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by Daniel Gloade on September 23, 2013

There was a very interesting article in the Kitchener-Waterloo Record on 16, September, 2013.   The article is located here:

It states that Kitchener-Waterloo calculates the next year’s tax rate using the Municipal Price Index (MPI).   In essence, the tax rate is calculated by looking at the projected cost of the municipality’s expenses.  The cost of municipal wages seems to be the largest factor.  The price index is calculated by looking at the prices of other municipalities in Ontario.

This method is not widely adopted. According to an article at the Saskatoon Star Phoenix located at:  only Calgary, Edmonton, Ottawa and St. Albert Alberta use MPI in calculating taxes.

While I am not an economist, I feel that there is good reason why this system is not used.  Setting your tax rate by comparing it to other municipalities is effective as long as the other municipalities take active measures to keep costs down.  The more cities adopt the MPI, however, the more that tax rates are disconnected by the actual cost of running a municipality.

Here is an example.  What if one municipality increased its wages dramatically?  Using the Municipal Price Index, the tax rate of all municipalities will increase to accommodate this change.  The municipal government can argue that, although there is a tax increase, it is proportional to the taxes of other areas.  But what if the wage increase was too large?  The MPI does not put a check on unnecessary spending.  It legitimizes the increased spending instead.

While MPI may be a useful tool, there is no substitute for a municipal government closely examining how things should cost.

The City of Kitchener website has a graph showing how Kitchener’s tax rate is low compared to other Canadian cities.  While these comparisons are useful, they should be taken with a pinch of salt.

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