By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
Rural towns in the West are sleepy little affairs, and the small southern Alberta town in which I grew up is no different. There were, however, two occasions when the local hum-drum was broken, and believe it or not, both brouhahas involved infrastructure. The first was whether a new sportsplex arena should be built to replace the community rink that had burned to the ground in a spectacular cataclysm on Halloween in 1975. The second came about in the mid-1980s, and was all about whether the town’s gravel roads should be paved.
Most of the talk turned on whether the town could really afford the infrastructure. What was largely ignored was whether the town could afford to maintain those assets into the future. That’s the bigger and more important question—especially when it comes to pavement.
Road infrastructure is quite unlike other forms of municipal infrastructure in at least three ways. First, roadways have a relatively short life-span—about 25 years depending on usage. Because time is so unforgiving, ongoing maintenance is critical. If it is postponed, the need for rehabilitation and replacement arrives much quicker and with a much heftier price tag. In A Capital Question (Canada West Foundation 2003) we noted that if preventative maintenance costs $1 per lane-kilometre, then renewal or rehabilitation is $80 and reconstruction or replacement is $250.
Second, a lot of the infrastructure owned and operated by municipalities is invisible. It’s buried under the ground. Not roads, streets, bridges, and sidewalks. All of that is visible to the eye, and if you happen to look past it, the jarring sensation of that pothole is sure to inform your lower back.
Third, roads and related infrastructure comprise a huge chunk of the infrastructure liability. The capital budgets of the seven big western cities show that, on average, about 40% of all unfunded infrastructure over the next 10 years involves roadways. The figure is about 25% in Vancouver, Edmonton, and Calgary, but rises to 50% in Winnipeg, and a whopping 70% in Regina.
Building and repairing roads involves big money. But, new technologies being developed and tested in western Canada are working to relieve some of that “sticker shock.” One such example is PSI Technologies, a Saskatchewan-based company dedicated to building better roads through innovation and technology. The company started-up in 1998 with the goal of bringing science to road construction, a process that PSI President and CEO, Curtis Berthelot says hasn’t changed much since the 1940s.
PSI employs what is known as “mechanistic” or “scientific design and assessment” for road beds and pavements, and uses tools like ground-penetrating radar and modern physics to help determine what needs to be done and where it needs to be done. The company has also developed new ways to recycle waste products such as broken pavement and crushed concrete, and use them as lower cost but highly effective aggregates in the road building process.
These technologies were recently tested in Saskatoon through an initiative called the “Green Streets” project, which was funded with help from Communities of Tomorrow and the City. The goal of the pilot was to see whether various waste products could be processed into aggregate for road construction, if they could be handled and laid down with existing road-building equipment, and if they could meet the rigorous engineering specifications for new roadways.
In March 2010, Saskatoon City Council was handed a report on the project. It concluded that the technologies had been proven out. Significant savings were reported—savings that would allow the City to repair 30% more road surface at the same time that structural integrity was improved, less energy was used in construction, and less material ended up in the local landfill. The report predicted that Saskatoon could become the first municipality in Canada to find all of its road aggregate in the form of recycled materials.
It’s always good news when a policy challenge can be overcome in ways that are environmentally and economically sustainable, and that also results in lower cost and less expenditure of tax dollars. That type of good news also tends to spread quite quickly. The “Green Streets” project and the work of PSI is drawing a lot of attention from groups like the American Society of Civil Engineers (ASCE), in their study “City of Saskatoon’s Green Streets Program”, and the Transportation Association of Canada (TAC), in their reports “Sustainability Case Review of Using Recycled Aggregate in Road Structure” and “Crushing and Processing Reclaimed Concrete for City of Saskatoon Rehabilitation of Road Structures”.
As it rightly should.
By: Michael Atkinson, President, Canadian Construction Association (CCA)
There is little doubt about the need for safe, reliable, and efficient core infrastructure, both for the safety of Canadians and the competitiveness of the Canadian economy.
The Canadian Construction Association, which represents the non-residential construction industry, has worked diligently to ensure that infrastructure remains a key policy consideration for the federal government. We believe it is critical to continue building partnerships with government leaders, industry, and other stakeholders to promote the importance of infrastructure investment—both now and in the future.
Over the past three years, all orders of government have invested considerable funds into infrastructure improvements, launching a worthy and long overdue national effort to modernize Canada’s infrastructure systems. However, much more is still required in order to complete the modernization process, ensure these assets meet 21st century standards, and that they will adequately serve the needs of Canadians for years to come.
