By Cherise Burda, Pembina Institute, and Stephanie Cairns, Sustainable Prosperity
Earlier today, the Toronto Region Board of Trade released its bold proposal to address gridlock and expand transit in the Greater Toronto and Hamilton Area (GTHA). The benefit of the four tools proposed by the Board is that they can be spread among the tax base, be kept relatively low for each tool, such as for a regional sales tax and fuel tax, and not hit one sector or user group hard.
More tools provide for greater flexibility to respond to issues of equity or to adjust rates according to impact. Three of the options also provide incentives to reduce congestion. And together, they can provide a stable and predictable revenue stream.
Here we present some important questions and answers on the proposed revenue tools. Sustainable Prosperity and the Pembina Institute will be conducting a more detailed analysis in the weeks ahead.
Q: Why do we need these new taxes and fees? Can’t governments better manage the tax revenue they already collect?
Municipalities cannot finance a project on the scale of the $50 billion total ($2 billion per year) cited for the Big Move from current, limited revenue sources. Nor can the Ontario government — it is facing a severe debt load, has increasing demands from education and health care, and has no fat to trim or funds to better manage. Major transportation improvements are needed to accommodate the GTHA’s fast-growing population — and that requires finding new ways to pay for the necessary improvements.
Q: What makes a regional sales tax a good option for the GTHA?
Small regional sales taxes are widely used to fund regional transportation plans. For example, Seattle, Phoenix, San Diego, and Los Angeles County have dedicated regional sales taxes of 0.5 per cent, and Denver has a 0.4 per cent tax. Many of these taxes were brought in by ballot referenda that clearly communicated the funds would be dedicated to build transit, indicating majority public support for these measures.
The success of sales tax-based initiatives in North America lies in their clear dedication and accountability: revenues are legally earmarked to specific regional projects and programs that directly serve those that pay the tax.
Q: What is the impact on retail businesses? Won’t it drive people out of the region to shop?
Transit-dedicated sales taxes of 0.5 per cent or less in many U.S. cities have not had significant negative impacts on local retail. A low GTHA regional sales tax — well under one per cent — would similarly keep down the border flight impact on local retail.
If, for legal or administrative reasons, a sales tax cannot be implemented exclusively in the GTHA area, revenues from a small bump in the province-wide sales tax could be dedicated proportionally back to municipalities on a regional basis, for the Big Move in the case of the GTHA, and the infrastructure investments of greatest priority in other regions.
Q: A sales tax is not a user fee. How is it fair to make everyone pay?
A dedicated regional sales tax has everyone — residents, commuters, and visitors — pay for better transportation, recognizing that all gain from the prosperity and quality-of-life benefits associated with improved mobility.
Q: Don’t we already pay enough sales tax in Ontario?
The 2008 GST reduction dropped sales tax levels in Ontario by two per cent, leaving tax room for a modest regional increase. By not focusing on the regional sales tax as the only revenue tool, the rate can be kept as low as 0.5 per cent in the GTHA, minimizing the impact on retailers and consumers.
Q: Why should drivers pay a regional fuel tax to increase service for transit riders?
Transit riders already pay fares that are directed to transit operations and maintenance. For example, the fare box covers 80 to 85 per cent of GO Transit’s operations and maintenance. New transit lines and stations require additional revenue.
Drivers — not just current transit users — will benefit from transit construction. Research by Environics finds that 60 to 70 per cent of drivers in the Greater Toronto Area would switch to rapid transit if it were available. And more people taking transit means less congestion, fewer accidents on the roads, and less pollution.
Q: Don’t people pay enough taxes on their gas already?
Even if drivers pay the added regional fuel tax, they still will be getting a major subsidy from general taxpayers. In mid-March, GTHA residents paid 39.7 cents of combined federal and provincial taxes on a litre of gas priced at $1.30 per litre. There is a widespread view that this fully pays for roads — but in fact, total revenues from road users (fuel taxes, permit and license fees, etc.) cover little more than half the annual government spending on roads. The other half is subsidized by general revenue sources, paid for by all taxpayers whether they use these roads or other modes of transport.
