By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
In April 2011, the Canada West Foundation published and released The Penny Tax: A Timely Tax Innovation to Boost our Civic Investments. This report, which drew considerable attention across Canada, proposed a fresh, creative, and innovative tax reform to help cities with their huge infrastructure funding challenges, and continues to be widely discussed and debated. I find myself constantly fielding calls and questions on the report.
The idea behind the “penny tax” is to give voters in our cities the right to choose whether or not they want to impose upon themselves a local value-added sales tax—an additional 1% point of GST in their city—to fund specific infrastructure projects. This “piggy-backed” tax would come into effect only if voters approve the tax in a referendum, and approve the specific infrastructure projects to be funded with the revenue. These types of local, voter-approved, and earmarked taxes are quite common for counties and cities in more than a few US states.
Adopting the penny tax concept into the Canadian context has generated some significant reaction—both positive and negative. What begins here is a four-part series to explore the penny tax idea in more detail.
The Problem
A Macro Look
Most of Canada’s municipal infrastructure was laid down in the post-war years from 1945-1975. Because infrastructure has a limited life-span—about 50 years averaged across all asset types—much of our urban infrastructure needs renewal. New infrastructure is also needed to accommodate continually expanding urban populations.
In the 1960s, governments in Canada were investing about 5% of that nation’s GDP into infrastructure. By 2000, investment had fallen to 2%. The ratio of the public capital stock to the private capital stock has also declined—from a high of 42% in 1975 to 28% by 2003. The infrastructure funding gap in the municipal sector alone has grown from an estimated $12 billion in 1984 to $123 billion today, and that does not include an estimated $115 billion that municipalities need to accommodate growing populations.
All of this “macro” data gives us a broad sense of the infrastructure issue. More helpful are some “micro” data.
A Micro Look
Detailed municipal capital budgets drill into the details and represent thousands of hours of planning. Together, the seven large western cities estimate that in the next 10 years they require $63 billion in infrastructure investment. But funding is in place for only $21.5 billion, leaving a $41.5 billion funding “gap.”
To be sure, not everyone agrees with these numbers. Economists are divided on the size of the investments required. But, there is broad agreement that a gap exists, it is significant, and it is growing. What seals the deal for me is that the issue is global. Infrastructure is emerging as an issue right around the world. It’s highly unlikely that Canadian cities would be the singular exception.
Brad Watson, a partner with KPMG, noted that, “Infrastructure is undoubtedly one of the great universal challenges of the 21st century.”
In tackling the challenge, the Foundation has advanced a package of five reforms that were first presented in Framing a Fiscal Fix-Up and then expanded further in No Time to be Timid. One reform we suggested was to augment the municipal property tax with more robust tax sources that could be targeted specifically to infrastructure.
The Opportunity
Investment in public infrastructure is critical to the continued economic and social development of our large cities, our provinces, the western region as a whole, and the nation. Public infrastructure provides necessary support for private sector investment by lowering costs for business and increasing the rate of return to private capital. Of what use is a factory sitting all alone on the prairie with no roads, no rail, no electricity, and no water?
Canada is better positioned to address its public infrastructure challenges than most other western industrialized nations—especially when it comes to expanding the pool of funding.
1) Canada’s finances are relatively solid:
- According to the IMF, only Germany posted a smaller government sector fiscal deficit than Canada in 2011.
- Canada’s total government fiscal deficit, measured as a percent of GDP, pales in comparison to the US (registered at 9.5%), the UK (registered at 8.6%), and Spain (registered at 8.0%)—we won’t even talk about Greece.
2) Canada has seen substantial reductions in its total tax load over the past 20 years:
- As noted in the Foundation’s report Ready for Takeoff, Canada has seen some of the largest tax reductions in the OECD.
- In 2011, taxes for all orders of government totaled 31.4% of GDP. That’s down from a high of 37.2% in 1998. That equals a $100 billion reduction in the total tax load.
- Cuts in the GST can also be measured. In 2003, GST revenues peaked at 2.6% of GDP. In 2011, GST revenues were 1.9% of GDP. That reduction is worth $10 billion. Similar calculations for provincial sales taxes show a $5 billion reduction.
