The way we pay for municipal services and roads is a bizarre system of hidden subsidies which encourage waste.
By Ted Mitchell
Published October 25, 2014
Hamilton is bad at math. Not the 2 + 2 kind, but interpreting what concepts like cost and price mean to the taxpayers of Hamilton.
You have to understand these concepts before you can form any kind of valid opinion on whether things like light rail transit (LRT), Aerotropolis and expressways are good or bad for the City and how they will affect your taxes.
Imagine you are buying groceries for the week. At checkout, the teller does not ring up any price on the items in your cart. Rather, they send the manager to the parking lot to check out your ride.
"Mr. Mitchell because you have a decent vehicle we're charging you $100."
To the next person in line with roughly the same stuff in her cart, "Mr. McGreal, based on your small car, your groceries will be $50."
Customers would eventually learn that having a cheap car will get you a deal on groceries, and fancy car owners will pay through the nose for the same things. To people accustomed to a free market in groceries and consumer goods, this sounds insane, and it is.
But it's a good analogy for how we pay municipal taxes.
Imagine trying to turn a profit at that grocery store. It would be hopeless unless you could change the rules and charge an amount at least somewhat related to the cost of things in their cart.
Hamilton, like all Canadian cities, collects taxes based primarily on the value of your house, not the cost to provide services to it.
Not the size of the house or the number of occupants and school aged kids. Not the area of the lot, the road frontage, or neighbourhood density. Not proximity to utility plants such as water, sewer or the elevation of your property above same. Not the surrounding land use or the distance you need to travel to work or school.
All of those things play a role in how much it costs the city to service your property.
The value of your house has exactly nothing to do with those costs. It is a form of wealth tax, meaning if you can afford an expensive house then you can afford expensive municipal taxes.
This system wrecks our city by offering a subsidy to waste and sprawl and therefore increasing the proportion of waste and sprawl over time.
It is not only direct municipal costs that increase, but the indirect costs dumped on all levels of government. This includes the negative outcomes associated with car dependency, from obesity and diabetes to air quality deaths to depression to dwindling efficiency of public and private services.
Waste is waste, and taxpayers eventually will pay for it - financially, personally, and culturally.
Think of the reason cities were first built many thousands of years ago. They were places of commerce where goods could be traded efficiently. They also developed new trades and culture and artistic sophistication, but the primary reason they existed was economic. Other benefits were just happy side effects. A higher density of people leads to a more complex and vibrant economy.
Now imagine you have two houses and lots of the same size, one in the city core, and one in an outer suburb.
Let's say the cost to service the downtown house is $3,500, while the cost to service the suburban one is higher at $4,500.
The farther a house is from the city core, the more money it costs per resident to build and maintain a length of road. A longer water pipe or electrical wire costs more than a short one. More horsepower is required to push water up a hill like the Niagara Escarpment by a steep margin.
The suburban house is farther from everything, so residents need to use roads more. Once accustomed to driving they can't resist a deal, and choose big box stores which keep fewer of their dollars in the local economy and pay fewer local taxes, compared to a downtown small business.
Every factor you can think of makes it a little less efficient to sprawl outward, and these small costs add up.
But it gets worse, because you don't pay for the size of your house.
The downtown house, being closer to the economic and cultural action, is worth more. So the downtown house ends up paying $4,500 for $3,500 of services and the suburban one pays $3,500 for $4,500 in services, making a $1,000 cross-subsidy from urban efficiency to suburban waste.
These factors are discussed in more detail in the book Perverse Cities by Pamela Blais.
The extremes of taxation inequality are downtown condos, with expensive taxes and cheap costs to service, and suburban low density detached houses fully serviced by utilities, with cheap taxes and high costs.
It's not just publicly funded municipal items like roads, buses, schools, police, and EMS that suffer from geographical cost perversion. Every utility, both public and private sector - like water, sewer, natural gas, electricity, telephone, internet, and even cell phones - are typically billed at rates that ignore the increased cost of servicing outlying areas.
Their maintenance costs are intertwined with the design and reliability of municipal roads and pipes, not to mention weather.
Other than the tax discount this system offers to suburbanites, there is no benefit to anyone else.
What is amazing is the attitude of many rural folks towards costs. They claim to be getting the short end of the stick when in fact the opposite is true.
This sense of entitlement worsens with decreasing population density. Not all rural people are self-centred, but misunderstanding is widespread about the reality of who is subsidizing whom.
It wasn't always like this. The ancestors of these rural folks were hard working, stoic, and knew the value of a dollar. I know, I'm their offspring. (Disclaimer: I identify as a northerner and have spent half my life in northern Ontario and most of my working life in rural and/or northern areas.)
But somehow ignorance and perhaps xenophobia spread and now we have widespread suspicion of all things big and urban, forgetting that the wealth of our country is built on the efficiency of services and manufacturing in large cities and only a tiny bit on hewing wood and drawing water.
As a share of 2012 Canadian gross domestic product (GDP), agriculture, forestry, fishing and hunting together account for just 1.6 percent. Even the giant mining, quarrying, oil and gas extraction sector makes up only 7.9 percent.