The Canadian Construction Association has long championed the cause that adequate infrastructure funding is economically critical to maintaining Canada’s competitive advantage. With projected strong growth in the resource and energy sectors, it will be imperative that Canada possesses an adequate and efficient system of infrastructure to support economic growth and investment, and help Canadian businesses remain globally competitive.
For the Canadian construction industry, this will require infrastructure investment that is built on a long-term and sustainable model that addresses key characteristics.
One of the most important and fundamental characteristics is that investments address the long-term needs of the Canadian economy and the Canadian population. As opposed to making reactionary investments in Canada’s infrastructure system, we should be following a sustainable plan based on the current and future needs of the country.
It is also imperative that any infrastructure program be clear in its purpose. This means identifying key goals to ensure both progress and accountability. Any infrastructure investment must be for a defined and distinct reason. Coupled with meeting the long-term requirements of the Canadian economy, this goal-setting will help keep any future planning on track and on target.
At the same time, any sustainable infrastructure investment will have to involve the private sector if we are to meaningfully address funding needs. With the inability of governments to finance and maintain infrastructure at the pace of its decline, it is becoming increasingly important to involve private-sector partners with new and innovative funding models.
This requires a “de-politicization” of infrastructure investment programs. Oftentimes, infrastructure investment is reactionary and short-term. Sustainable investment in Canadian infrastructure will have to come from a long-term program that is immune to changes in political priorities or to the governing party. It should not be viewed as a program linked to a particular group, but rather, as a program fundamental to the economic and social well-being of the country.
Further to this, a long-term and sustainable infrastructure investment program should not be adversely affected by economic cycles, inflation or public sector fiscal concerns. This may mean shifting funding away from traditional property or excise taxes toward user fees and income or sales taxes. Regardless of the ultimate funding mechanism, a sustainable infrastructure program must be built—and built to last.
As well, the program must be self-perpetuating, and not dependent on renewed grants, authorizations, or successive commitments and contributions. That said, future infrastructure plans, and particularly the funding options, will need to remain flexible. Given the size of the Canadian landscape, and the varying needs of the different regions across Canada, it is very important that any plan and priorities fit the unique regional needs of the country, rather than a one-size-fits-all approach.
We understand the importance of infrastructure investment both for the economy and Canadian society. Should the infrastructure deficit continue to grow, it will become increasingly clear that new ideas and policies will be required to help overcome this important issue. But with a clear and long-term infrastructure plan, a more sustainable solution can be developed for Canada’s future.
By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
Solutions to policy problems seldom enjoy unanimous, much less unqualified, support. The “Penny Tax” is no exception. In this final segment, I respond to the critics.
Criticism: The infrastructure deficit is fictitious. It compares what “is” spent (observable) with what “ought” to be spent (unobservable). Many infrastructure “needs” are really “wants,” “whims,” or “dreams.” The Canada West Foundation has not defined infrastructure and has no sound analysis to show a deficit. (See National Post, December 6, 2011 and Business in Calgary, November 2011).
Response: In A Capital Question (2003), New Tools for New Times (2006), and The Penny Tax (2011), Canada West defined infrastructure, developed a detailed taxonomy of municipal infrastructure, and placed various estimates of the infrastructure deficit in context using objective data. We also noted huge strides being made in measuring infrastructure needs based on advances in public asset management. For example, the City of Edmonton has developed a rigorous methodology to inventory all of its assets, measure their age and condition, and then determine when, where, and how much investment is needed. The “ought” is being objectively measured. There is also anecdotal evidence—from bridges cracking apart in Saskatchewan to the numerous road collapses in Quebec. While denying the problem dispenses with the need for a solution, it flies in the face of the evidence and a consensus that infrastructure is an issue right around the globe.
Criticism: The claim that property taxes are an inadequate source of revenue for municipal infrastructure and that municipalities need more federal and provincial funding is becoming a tiresome refrain. Property taxes are appropriate for municipalities and are less harmful than other taxes. Federal and provincial grants are undesirable because they muddle accountability. Municipalities should employ more user fees and better pricing, and as a second-best alternative, user pay taxes like those on fuel, amusement and hotels. (See National Post, December 6, 2011 and Winnipeg Free Press, February 17, 2012).
Response: Every tax has both advantages and disadvantages. A diverse tax regime allows the weaknesses of one tax to be offset by the strengths of other taxes. But in Canada, the property tax is the only substantial tax open to municipalities. Because property taxes seldom keep pace with economic and population growth and the tax cannot generate revenue from visitors who use city services and infrastructure, grants are necessary. Around the world, local governments that rely heavily on property taxes also rely heavily on grants. If our cities are to be restricted to the property tax, then grants must follow. If grants are to be ended, then the local tax regime needs to be diversified. And, such diversification must go beyond user pay taxes with a narrow tax base and limited revenue-generating capacity. I’m very much in favour of pricing and user fees, but not all infrastructure can be funded through user pay.
