because cities and city regions are the major drivers of economic prosperity. Some of us have been saying this for years, going back to the greater Toronto area task force in the mid-nineties right up to the TD Bank's report that came out this week.

    The third reason is that many federal policies have an impact on cities. Immigration policies, aboriginal policies, the innovation strategy--these all have an impact on what cities do and the expenditures they make.

    Furthermore, Canada has made international commitments, such as the Kyoto protocol, that require municipal programs to achieve the targets. Things like public transit are very important to meet those commitments, and public transit is a municipal expenditure.

    So those are three reasons. There are more, but those are three main reasons the federal government should take an interest in cities.

    Second, what are the fiscal challenges facing cities? To be competitive, cities need to attract business and skilled labour. This means that transportation and communications infrastructure, as well as services that enhance the quality of life, are critical to competitiveness. These are services like parks, recreational facilities, cultural facilities, social services, a good school system, policing, health care, air and water quality.

    Yes, taxes are important in attracting people, but the studies are beginning to show, more and more, that to be competitive, cities need to be nice places to live. The knowledge workers, the key to economic prosperity, are increasingly looking for a nice place to live, and that means good schools for their children. It means being able to jog in the park. It means feeling they're safe. It means not seeing homeless people on the streets. These are all services that municipalities are responsible for, so to be competitive, they have to provide these services.

    A second fiscal challenge facing cities is the off-loading of services by the federal and provincial governments. This has increased municipal responsibilities. At the same time, there's been no diversification in municipal revenues. As Jack Layton said, municipalities rely largely on property taxes and user fees to finance their services.

    I've written a lot about property taxes over the years. I've just completed a study on property taxes in 25 countries around the world. I think property tax is a good tax for local governments, but I think we're asking it to do a little bit too much. It's not appropriate--nobody thinks it's appropriate--to have this tax pay for the soft services, the social services, that we provide now at the municipal level.

    As well, it's not a very elastic source of revenue. In other words, as the economy increases, property tax revenues don't increase. You have to raise the rate of tax, and you know, politically, that's a very difficult thing to do. But the tax base doesn't increase automatically over time. In some municipalities, it's just not enough money for the services they have to provide.

À  (1015)  

    A third challenge has to do with urban sprawl. Urban sprawl, whether you love it or you hate it--and there are people who love it and there are people who hate it--I think we have to agree that it has increased the cost of services that municipalities have to provide and has put pressure on existing revenue sources.

    So in light of this new fiscal environment, municipal finance experts are beginning to question the fiscal sustainability of cities. Obviously they have been sustainable. They haven't gone bankrupt recently, but their continued ability to meet the expenditure requirements with existing revenue sources, under the circumstances that I've just described, is in question.

    What needs to be done? It's not a simple problem, so the solution is not simple either. And all three orders of government have to work together and in a coordinated fashion to help cities.

    There are things municipalities have to do themselves. They need to remove the distortions in the property tax. I did a study recently for the CD Howe Institute that talks about how some of the ways in which we finance services at the local level have perhaps exacerbated sprawl rather than reduce it. For example, we overtax commercial and industrial properties and apartments in those cities. That has to be fixed. We maybe even can raise property tax rates in some parts of the country, although I know that's not going to be very popular.

    We are starting to make greater use of user fees, but more importantly, we need to restructure them so that they ensure the efficient use of services. This means we have to price water, roads, and transit correctly and to ensure that we're reflecting the marginal cost of providing those services so that we're putting the right incentives into our user fees.

    Turning to the provincial level, if we're going to reduce the municipal fiscal imbalance, in other words the difference between expenditures and revenues, the provincial government either has to take back from some of the responsibilities it has off-loaded, such as social services and social housing in Ontario, or they have to give municipalities access to other revenue sources--for example, income sales or fuel taxes. Quite simply, we have expenditures growing faster than revenues. We either have to off-load the expenditures or provide some more revenues to make that balance work.

    But I believe that to ensure local autonomy and accountability, municipalities have to be responsible for levying any taxes to which they are given access. So if we're going to give municipalities access to income, or sales, or fuel taxes, they have to set the rates. They have to take responsibility for those tax rates. They make the expenditures, they set the tax rates.

    These local tax rates also need to be set on a region-wide basis. For example, in Toronto we can't have a fuel tax in Toronto and leave out the rest of the GTA. It's pretty obvious what would happen if we did that. So we have to levy these taxes on a region-wide basis. And in some parts of the country we don't have a structure to do that. We don't have a government at that region-wide level. So this will require some municipal restructuring in some parts of the country.

    I also think that the four large metropolitan regions I mentioned at the beginning, where more than 50% of Canadians live, have to be treated differently from other urban areas. For example, I'm not sure giving local taxing authority for new tax sources is appropriate for the whole country. It may just be appropriate, at least to start, for the large metropolitan regions, leaving the smaller municipalities to rely a little bit more on transfers than the large metropolitan regions. They are different and I think they should be treated differently.

    At the federal level I think the federal government should invest in those aspects of cities that make them competitive and improve the quality of life. This means transportation infrastructure, affordable housing, water and sewer infrastructure.

    And I think the federal funding needs to support environmental, social, and economic sustainability. In other words, the money should be going to things like public transit. It should be going to regions where there's integrated regional land use and transportation planning, where the city regions are using proper pricing for roads, transit, and water. These are important aspects of sustainability.

    Finally, I think municipalities need ongoing dedicated funding instead of time-limited programs. The federal advisory panel on the Transportation Act, for example, recommended giving cities access to the fuel tax. You've heard the Federation of Canadian Municipalities recommend that. The TD Bank recommended that in their study this week. Again, I believe accountability requires that municipalities set those tax rates and be responsible for them.

    So there are things that need to be done by all three orders of government, and I think they need to be done in a coordinated fashion to help cities continue to be the engines of the Canadian economy.

    Thank you.

À  (1020)  

    The Chair: Thank you very much.

    We'll start our rounds of questioning.

    Go ahead, Mr. Penson.

    Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.

    I'd like to thank the panel for being here today and for bringing forward some important issues.

    It seems to me, though, that the discussion surrounding Canadian cities, where 80% of our population live these days, is really not much different from what I hear in a rural riding. There are the same kinds of concerns in the rural municipalities. In Saskatchewan, for example, paved roads and paved highways are now becoming gravel roads, because they don't have the money to service them.

    I'm really wondering if this isn't more an issue about where Canada is in terms of competitiveness. Our standard of living has been in a long-term decline for about 30 years. And it seems to me that some of the problems that are being identified by the people representing municipalities, representing cities, are really no different from the rural concerns. It really has to do more with getting Canada back on track in terms of productivity and competitiveness than it does specific jurisdictions.

    With the experiences we've had in the past of trying to rejig the Constitution to give new powers to different bodies, it seems like that's been a political minefield. So I think we need to concentrate on getting the country back on track, and the cities will be part of that equation because, as Ms. Slack has just told us, they're very important in the overall equation here.

    Shouldn't it be more our focus to try to make Canada number one or number two in terms of productivity again, as we were 30 years ago? I believe we should change those policies that are holding us back and try to get us to realize our full potential in this country, because I believe we have the potential to achieve a lot more than we are achieving.

    Wouldn't everybody benefit as a result of that, rather than trying to redesign the jurisdictional landscape to change extra powers for the cities?

    Ms. Enid Slack: I agree with some of what you said, but perhaps not all. I think what we're finding in this new world of globalization is that rather than countries competing against countries, cities are competing against cities. And it's Toronto against European cities and other American cities.