The Point
Across the long-term, Canada will not be as pressed—at least as much as other nations—to draw on tax revenues to close the deficit, cover interest, and repay accumulated debt. Unlike other nations, Canada has also benefited from large reductions in personal income tax, corporate income tax, and federal and provincial general sales taxes.
The point is that Canada has a measure of fiscal space—tax room—to start making serious headway on the nation’s infrastructure liability. Providing voters themselves with the option to employ that tax room is a viable policy option that we should consider.
When the federal GST was reduced from 7% to 6% in 2006, and reduced again to 5% in 2008, the Prime Minister was clear in an address to the Federation of Canadian Municipalities that Ottawa was not necessarily working to “reduce” the sales tax but to “vacate” the tax room for the provinces, enabling them to pick some of it up and use it for provincial as well as local needs. And, that’s exactly what the penny tax proposal is all about. Click here to read the Prime Minister’s address.
Big Problem Meets Small Solution
Getting a handle on an infrastructure challenge that runs into the billions of dollars requires more than just “tinkering” with the status quo or “piddling” around the periphery. Big problems require big solutions. Interestingly enough, a big part of Canada’s solution could come in the form of a small and seemingly insignificant penny.
But, let’s also be very clear here. I’m most certainly not arguing that taxes should rise back to the levels we saw in the 1980s and 1990s. There is virtual unanimity across the policy community that a tax-to-GDP ratio of 37% is too high, and I agree. However, could it also be that a tax-to-GDP ratio of 31% is too low, especially when considering the nation’s infrastructure needs?
Also, I’m not one to argue that throwing money at the infrastructure challenge is the solution. Enlarging the funding pool is part of the answer, but not the whole answer. New funding tools and mechanisms are best seen as embedded into a larger policy package that includes a stronger focus on core priorities, better pricing models for municipal services and infrastructure, and competitive service delivery options.
You may also be interested in parts II, III, and IV of the “1¢ Solution to a Billion Dollar Problem” series.
Related Readings
Harper, Stephen, the Right Honourable. 2006. Address by the Prime Minister on Commitments to Communities. A speech of Prime Minister Stephen Harper delivered at a June 2, 2006 meeting organized by the Federation of Canadian Municipalities. Montreal, QC.
Vander Ploeg, Casey G. 2011. The Penny Tax: A Timely Tax Innovation to Boost our Civic Investments. Canada West Foundation. Calgary, AB.
Vander Ploeg, Casey G. 2009. Ready for Takeoff: Bold Tax Policy Moves for a More Competitive Western Canada. Canada West Foundation. Calgary, AB.
Vander Ploeg, Casey G. 2004. No Time to be Timid: Addressing Infrastructure Deficits in the Western Big Six. Canada West Foundation. Calgary, AB.
Vander Ploeg, Casey G. 2002. Framing a Fiscal Fix-up: Options for Strengthening the Finances of Western Canada’s Big Cities. Canada West Foundation. Calgary, AB.
By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
A couple of weeks ago, hundreds of municipal officials and public servants met at the Queensbury Centre in Regina for the annual meeting of the Saskatchewan Urban Municipalities Association (SUMA). Saskatchewan has Canada’s fastest growing provincial economy, and the rooms were abuzz with growth-related issues like infrastructure and affordable housing.
I like getting out to these get-togethers. It’s a chance to leave the office behind, shake off the reading, the researching, the analyzing and the writing, and spend some time with those who live and breath public policy at ground zero. Of course, such invitations don’t come without strings. At SUMA, I gave a presentation about www.LetsTOC.ca. Click here to view the PowerPoint of the presentation.
I showed delegates some numbers that I developed from the capital budgets of the seven biggest cities in western Canada—Victoria, Vancouver, Edmonton, Calgary, Saskatoon, Regina, and Winnipeg. Over the next 10 years, the capital budgets show a combined infrastructure need of $63 billion but only $21.5 billion in secured funding. That leaves $41.5 billion worth of infrastructure investment—for new and existing assets—that is unfunded.
