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Second Global Report on Decentralization and Local Democracy. GOLD 2010 EXECUTIVE SUMMARY
government services wherever possible. But, services can only be priced when nonpayers can be excluded from consuming the service and should only be used in cases where a marginal cost is associated with each additional user. These factors suggest that user fees apply best in cases where the local government services have some characteristics of goods and services provided through the private sector. Water, sewerage, electricity, solid waste disposal, higher education and urban mass transit are among the services that can be substantially or totally financed with user fees. U.S. local governments generate 25.7 percent of their own source revenues with user fees and charges and 35.0 percent when local public utilities are included. Canadian local governments raise a similar 25.6 percent from user fees.
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Reduce the over-taxation of business. There is no economic justification for the high taxation of businesses either through the property tax or the sales tax. Local governments should reduce the property tax burden on non-residential properties to be more closely related to the benefits received from local services. Of course, a reduction in property taxes on nonresidential properties will necessarily mean an increase in taxes on residential taxpayers. To minimize the impact on residential taxpayers, a phased implementation is suggested along the lines of what is currently being done in cities such as Vancouver and Toronto. Although some states in the U.S. have exempted certain business input purchases from the sales tax and some provinces have harmonized their sales tax with the federal GST in Canada, many states (and some provinces) still need to eliminate the sales tax on intermediate transactions.
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The erosion of property and sales tax bases must be reduced or eliminated. Property and sales tax base erosion have resulted from a number of factors including political decisions (either at the state or local level) and underlying economic trends that lower the taxable bases relative to economic growth. The result is either declining revenues relative to the economy or higher tax rates to maintain revenues. Higher rates and narrow bases increase the distortions arising from the taxes and declining revenues could result in under production of local public services. The best approach is to keep the bases broad to the maximum extent possible.
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Local public services should be priced properly wherever possible. Local public services should be priced wherever
Conclusions Five suggestions are made in this chapter: •
Canadian cities need to be provided a richer mix of tax options. Revenues from a broader mix of taxes would give Canadian cities more flexibility to respond to local conditions such as changes in the economy, evolving demographics, and expenditure needs. Other taxes are more effective than property taxes at linking the costs and benefits of services when people commute to work from one jurisdiction to another. In principle, an income tax ‘piggybacked’ on the federal or provincial tax with locally set rates has clear advantages in terms of local autonomy, accountability, and revenue elasticity, but there are obviously some problems in imposing such taxes at the local level. Selective sales taxes, used by some municipalities in Canada, could also be extended to all municipalities.
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