    If we invest in our cities, then the whole country will benefit from that investment. These are the drivers, and if we're trying to be competitive we're going to have to do it through our cities. Because this is where the knowledge workers come, this is where innovation is happening, and this is where we are going to make ourselves competitive.

    There's no question there are problems in rural areas, and they all sound the same--roads and social problems. I don't disagree with that, but I think you'll find that the concentration of problems is much different in cities, particularly in the large cities.

    So when we talk about homelessness, we talk about cities being magnets for a lot of problems in surrounding areas. In Toronto, for example, we found that 47% of people using homeless shelters came from outside of Toronto into the city. So there's a very high concentration in the cities. Gridlock is very much an urban phenomenon.

    So, yes, there are issues in rural areas that need to be addressed, of course. But I think you'll find a higher concentration of problems in cities that need to be addressed and I think you'll find that cities are the drivers of this new competitiveness.

À  (1025)  

    Mr. Charlie Penson: Ms. Slack, I agree with what you're saying, but what I was suggesting to you is that the answer to it, it seems to me, is not necessarily just finding a new source of funding from the federal government direct to the municipalities. I'm suggesting that if we were to improve Canada's competitiveness, it would automatically flow that there would be improvement in our cities.

    United States cities are doing very well, and it's partly because the entire economy is going well in the United States. Thirty years ago the United States was number one in productivity in the world and Canada was number two; we were very close behind. Now we're thirteenth. And I'm suggesting to you that part of the problems we're seeing in the cities is just a reflection of the way the entire country has been performing in terms of standard of living lately.

    Ms. Enid Slack: I'll take one more stab at it and then I'll turn it over to Jack Layton.

    I think you're saying that if we're competitive our cities will do well. And I'm saying if our cities do well we'll be competitive. This is because we're finding that we depend on knowledge workers and we need to attract them to Canada, and they want to live in cities because the services they need.... We call them “agglomeration economies”. There's a buzz when all the companies are together.

    So they're coming to our cities and we need to attract these knowledge workers. We need to do more than that, of course, but to be competitive, I think we need to make our cities attractive places for people to come, for the knowledge workers to come, to then improve productivity and do all the things to make us competitive.

    Mr. Jack Layton: It's an excellent question, and it does take us into what would seem to be one of those chicken-and-egg sort of cycles. I guess what we're really looking at are cause-and-effect questions.

    First, you're right that with the problems we're identifying in cities, you can find very similar kinds of problems, with a certain similar quality, in rural Canada. Our rural municipalities are facing many of the same sorts of problems, with an inability of their financial structure to address their needs. That's why we have this concept of a rural partnership, this very active attention to the rural file or files here in the House of Commons. There's an active network of MPs working together on it. There's a secretary of state addressing it. There's a thrust there.

    In the cities, I would say, we don't have those parallel structures. At FCM, what we've done is created within ourselves a very active big city mayors' group and a very active rural forum--it's been a rural forum, but we're now formalizing that in our constitution into a rural caucus--to recognize those different tracks.

    In terms of talking about competitiveness and productivity, I have some very practical examples. If it's going to take an auto parts truck 45 minutes longer to get from Oshawa to the border because of congestion in Toronto, that's a very tangible reduction in our competitiveness. You can put a dollar sign on it and the auto parts manufacturer will decide where to locate accordingly. If the housing for the workers is so expensive in a city that you have to pay them a certain level just for them to be housed in the city, that's going to affect the competitiveness of the industries locating there. All these things are part of the equation that is involved in industry relocation.

    Why are we facing a drain of head offices? Well, I think it's partly because the quality of life we've been able to assure in our cities for those head offices and their employees is slipping. They can see it as they head to work: the distances, the time of travel, the number of smog days, the number of homeless people in the streets, the quality of our school system, etc. They see all of this slipping, and when they compare it with the U.S., they make a different decision.

À  (1030)  

    Mr. Charlie Penson: Mr. Layton, I wonder if I could just interrupt. My time is short, and I'd like to ask you another question on how to resolve this.

    I think at least two members of the panel have identified that the infrastructure programs are not a very adequate way of addressing this. They're not long-term solutions. There isn't long-term funding. I would suggest to you that the early infrastructure program I was familiar with here had Lloyd Axworthy's Winnipeg riding get four times as much as my riding in Peace River.

    There's a political problem without dedicated funding. How do we resolve it without cutting out the provinces? I'm suggesting to you that the provinces have to be part of this equation. Otherwise, we get into a quagmire of constitutional jurisdiction. How do you propose to do that?

    Mr. Jack Layton: Well, virtually all the agreements that have been structured so far have been on the basis of agreements hammered out with the provinces, like the affordable housing agreement. Salutations to the Province of Quebec for so quickly signing on to the agreement and honouring the entire spirit of where everybody wanted to go with that one. Other provinces have been more problematic, and that's always the difficulty you get into. But our notion is that you have to have all three orders of government working together.

    There may be certain key specialized areas where, with the consent of the provinces, you're able to move--for example, the Green Fund. That was done with the consent of the provinces one by one, and they have supported that sort of an initiative. But we see a long-term infrastructure funding program with the consent of the provinces as the goal. We don't believe it needs any adjustment to the Constitution, because you're right that once you step into that area, it's a very difficult thing. Constitutions are made up of practices, Supreme Court decisions, and the constitutional document itself. It may be that the changes will actually happen in those first two areas.

    Mr. Charlie Penson: And an amending formula that's very difficult to change.

    Mr. Jack Layton: Absolutely.

    The Chair: Madam Picard.

[Translation]

    Ms. Pauline Picard (Drummond, BQ): Thank you, Madam Chair.

    Mr. Layton, I'd appreciate your clarifying something for me. Your answer leads me to believe that more than likely I misunderstood some of what you said. I am personally acquainted with the President of the Union des municipalités du Québec and in my opinion, she would probably not appreciate the comments you made in your presentation. Although your response to my colleague's question was somewhat tempered, from what I understand, you're suggesting the federal government amend the Constitution so that it can take over from the provinces and provide services to municipalities. Let me just say that I disagree with you on this, as I'm sure the Union des municipalités du Québec does.

    I'm the Member of Parliament for Drummond, a riding located in the heart of the province of Quebec. Our city is thriving on the economic front. However, the riding also encompasses 22 semi-urban and rural municipalities with very different needs. Consider the fact that some rural municipalities still don't have basic telephone service. As I see it, it would be rather difficult for the federal government to meet all of these needs.

    As a sovereignist, I am dismayed at the suggestion that the federal government can meet needs it doesn't even know exist. How is that possible? The Constitution would have to be amended. The provinces have trouble as it is meeting the needs of each and every municipality. Do you really think the federal government can, while operating at a distance, adequately meet their needs?

    Furthermore, from what you've said, it seems your studies focus solely on major urban centres like Montreal, Toronto or Victoria. While it's true that 80 per cent of the population lives in large cities, Quebec is a very large province with a population of seven million. Three million people live in the Montreal area, while the remaining four million are spread across various municipalities or counties in the province. I'm not certain that I understood you correctly, but I would like you to clarify the gist of your recommendations.

À  (1035)  

    Mr. Jack Layton: Thank you for your question.

    First of all, I attended a meeting of the UMQ several weeks ago along with a number of other mayors. What we found from our discussions was that all municipalities, whether large or small, seem to experience the same problems. Not all have the required resources to meet local needs. The challenge for us is to address the inequity between resources and needs.