Sure, some dispute the numbers. Do the cities really need that much? Or, is this just a ploy for more grant funding? For sake of argument, let’s cut the number by half—a $2 billion funding gap. That’s still a lot of kingo.
The point is, the magnitude of the challenge requires policy-makers to embrace innovation as a guiding theme. This means thinking and doing things in new ways that are:
BIG …and… small.
A seemingly “small” or insignificant innovation that hits on a routine infrastructure investment—such as a regular maintenance procedure—has the potential to increase efficiency and productivity, and thereby, lower costs. Huge savings can accumulate because the infrastructure investment is undertaken year after year and in city after city. Over time, that means big savings that can then be pumped into completing more infrastructure projects.
A good example of this kind of innovative focus comes from a new initiative being played out in several Saskatchewan municipalities to design, test, and prove out a better and more efficient way to replace water service connections—a regular if not rather mundane maintenance procedure that goes on in cities across the world each and every day. The new approach—dubbed “End-to-End” Service Connection—is one of the key projects being financed and driven by Communities of Tomorrow (CT).
The idea is to reduce the amount of time it takes to repair or replace a local water service connection by designing a new type of excavation cage, pipe-winching device, and water shut-off valve. Just like arthroscopic surgery, the intent is to reduce the amount of digging and subsequent repairs to streets, sidewalks, boulevards, and property. When compared to the current method of service connection replacement, cost savings in the order of 40% could be achievable.
In Regina alone, there are almost 7,000 local water service connections that need to be replaced at some point in the near future. Possible savings could reach $15 million. If Regina’s situation reflects that of the other six big western cities, that $15 million adds up to $250 million in combined savings.
While the innovation itself is interesting enough, what’s more is the innovative process by which “End-to-End” got started and continued to develop. CT first held a series of discussions with the managers, leaders, and staff at a number of Saskatchewan’s cities. These “brainstorming” or “blue sky” sessions were intended to identify a list of common challenges to which the cities were seeking solutions—a sort of “wish list.” Repairing and replacing municipal water service connections floated to the top as a shared concern.
During these discussions, it was found that the City of Regina had pioneered a new “Super Winch” system, which was the key that opened the door to a completely new approach. CT pulled together a collaborative consortium to begin and develop the work. The partners in this consortium include staff from the Public Works and Engineering Departments of seven Saskatchewan cities, researchers from Canada’s National Research Council, the University of Regina, and the Saskatchewan Research Council, and instructors from the Saskatchewan Institute of Applied Science and Technology (SIAST).
The efforts of the consortium are geared toward developing and proving out a high efficiency version of the service connection system that can be deployed throughout Saskatchewan municipalities. The City of Regina and the City of North Battleford are participating as the “living labs” to demonstrate and test the new system.
Dorian Wandzura is the General Manager of Public Works for the City of Regina. He understands that these types of “small” innovations can generate “big bucks” in savings. “Small savings on each job in beijing can add up to significant dollars when that job is multiplied thousands of times over. This is a clear demonstration that an innovative approach can make a dramatic difference,” [1] he says.
John Wade, City Manager for Melfort, echoes the refrain. “Anytime that there’s a possibility of saving dollars for the taxpayer, and there’s ways to accomplish that, we’re behind it one hundred percent.” [2]
Back to SUMA. Delegates at the workshop where I presented on www.LetsTOC.ca were invited to fill out a short survey prior to the session. One of the questions asked delegates to identify infrastructure innovations they were pursuing. While a number of examples flowed forth, the one mentioned the most was establishing partnerships to develop new technologies and improve on existing practices and approaches.
Broadly speaking, there is nothing new or innovative about the concept of partnership. But, when non-profits like Communities of Tomorrow and Canada West Foundation join up with municipalities and researchers at educational institutions and independent research councils, the “small” idea can produce some “big” results.
References
1. Quote obtained from “Governments of Canada and Saskatchewan invest in waterline replacement technology”, published at Canada News Centre on November 25, 2011.
