Recent Related Studies & Reports

Globalization, Competitive Regionalism and Municipal Tax Sharing

Professor Paul G. Thomas
Political Studies
University of Manitoba
St John's College
92 Dysart Rd
Winnipeg, MB R3T 2M5
Tel: 204 474 8116
Fax: 204 474 7619 or 474 7610
Email: PGTHOMAS@cc.umanitoba.ca
July 2002

Draft, not for quotation. This paper represents the opinions of the author alone. Draft, not for quotation.

I  Introduction

The term "globalization" refers to the emergence of an international economic system in which money, goods, services, corporations and people move more freely, constantly and almost instantaneously from place to place. During the initial discussions of the globalization phenomenon, it was often asserted that time and place no longer mattered in the new world of global commerce. Contrary to the early predictions, however, the dispersal of economic activity encouraged through trade liberalization and the emergence of new networks of information and communications technologies has not eliminated the importance of geography. National borders matter less in terms of the rapid movement of investment capital and products. Place is still important, however. The "knowledge" industries of the future look for different assets or attributes of communities than did the "smokestack" industries of the past. Resource availability and transportation links, for example, have become less important, while "social capital" features, like universities and cultural institutions, have become more important in location decisions for more "footloose" firms and their mobile workforces. Cities and regions able to attract creative and technologically sophisticated people will do well in the future and this requires a "cluster" of complementary firms, non-profit organizations, supportive governments, cultural amenities and community involvement through rich networks of interaction.

By reducing (but not eliminating) the importance of time and space, the trends towards a globalized marketplace have increased competition among countries, regions and local governments for scarce investment dollars, dynamic industries, high-tech jobs and the skilled knowledge workers of the future. Local governments and regions in Canada, Europe and the United States have attempted to secure their economic future by becoming more entrepreneurial in their outlook and activities. Many local governments devote significant resources to compete with other localities in order to attract new companies, to encourage expansions and to retain companies that are contemplating relocation.

This paper represents a selective survey of the vast literature on globalization, the rise of so-called city regions and the implications for municipal reforms, particularly in the Canadian context. The main concern is whether the pressures of globalization require fundamental reforms to the governing structures of metropolitan regions through processes of annexation or the consolidation of municipalities. What are the alternatives to some type of amalgamation? Given the political sensitivity and difficulty of achieving major structural changes, what are the potentials and limits of voluntary councils of governments as regional governing mechanisms for city regions? Do service sharing and revenue sharing represent viable ways to achieve successful regional governance without creating formal regional governments? In particular, what is the experience in Canada and the United States with tax sharing? Are there lessons to be learned about the value and the political feasibility of this type of mechanism to promote greater cooperation among governments to achieve well-managed, sustainable economic growth within the Capital Region of Manitoba?

In answering these questions, the paper starts from several assumptions. First, there is no model of municipal tax sharing that is right for all regions. The historical, legal, financial, economic, geographic, cultural and political circumstances of a region and of the governments that comprise it will influence whether tax sharing is desirable and politically feasible. Second, tax sharing is not a panacea, but it may be a practical way to enhance economic success and to promote a regional outlook. Third, the main obstacles to tax sharing are political, rather than technical in nature. However, the political challenges involved with the achievement of tax sharing are likely to be less than annexation or amalgamation.

II  The Wider Context

Globalization refers to both the process and the condition of the emergence of a dynamic, integrated world economy. Financing, investment, trade and corporate decision-making have become more international in scope. New technologies of information processing and telecommunications have contributed to the process of globalization. Most national governments have supported the process as the key to economic prosperity and have contributed to the emergence of a global marketplace through their participation in trade liberalization deals like NAFTA. International institutions like the World Trade Organization, the International Monetary Fund and the World Bank have taken on more importance because of the market-oriented policy reforms they promote. National income, employment, rates of growth and interest rates are more deeply affected by the international economy than was true in the past.

New constraints are placed on the policy choices of national governments; they no longer exercise the same degree of control within their borders over the major levers of economic and political life as they did in the past. It has been argued that globalization is eroding the powers of national governments. They are said to have become too small for the big problems of economic and political life and too big for the small problems. Within Canada, dealing with "the fallout" from globalization has been mainly a provincial and local responsibility. In part, this is because these levels of government have control over the policy fields where the adjustments to the impacts of globalization are felt most-education and training, labour markets, science and technology, the environment, the new cultural industries, etc. Also, during the 1990's, reduced policy leadership and financial support from the Government of Canada placed addition pressures on provincial and local governments to cope with the impacts of globalization, both in terms of attracting industry and making the related economic and social adjustments within their own communities.

As national borders diminished in importance, regional locations became increasingly the focal point for economic activity. What have been called "metropolitan regions," "city regions," "citistates" and "region states" have become "the relay point" or "gateway" of national economic space, linking the local to the national and to the international economic processes. In his 1993 book, Citistates, Neal Pierce described the new regions as follows:

The inescapable openness of each citistate covers a breathtaking range. Environmental protection, economic promotion, workforce preparedness, healthcare, social services, advanced scientific research and development, philanthropy—success or failure on any one of these fronts ricochets among all the communities of a metropolitan region. No man, woman, family or neighborhood is an island.

Pierce argued that citistate divided against itself will prove "weak and ineffectual" in the face of the new economic realities.

Similar views were expressed by Henry G. Cisneros and Marc A. Weiss in their book, The Wealth of Regions and the Challenges of Cities (2002):

Even a cursory look at the new economy reveals that metropolitan regions have become the fundamental building blocks of national prosperity and improved quality of life. The dynamic industry networks that are driving economic growth operate regionally in all these facets-production, research, labor, supply, sales and distribution. The fates of urban, suburban and outlying communities are inextricably linked by the metropolis which cuts across city and country boundaries. We must act regionally because businesses do. When they make decisions to locate or to expand a facility, they look at the entire metropolitan area-its transportation and infrastructure, its workforce, its educational and cultural institutions, its environment and amenities and its existing industry networks.

Acting regionally, does not necessarily require regional government or amalgamation.