    As we can see, the federal government has substantial resources, whereas the municipalities do not. Therefore, we want to make new arrangements, with the provinces' consent, to transfer some assistance. Given our experience in this area, we have developed a number of different program concepts which call for the participation of three levels of government. These programs should span a period of approximately 10 years. It's not a matter of announcing every now and then a program that would not be adequately funded to meet current needs. These are the kinds of arrangements that we need to make.

    I have to say that Quebec has worked very hard and that efforts have proven successful. It's been a very interesting experience for me. Occasionally, it's been more difficult dealing with the Government of Ontario. What's needed is considerable flexibility when it comes to implementing a federal program so as to meet the needs of each province, bearing in mind the current political situation. Obviously, the actual residents of these communities know best what needs to be done, but our colleagues here have yet to commit to the process. We've taken some interesting and important first steps, but we need to continue moving forward.

    Ms. Pauline Picard: I really appreciate the fact that you answered me in French. Thank you very much.

    I would like to ask another question. We are hearing right now about plans to earmark money for the new Canadian Strategic Infrastructure Fund. Given the available resources, as you said, and the fact that the government ended its fiscal year with a surplus of some $10 billion, will the $2 billion for the new Strategic Infrastructure Fund be enough to meet the needs?

    Mr. Jack Layton: No, because we have said for a long time, and this was confirmed again by the TD Bank study, that there is a $44 billion deficit in terms of municipal infrastructure. Much of that deficit involves wastewater and water treatment systems, as well as public transit and housing. Canada currently has no affordable housing policy. Of the developed countries, Canada is the only one without that type of program.

    Two billion dollars is a help; we will welcome it, but it is not enough.

À  (1040)  

    Ms. Pauline Picard: What do you think about the fact that in some rural areas that lack even basic telephone service—and I think this is the case in many parts of Canada—there are plans for everyone to be connected to the Internet? In those areas, children going to school have no access to the Internet because there is no telephone or cable service. I live about an hour from Montreal, which is not very far. What can be done or do you suggest should be done to eliminate these inequalities so that all citizens can have access to these tools? It is incredible to think that there are people that have no telephone service in this age when people have landed on the moon. These people are not living in the jungle, but in rural municipalities. Have you thought about this problem?

    Mr. Jack Layton: Yes, our Rural Forum and our Northern Forum have worked very hard on this. In a policy that we can send you, we suggested to Mr. Rock that municipalities and small communities should be the Internet gateway in each community. We are prepared to work with the federal government, the provinces and the territories to achieve that objective. Mr. Knight can give you details on our concept. 

[English]

    Mr. James Knight (Chief Executive Director, Federation of Canadian Municipalities): Thank you.

    Of course, there was a commitment to universal broadband access by the Government of Canada in the throne speech a couple of years ago. The policy has meandered a bit, but I understand it's coming back to the table.

    We have a notion that community groups working collectively can launch their own systems, perhaps through the leadership of the municipality and with financial support from the Government of Canada. We have excellent examples of that in a small community nearby, the municipality of Lanark Highlands. Rather than waiting for the private sector to come to what is not really an economic market, local community groups working with the municipality have developed their own system.

    This has also happened in the north. We believe the Government of Canada should enter at this point not through large subsidies to the private sector but through assistance to community organizations, working with municipal governments to bring broadband to rural Canada particularly and to northern Canada. There are good examples of this, and we're talking with Mr. Rock about this now. In fact, he's coming to see us next week at our conference to engage further in the discussion.

    The Chair: Mr. Wilfert, please.

    Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chair, and I thank the panellists for coming today.

    The comment was made that what urban communities need is a fiscally sustainable foundation. I don't think anybody disagrees with that. Certainly I don't disagree with that. It's always good to remember where you come from, so I went back and reread again.... Every once in a while I like to read what I said at the Cities of Tomorrow Conference back in November 1996, which you two gentlemen were at. Basically we talked about the need for more fiscal room for municipal governments in Canada.

    All the panellists, Madam Chair, talked about or touched on an urban lens, or an urban strategy, which very much reflects the Prime Minister's task force recommendations, particularly on housing, transit, and infrastructure. I would suggest to you that the federal government is more engaged now with urban communities than it has been since the mid-1970s. I think it's an excellent realization that with 80% of the country living in cities--we're more urbanized on a per capita basis than the United States--we need to be engaged, notwithstanding the Constitution.

    Had I my druthers, I would have cities recognized as an order of government in Canada in the Constitution. I would agree that we don't want to go through that land mine, but we don't have to. We don't have to because the federal government, since 1993, has become far more engaged in areas of the environment and infrastructure and in a host of areas, like urban crime and safety, in which they were not engaged in the past. Part of that, of course, is because of the realization that we have to be a player.

    An urban lens, absolutely; we need to have a long-term capacity for urban governments to be able to function. In doing so, in my view we need to develop the fiscal capacity for them to do so in terms of maybe more tax room, which would create more accountability and transparency, not simply providing more money. I think in the end, all civic leaders want to be able to be accountable for the dollars they spend. At the same time, that doesn't preclude us from continuing some of our long-term funding, which I would agree we need to do on infrastructure. We didn't have a national infrastructure program until 1993. The FCM proposed it in 1983 and it languished until the government came into power in 1993.

    On national transit, again, we have thousands of municipal governments, over 5,000 in Canada. Maybe one size doesn't fit all, nor should it fit all. There has to be a certain capacity. There has to be a certain ability in order to have a transit system to fund.

    Jack very clearly outlined that the problem with the housing program is often with other jurisdictions, the provinces, although I think we are seeing some movement in that area. I would really like to put a little more flesh on it, Madam Chair, as to how we develop the fiscally sustainable foundation. On the one hand, we need to improve the ability of municipal governments or urban governments to have more fiscal room to manoeuvre in order to do the things they need to do. At the same time, we have to develop much more long-term, sustainable funding programs without....

    I went through that debate. I don't really like to hear about the fuel tax, personally, because I don't think it's up to others to tell us where the money should come from. I think it's up to us to be able to enunciate that.

    So I'd be interested in how we could put a little more flesh on this sustainable foundation. How do you think we're going to achieve it? Some of my colleagues on the other side would suggest we would achieve it without us being engaged, which I don't believe is possible.

À  (1045)  

    Mr. Jack Layton: I'll be brief, because I'm sure there are others who would want to add comments here.

    First of all, I'm agreeing with you that we do need a long-term, fiscally sustainable foundation. The paper we're presenting to you begins to open the door to some of the untouchable subjects, such as shifting tax points, opening tax room, and opening taxing powers. However, we believe this has to be done very carefully. It needs a lot of thought and a huge amount of work, because we're dealing the context of our federal-provincial constitutional structure.

    On the other hand, there may be some things that can be done sooner rather than later. Our great fear is that while that work is being done, a number of other issues we're addressing, and the critical situation we're in, could be put on ice, as it were, until the studies are finished. This would be a tragedy.

    We think there are excellent models of transfers from the federal level through to the state, city, and municipal levels of all sizes, with some federal goals being negotiated and worked out with the provinces--as we've seen emerging in housing. We've seen some excellent and innovative programs in the United States and Europe. We've put these before you. They include the concept of revolving funds around infrastructure. I know you're familiar with these from your days at the FCM. We have created a couple of these, which are working well. In the U.S. they have addressed the differential situation of rural and urban by using revolving funds for water infrastructure for larger cities, which pay themselves back out of rates. For smaller communities, which would never be able to pay for a water-filtration plant, a grant program is in place.

    Irrespective of the size of their community, every Canadian should have clean and safe water. We think this sort of an approach is fundamental.