2. Quote obtained from “Governments of Canada and Saskatchewan invest in waterline replacement technology”, published at Canada News Centre on November 25, 2011.
By: His Worship Carl Zehr, Mayor, City of Kitchener
Storm drainage or storm water management (SWM) is just one of many responsibilities shouldered by Canada’s municipalities. But it’s also a very unique responsibility in that it offers municipalities a great opportunity to motivate positive changes in behaviour and alter their perceptions about the environment.
In 2011, the City of Kitchener engaged in an innovative yet controversial change. The City moved storm water management funding from the tax base to a user pay system. The new user pay rate—based on the amount of impervious area on each property—has resulted in a source of dedicated and sustainable funding for the costs associated with storm water management. The rationale is clear: the more impervious area that an individual property contains, the greater the runoff and pollutants that will come from that property. And, that property will also result in greater demand on the City’s storm water management system.
Properties with a high percentage of impervious surfaces—buildings, driveways and parking lots—typically create a lot of runoff. These surfaces don’t allow water to absorb into the earth. Under Kitchener’s new user pay system, industrial, institutional, and commercial properties are now paying a fairer share. These types of properties contribute more runoff and pollutants than residential properties.
I even feel self-conscious about the amount of impervious area on my own property. My own driveway is quite big. Things are designed for convenience, not for conservation. I didn’t think about that before because the cost impact was buried in my taxes.
In Kitchener, replacement and maintenance of aging infrastructure priorities historically took precedence over upgrading the system, resulting in current SWM infrastructure needs being under-funded, says Grant Murphy, who serves as Kitchener’s Director of Engineering Services. According to Grant, the old tax-based system of funding placed a disproportionate amount of storm water management costs on properties with a higher assessed value, and residential properties carried more of the burden than industrial, commercial and institutional properties. What’s more, tax increases only amplified this inequity between different property sectors.
Now, with a user-fee system, storm water services are no longer funded through property taxes but through a separately billed utility—just like gas and hydro.
It scared the heck out of me when we first started talking about doing this. It’s not an easy process to change the way we think about making the system fairer for taxpayers. Selling the concept to the public can be extremely difficult when you’re talking about taxes versus user fees. The result, however, is a solution that, at its core, makes Kitchener a better steward of the environment.
Kitchener has a population of about 230,000. Its storm water infrastructure assets are valued at $260 million, and are spread across a land mass of about 137 square kilometres (53 square miles). All of the City’s storm water flows are directed towards the Grand River, with Lake Erie acting as the ultimate receiver. Additionally, about 70% of the drinking water for Kitchener comes from groundwater sources, with the balance from the Grand River. Therefore, source water protection is critical, not only for Kitchener but right across the watershed.
Under the new user pay funding model, we were able to bring Kitchener’s storm water management up to a sustainable level of service, clean-up the central downtown Victoria Park Lake, and make other improvements to the SWM system. There was overwhelming evidence that the City needed to move forward with an increased level of SWM service. Urbanization and intensification were placing pressure on system capacity and causing significant impacts on downstream natural streams and creeks.
A storm water rate credit system is also underway that will recognize efforts by private property owners to adopt best management practices, including vegetated swales, infiltration trenches, porous pavement, or extended detention stormwater basins. Property owners can qualify for a maximum credit of 45% of the monthly utility bill if they can demonstrate that their stormwater facilities are functioning as approved.
Others are beginning to take notice of our innovative program. In August 2011, the City of Kitchener was awarded the Peter J. Marshall Municipal Innovation Award from the Association of Municipalities of Ontario (AMO) for implementing the new storm water utility. The award recognizes municipal governments that demonstrate excellence in using innovative approaches to improving capital or operating efficiency and generating greater program effectiveness through alternative service delivery initiatives and partnerships.
Kitchener was also awarded a grant from the Government of Ontario’s Showcasing Water Innovation Program, which supports projects with innovative and cost-effective ways to improve drinking water, wastewater, and storm water systems.