Metropolitan regions present a range of assets to potential investors and developers:

Industries are fed by a variety of sources, including raw materials, sophisticated transportation, a skilled labor force, research facilities and an environment that can incubate new jobs. Standing alone, neither cities nor suburbs can provide the airports, universities or land to harness these resources. Working together, these generative assets can be combined and coordinated to produce new products or offer something to a world that values technology, information and managerial direction. Like it or not, therefore, localities must find ways to collaborate on policy, planning and development. (H.V. Savitch and R.K. Vogel, Regional Politics in a Post-City Age, 1996)

Economic growth is now based on "regional clusters" of related industries and a supportive environment of governmental and non-governmental institutions.

In his recent, acclaimed book, The Rise of the Creative Class (2002), Richard Florida argues that people who work at highly creative jobs-scientists, engineers, architects, software developers, artists, etc.-have become the driving force of the "new economy." These people are starting the businesses of the future and attract others to locate where they are found. The factors which influence the location decisions of the creative class are:

• a "deep" labour market with opportunities to change jobs
• numerous "third places"—venues other than home or work, such as bookstores, universities, cafes, etc.—where they can connect to other people
• authenticity—cities with a sense of history and genuine neighbourhoods and an environment that supports recreation
• diversity, tolerance and openness to new ideas.

For people in the high-tech, creative industries, "quality of life" involves more than higher incomes and material possessions. Florida's book emphasizes the importance of "social capital" in addition to "financial capital") as a source of regional economic advance. Rich networks of interaction and bonds of social cohesion among different elements within a community are crucial to the generation of social capital. Whether social capital is generated spontaneously by communities or whether governments can contribute to its creation is an ongoing debate within the literature. (See Vivien Lowndes and David Wilson, "Social Capital and Local Governance: Exploring the Institutional Design Variable" [2002])

Several recent studies suggest that building healthy and vibrant communities is less about formal governmental structures and more about building relationships. However, excessive governmental fragmentation and political divisions within a metropolitan region will probably inhibit the emergence of social capital and may weaken the capacity of a region to compete economically. Certainly many business leaders in the United States complain about working through the maze of jurisdictions surrounding major cities. Speaking to the Cincinnati Chamber of Commerce in 1997, William Barleigh, C.E.O. of E.W. Scripps, observed that political fragmentation meant that many business people regarded the Cincinnati region as "a divided and bickering place where decisions…seem to be hopelessly entangled in public-private gridlock." (Quoted in "Dare to Share: A Review of Tax-Revenue Sharing in the United States," A report from the Ohio Chapter of the Sierra Club, March 2001, Pg. 1.) With 243 political jurisdictions in the greater Cincinnati area, it is not surprising that the region lacked a shared sense of direction and internal cohesion. Multiple governments are the pattern around most cities within the United States. Chicago, for example, has more than 400 governmental units within its region.

The Capital Region of Manitoba comes nowhere close to the extent of political fragmentation found around Cincinnati or most other major American cities. Manitoba's Capital Region is comprised of sixteen municipalities, but there are other types of government bodies operating within the region, such as school districts, regional health authorities, planning districts, conservation districts, economic development regions and administrative districts for the various public programs delivered by departments of the provincial government.

Streamlining local government structures in the United States is more difficult than in Canada because state governments cannot (due to constitutional protections for "home rule") or will not (due to political traditions of local autonomy) act without local approval, which has usually not been forthcoming. In contrast, Canadian municipalities are legal creatures of the provincial government. Therefore it has been easier in legal terms to experiment with two-tier structures, annexations and consolidation of municipalities. The key point for this discussion is that: the greater difficulty of streamlining jurisdictions and the resulting greater degree of political fragmentation of metropolitan regions found in the United States has led to more reliance upon different forms of inter-jurisdictional cooperation to promote regional economic prosperity and to achieve cost saving for governments. There has been less pressure for such regional collaboration in Canada.

Economic hard times and advancing globalization during the early 1990's put pressure on many local governments to do more to attract capital and jobs to their area. Some measure of competition among local communities is obviously desirable; it can lead to investment, new firms, higher incomes and economic growth, which can benefit entire regions, not just individual cities and municipalities. However, competition can be excessive and sterile if local municipalities adopt a "beggar-thy-neighbour" mentality and companies play jurisdictions against one another to maximize the subsidies they obtain. When companies have already made location decisions based on normal business criteria (access to resources, skilled workforces, telecommunications systems, etc.) the provision of subsides (land, property tax relief, direct grants, etc.) can represent a "windfall" profit for the owners and shareholders. It can divert scarce tax dollars from higher priority areas of public spending. Economically prosperous and more affluent communities have advantages in competing for businesses with the result that excessive competition can widen the financial and service disparities among local governments.

A Minnesota study released in February 1999, examined the results of financial incentives to businesses offered by local, state and the national governments. It found that:

• 123 deals cost more than $35,000 per job
• 38 of the deals cost more than $100,000 per job
• about 60% of the jobs offered wages 20% below local averages.

The advice of the study was that governments could reduce their costs and maximize their benefits by following more uniform approaches that tied incentives to standards. They also recommended that more emphasis should be placed on creating a favourable, general business climate, rather than negotiating individual deals. The study recognized, however, that no local official wanted to lose a high profile deal because tax support or other types of assistance to a prospective new business could not be found.

"Competitive regionalism" is a concept that has recently come into the literature to describe a way out of the dilemma that local governments are forced to compete, but they must avoid the drawbacks of excessive competition. According to Linda McCarthy, "Competitive Regionalism: Beyond Individual Competition" (A Study done for the USA. Economic Development Administration, 2000), the concept involves collaboration among local governments, private and nonprofit bodies, working with higher levels of government, to focus economic development efforts with the aim of securing the full potential benefits for a metropolitan region. "Regional cooperative efforts," writes McCarthy, "may have the potential to reduce wasteful competition, promote more productive spending of public resources and allow cities to achieve results collectively that they could not accomplish individually." (McCarthy 200, Pg. 2)

Similar ideas about the necessity and advantages of thinking and acting on a regional basis are found in a recent Canadian study. In "Why Cities Matter? Policy Research Perspectives for Canada" (Canadian Policy Research Networks, 2002). Neil Bradford offered the following 21st century vision for Canadian cities:

Community-based regionalism envisions urban places where everyone is on the same 'map'—city and suburb, business and labour, social movements and citizens, local politicians and planning experts, and provincial and federal representatives. Regional strategies are necessary because the city's problems of urban sprawl, air and water pollution, social polarization and spatial segregation, transportation gridlock, and decaying economic infrastructure will only be solved at this scale of action. Equally important, however, they must be 'bottom-up', informed and structured by input from the neighbourhoods where people live, where community organizations work, and where vital policy intelligence resides. In this vision, strategic priorities include: regional tax equity, uniform levels of public service, and cooperation across municipalities in planning for ecosystems and economic development, which also integrate 'cluster building' with skills formation in local labour markets.