    You mentioned briefly the need to be sure we're addressing the different transportation needs in the country. We couldn't agree more. In fact, we're suggesting the federal government could even place certain expectations--again worked out with the provinces--on what municipalities would do with money that's oriented towards sustainable transportation. In other words, there might be some milestones, goals, or systems put in place. We've seen this with the gas tax in B.C., where a planning regime is required to be in place to control sprawl before the dollars can really flow. We agree with these objectives, so we're willing to submit ourselves to this kind of discipline.

    So there are some exciting possibilities for working together in combining targeted programs and long-term reconfiguring of a sustainable financial structure for municipalities.

    The Chair: Dr. Slack.

À  (1050)  

    Ms. Enid Slack: Thank you.

    I agree with what Jack Layton has said. I guess what I said was if you have an imbalance between expenditures and revenues, either you fix the expenditures or you fix the revenues. At the provincial level, I think we have to revisit some of the local services realignments and exchanges that have taken place across the country. We need to ask if we off-loaded the right expenditures and if there are corresponding revenues to meet them. I think people are beginning to think the answer is no.

    So I think we have to start by revisiting what municipalities should be responsible for compared with other orders of government. When we've answered that question, then we have to ask what revenues they need to meet those obligations. For example, if we're going to say social services should be funded at the local level, we can't then say we're going to fund them with the property tax.

    The reason we all jump on the fuel tax is there are some problems with giving tax points on some of the other tax sources. Income taxes create some problems, largely because we're reducing income taxes in Canada and around the world. Sales taxes might be a little bit easier. The fuel tax just seems to be one that works. Given that we have such a big transportation problem, the fuel tax is more popular with people. It doesn't have to be the fuel tax.

    But, again, I think we have to align expenditures and revenues together.

    The Chair: Mr. McMahon.

    Mr. Fred McMahon: First, let me just make a quick note. If this morning was supposed to focus on urban issues, I didn't receive that in my--

    The Chair: You were here on another specific point. Another member of the panel couldn't come and you were placed in here, so don't worry.

    Mr. Fred McMahon: Thank you. But I will make a point on municipalities in general.

    When I was growing up in Nova Scotia, I can remember driving with my parents through the Annapolis Valley. They could point out where one constituency changed from one party to another. There was good pavement on the road where you had the MLA from the government party, and all of a sudden it was pothole city on the other side of the road, where the opposition member was.

    The reason I make that point is that in considering what to do with municipalities you need to consider accountability. If it's through a grant program, then you're going to start to see grants, as was already mentioned, going to the places that are the most politically needy, if you will, rather than to those that have the real need or the real capacity.

    It is far better to have accountability by having the municipalities levy their own taxes. It is a point of good governance, now broadly recognized, of subsidiarity, which means that the lowest level of government that can deliver a service should deliver a service, but you cannot cut off the revenues of any level of government from its own revenue sources. That is a recipe for various political games and it breaks accountability. That means money may well not be wisely spent.

    Thank you.

    The Chair: Dr. Berdahl.

À  (1055)  

    Dr. Loleen Berdahl: To respond to your question about long-term urban sustainability and what the federal government role can be, I would suggest there are three things that the government might focus on.

    The first is that very much in respecting the different responsibilities of all three levels, or orders, of government--whichever language you want to use--I think one thing is to look at the tripartite agreement model and what has been done with the Vancouver agreement to see if there are opportunities in other cities to have that type of model.

    Obviously the Vancouver agreement is so new that we can't say whether or not this is going to be a shining success story. But I think that kind of approach, of engaging all three governments in a local area, localized to that city's own needs so that not every city gets a downtown revitalization program that looks at drug addiction, since not every city needs one, finding what makes sense for the city, and all working together is the right one.

    The second thing that I would suggest needs to be done and could be done rather immediately is for the federal government to become much more aware, and much more purposely aware, of the impact of federal programs on urban areas, and to engage the urban areas in those dialogues.

    To take but one example, immigration is a federal policy area. I don't think anyone is arguing that cities should start dealing with immigration; however, most immigrants end up living in the large urban areas, and sensitivity to that fact could benefit the cities.

    The last point I would mention is that the federal government needs to be aware of both off-loading and of the impact of pulling out of programs. In terms of off-loading, what I'm talking about is if there's an area that either the federal or provincial government should be involved in and they are not, quite often municipal governments end up getting engaged because they're the sites of that kind of policy challenge. That then creates a fiscal strain for them.

    In terms of pulling out of programs, my concern here is that if we see the federal government or the provincial government or all three governments get engaged in urban programs that raise public expectations and then the political climate changes and suddenly the two senior governments pull back, there's still a public expectation that the program will continue, and in effect the municipal government is left holding the bag. So some sensitivity to whether what's being done can be sustained and whether it's something that should be sustained I think would benefit federal programs in urban areas.

    Mr. Bryon Wilfert: This would mean, Madam Chair, a more formal consultative process, as was done on Bill C-10, when we looked at the payments in lieu of taxes issue. It is on issues of that nature where, if in fact federal policy is going to impact on urban regions or on cities generally, I would suggest, as we would engage the provinces, the federal government needs to engage the municipalities through presumably the FCM, as the national voice for municipal governments.

    For the record, I would use the word “orders” rather than “levels”. Levels gives us the suggestion that somehow it's all hierarchical. You used the word “off-loading”, which is very true. There is off-loading that's done. Interestingly enough, though, when we talk about the state of Canada's cities, I agree with your point about competitiveness; we have to have world-class cities in Canada. We have to compete with the best around the world, and we have to make sure that we have the proper tools for our cities to be able to do that. The FCM developed their quality of life index, ten key components that really evaluate the state of our cities, which is not always simply fiscal.

    Interestingly, and I'll conclude with this, Madam Chair, the National Citizens' Coalition now is on the bandwagon for this gas tax. Yet I don't see anybody on the bandwagon with the provinces. Vancouver, Montreal, Edmonton, and Calgary, if my memory serves me correctly, already get fuel tax money from the provinces. They determine the rate, but there is money there.

    Again, I don't see the point, though, without.... I guess it's up to the federal government to decide where dollars should go. Obviously, if you're taking money away from fuel tax, which may go to.... And I don't disagree. It doesn't necessarily go to transportation; it may go to health care or to other areas. But there is going to be an offset because of the fact that you're taking money from one to another.

    The fact that we are engaging at this point, and are having you here today, I think is a very important recognition of the role of cities.

Á  (1100)  

    The Chair: Mr. Nystrom, go ahead, sir.

    Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you, Madam Chair.

    Welcome, everybody, to the finance committee.

    I want to try to get questions in three different areas to give everybody a chance to participate, but I'll start with the municipalities once again.

    You're saying here in one of your papers that one possibility of getting more revenue to the municipality is through a change in the tax system--more taxation room--and the possibility of creating a federal tax of one sort or the other. You mentioned possibly a personal income tax, an excise tax on fuel, GST, and so on. I wonder what examples you have from different parts of the world where this may have been done, where there are tax points to cities. Do you have any other examples, as well, of a federal state, as in the United States, Australia, or Germany? Federations are unique in terms of our three orders of government.

    Dr. Slack, you mentioned that you have to treat the big four differently. When we start treating members of the family differently, it gets sensitive from time to time. Where do you draw the line? Why should Edmonton be treated differently from Regina, where I come from, for example? And in what way do you treat us differently? I'm not suggesting you're talking about second-class citizens or third-class citizens, but how do you treat them differently? I think that's something that is very important to look at as well.