Criticism: A local penny tax is a “bad” idea and “difficult” to implement. There is “no way” the federal government wants to collect different GST rates in each city. (See Global Edmonton, September 28, 2011).
Response: This is not an argument. Rather, it is assertion and speculation. The federal government is not on record in this matter. What’s more, we live in a digital age with massive computing power. This should eliminate a lot of the difficulty in managing a diverse local tax regime. In the US, localities have many different taxes and differing rates of tax. This has not proven unmanageable. Such “difficulties” used to be trotted out against road tolling. Technology (e.g., electronic toll collection, global positioning systems, in-car transponders) has addressed these concerns.
Criticism: Shoppers will drive out to “low-GST” or “no-tax” towns to shop. (See Global Edmonton, September 28, 2011).
Response: This too is mere speculation. First, there are ways to address such concerns, such as applying the tax across the broader city-region. Second, the problem may be overstated. With a small 1% tax, a shopper making a $1,000 purchase faces a local tax differential of $10. Will a shopper really spend two hours on the road and burn $15 on fuel to save $10?
Response: The Penny Tax proposal does not call for separate votes on each and every infrastructure project, but one referendum every six years on a basket of projects. Since referendums will be held alongside local elections, costs will be kept to a minimum. Democracy does cost money. The last federal election cost almost $300 million. Should we therefore dispense with elections? Of course not.
Response: The penny tax has the strongest taxpayer protection you can find. Not only would provincial enabling legislation cap the rate at 1% but the taxpayers are always in control because the tax is voter-approved. I trust voters. One of the strongest safeguards with the Penny Tax is that if it generates more revenue than expected, the excess would be rebated to taxpayers through lower property taxes. This is a very transparent and accountable tax proposal.
Criticism: Calling the proposal a “penny tax” is powerful, dangerous, and slick marketing. It’s a “cheap tax grab” and a “very strange proposal.” It’s being proposed by a “left-leaning” group and is supported by people “associated with professional sports franchises.” (See Calgary Sun, October 2, 2011 and Business in Calgary, November 2011).
Response: The “penny tax” is a colloquial expression used in the US for local option sales taxes. As such, the term is accurate. What is not accurate are many of the slogans that critics have thrown out. A “strange” proposal? It’s not strange for dozens of US counties and municipalities. A “cheap tax grab?” The tax cannot be “grabbed” by government. Rather, it must be “granted” by the voters.
Criticism: Critics rail against certain “unpopular” projects—artwork on overpasses, the new $400 million road link to the Calgary airport, the Peace Bridge, Calgary’s Saddledome. If these “unnecessary” projects were left on the drawing board, there would be more money for “essential” infrastructure. (See National Post, December 6, 2011 and Calgary Sun, October 2, 2011).
Response: This comment misses one of the greatest features of the penny tax—the fact that both the tax and the projects have to be voter-approved. Projects that cannot earn broad voter support will not go ahead. The process we suggest works to solve the very complaint being made. At referendum time, if you don’t like the projects, then don’t vote for the tax.
To date, critics have failed to interact with the substance and essence of the penny tax proposal. Canada West Foundation Senior Economist Mike Holden is bang-on with his recent op-ed entitled “How Biases are Ruining our Public Policy Debates.” Holden argues that:
Increasingly, those who involve themselves in important public policy debates seem to be eschewing critical thought, persuasive argument, and evidence-based decision-making in advancing their positions. Instead, they resort to fear, ideology, intentional misrepresentation, and pejorative language to mobilize a pre-existing support base against its perceived opponents. The result is that important discussions about how we move forward as a society consist not of people with different views trying to work together to find common ground, but of opponents retreating to entrenched positions, surrounding themselves with like-minded individuals, and refusing to consider alternate points of view. This trend is threatening our ability to form sound, broadly-supported public policy in Canada.”
To date, criticisms leveled against the penny tax idea have been exactly that. One critic asserts that Calgary doesn’t have a “revenue” problem, it has a “spending” problem. (See Calgary Sun, October 2, 2011 and Business in Calgary, November 2011). Is this really true?
Well, here’s the real story. In 1990, the City of Calgary’s operating expenditure was 3.9% of Calgary’s per capita share of provincial GDP. In 2010, operating expenditure was 3.1% of GDP. The City of Calgary’s total operating and capital expenditure in 1990 was 4.9%. Today it is 4.8%. Is this really a “spending” problem?