There is both a "top down" and a "bottom up" component in this version. Governments are no longer as central to and dominant in the process of setting directions for local communities. However, they need to play a role in ensuring that a vision, sense of direction and strategies emerge from within the community. Their role is more facilitative than directive. "Governance" replaces government. It involves sharing power, the creation of formal and informal networks of interaction, more open and responsive flows of information and intelligence in all directions, decision-making on multiple levels and across multiple sectors and dynamic changes. This more complicated and kaleidoscopic approach to agenda setting recognizes that governments do not have a monopoly on the knowledge, skills and capacity to achieve economic and social improvement.

The key point of the above discussion is that regionalism does not require the formation of another level of government. Building prosperous and healthy communities is less about structure and more about building positive relationships. Relationship building is key to overcoming political divisions and sterile competition. A regional consensus-building exercise in the United States reached the following conclusion:

Regionalism is the coming together of the regions' leadership, resources and citizens around a shared agenda for improving the economic vitality, the standard of living and quality of life in our region. It is the taking of collaborative actions of regional benefit which cannot be taken as effectively or efficiently within individual jurisdictions.

Depending upon the history and contemporary circumstances of a region, there may be more or less readiness to adopt regional perspectives and actions. It may take a crisis, creative leadership or both to begin the process of forging a regional consensus.

In addition to responding to the competitive pressures arising from globalization, calls for municipal amalgamations claim to offer significant cost savings. This is a highly contentious topic, on which the empirical evidence is mixed. Mergers may reduce the number of elected politicians, but salaries of municipal officials are a tiny percentage (less than one percent in one study) of total spending. Furthermore, empirical research shows that economies of scale are negligible when it comes to most municipal services. The exceptions are specialized services and those that require important capital investments (like water treatment plants). Having reviewed numerous studies, Robert Bish (University of Victoria) concluded that "there is overwhelming evidence that the least expensive local governments are found in polycentric systems of small and medium-sized municipalities that also cooperate in providing those services that offer true economies of scale. Large municipalities do not seem to be as capable of cooperating in this way, of decentralizing their services, or of using alternative delivery mechanisms for services that lack economies of scale." [Robert L. Bish, "Local Government Amalgamations: Discredited Nineteenth-Century Ideals Alive in the Twenty-First Century" (C.D. Howe, 2000)] Bish's preference is clearly for the political equivalent of an economic marketplace, namely, a dispersed system of independent local governments who are free to enter into service and tax-sharing agreements with neighbouring municipalities if local politicians judge this to be in the best interest of their taxpayers. A key point in the above quotation is the fact that less costly local governments are found where there is significant regional service provision. It should also be noted that deciding whether bigger or smaller local government are better depends, not only on calculations of economic efficiency, but also on how political values like inclusiveness, equity, responsiveness and accountability are expressed within governing arrangements and practices.

As a summary of this section of the paper, the following points can be noted:

• cities, suburbs and surrounding communities are part of a complicated, interdependent and dynamic regional process, whatever the form of governmental structure that exists
• city regions are becoming more important economically
• successful regions depend on both investment and social capital; the latter originating rich relationships and bonds of social cohesion
• creative talent is attracted by quality of life, diversity, tolerance and the quality of governance
• good governance will increasingly involve shared power involving a wide range of government and non-governmental institutions and actors
• regional cooperative efforts cannot influence all the factors that contribute to economic growth; structural and process features of local government pale in importance compared to such factors as population, labour force characteristics, financial services, geography, etc.—all things that local governments can do little to change.

While realism requires a recognition of the limits of different kinds of actions, governments can marginally improve the economic prospects of their communities by working together and with their stakeholders.

Local governments in Canada have increasingly recognized the potential advantages of regional collaboration. Many cities have adopted "competitiveness strategies." A few have worked with adjoining municipalities. In 1999 an Ontario Competitive City Regions Partnership (OCCRP) formed to promote "strong linkages and dialogue between business, government, education and community leaders to generate innovative approaches to developing competitive city regions and action plans to galvanize community commitment. Through the Partnership's activities, the provincial and federal governments are looking for new avenues to support local strategic change." (OCCRP Home Page) Similar partnership approaches are being used in cities like Edmonton, Halifax and Montreal.

The Winnipeg region faces an uphill battle to compete with larger more affluent regions. According to the 2001 census, 51% of Canadians lived in four regions: the Golden Horseshoe around Toronto, Montreal and its regional communities, Vancouver and B.C.'s Lower Mainland and the Calgary-Edmonton corridor. These four regions grew faster than the country as a whole, with a jump of 7.6%, compared to only 0.5% for the rest of the country. As magnets that attract people, investment, jobs and services, the big four are becoming the dominant centers of economic, technological, cultural and political power in Canada. For the 1996 to 2001 period the Winnipeg region grew by only 0.6%.

III  Regional Governance Without Regional Government

There is persuasive evidence in the literature that achieving regional economic advantage, along with cost efficiencies in municipal service delivery, does not necessarily require fewer governments. Moreover political consolidation by means of annexations and amalgamations can be costly actions in terms of heightened political conflict and lasting divisions within the larger communities they create.