    I wonder if you can give us some evidence from other parts of the world from which we might learn. I think what Mr. McMahon has said about transfers is quite relevant. You can have political favouritism and lack of accountability. It depends on who's in power, on who gets all the money for the infrastructure programs. You don't have many Liberal MPs in rural Saskatchewan for about 1,000 years, so the highways all go to potholes because you don't have the transfers for a national highways program. They get rid of the Crow rate. We have thin-membrane highways that are devastated by the big trucks that now go over them. Now it's a big burden on the provinces to build thicker-membrane highways.

    I think those are some of the problems of transfers. We are all human beings. We can say, well, if I'm the prime minister of this country, I wouldn't do that. But who knows? I might have a minister of finance who would do that.

    Mr. Jack Layton: Excellent, well-phrased question.

    First of all, let me comment on practices elsewhere. We are drawing information from around the world to try to find the best practices. This is what we want to sort through with you and the best minds available in Canada, so we can come up with the best possible proposals.

    It's interesting that Germany, for example, which you mentioned, was a country that came together as a federation while already having very mature city states and provincial-like structures. So, of course, in their constitution they made provision for the existence of these entities. These entities were the very ones coming together.

    The Fathers of Confederation represented largely rural communities, or what we would call towns today. I'm not sure there were very many areas that would even have qualified as urban in 1867. In their constitution, they provided for a percentage of revenues collected by the central government to flow directly down to the local government.

    In Italy, most recently, 4% of the income tax has been dedicated to municipal governments. An additional 1% may be added at the request of the municipality. So it's a combination of the transparency/accountability question. This has been a relatively new innovation in Italy.

    In the United States, as I mentioned earlier, it's quite surprising to see there are 3,000 municipalities with access to some form of income taxation, and 6,000 with access to some form of sales taxation. This is quite remarkable.

    We want to see how these are working, and which techniques and strategies might be applicable to Canada. We're ready to work with you on these ideas. Clearly, the debate has begun. It's out there in public discourse now. It's a good thing it is happening.

    Once again, I'd underline we do need to have that investment, in the meantime, in our communities of all sizes. I have to say that FCM doesn't really distinguish between, let's say, four metropolitan areas, as Dr. Slack has done. I remember at one time it used to be three. Now it's four. We see this as a bit of a problematic area. We're suggesting that all of our communities need focused attention based on their particular needs and situations. They have different needs and situations, so the kind of infrastructure they're going to require is going to be different. It's in diversity--to cite a trite but important quote--that we can be strong. So we have to have this sort of flexibility.

Á  (1105)  

    Mr. Lorne Nystrom: Dr. Slack, we also need national standards, goals, and objectives. I wonder if you could explain why you're excluding Regina from being treated differently.

    Some hon. members: Oh, oh!

    Ms. Enid Slack: As I prepared my remarks, I still wanted to make the point that we have to treat the large regions differently from the small. I wondered where I should draw the line. Of course, who's in and who's out is the big question.

    But I think the point I'm trying to make is that equality does not necessarily mean equity. Treating everybody in the same way is not necessarily fair. The reason is that the needs of different municipalities are different, as Jack just said, and the ability to meet these needs are different. I think Loleen Berdahl also made the point that if a drug rehabilitation program is needed in Vancouver, you're not going to do one in every city in Canada. It's not necessarily needed in other places.

    Frankly, some things will work in large regions and won't work in others. If we're talking about tax points on the income tax or the fuel tax, they are not going to help a small town. They are not going to bring in the revenues, because the town may not have the fiscal base on fuel or income to help them. So this may be appropriate for only a large area.

    Mr. Lorne Nystrom: Winnipeg is 600,000 people.

    Ms. Enid Slack: Well, we can debate--and I accept this--what we include as a large metropolitan region. I'm not stuck on these four, beyond noting that 51% of the population lives there.

    But it is an important point to make that needs and solutions are different in different parts of the country. Equality does not mean equity. As appropriate, we have to treat different places differently.

    We can debate whether Winnipeg is in or out.

    Mr. Jack Layton: Regina is clearly in.

    Mr. Lorne Nystrom: My hometown of Wynyard has 2,500 people. Are they in?

    I want to go to Mr. McMahon, if I can. Taxes, taxes--I could probably have a debate with the Fraser Institute for a long time over taxes. Even with the capital tax, it partly depends on what your exemption is.

    The Saskatchewan government has increased the exemption on capital tax for companies from $10 million to $15 million. But again, you're looking at a very low taxation regime.

    We just had the biggest tax cut in the history of this country--$100 billion over five years. It scares an awful lot of people to have huge tax cuts. I go back to my home riding and province again, where there's a tremendous drought on the prairies, and farm incomes are plummeting. We need a massive farm aid bill to support farmers who are injured by the U.S. trade bill.

    The Americans are subsidizing their farmers more massively than before, by $180 billion over 10 years. You need taxes to pay for that. We have homelessness problems, and we need taxes to pay for that. We have a national health care program. I think 90% of the people in this country want to keep a national medicare program that's funded publicly. We need taxes for that. So what are you going to cut back on, if you're going to have this sort of low-tax regime?

    We're seeing the consequences now of tax cuts by this Liberal government, if you can call it that, in British Columbia. Campbell sort of looks like Mike Harris on steroids, with his tax cuts. Look at the suffering in British Columbia, in terms of the cutbacks in communities. I was in Nelson, B.C., about a month ago speaking to a couple of hundred people, and the layoffs in that community are just devastating. So where do you draw the line? Is this the end-all and be-all? What about people?

    Mr. Fred McMahon: Well, let's start where we agree. I think we're both horrified by the U.S. farm bill. That may be where we stop agreeing, on taxes anyway.

    Mr. Lorne Nystrom: And Gordon Campbell...? After all, he's a Liberal.

    Mr. Fred McMahon: No, actually, I'm quite disappointed. I don't think Gordon Campbell in British Columbia has really tackled his major problems. It's quite odd; they're talking much more loudly than they're acting.

    But let me go to your question about where we cut. One, there's a lot of politicized spending in Canada. We've seen that in job programs, economic development programs, and that sort of thing. That's one place to cut. We can save a few billion there.

    The Atlantic Canada Opportunities Agency is largely a patronage-pushing agency, as economic development agencies tend to be. There's no evidence at all that they work or provide any jobs. Some of their reports on the number of jobs they provide are acts of science fiction. Then you look at the overall data and there's nothing there. That's one area where we can cut.

    Employment insurance is not paid directly by taxes; it's paid by payroll taxes. I come from Atlantic Canada. What we do with employment insurance down there is a crime. It's basically a government-sponsored billion-dollar bribe to young people to not go on to further their education, get skills, and seek full-time work. It's a bribe to enter seasonal industries. We could save lots of money there. And corporate welfare; all that should be cut.

    I've named a few areas. As Everett Dirksen famously said, a billion here, a billion there, and soon you're talking about real money. I think you could find a billion here and a billion there and start talking about real money.

    As for the corporate capital tax, you can get rid of that very easily. It's a very small part of the government's overall revenue growth. You can cut it and not feel it, and pay for it with a billion here and a billion there.

    I would like to add a footnote to some of the comments on municipal taxation. I think it's probably a bad idea to give municipalities an automatic share of any revenue stream, for two reasons. When a government gets money without accountability, which is basically what happens when it's an automatic part of the revenue stream, they find ways to spend the money, no matter what it's on. Give a city government a few billion dollars or a few hundred million dollars, whether it needs to spend it or not, or would spend it if its citizens were voting for those taxes, it will find a way to spend it.