So, I too hear a tiresome refrain—the continual reactionary positioning of the anti-tax crowd who want to kill new ideas the moment they arrive, who constantly whine that taxes are too high and growing out of control (not true) and that paying taxes is tantamount to theft (also not true). In a modern industrialized economy, taxes are necessary to fund important public services and infrastructure that are essential to making private investment profitable and productive. And, with that, we are right back to my first point discussed in Part 1.
By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
As a former colony and dominion of the British empire, Canada has inherited a number of practices and traditions that developed and evolved in Great Britain. Canada’s parliament—based on the Westminster system—is but one example. A less well-known but not unimportant “hang-over” from Canada’s colonial days is the heavy reliance of our local governments on the property tax as a source of funding.
While the idea of a broad-based and locally-levied sales tax like a penny tax may be somewhat foreign in the Canadian context, the same does not hold for local governments in most other nations. Local governments in western and eastern European countries, the US, and southeast Asia employ a wide variety of taxes—everything from income taxes, payroll taxes, general sales taxes, and selective sales taxes on specific goods and services.
The International Experience
According to the Organisation for Economic Co-operation and Development (OECD), local governments in the Scandinavian trio of Sweden, Norway, and Finland obtain virtually all of their tax revenue from personal income tax, which also comprises about 70% of local tax revenue in Switzerland. In Luxembourg, local governments get almost all of their tax revenue from corporate income tax. Payroll taxes represent over 60% of local taxes in Austria.
Local governments in Hungary get almost 70% of their tax revenue from a broad-based general sales tax, which also generates between 5% to 10% of local tax revenue in the US, Japan, and Italy. Local governments in most nations also collect at least some selective sales tax revenue, including Canada. Local governments in Canada get 2% of their tax revenue from selective sales taxes, which are levied primarily on utilities such as electricity and natural gas. However, these taxes are used much more heavily in other countries such as France, Korea, and Italy.
To be sure, local governments in all OECD nations collect property tax. But dependence on this tax source varies widely, from a mere 1% of local tax revenue in Switzerland to 90% in New Zealand, 96% in Canada, and 100% in Australia, Ireland, and the UK. The tax profile of local governments in the Commonwealth of Nations—formerly the British Commonwealth— stands in stark contrast to local governments elsewhere.
Germany—which too is a federal state—is one of the most interesting examples of tax diversity at the local level. About 50% of all local tax revenue in Germany comes from personal income tax, 25% from corporate income tax, 15% from property tax, 5% from a general sales tax, and 2% from selective sales taxes.
My point here is not that Canada’s local governments be given access to each and every tax source they desire, nor should government necessarily increase taxes. My point is that there is no fundamental law of the universe that dictates our local governments be so singularly dependent on just one tax source. Other options are available. And, allowing voters in a city to decide themselves whether they want to pay a small sales tax to improve local infrastructure is not a crazy idea.
The US Experience
Local governments in 36 US states—counties, municipalities, school districts, and special districts that deliver services across municipal or county lines—are allowed and often do levy some form of general or broad-based sales tax. In fact, about 22% of all local tax revenue in the US comes from sales taxes.
Most of these taxes are strictly regulated by the state constitution or state legislation, which stipulate the conditions under which they may be used, and the maximum rate that can be levied. Local governments in Mississippi can only have a general sales tax rate of up to 0.25%, while those in Alabama can levy a general sales tax of up to 8.0%.
The idea of a penny tax for municipal infrastructure takes off from a similar tax used in Oklahoma City to fund recreation and cultural infrastructure, the Special Purpose Local Option Sales Tax (SPLOST) used by local governments in the state of Georgia.
In Georgia, counties and municipalities that wish to establish a SPLOST tax first prepare a list of projects to be funded by the tax. This list, and a proposal for up to 1% SPLOST, are then put on the ballot at a regularly scheduled local election. If approved, the tax comes on, the projects proceed, and government follows up with regular reports on the tax, including the amount of revenue collected, the projects completed, and those still in progress.
After six years have elapsed, the tax automatically sunsets—it comes off. To reinstate the tax, a fresh list of projects must be identified, and another proposal for SPLOST submitted to voters in a referendum.
As noted already, many of these referendums are successful. And yes, they succeed even in jurisdictions with a reputation for being virulently “anti-tax.” That includes places like Cobb County, Georgia where the March 25, 2011 SPLOST referendum—passed.
The Canada West Foundation’s research on local finance and infrastructure has been international in scope. The search for optimal infrastructure funding tools should not be restricted to historical Canadian practice. There is much to learn and appreciate from the approaches taken in other countries. A small, local, and voter-approved penny tax is one such innovation that could do much boost our infrastructure investments.