Achieving a regional approach to governance, involving a variety of forms of inter-municipal cooperation, is not without its difficulties, but involves fewer obstacles than the creation of two-tiered metropolitan structures, annexations or the merger of municipalities. Not surprisingly, individual municipalities do not want to lose their identity or their independence. However, their willingness to consider various types of regional collaboration will depend on their history, current circumstances and the form of inter-municipal collaboration being proposed. The greater the number of governments involved the harder it will likely be to achieve agreement. Regional arrangements have tended to be adopted in the United States in places with prosperous, growing suburbs and a declining inner city. Also, state government leadership has often been important to the initiation of regional programs like tax sharing. In some instances, additional financial resources have been used by state governments to induce local governments to enter tax-sharing programs. An interesting question is whether regional consciousness must exist first to make regional collaboration feasible, or whether institutional and financial reforms can promote regional thinking and behaviour, or whether both attitudinal and structural changes can/must occur simultaneously.

David Miller (a former city manager and Dean of the Graduate School of Public and International Affairs, University of Pittsburgh) wrote an article titled "Fiscal Regionalism: Metropolitan Reform Without Boundary Changes," Government Finance Review, December 2000 (Pg. 2-6), that identified several strategies for attracting business and promoting regional partnerships. "Fiscal regionalism is a set of cooperative strategies that recognize…the existing configuration of local governments but create regional funding mechanisms for a wide variety of public purposes." (Miller, Pg. 3)

Miller's perspective recognizes the important connection between the seemingly separate policy decisions of local governments with respect to economic development, taxation policy and land use planning/regulations. The amount of revenue that a local government can generate on its own depends largely on the value and types of land use within its jurisdiction. Commercial, industrial, agricultural and residential land use produce differential tax yields from property and other forms of taxation. Local governments in Canada rely very heavily on property taxes. In the United States according to a 1996 study, property taxes accounted on average for 74% of local tax revenues, with sales tax accounting for 16% and personal income taxes for five percent. Heavy reliance upon property taxes limits the "fiscal policy" (taxes and spending) decisions of local governments in both countries.

Local governments have a strong incentive to develop a land use plan that maximizes the value of property. However, different land uses imply different service requirements. Residential development, for example, requires roads, sewers, water, waste management, fire and police protection, schools, libraries, social services and other services. Moreover, different types of residential development require different types of services and produce different levels of revenues—for example, multiple low-income housing versus large-lot, expensive homes. Not all of these services are paid for by local government; often state or provincial financial support is involved. Similarly different types of commercial, industrial and agricultural activity produce different revenue yields and service requirements. A purely "rational" approach for a local governments would be to allow or to pursue development that generates a "fiscal dividend," i.e., a surplus of revenues over expenditures. In a fragmented, metropolitan region, local governments may compete with one another, mainly through land use regulations, to achieve a fiscal dividend. They are under no legal obligation to consider impacts on neighbouring municipalities or on the region as a whole. The availability of provincial subsidies to industries and financial support for both infrastructure and services creates an incentive for municipalities to let other governments cover the indirect costs of their development decisions.

The above discussion implies a simplified and seemingly straightforward model of local decision-making in which municipalities calculate precisely and in a narrow, parochial manner the costs and benefits of different kinds of development, including the political benefits of securing a new housing development or new business. There are however, at least two problems with this model. First, it implies more perfect knowledge on the part of local decision-makers than actually exists in most instances. Usually, reliable information on the short and long-term costs and benefits of a proposed development are not available and, even if such analysis exists, there is no guarantee that it will be used because most developments seem to symbolize progress for a community. Secondly, it is wrong to assume that local politicians are always parochial in the outlook and short-term in their thinking. At times they will consider, or will be forced by other pressures to consider, the wider and long-term implications of particular developments.

IV  Municipal Tax Sharing

Tax sharing represents one practical way to promote regional thinking and acting. With tax sharing, a portion of each locality's tax revenues is contributed to a regional pool and redistributed according to some criteria other than the locality's original contribution to the pool. The details of a tax-sharing program will determine its overall fiscal impacts, the degree to which it is re-distributive and the extent to which it is politically acceptable to the various governments involved. The tax sources covered can be limited to a particular tax (e.g., commercial-industrial property tax) or it can cover more than one tax field (e.g., property and sales taxes). A local government's contribution can be set as a percentage of the incremental growth in tax revenues beyond a base year or as a percentage of the current tax base. Distributions from the regional pool can be based on number of criteria—per capita, tax capacity, fiscal need, land use decisions, etc. Most tax-sharing schemes involve a small number of governments. The only tax-sharing program for an entire metropolitan region in the United States is Minneapolis-St Paul (which is discussed below). All tax-sharing programs are meant to balance regional goals with local autonomy.

Because it reflects the close relationship between land use policy and taxation policy, tax sharing can been used to pursue a number of potential aims:

• as an alternative to annexation
• to enable a region to compete for industrial/commercial development by reducing inter-municipal competition
• to promote regional outlooks and regional strategies
• to promote "smart growth" and to control sprawl
• to deal with fiscal disparities among local governments and to improve the quality and comparability of services
• to assist those communities in the early stages of development or in decline by allocating additional revenues to them
• to address the over reliance upon property taxes, especially when upper levels of government allow additional tax room (e.g., sales tax, income tax, gasoline tax, etc.) to be occupied by local governments.

How well each of these potential aims is served by a particular tax-sharing program will depend on what taxes are shared, what percentage of the revenues are shared and what is the basis for redistribution.

Because tax sharing is a relatively recent development, there are not good empirical studies of how well it serves these multiple aims, not all of which may be compatible in practice. Cases of multi-party tax sharing are particularly rare. Also, tax sharing is less popular in Canada than in the United States. The constitutional and financial circumstances of local governments in the two countries are not the same. Documenting claims made on behalf of tax sharing is difficult; therefore.

There are a series of potential arguments against tax sharing:

• an attachment to freedom of choice for individuals and businesses that should not be constrained by tax rules
• concern for the autonomy of local government
• the perception that there is no need to redistribute tax revenues, because local governments have the financial capacity to provide basic services
• the perception that local governments do not have "surplus" revenues to share both because they are basically limited to property tax revenues and because of "cutbacks" in transfers from senior levels of government
• fear of the "Robin Hood" principle, that tax sharing will "steal" from the "rich" municipalities who are more entrepreneurial and efficient, and give to the "poor" municipalities who lack aggressiveness in pursuing development and fail to maximize their tax revenues or control their costs
• lack of knowledge and understanding of the issue of tax sharing and the fear of the uncertain
• loss of accountability because the government that approves expenditures will not necessarily be the same government that increases taxes to cover that spending
• the general "climate" of a lack of regional consciousness, limited acceptance of regional approaches to problem solving and even mistrust of the motivations of the people who propose tax sharing.