    Equally--and this is more on your side of the street--when a government has to spend more money and doesn't have the flexibility over its own taxes, then it has those problems. So I think municipalities should be responsible for setting their own rates for tax revenues they receive, as they are in municipalities in the United States, as Jack Layton mentioned.

Á  (1110)  

    Mr. Lorne Nystrom: I wonder if Dr. Berdahl would like to answer something about political spending and western diversification. You were talking about western diversification. You also said in your brief there are economic and demographic differences in the west compared with the rest of the country. It might be useful for the committee to know what some of those differences are in terms of how we might treat them fiscally.

    Dr. Loleen Berdahl: Do you mean differences within the region or between the regions in Canada?

    Mr. Lorne Nystrom: I mean the regions in Canada. You say in the brief that there are some economic and demographic differences. It might be useful if you could elaborate a bit on that.

    Dr. Loleen Berdahl: Sure. I'll start with the question about economic diversification.

    As I mentioned, I see a lot of potential for a shift in mandate for WD to start being a regional voice in Ottawa--actually, it already is--or to enhance that voice and to be seen more and more as a facilitator of regional cooperation.

    The reason I mention this as a priority is that we've had a fair bit of attention paid to western Canada in the last bit. Of the attention that has been paid to western Canada over the last 30 years in terms of scholarly research and a lot of the political attention, most of it tends to be focused on issues of western alienation or disgruntlement or regional fairness. There hasn't been a lot of attention to things the region can do working together in its own interest, so I think there is a role for WD in that.

    What I'm saying is, right now from a federal perspective, there might be more of an emphasis on the economic diversification side of the title of Western Economic Diversification. I would shift a little bit of that to the western side, the western voice.

    In terms of the economic and demographic differences between western Canada and the rest of the Canada and what makes the west unique in a number of ways, we just did a report that came out at the start of May looking at trade patterns, actually exports, out of western Canada, separating western Canadian data out of national data. What happens with the national data is that the Ontario economy and particularly the Ontario auto parts economy is so large that it actually shifts the way our national data is presented. When you separate the west out, we start to see some very different patterns.

    The west is growing in its economic dependence on the United States but is not as dependent as is Ontario. The west is still a very resource-dominated economy. We have been talking about economic diversification for years, for decades. We're not seeing it really happen, so we do have that resource economy side that's an important distinction for the region.

    This resource economy makes us vulnerable in a number of ways. First of all, we're vulnerable to the volatile resource markets. The second thing is that if you're dependent on natural resources to the extent that those are non-renewable natural resources, your long-term economic prospects are different.

    The third thing, something Fred and I were actually talking about before we started this session, is that a lot of the protectionism we're starting to see coming out of the United States is looking at natural resources and will hit western Canada in particular. That's a concern.

    In terms of the demographic differences in western Canada, western Canada is roughly as urbanized as the rest of the country. The region is unique in that two-thirds of the aboriginal people living in Canada live in the four western provinces, with particularly high concentrations in Saskatchewan and Manitoba. This means that dealing with aboriginal issues, looking at some of the socio-economic gaps and at treaty issues, becomes particularly important for western Canada.

    There are a number of demographic points to mention. One other point I would mention is in terms of immigration. Immigration patterns in western Canada are highly skewed in that immigrants will typically end up in British Columbia, in particular in Vancouver, or they tend not to end up in western Canada at all. There's a real need to start looking at attracting immigrants to the region and attracting them across the region.

Á  (1115)  

    The Chair: Thank you.

    Madam Minna.

    Ms. Maria Minna (Beaches—East York, Lib.): Thank you, Madam Chair.

    Personally, I want to commend the FCM, Ms. Slack, and Ms. Berdahl for their work, and Mr. Knight with respect to the urban issues. I'm really pleased to see that we're finally having a real dialogue in this country--at least it has started, in any case. Certainly in the task force from the Prime Minister, as well as this committee's discussions and others you're having, I think it's time we started addressing the issues very aggressively.

    I, for one, support it tremendously, and I agree that we need to look at the funding. There is no question that, for the larger centres, however we demarcate them, at whichever point we decide, in debate or during dialogue, there is a difference in how they could be treated versus the smaller areas and centres that may require a different approach. But taking into account all those differences and so on, I think it's important to identify long-term sustainable funding for municipalities. That is why I would look at it in whatever form that would take.

    From my perspective, I would prefer to see funding where, as Professor Slack mentions, taxes are levied, for which the municipalities have accountability as well, because that then creates a relationship to the people who are paying the taxes--or it could be a part of it, anyway, not all transferred.

    The other issue that would have to be resolved also, and Professor Slack has mentioned it in her points, is the fact that the off-loading that has happened, whether it's federal-provincial, but in many cases from provinces to municipalities, has to be dealt with, because we transfer on a per capita basis, for instance, on the social side of the equation.... CHST transfer to the provinces is on a per capita basis, which includes the people of the municipalities.

    If the provinces then don't spend money on the social issues and transfer that responsibility to the municipalities, what happens? Do we continue to transfer on a per capita basis to the province? So it seems to me there are some really hard-nosed discussions that would have to take place in this country.

    My one and only question--because I want to go to Mr. McMahon on something--is on the area of accountability and levying.

    Professor Slack, Mr. Layton, have you or the FCM looked at the constitutional aspect of that? Can any of that be done outside of having to deal with a constitutional amendment? Because you know what that means; we will never get to dealing with the cities if we have to address that. Can we address the accountability question, a direct levy of some kind, without having to deal with the constitutional issues? Have you looked at possibilities in that context?

Á  (1120)  

    Mr. Jack Layton: Perhaps I could start.

    We believe that for cities to have their own income-taxing power or sales-taxing power would likely take us into negotiations that would hover around the edges of the Constitution, and so are likely to be difficult. They're going to have to be very carefully worked through. It would probably take a considerable number of months of work, maybe even years. Meanwhile, our infrastructure has to be addressed now.

    That's why our proposals to you today are for the federal government to join with us and address those three needs that were identified by the Prime Minister's task force for immediate attention: a fully ramped-up, fully funded national housing program; a fully ramped-up public transit investment program, where we really are remarkable as a country in not having any of that investment flowing into transit from our national government; and a fully funded and longer-term infrastructure program so that every Canadian can have access to clean water and we're not dumping sewage into bodies of water around our cities. We really do want this committee to assist us in bringing those points forward in the budget discussion.

    Meanwhile, back in the world of intellectual long-term thinking, we are certainly interested in exploring something that would be longer term, sustainable, accountable, and so on, but right now we do look at that situation of the changing financial structure of the country. Ten years ago we were not in a position where we had a federal government with a $15-billion or thereabouts surplus. We were not in a situation where transfers of money from the federal government to the provinces to deal with social issues--and much of that came down to the cities as well, in certain provinces--had been trimmed back. I know it's now per capita, but compared to funding levels before, one of the reasons there is now a surplus is that there were cuts in those areas, quite large ones. This is beginning to leave a legacy now, ten years later, that we're starting to see. We're going to have look at how we can address that, because municipalities on their own with their property taxes are simply not going to be able to address many of the issues we're having to address now.

    I guess that would be my basic point. We want to work with you on the restructuring of financing over the long term, but we really need your help in terms of this upcoming budget. We think there has been some progress we can build on. We've broken through some of what might have been seen as constitutional barriers, but we still have the occasional individual, even in this building, who will say that cities are really a provincial matter. That's a concern to us because we think we really need to move outside of that traditional thinking even more than we're doing so far.