By: Casey Vander Ploeg, Senior Policy Analyst, Canada West Foundation
If the size of the municipal infrastructure funding challenge is the daunting bad news, then the encouraging good news is that the tax burden in Canada has eased significantly over the past 20 years. Personal and corporate income taxes have fallen since the mid-1990s, and so have sales taxes like the federal GST. All of this presents an opportunity today that did not exist yesterday.
One such opportunity is to consider a “penny tax” for infrastructure. The basic idea behind the penny tax is to give voters in Canadian cities the right to choose—through referendum—whether or not they want to impose upon themselves an additional 1% point of GST in their city to fund specific infrastructure projects.
The idea goes well beyond a new tax for infrastructure. Rather, the idea incorporates a number of features that would make the penny tax the most accountable, transparent, and visible tax in Canada. Not only that, but these features should increase acceptability and legitimacy of the tax, and make it an attractive alternative capable of enjoying popular support. In my mind, all of these features are non-negotiable.
Unlike taxes that are imposed by government from the top-down, the penny tax could only be imposed by voters themselves from the bottom-up through a local plebiscite or referendum. Thus, ultimate responsibility for the tax is left in the hands of the voters themselves. This enhances local decision-making and injects the idea with an inherently democratic flavour. Such referendums for the tax can be held at every other municipal election to keep costs to a minimum. An interesting side benefit is how such referendums could boost lagging interest in municipal elections.
Earmark the Revenue
Not only should the tax be voter-approved, but the specific projects to be funded should be voter-approved as well. Such “earmarking” of the revenue carries two powerful benefits for taxpayers. First, earmarking shields the revenue from being diverted elsewhere. Accountability is strengthened. Second, earmarking establishes a clear connection between a tax and a government expenditure. Transparency is enhanced. The reasons are obvious—taxpayers know where the revenue is going.
A Sunset Provision
The penny tax would only be in effect for a limited time—across two municipal election cycles or six years. After the time period is up and the project’s completed, the tax will “lapse” or “sunset.” If civic leaders want to implement the penny tax again, another set of projects will have to be identified and the voters will have to be asked again. Not only do the voters stay in control, the automatic sunset yields another huge benefit in the form of improved accountability. Governments that are confronted with the risk of losing a revenue source will work diligently to manage the tax wisely and spend the revenue prudently.
Cap the Tax Rate
The introduction of any new tax is often accompanied by fears that the tax will increase over time. This will not be possible with a local penny tax, as the tax rate would be capped at 1% by the enabling legislation that specifies how municipalities can use the tax. Voters could still choose their own rate of tax, however. For example, voters might be allowed to approve any rate of sales tax up to the 1% maximum.
Separate Annual Report
The penny tax should also be subjected to a comprehensive accountability and public reporting framework. A separate annual report on the tax could be produced annually, and would include valuable information such as the amount of tax revenue collected, the usage of the proceeds, and the status of various projects. This ups the accountability ante even further.
Piggy-Back off the GST
To keep administration simple and costs low, the penny tax should “piggy-back” off the existing GST. In other words, local jurisdictions in which the penny tax is implemented would pay GST at a 1% higher rate than jurisdictions that have not imposed the penny tax. This extra 1% would be collected by the federal government, and then returned to the provincial government much like the harmonized sales tax (HST). In turn, the province would hand over the revenues to the municipalities that imposed the penny tax.
Rebate Excess Revenue
This is my absolute favourite feature of the penny tax, because it is very unique and it really protects taxpayers. The penny tax, as I envision it, would be approved by voters only as a mechanism to fund a specific project or set of projects whose costs have been established in advance. But, it can be difficult to predict with certainty just how much revenue a tax might generate over time. If the economy grows faster than expected, tax revenues will exceed expectations. If the tax generates excess revenue, it should be returned to taxpayers. Excess revenues could, for example, be pooled in a reserve fund until the end of the tax cycle. This revenue would then be returned in the form of reduced property taxes. More than a few municipalities across Canada already have experience with such systems by employing mill rate stabilization reserve funds.
Conversely, it may also be the case that penny tax revenues are lower than anticipated. This would mean that not all projects could go ahead. Consideration should be given to establishing a rank order of projects—those with a higher priority would proceed while those with a lower priority ranking would be postponed.
Given the importance of infrastructure, the lower tax burden that we have today, and the right combination of features, there is no reason that the public should immediately rule out a penny tax for infrastructure. The US experience here is instructive. Since 2000, there have been almost 400 various tax and borrowing initiatives for infrastructure in the US. Surprisingly, 70% of these referendums succeed. We will explore the US and the broader international experience with these types of taxes next week.