The fact that municipal tax sharing is not more widespread throughout the United States and Canada suggests that the above list represents a powerful set of obstacles, especially when multiple governments are potentially involved.

Not all the technical or substantive arguments against tax sharing are persuasive. The choice of the three main design features of a tax-sharing program—what taxes are covered, how much tax revenue is shared and how the money is distributed—can be used to address some of the objections. For example, rather than threaten local autonomy, tax sharing, especially if it is implemented on a voluntary basis, can be used to avoid annexation or amalgamation. Similarly, fears that tax sharing will penalize "efficient" municipalities and be re-distributive in its impacts can be addressed by limiting the amount of revenues available for distribution from the regional pool, by incorporating a measure of "tax effort" to avoid rewarding jurisdictions that under-tax their residents and by adopting a rule that no participating government will be worse off financially after tax sharing. (This may require additional support from the state/provincial level.)

On the matter of loss of financial accountability, three counter arguments can be made. First, the principle that taxing and spending power should coincide is already widely disregarded in practice in Canada and the United States. Neither provincial nor local governments spend only the money they raise from taxes levied at their level. Both depend on transfers from other levels. Public finance arrangements in the provincial-local government field are already so complicated as to defy easy understanding. Surveys of public opinion reveal widespread ignorance and lack of understanding about who pays for what in the interdependent world of intergovernmental relations. Second, part of a tax-sharing scheme could be the publication of information about where money is raised, how it is spent and what results are achieved so as to allow for a greater measure of public accountability. Finally, although accountability is an important value it must be balanced and accommodated with such other goals as equity, financial stability and well-managed growth. Tax sharing is one of a number of policy tools used by governments to promote economic development, regional partnerships, "smart growth" and greater equality of opportunity for local communities and their residents. It cannot be looked at as isolation or judged on the basis of one value, even so important a value as financial accountability.

In summary, therefore, it is technically possible to design a tax-sharing program that balances a number of criteria. There will be trade-offs among different aims or values. For example, limiting the amount of revenues to be distributed under a tax-sharing program will allow for less progress in terms of reducing fiscal and social disparities among local communities.

V  Case Studies in Tax Sharing

The following section examines a number of tax sharing programs in the United States to illustrate the different purposes and approaches that have been developed. Four types of programs are examined:

• programs to reduce fiscal disparities (Twin Cities, Minnesota)
• programs to encourage economic development (Dayton, Ohio)
• programs designed to protect environmentally sensitive lands (New Jersey)
• programs designed to protect community assets (Denver, Colorado).

Individual programs may serve more than one public policy purpose.

The Minneapolis-St Paul Fiscal Disparities Program

This program was established under the auspices of the Minnesota Fiscal Disparities Act, 1971. The Minneapolis-St Paul program covers seven counties and about 300 local governments, including counties and school districts. Under the program, which uses a 1971 base year, municipalities contribute 40% of the growth above the base year in their commercial and industrial property tax base to a regional pool. A common tax rate is applied to the pooled revenues for the purpose of redistribution to the member municipalities. The distributions from the pool are based upon a formula that includes each municipality's population and the ratio of the average fiscal capacity of all the member municipalities to the fiscal capacity of the individual recipient municipality. The equation for the distribution is as follows:

Population of		Average Fiscal Capacity
	X	-----------------------------	=	Distribution
City/Town		City/Town Fiscal Capacity

If a municipality's fiscal capacity is the same as the regional average, its share will be equal to its population as a percentage of the entire area's population. If its fiscal capacity is above average, its share will be smaller. If its fiscal capacity is below average, its share will be larger. In short, the program aims to be redistributive. However, it covers only commercial and industrial property taxes and not residential property tax. Member municipalities retain 60% of the increase in their commercial/industrial taxes. Also, the program is based on relative "fiscal capacity" (the relative ability to raise revenues), not on "fiscal need" (the relative demand/cost for municipal services). A comprehensive description of the program, "Minnesota's Fiscal Disparities Programs, Twin Cities Metropolitan Area and Iron Range" can be found on-line at www.house.leg.state.mn.us/hrd/hrd.htm. More than 30 years after its passage, Minnesota's Fiscal Disparities Act remains controversial, as does the Twin Cities program.

The original legislation was enacted by the Minnesota legislature in 1971 (by a one vote margin in the House of Representatives), but did not come into effect until 1975 due to a court challenge that lasted four years. The impetus for tax sharing was concern about the imbalances in the distribution of commercial and industrial development. The underlying idea was to allow all cities in the regional to share in the revenues from commercial-industrial development, which was seen to result, to a large extent, from the regional market and public investments made at the regional and the state level. Since 1967 the Twin Cities had a weak form of regional government. It was called the Metropolitan Council which consisted of 17 citizens appointed by the Governor from the various districts comprising the Twin Cities. It gradually took over responsibility for planning and delivering major regional services, like sewers, airport policy and regional land use policies. The existence of the Council contributed to the emergence of regional outlooks. Lobbying by the nonpartisan Citizens League was also instrumental in building support for the concept of revenue sharing.

Thirty years after its adoption the Twin Cities program remains controversial. Annually there are bills presented to the Minnesota legislature to repeal the Act that authorizes the program. According to David Rush, Inside Game, Outside Game: Winning Strategies for Urban America (Brookings Institute, 1999): "By 1998 the annual fiscal disparities fund had reached $410 million, almost 30 percent of the region's total commercial-industrial property tax collections." (Pg. 240) The program has achieved its primary goal of lessening fiscal disparities. The gap in the commercial-industrial tax base between the have and the have not municipalities shrank from a fifteen to one ratio to five to one. (Henry Aubin, "Minneapolis: A Model for Montreal" Montreal Gazette, November 3, 1999)

Achieving greater fiscal equity cannot be done without redistribution, so there are perceived "winners" and "losers" under the program. In 1998 among cities, villages and townships, 137 were net recipients and 49 were net contributors. Wealthy suburbs in the Twin Cities contribute while older, first ring suburbs receive. The City of Minneapolis has fluctuated between giving and receiving, pulling in about $600,000 in 2000. In contrast, in the same year, the wealthy City of Burnsville (which challenged the original law) contributed nearly $4 million of its $31.7 million commercial-industrial tax base. Representatives of affluent areas argue there are other ways to level the tax-base playing field, such as the use of tax-increment financing to attract business.