    Ms. Enid Slack: Some of us are working on just the questions you've asked. There are a lot of issues. When you're talking about municipalities levying on the income tax, you have the tax collection agreements between the federal government and the provinces. You have the municipal act in each province, and they're all a little bit different. In Ontario, for example, it says quite explicitly that municipalities cannot levy on income.

    There's a lot of studying to go on, a lot of negotiation to go on, before we can get there. That's not to say it isn't doable, but there are some impediments along the way.

    Ms. Maria Minna: [Editor's Note: Technical difficulty]...with respect to his comments earlier, when you first presented, on tax comparisons Canada-U.S. I've heard this so many times from different presenters. We're always being compared in a unfavourable light overall.

    Ireland is always used as the darling example, and quite frankly I'm tired of hearing it. I'll tell you why. When I was speaking to some politicians from Ireland, they told me quite bluntly that it wasn't the tax cuts that caused the economic output, it was the fact that they got a ton of money from the EU, and then they provided free access to university. Education provided the fuel and then tax cuts came after that to some degree. But they weren't giving all of the credit to tax cuts.

    I think we have to look at it in perspective. If we were to give every Canadian young person free access to university education and institute in this country an early childhood development program, starting from ages zero to six, just think of the human power we would have in this country--if we just started looking at the human potential for a change and not just the tax cut side of things. So I want to put that in perspective.

    I want to go back to hard-core numbers, because you were comparing us with the U.S. I want to look at some numbers that I have here from the Department of Finance. In the budget cuts of 2000, we are going to be looking at, from 2000-05.... The federal income tax rate, which is at 26.12% now in 2002--this is Canada--will be at 22.12% in 2005. The federal income tax rate in the U.S. is now at 35% versus 26% on our side, and will be at 35% in 2005 versus 22% on our side. The federal-provincial income tax rate in Canada is now at 38%. In the U.S. it's at 39%. In Canada it will be 31% in 2005 and will be at 39% in the U.S. Federal-provincial business tax rate including capital tax in Canada is 41.5% now, 34.6% 2005; United States, 40% now, 40% 2005.

    With respect, I think we're doing well. Not only that, when you look at the differences of what our taxes pay for, which is not taken into account in the overall figures--always. When I hear corporate tax, I never hear about the social benefits, the health care, that businesses in Canada don't have to pay for and don't have to negotiate for at the bargaining table all the time, as well as all of the cost of living. In some parts of the U.S. my colleague here was telling me he has to pay $600 for six months' car insurance, not for the full year. I think here you get practically two years for that amount in some cases. Then there's the cost of living. I was looking at a recent table, and this was on groceries--things we import from the U.S. They are cheaper here compared to some of the cities in the United States. So we are comparing apples and oranges all of the time.

    But just basic corporate tax, when I look at our tax cuts and look at the Americans and look at where we're going to be in 2005 and where they will be in 2005, it seems to me here we're looking at we're going to be behind them. So why is it that we're always beating ourselves over the head how we don't have enough cut taxes, and let's cut some more? Where are we going to cut it from? It's training programs that help people to find jobs. Everybody has their own interpretation on ACOA, but that would be the same as western diversification, that would have to go too. So regional development would go. Let's cut the things that actually....

    I'm not venting; I'm just saying I would like to see some figures. If I go by the Department of Finance, unless you tell me their figures are totally out of whack, it shows me that in fact corporate tax, including capital tax, will be behind in Canada by minus 5.4 percentage points by 2005 compared with that of the United States.

Á  (1125)  

    Mr. Fred McMahon: First, let me mention something about your opening preamble on Ireland. The Irish reformed their advanced education in the mid-1960s, I think, though it might have been a little bit later than that.

    I remember sitting in an office in Dublin and hearing two people from their central bank talk, and one said to the other, “My, the mid-80s were just awful days, weren't they, Rafique?” He responded, “Yes, it seemed in those days everybody took a taxi directly from the university to the airport to catch a plane to the United States to find a job.”

    Yes, the Irish did provide good education. They provided it a couple decades before their economic miracle started. When they had high taxes in Ireland, they were exporting their well-educated people to the United Kingdom and the United States. They're now bringing people back.

    As for EU subsidies to Ireland, they typically equalled between 2% and 4% of GDP. Half of them were agricultural subsidies. Our net transfers to Atlantic Canada are between 20% and 40% of GDP. If these sorts of subsidies helped, Atlantic Canada would be the economic star--not Ireland, which received petty cash from the EU. As I said, there were major tax cuts, which were far more brutal than in Britain or the United States under Thatcher or Reagan. Importantly, they were supplemented by the unions' buying into the idea that profits are important in an economy.

    As for where we have to cut, you threw a range of numbers at me. I wish Jason were here, as he knows more numbers than I will remember in a lifetime. But I think you need to remember two things. When you look at Canadian corporate taxes, our highest rates come in at quite a low level. In the United States, the high marginal rates you're talking about cut in at a couple of hundred thousand dollars, I believe. Ours cut in long before that.

    On the overall corporate tax--not just the corporate capital tax--KPMG just released a study showing Canada's tax burden this year at 42.1%. It has been going down, and will be 38.6% next year. I won't make a comparison with the United States to start with, but the overall corporate tax in OECD countries is 31.4%. In EU countries--the real high-tax nations of the world--it is 32.5%. The United States actually has a fairly high overall corporate tax burden at about 40%, a comparison you'd like. By comparison, Ireland is at 20%, and is going down to 16%.

    We have a lot of tax-cutting room left in this country. The overall tax numbers show it. We tax 40% of our economy. The U.S. taxes 30%. One of the great things about cutting taxes--as worldwide research shows, not just research on Ireland or the United States--is that lower taxes for economic growth results in more money, in the end.

Á  (1130)  

    The Chair: Very quickly, Ms. Minna.

    Ms. Maria Minna: You referred to overall corporate taxation this year at 41%, but you failed to acknowledge the fact that the budget of 2000 is a progressive cut. By 2005 we will be down to 34.6%, and the U.S. will be at 40%.

    To my mind, this is really good progress for Canada. It puts us in a very good position, not to mention the fact that the American tax cut sunsets after ten years, which is an interesting way of cutting taxes.

    Mr. Fred McMahon: I'm glad you and I agree that tax cuts will be good for the Canadian economy in this situation.

    Ms. Maria Minna: I'm not agreeing that we need to do more, though. I'm saying we've done plenty. By 2005 we'll actually be behind the U.S., which is fairly good, at this point.

    The Chair: Just for clarification, by “behind” do you mean lower?

    Ms. Maria Minna: By 2005 we actually will be lower than the U.S.

    The Chair: Okay. I just wanted to clarify that.

    Ms. Maria Minna: At this point we should be looking at investing in people.

    The Chair: Thank you.

    Mr. Penson, for a question, and then Mr. Pillitteri.

    Mr. Charlie Penson: I'd like to ask both Mr. McMahon and Ms. Berdahl a question.

    I just wanted to say, Mr. McMahon, one of the reasons we haven't been talking to you more about the capital tax is that both Jack Mintz from the C.D. Howe Institute and Herb Grubel were here earlier discussing that very important topic. But I think your point is that for the amount of money the federal treasury gets out of it, there's a high cost in terms of overall investment in Canada. It's a negative in terms of investment. Was that your point?

    Mr. Fred McMahon: Absolutely. It's important--and I may inadvertently have done this--not to confuse the corporate income tax with the corporate capital tax. On the corporate capital tax, yes, you have it exactly right. It is quite small, at about 0.6% of federal revenues. It creates large amounts of distortion for that. We could save money, on both the collection side and in spurring economic activity, by getting rid of it.