The City was also awarded almost $1 million to develop public outreach tools and pilot projects to ensure effective uptake of the stormwater rate credit policies by property owners and another $1 million for a City initiative called Beyond the Landfill, Finding Better Uses for Stormwater Pond Sediments.
All of this funding recognizes Kitchener’s dedication to developing smart solutions to help protect our local water supply. The investment will go a long way in helping us continue the work that’s now underway in the areas of storm water management and innovative sediment treatments. Pending the success of the trial study we’re conducting with the Region of Waterloo, it could lead to space savings in local landfills and a reduction in energy required to fertilize local soils.
To be sure, it hasn’t always been an easy path to follow, but in the end, it was the right thing to do. And it’s nice to be recognized not just for the effort we put in, but that the idea itself is innovative and helps foster positive environmental action by our community.
By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
Last week I spent some time reviewing ReNew Canada’s special report on the “Top 100” infrastructure projects in the country, and then posted the top three contenders for the most innovative projects across 10 categories (click here to view). This week, it’s time to announce the winners—in my humble opinion—in each category. Here they are:
Transportation—Roadways and Bridges
Winner: Southeast Stony Trail (Alberta)
Innovation: Delivery
Description: Southeast Stony Trail is one of the largest highway projects in Alberta history and is the province’s largest ever PPP road project. The project is being delivered through a “DFBO” or a “design-finance-build-operate” PPP contract valued at $769 million. Innovative PPP delivery has resulted in significant savings. Under traditional procurement, the cost was estimated at $1.8 billion. Another innovative aspect of the PPP agreement is how the contract includes operations and maintenance to Deerfoot Trail—an entirely separate roadway.
Transportation—Public Transit
Winner: York VIVA Bus Rapidways (Ontario)
Innovation: Concept
Description: This $1.4 billion project will result in a set of separate centre lanes—Rapidways—that will allow VIVA buses to travel freely regardless of traffic volume on the adjoining roadway lanes. The project also involves new transit stations that will connect the York VIVA buses to the Toronto subway system and Go Transit. The Rapidway concept is innovative in that it helps public transit to better compete with the private automobiles on the “free” road. The dedicated bus lanes ensure a time advantage during congestion, and that makes public transit a more attractive option.
Transportation—Sea and Air Ports
Winner: Calgary International Airport Terminal (Alberta)
Innovation: Financing and Technology
Description: A total of $1.3 billion in upgrades and additions are being made to the terminal at the Calgary International Airport. Project innovations include the financing model and technology. Rather than using tax dollars, the Calgary Airport Authority—like other airports in Canada—levies a $25 improvement fee on each passenger ticket for departing flights. The project also includes technological innovations such as a geothermal heating and cooling system and radiant floor heating and cooling.
Public Service (Health, Education, Social, Community, Culture)
Winner: Canadian Museum for Human Rights (Manitoba)
Innovation: Finance
Description: The new Canadian Museum for Human Rights in Winnipeg is the clear winner in this category. While the museum’s unique architectural design is impressive enough, what really draws attention is the financing model. The federal government has committed $100 million, the province $40 million, and the City of Winnipeg $20 million. But the largest piece of financing has come through fundraising and philanthropy, which totals just under $120 million. Almost 40% of the museum’s cost has been raised outside of government, and that makes this project shine. The museum is also shooting for LEED Silver certification.
Thermal Electric
Winner: Swan Hills ISCG Power Project (Alberta)
Innovation: Concept, Technology, Financing
Description: This coal-powered thermal electric power project is located in Swan Hills, Alberta. The $1.5 billion project will tap into a reserve of coal that is very deep and cannot be mined. Through technology developed by Swan Hills Synfuels—in-situ coal gasification (ISCG)—the coal will be converted into gas, which will then be used to fuel the power plant. The technology results in cleaner fuel, reduced air pollution, reduced carbon emissions, and lower water usage. It is anticipated that the project will capture and sequester over 1.3 million tonnes of CO2 each year, and provide needed CO2 to nearby oil extraction projects as well. The project is being primarily privately funded, but $285 million has been provided by the province’s Carbon Capture and Storage Fund.