Other critics of the program make different arguments. Some argue that to achieve greater equity the tax-sharing formula should also consider disparities in the costs of providing services. Since the program focuses on growth, it discourages communities from competing with each other for new business development. However, there is a differential impact on communities at different stages of economic development. A city that saw most of its industrial property development prior to 1971 will contribute little to the revenue pool, but will receive a payment from it. In contrast, a suburb that attracts new commercial or industrial development will pay into the pool.

Two of the leading urban experts in the United States disagree on the worth of the Twin Cities program. Myron Orfield, and member of the Minnesota Legislature, a consultant and an author, argues that tax sharing should be the first item on the regional reform agenda because it is the foundation for a political coalition between central cities and inner ring suburbs. It is an alternative to structural reform that can only happen when regional thinking becomes strong. In contrast, David Rusk argues that tax sharing is merely a palliative that has limited impact on sprawl and merely shores up the economic health of communities already in decline. (Inside Game, Outside Game, Pg. 329) In their book Peace Matters: Metropolitics for the Twenty-First Century (2002), Peter Dreier, John Mollenkopf and Todd Swanstrom draw the following conclusion: "Despite its early success, the Metropolitan Council has disappointed many of its supporters. It did not provide leadership on the major development issues of the 1980s. … Moreover the existence of the Council and regional tax sharing has not prevented the Twin Cities from becoming one of the most sprawled-out metropolitan areas in the United States. Minneapolis has actually fared poorly under tax-base sharing because the formula stresses revenue-raising capacity, which counts the City's booming downtown but ignores the spending needs generated by its relatively large poor population" (Pg. 190-191). This conclusion might suggest the limited structural reform (metropolitan government) and policy change (tax sharing), but reformers would argue that the Twin Cities' reforms were not strong enough to offset underlying economic and political forces that promoted competition and fragmentation among jurisdictions.

The Economic Development/Government Equity Program (EDGE)_Montgomery County, Ohio

The Edge program began in 1992 under a nine-year agreement. It was renewed for a further 10 years in 2001. The program is primarily an economic development tool that provides funds for infrastructure to increase the attractiveness of local communities to commercial enterprises. Areas that are successful in attracting new businesses and increasing their tax bases will be net contributors to the Government Equity (GE) Fund and will help slower growth areas. Currently all but one of the potential participating jurisdictions are members of the Edge Program. This includes 14 cities, five villages, and nine townships. The City of Dayton is the largest member.

A declining regional economy and municipal fiscal constraints was the original impetus for Edge. In 1989 Montgomery County increased its sales tax by 0.5% to a total of 6.5%. Seventy percent of the proceeds from this increase were earmarked for Economic Development (ED) Funds for the Government Equity (GE) portion came from participating jurisdictions. Contributions to the GE fund are based on a complicated formula that involves growth in income taxes, residential property taxes and increases in commercial/industry property values. (For details on the formula, see Final Report, Local Revenue-Sharing Methodologies, prepared by BBC Research and Consulting, October 30, 2001, Pg. 6.) There was a long political battle over the program, that included court challenges. Details of the formula were controversial, particularly the original proposal to use only property taxes, the increased value of existing property and later the inclusion of payroll taxes. (For details on the difficult genesis of the program, see David Rusk, Inside Game, Outside Game, Chapter 10.)

Each year $5 million is available for GE grants. Eighty-five percent of the fund is awarded to participating jurisdictions to establish or to expand commercial, industrial and research facilities. The fund supports mainly infrastructure to facilitate such developments. Ten percent ($500,000) of the fund is reserved for "special projects" to take advantage of newly emerging economic opportunities." The final 5% ($250,000) is reserved for "unexpected opportunities or threats that occur between funding cycles."

Grants are awarded by a county commission according to a set of selection criteria and on the basis of recommendations from an advisory committee representing governments and the private sector. The program emphasizes sectors with high growth potential. Special consideration is given to collaborative efforts that involve two or more communities or that encourage growth in areas already served by basic public infrastructure. The advisory committee discourages projects that would simply relocate business from one jurisdiction to another within Montgomery County.

David Rusk argues that given the region's fragmentation, Edge represents a significant accomplishment. By September, 1998 the program had gone through seven project-funding cycles and committed over $34 million to 152 projects. Projects have ranged from convincing General Motors to expand its truck and bus plant in Moraine rather than move it to Louisiana (65 new jobs and 3,500 retained jobs) to converting an abandoned store in Kettering into a Victoria's Secret phone-order center (1,000 new jobs). The Edge subsidy per job is approximately $1,400. Edge dollars have successfully leveraged additional public dollars for tourism, transportation and specific industry projects. Every $100 of Edge money has leveraged more than $400 in other public funds.

The GE Fund has had a modest redistributive impact because there is a cap on the contributions. "About a half million dollars a year in shared revenues is a tiny fraction of the total budgets of the 28 participating governments. (Rusk, Pg. 213) Moreover, the usual net contributors (wealthy communities) are protected by a last-minute compromise called the "settle-up" provision under which no jurisdiction will contribute more to the equity fund than it receives from the economic development. "Settle up" takes place every three years. The Ohio program is much smaller than the Twin Cities one because it involves only $1 per resident of Montgomery County per year compared with approximately $100 per resident in the Minnesota program.

According to David Rusk "the true value of the Edge program is that is has opened the way to an unusual level of intergovernmental cooperation in Montgomery County. Local officials cooperate constantly in the administration of the program in particular through service on the Edge advisory committee." (Rusk, Pg. 214)

Hackensack-Meadowlands, New Jersey

In 1972 New Jersey established the Hackensack Meadowlands Development Commission to develop a master land use plan for the Meadowlands district that encompasses all or part of 14 jurisdictions. Some of these municipalities had a great deal of developable land while others had a high proportion of sensitive wetlands or attractive potential parklands. Preserving these special areas would require some municipalities to sacrifice commercial development.