    By the way, I don't know about you, but I'm pretty dense on the tax side. So hearing the same thing three times would very much help me, but I apologize if I'm treading over well-trod territory.

Á  (1135)  

    Mr. Charlie Penson: No, I think it's important. According to the presentation Mr. Mintz and Mr. Grubel made, we know we need a certain level of taxation, but what's the best way of getting it without turning people off working, investing, or saving? Would you agree that's...?

    Mr. Fred McMahon: That's precisely right. At this moment, it is, as the title of the paper I'll send to you says, Canada's most damaging tax.

    Mr. Charlie Penson: Thank you.

    I'd just like to turn to Ms. Berdahl. I was a little surprised that you would choose Western Economic Diversification as a vehicle to further the goals of western Canada. Perhaps it's partly because people out west feel they have to get a share of this pie, too.

    It seems to me regional development programs have largely been discredited. The Auditor General, year after year, tells us they're not a very good investment. If you look at the Atlantic Canada Opportunities Agency, which Mr. McMahon talked about, it is a very important part of the money they get from Ottawa, but a lot of institutions have largely discredited that model. I wonder why you'd want to use that as opposed to lowering federal taxes, regulations, and interprovincial trade barriers, which might be more effective.

    Dr. Loleen Berdahl: I think that's a fabulous question. I have some hesitancy in suggesting expanding WD, and I'm not suggesting that; I'm suggesting expanding their mandate. That might even involve changing what we think of WD doing.

    When I and a lot of people in the region think of WD, we think of the presence of the federal government in the region and of the voice, much more than the actual economic diversification programs, or economic development programs. So in a way there's a tension.

    I'm not here to suggest that we expand economic development programs in western Canada. I'm here to suggest that we look at the fact that WD is a federal entity that's present in the west, that has some credibility in the west, but is able to sit at the table and not have people suspicious, “Oh, the federal government's here....” I'm not articulating myself as well as I would like.

    There's some political capital WD has that could be beneficial to the idea of regional cooperation. If we're going to move forward on regional cooperation, and I very much hope the region does, it would be very nice if the federal government were engaged in the dialogue, or at least very well aware of that dialogue. I think WD, being the federal voice in the region, is something of benefit.

    As I mentioned earlier, in a way I'm sort of separating the “Western” part of the title out of the “Economic Diversification” part of the title. There has been a fair number of attacks in recent years on WD, on the economic diversification side. Those may or may not be fair. I haven't personally done that research, so I can't comment on that.

    My concern is that if we were to say, “We don't like the economic development model any more, let's cut it”, the federal presence in western Canada would be lost. That's why I'm suggesting we start reconsidering the mandate and role of WD. I think there is a need for a western presence. It's been nicely developed through the regional office, and I would hate to see it cut without some consideration of that regional voice.

    Mr. Charlie Penson: Thank you for that explanation.

    The Chair: Mr. Pillitteri, you have the last question.

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair.

    I'm going to be asking a couple of questions off the top of my head, since I've been here long enough to remember a lot of these presentations.

    I like the scenario about the Irish and about the people coming out of university, getting a bus or an airplane ticket, and going to the United States. The question I want to ask you is this. You see, I have a family, and I have a son I wanted to send to school in Ireland since there was no possibility here in Canada for him to enter university. In the mid- or late 1970s, there was no room for anyone who wanted to go to medical school or law school here, and Ireland is the one recognized by Canada for their degrees. Therefore, there were a lot of Canadians who went to be educated in Ireland, and then it became recognized in Canada.

    Do you have any statistics on how many Canadians went to get themselves educated and to pay for their education in Ireland? They were not part of what you call a brain drain, because they actually went there to get themselves educated. That's one question.

    Another thing I would like to say with respect to your presentation is that we know, for instance, that today almost 25% of our expenditure comes from the GST, which is 7%; it brings in some $20 billion. When we talk about taxes, how much is from personal taxes, how much is from corporate taxes, and how much is from payroll taxes? In the United States it is much higher. Can you bring those in columns so we can challenge everyone equally in what we do in restructuring the spending of our public projects? That's a question I'd like to ask.

    Mr. Knight, I was also a municipal politician in my earlier life, and we used to put money away for capital expenditures. Actually, a lot of times those municipalities that were more frugal accumulated quite a bit of money. Why is it that municipalities should not be held accountable when they create a budget every year where they know they're not going to raise taxes before they call a municipal election? In order not to raise taxes, they take some of that money from those capital budgets and put it into lowering the mill rate. In other words, they try to get re-elected.

    Do you think there should be some responsibility that once that money is put away and so on, it should not be used differently but should be used for the programs it was meant for? Then we could have infrastructure in the cities, whereas all of a sudden they use that money and say, we really have no money to go into an infrastructure program.

    You see, this is two-pronged. I would like to have your answers on that.

Á  (1140)  

    Mr. Fred McMahon: First, no, unfortunately, I don't know how many Canadians go to school in Ireland. I can tell you I had a delightful conversation on the plane back from Ireland with a young Canadian medical student, so I know there's a minimum of one.

    As for the tax breakdown, those numbers are readily available, but I'm afraid I don't have them. Once again, you're missing Jason, who could count them off for each province, city, and territory. But it is important to try to keep the whole tax burden simple. A consumer tax, the GST we have, is a nice, simple tax. We should look at flat taxes throughout our economy and at where we can get them. But, no, I can't provide the specific breakdown.

    Mr. Gary Pillitteri: I'll just follow up on that before Mr. Knight answers. What is the value-added tax in Ireland? Make a comparison. You have to also give us the value-added taxes you mostly have in European countries.

    Mr. Fred McMahon: I'm sorry, I just don't remember the value-added tax in Ireland.

    Mr. James Knight: Thank you for your question about municipal reserves and their use for short-term political purposes. Of course, municipal governments and municipal councils have to be held accountable for the public moneys they spend. I think fundamental to this problem you identify is the inadequacy of the property tax. It's the only tax that comes as a bill in the mail. I know exactly what my property tax is, but I have no idea how much I paid in GST. I don't have a clue. I have no idea what I paid in excise tax, and I have no idea, frankly, what I pay in income tax, although I might have learned a bit today.

     Property tax is highly visible and therefore it's a highly charged tax from a political perspective, from a re-election perspective. It's very difficult for local politicians to increase property taxes, because the next candidate is going to come along and say, well, my platform is to reduce them. Because they're so visible and because it arrives as a bill in the mail, there's political vulnerability.

    That's why we say that overreliance on property tax is a liability. That's why in other countries municipal governments rely to a much smaller degree than Canadian municipalities on property taxes, because property taxes are a very tough instrument. They're regressive. Seniors living in older areas where values have gone up can be forced out of their houses in some cases. It's a very tough tax for politicians to implement. It's an important tax and it's a valuable tax and it should be a significant part of the municipal revenue equation, but in some cities it's up around 80%, and that's far too high. There has to be access to taxes like excise taxes or income taxes or sales taxes, which are less politically sensitive. That's our case.

Á  (1145)  

    The Chair: Mr. Penson, go ahead.

    Mr. Charlie Penson: I want to ask Ms. Berdahl if she would send a copy to the committee of the study she was talking about that separated western Canada out of the national equation in terms of--

    The Chair: Okay. If you send it to the clerk of the committee, we'll have it distributed to all of the members.

    Thank you very much on behalf of all the members. We had eleven of us out today. I'm glad all of us will receive this information; we'll distribute it to everyone.

    We are adjourned.