Toronto and other large Canadian cities may seem "elitist", but they are paying their fair share and a significant portion of yours too.
If you lived 10 miles outside of Timmins, could you afford to pay the real cost of hydro lines, internet and phone? That cost would be several times what it is in Toronto. You can only afford it because every Toronto resident pays more to subsidize these services.
Canada decided a long time ago to share these costs. In the 1930s to 1960s, government programs accelerated development in the north and rural areas. These areas could never have financed this infrastructure by themselves.
A generations-long flow of subsidies from efficient large cities to the country has achieved great gains in equality of opportunity, but the casualty has been entitlement.
Now, there is another side to this discussion: whether the free market places an appropriate value on farm produce and resources such as forestry and mining. You can make a strong case that it undervalues these things, but this is a defect of capitalism and power, not government. Government tries to level the playing field by providing northern and rural roads and utility infrastructure below cost.
That 'short end of the stick' attitude is what motivates the concept of Area Rating: Since I don't get the same transit, fire, library services and so on, I shouldn't have to pay for them.
If it's every man for himself, then why don't we area rate everything? Roads are vastly more expensive per capita in outlying areas. That one factor alone would overwhelm the services you don't get and don't pay for on your tax bill.
Water, sewer, electricity, gas, phone and internet would all cost more.
Each one of those services may only have a disparity of a few dollars per month, but add it up and we're talking a subsidy of hundreds to thousands of dollars per household per year heading from the city core to suburbs and rural areas.
The largest subsidy on the municipal tax sheet involves roads.
My Hamilton taxes are currently about $8,000. The City has a tax calculator that breaks this down into sectors, in my case some of the numbers are:
|Sidewalks||$76 (area rated)|
|Fire||$757 (area rated)|
|Transit||$511 (area rated)|
|Special infrastructure re-investment||$208 (area rated)|
I chose the items listed other than "Roads" because they depend indirectly on roads and density. The denser central parts of the city are going to have lower costs associated with these departments, socioeconomic problems aside.
If conservatively, 10 percent of these road-dependent services were added in, it would total $665 + 0.10 x $3,393 = $1,004.
But all drivers pay gas taxes and gas is expensive so that must contribute a lot, right?
As a high estimate, last year our two cars logged 5,000 km within City of Hamilton roads. They average 8 L/100 km (I keep records) but more like 10 L/100 km or 28 MPG in the city. At $1.30 / L that's $650 for 500 L. The gas tax portion works out to 41.7 cents / L for a total of $208.50.
That's only 20 percent of the fixed price for city roads based on the value of my house. Imagine how differently you would use electricity if your fixed monthly cost was $100 and the 'use' cost averaged $20.
This small marginal cost of driving encourages more driving, because you might as well get your money's worth and drive as much as possible.
The amount of municipally collected tax directed to roads should be zero. It should be fully funded by gas tax, the user pay principle. This is a basic and widely held conservative ideology.
Unlike funding libraries and schools, nobody benefits from my use of city roads except me, so I should bear the full cost at the pump, and so should you.
Cities get almost no gas tax money from the province and feds. It pays mostly for provincial roads and even then doesn't cover the full cost.
If Canada were fiscally conservative, we could bring municipal road taxes down to zero, increase the provincial gas tax accordingly, and distribute it to cities to fully fund roads. How much would this bump up the gas tax?
Last year our two cars drove 25,000 km in total. At 8 L / 100 km, that's 2,000 L @ $1.30 = $2,600, of which $832 is tax. Read what that means: I paid less in gas tax for two cars for a year than just the portion of municipal tax that goes to roads.
If you tack on the municipal $1,000 to this, it's equivalent to a gas tax of 50 cents more, or 91.6 cents per litre.
This would bump up pump prices from $1.30 to $1.80 / L. This is a high estimate, as the average person pays less in municipal tax and drives further, so a 20 cent gas tax increase would probably be enough.
For comparison, European gas prices range from $2.00 to $2.85 / L for 2014 Q2. Not surprisingly, they drive a bit less, have less congestion, and amazing transit.
The way we pay for municipal services and roads is a bizarre system of hidden subsidies which encourage waste.
We continue to price municipal services at what the market will bear. The taxation status quo avoids linking price to costs. This punishes efficient use of services with excessive prices and encourages sprawl which is financially unsustainable.
We overpay fixed costs for roads which subsidize heavy users of those roads. Marginal costs (gas tax) are a small portion of revenue and this encourages overuse of a common resource.
The predictable outcome of these two factors is widespread economic inefficiency and traffic congestion.
If the status quo wins out, that is if suburbanites vote for their self interest in perpetuating this unfair system, then we will never get a handle on traffic congestion or increasing taxes and falling levels of service. It will slowly but relentlessly destroy our cities economy and quality of life.
It's election season. Beware of anyone speaking of fiscal responsibility when they're running a grocery store that doesn't charge you for the cost of the items in your cart.
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