The Commission operates a tax sharing pool which seeks to ensure that each municipality receives a fair share of the taxes generated by new development and it seeks to lessen competition for development. With 1970 as the base year, the 14 governments contribute 40% of the local growth in tax revenue into a regional pool. Two types of payments are made from the pool. The first compensates communities for the school pupils living within the Meadowlands district boundaries. After the school payments have been made, the remaining revenues are shared among the 14 municipalities based on their proportion of the total land use in the Meadowlands district. In 2001 total revenues distributed were about $6 million.

Local municipalities were initially skeptical about the Commission exercising authority over land use decisions until they were assured that they would be compensated for the fiscal impacts of decisions to protect wetlands, parklands, open spaces and the creation of public facilities in some areas. This program is less about equalizing fiscal capacity and more a means of redistributing growth in tax revenues in a unique geographic area.

Denver: Scientific and Cultural Facilities District

In 1987 the Colorado legislature passed a law allowing a six-county region to create a regional cultural asset district. The Scientific and Cultural Facilities (SCFD) district was created in 1988 when voters ratified it by a vote of three to one.

The SCFD collects a tenth of a percent of sales tax. The funds are distributed to three tiers of cultural organizations: the "Big Four" (art gallery, zoo, botanical garden and science museum), the major performing arts organizations and the smaller cultural institutions.

The Big Four had lost state funding in 1982. The City of Denver and the County of Denver provided half of the funding for the Big Four. They were losing population and revenue to surrounding counties. Most of the visitors to the various art institutions were from the surrounding counties.

By 1999 SCFD had revenues of $33 million and distributed funds to more than 300 cultural institutions. The SCFD was scheduled to "sunset" in 1996 but voters extended its life through to 2006. A similar program the Allegheny Regional Asset District, operates in the Pittsburgh area based on a one percent county sales tax. In that program, half of the money supports regional cultural and recreational assets and the other half goes to local governments, based on a formula designed to benefit poorer municipalities.

There are many other examples of regional tax sharing in the United States. Most involve property and sales tax. Most have more than one aim. The five examples discussed above all present some interesting parallels to the situation of the Manitoba Capital Region. However, each regional situation involves some distinctive features and the next section of the paper seeks to identify those features in the Winnipeg region.

VI  The Relevance of Tax sharing for the Manitoba Capital Region

The Final Report of the Capital Region Review Panel (December 1999) observed that: "Tax sharing of future development in a region is beginning to be a feature of the municipal landscape." (Pg. 57) As examples, it cited agreements between the Town of Russell and the Rural Municipality of Russell and the City of Portage la Prairie and R.M. of Portage la Prairie. Authority for such tax sharing is found in the existing Municipal Act. (Section 259) The Review Panel recommended that both service and revenue sharing be made permissible, but voluntary under its proposed Regional Associations Act. (see Pg. 75 of Capital Region Review) Unfortunately, there is no extended analysis or discussion of the pros and cons of tax sharing in the report. The Review Panel seemed content to allow for the possible emergence of tax sharing within the Capital Region if and when economic circumstances and political willingness on the part of individual municipalities made it possible. Apparently, the Panel saw no need for a broader regional approach or for any provincial leadership on the issue. This stance was consistent with the overall direction of the Review Panel's report in favour of a decentralized, incremental, voluntary and consensual approach to growth management within the Capital Region.

By failing to discuss the relevance of various tax sharing models for the Manitoba Capital Region, the Review Panel missed the opportunity to provide practical advice and to serve the educational purpose of promoting wider knowledge of the issue. As indicated several times in the earlier analysis in this paper, tax sharing cannot do it all. It must be seen as one policy tool among a number of options available to governments to market a region, to promote smart growth and to reduce disparities among jurisdictions.

Multiple aims are often attached to tax sharing but these aims may not be entirely compatible in practice. Any tax sharing scheme must balance regional needs with local autonomy, economic efficiency with equity, etc. As noted above, a tax sharing scheme can be created in any number of ways depending upon the public policy goals being sought and the level of political support for such a program. There is no one model right for every community. The historical traditions, the present and anticipated future economic circumstances, the number of governments affected, their financial condition, the support of provincial governments and the existing state of regional thinking, are all factors that must be considered when looking at tax sharing options. The political challenges of achieving tax sharing are always greater than the technical challenge of designing a program.

What is the political feasibility of some sort of tax sharing for the Manitoba Capital Region? An answer to that simple question requires the examination of the distinctive features of the Region.

The most prominent feature of the Manitoba Capital Region case is the relatively small number (16 in total) governments involved compared to most major US city regions. Another key feature is economic importance of Winnipeg to the Region. The fact that Unicity was formed back in 1971 reduced political fragmentation in the Capital Region. Part of the thinking behind Unicity was to enhance Winnipeg's prospects in terms of economic development. Businesses looking to locate within the Region would no longer have to navigate through a maze of competing and sometimes conflicting jurisdictions. Whether in fact Winnipeg has benefited from political consolidation is impossible to determine with certainty. However, it is probably easy to exaggerate the significance of political structure alone as a factor in business decision-making. Likewise, it is impossible to know to what extent the Manitoba Capital Region today suffers economically from an image of political infighting and a failure to market itself on a unified basis. The risk entailed with prominent regional divisions is probably not the loss of particular business deals that go elsewhere, but rather a general lack of a regional vision and strategy to identify and to seize economic opportunities.

Tax sharing is often adopted to reduce inter-jurisdictional competition for business that is seen as wasteful of tax dollars. Some measure of competition among local governments is presumably healthy because it creates a dynamic for growth. What qualifies as healthy versus sterile competition is partly in the eye of the beholder. There is almost no evidence available on the extent, intensity and type of competition for business that goes on within the Manitoba Capital Region. What little evidence exists is usually anecdotal, like the stories of Wal-Mart playing off the City of Winnipeg against adjacent rural municipalities. Given the relatively smaller number of local governments involved, and the primarily rural/agricultural character of many of them, the competition for business is far less than in many American city regions.

