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.
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.
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.
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.
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.