Q: Won’t a regional tax lead to “gas flight” — people driving out of the region to get their gas?
The GTHA-wide nature of the tax means that most people would not save money after driving the distance required to escape the tax.
In Vancouver, expanded public transit has been funded in part by a fuel tax, catalyzing a drop in per capita car use and a jump in cycling (up 26 per cent) and transit use (up 17 per cent). Although Vancouver’s 17 cents per litre fuel tax, added to B.C.’s six cents per litre carbon tax, has led to some cross-border fuelling in neighboring Washington State, this should be less of an issue in the GTHA, where a much lower tax rate can be considered — under 10 cents a litre and as low as five cents.
Furthermore, recent studies have shown that cross-boarder travel from B.C. to Washington State occurs in search of cheaper products in general, and shoppers will fuel up while they are there rather than driving there for the sole purpose of buying gas.
Q: Won’t retailers have to absorb the cost of a commercial parking levy, and won’t that drive up costs of merchandise?
Parking already has real costs: the cost of the land devoted to parking instead of other purposes, and the costs of building, maintaining, and repairing parking spaces. Owners of parking lots at malls and offices choose whether to pass these costs to drivers through parking charges, pass them on to tenants who then charge higher prices for goods and services, or absorb the cost through lower profit margins. They will need to make the same choice about whether to pass on the cost of the commercial parking levy.
Polling in the GTHA finds that drivers are willing to pay higher parking fees to improve transportation infrastructure.
Q: How are express high-occupancy lanes different than road tolls?
Express lanes are paid but optional lanes on a major highway that allow drivers to bypass traffic congestion. In California, which shares Toronto’s congested highway problems, a paid express lane on a major highway (Route 91) averages 60 miles per hour (100 km/h) during peak periods compared to 15 mph (25 km/h) in the regular lanes — and similar benefits have been found on other tolled highways.
In the Toronto region, Highway 407 is an entirely tolled highway; because it costs to drive it, the highway is usually free of congestion. In contrast, an express lane is just one paid express lane on a highway — such as 400-series highways, the QEW, or the Gardiner Expressway — and the revenue could be collected by the province for transit expansion (in the case of the provincially-owned 400-series highways) rather than going to a private company, as is the case with the 407.
Q: Why are these the right tools?
The mix of revenue tools will generate predictable and stable revenue dedicated to relieving the GTHA’s congestion. It looks to those who will benefit from the Big Move transportation plan to pay for it — residents, visitors, commuters, drivers, and local businesses. And it includes incentives to increase transit use, walking and cycling.
The options proposed are a mix of user-pay (such as express lanes) and society-pay tools (i.e. sales tax), as well as those that encourage a shift to transit, walking, and cycling (i.e. fuel tax and parking levy).
Q: How would these taxes affect lower-income residents?
Lower-income residents have the most to gain from improved public transit and reduced auto dependency. Many rely exclusively on public transit, or are forced by limited transit options to own a car at an average cost of over $10,000 a year, a disproportionate percentage of the household budget.
Evaluations of California’s SR-91 highway have shown that low-income drivers do use the express lanes and are as likely to approve of the lanes as drivers with higher incomes. Delays caused by congestion can result in lost hourly wages — more typical at lower-income levels — or extended hours and late fees for day care, which could be avoided with express options.
The revenue tools can be designed to address potential impacts on lower income sectors. For example, to soften the impact on buyers and developers of lower-cost homes, those that fall under a certain price threshold can be exempted from the regional sales tax. The tax rate could also be graduated for homes above that threshold. Another approach is to use tax credits for low- to moderate-income residents, an approach already used for Ontario sales taxes, the sales tax on energy, and property taxes.
Stephanie Cairns is managing director of sustainable communities at Sustainable Prosperity, a green economy think-tank at the University of Ottawa. Cherise Burda is director of Ontario policy and sustainable transportation at the Pembina Institute.