"All things being equal," a business will locate in an area where taxes are lower, but all things are usually not equal when Winnipeg is compared to smaller population centers outside its boundaries. Winnipeg offers immediate access to infrastructure and amenities that smaller communities cannot provide. There is a limit, therefore, to how much tax sharing could create a level playing field among Winnipeg regional municipalities.

Tax sharing is also seen as a way to limit "urban sprawl." In part, this involves limiting competition for commercial/industrial development, but it is also intended to deal with the distribution of high value residential property. Most of "the sprawl debate" in the Capital Region has in fact, focused on rural residential development, especially the development of "high end" homes outside of Winnipeg. Like businesses, household location decisions may be affected by property taxes. Municipalities that are able to attract relatively high-value residential properties will generally be able to maintain a lower tax rate and still provide high quality services compared to concentrations of lower-value residential properties. The absolute number of people opting to build new homes outside of Winnipeg is not large, but Winnipeg is getting a declining share of new housing starts. Some outside communities (like Springfield and St Pauls) have been successful in attracting high-end housing. Competition for population and housing does not have the same payoff in terms of taxes as new business developments. Some residential developments actually cost municipalities more in service requirements than they pay in taxes. This explains why most tax sharing programs are limited to commercial and industrial developments. In conclusion on this point, if the real concern about sprawl is the dispersal of residential populations, most tax sharing programs do not address this issue directly, focusing instead on the business side of development.

The metropolitan region of Winnipeg experienced about the national average in terms of population growth during the period 1996 to 2001. It grew much slower than the four city regions around Toronto, Vancouver, Montreal and Calgary/Edmonton. Relatively slow population and economic growth might imply lower levels of competition among governments within the region. A contrary interpretation would be that governments would be more anxious to seize opportunities when they appear. Also, limited economic and population growth dispersed widely over a metropolitan region adds significantly to the infrastructure costs covered by local and provincial governments. As mentioned earlier, the level and nature of competition is not easily identified, making the case for tax sharing harder to prove.

There is not good public finance data on who pays for and who benefits from infrastructure and service delivery expenditures within the Capital Region. The absence of such data prevents a meaningful comparison of property tax data. It leads to allegations that low property taxes in certain municipalities reflect provincial and even federal financial assistance. Comparing service levels and service costs is also very difficult because of the lack of comparable data. Dealing with these information gaps represents a large conceptual and analytical challenge. However, in the absence of such data there can be suspicions and charges that some jurisdictions are receiving unfair subsidization and/or are not paying their "fair share" towards regional economic success.

Tax sharing is seen as a means to reduce disparities in the fiscal capacities and service levels (both quantity and quality) among municipalities within a region. Disparities in revenues and service costs can be due to a number of factors, including economic change and demographics. Measuring "fiscal capacity" is somewhat more straightforward and less controversial than measuring "fiscal need," which is inherently a more subjective, value-laden judgement. Any examination of the relative fiscal capacity and fiscal need of a particular municipality would require a comparison of its "tax effort" compared to that of other municipalities within a region. Presumably, it would be wrong to reward a municipality with transfers from a regional tax pool if the municipality was not utilizing all available tax sources available to it or had chosen to be well below the regional average rate of property, industrial or commercial taxes. There could never be perfect equality in the tax base per capita of communities, nor would it be possible to eliminate completely the disparities among communities' fiscal resources. Therefore, the real question is how much "equalization" is desirable and possible. Financial and economic analysis can help to answer this question, but ultimately it comes down to a political judgement. Unfortunately, there is little data on fiscal disparities among Capital Region municipalities to guide any such decision. Another obstacle to tax sharing within the Capital Region is the perceived lack of need for such measures. As suggested above, problems of competition for business and of so-called "urban sprawl" are not seen as serious as those found in the major US cities where ambitious tax sharing schemes have been tried. It is probably assumed that all local governments within the Capital Region have access to sufficient tax revenue to provide the basic services expected from a municipal government. At the same time, most municipal officials would probably argue that they do not have "surplus" revenues to share. Also, the rural municipalities probably see the City of Winnipeg as inherently less efficient in its operations and expenditures. The City of Winnipeg would point to its relatively low costs for major service compared to other western Canadian cities. It would argue that most local politicians outside of Winnipeg have no knowledge or appreciation of the wider range and more complicated nature of the services that must be provided in a major city like Winnipeg. Lack of knowledge and understanding of the various options for tax sharing adds to the perception of a lack of need for such measures and to resistance when a proposal is made.

Another argument against tax sharing is that alternative approaches are more attractive. Proponents of regional planning would probably argue that annexation represents a better response to the problems of economic competition, urban sprawl and fiscal disparities. Defenders of local governments and their autonomy would probably argue that tax sharing would reward the City of Winnipeg after it fostered sprawl within its boundaries and dug itself into a deep financial hole through over-spending during the 1990's. An alternative to either annexation of tax sharing is user fees paid by non-city residents and their "home municipalities" to the City of Winnipeg to cover the costs of libraries, pools, parks, etc. Adoption of full cost accounting for services delivered by the City of Winnipeg means that agreement on the true costs of a particular service would be easier to obtain and, in the event of a dispute, some form of mediation service could be provided through the provincial government.

As was seen in the earlier discussion of the American tax-sharing schemes, the "political price" paid by state governments to obtain the agreement of local governments was in some cases access to new revenues, such as a small percentage share of sales taxes. Canadian municipalities have been arguing for years that they are too dependent on property tax sources and need access to alternative revenue sources. Manitoba is unique among the provinces in providing its municipalities with a small percentage of personal and corporate income tax revenues on an unconditional basis. A percentage of sale tax collected within the Capital Region could be assigned to an Economic Development Fund to market the regions as a business location and a tourist destination. By ensuring that no jurisdiction would lose financially from tax sharing and stood the chance of benefiting economically from regional development, opposition to the concept could be reduced.

There is currently little evidence of regional thinking and regional action within the Manitoba Capital Region. Tax sharing might promote more of a regional outlook over time. An alternative approach would be to create a permanent, institutionalized regional association of government and allow for possible tax sharing programs to emerge out of that forum or the bilateral dealings between member municipalities. This would represent the slower, consensual approach favoured by the 1999 Regional Panel.

For more information contact capitalregion@gov.mb.ca