Hydroelectric
Winner: Niagara Tunnel Project (Ontario)
Innovation: Technology
Description: The Niagara Tunnel is a $1.6 billion project being constructed by Ontario Power Generation. The purpose of the project is to provide additional water to the Sir Adam Beck hydroelectric power stations. A key part of the project is boring a 12 metre high and 10 km long tunnel under Niagara Falls. To accomplish this task, the project used “Big Becky”—the largest rock tunnel boring machine in the world. In May 2011, the boring machine reached daylight after drilling for four years underneath the Falls.
Renewable Electric Energy
Winner: Blackspring Ridge 1 Wind Project (Alberta)
Innovation: Technology and Export
Description: This 300 megawatt energy project will see over 160 wind turbines erected near the small town of Vulcan, Alberta. The project is owned and financed entirely by Greengate Power Corporation, and when completed in 2013 it will be the largest wind farm in Canada. A unique aspect of the project is how Greengate Power has signed a contract with California’s Pacific Gas and Electric. The California utility is required by regulation to purchase 20% of its power from renewable energy sources. The contract provides Pacific Gas and Electric with renewable energy credits generated by winds sweeping over southern Alberta.
Water and Wastewater
Winner: Hanlan Feeder Main (Ontario)
Innovation: Partnership
Description: The Hanlan feedermain project is a 15 km long stretch of water infrastructure connecting York Region’s water treatment plant on Lake Ontario to the Hanlan Reservoir and its pumping stations. The new feedermain will help meet growing demand for water, and ensure no disruptions to water service when the existing feedermain requires inspection or maintenance. The innovation here is the partnership established between the regions of York and Peel. The York-Peel water Agreement requires Peel Region to provide water to York Region, while York Region provides Peel with $340 million to upgrade Peel’s water infrastructure. This is a good example of how regions can cooperate to get essential infrastructure projects completed.
Environment and Waste Management
Winner: Sydney Tar Ponds Cleanup (Nova Scotia)
Innovation: Partnership and Technology
Description: Eight years ago, a ten-year $400 million project was announced to remediate the Sydney Tar Ponds on Cape Breton Island. The clean-up of the tar ponds—a top contender for one of the worst ecological and environmental disasters in Canada—has been given to the Sydney Tar Ponds Agency, a Special Operating Agency (SOE) of the Nova Scotia government. Rather than digging up and moving the dirt, the contaminents and soil will be cleaned and stabilized on-site. While a number of technologies are in play, the most interesting is bioremediation or “land farming.” This process tills into the soil bacteria and nutrients that “eat” hydrocarbons. Over a dozen community groups have representatives on a special Community Liaison Committee that works with the Tar Ponds Agency during the cleanup.
Most Innovative Project Overall
SaskPower Boundary Dam (source: Wtshymanski at en.wikipedia)
Winner: Boundary Dam Integrated CCS Demonstration (Saskatchewan)
Innovation: Technology
Description: With over 600 megawatts (MW) of output, the Boundary Dam power plant in Estevan, Saskatchewan is one of western Canada’s largest coal-fired thermal electric plants. The plant is currently undergoing a $1.3 billion upgrade that will retrofit Unit 3 with a carbon capture, storage, and enhanced oil recovery system. While the project will reduce the output of Unit 3 by about 40 MW, the project has the potential to capture an estimated 3 million tonnes of CO2 annually. The project is the largest carbon capture and storage project in the world, and is slated for completion in 2015. Given the globe’s concern with climate change and the need to deal with CO2 emissions, this project—in my opinion—emerges as the most important and innovative projects on ReNew’s “Top 100.”
One of the most interesting features of my “Top 10” is how 70% of the most innovative projects can be found in western Canada. I certainly did not intend this outcome, but that’s how things have shaken out. Before I submit this list to the folks at ReNew Canada for inclusion in their March-April issue, I invite comments and feedback—either to the blog or in the forum. If I have missed the mark on any of these, please let me know.
Click here to read Part I of “Biggest” vs. “Best”.
