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?
Criticism: The proposal will result in too many plebiscites and this will be too costly. (See Calgary Sun, October 2, 2011 and Business in Calgary, November 2011).
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.
Criticism: There are not enough safeguards to keep the tax at 1%. We could see “tax creep.” (See Calgary Sun, October 2, 2011 and Business in Calgary, November 2011).
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.
You may also be interested in parts I, II, and III of the "1¢ Solution to a Billion Dollar Problem” series.