Today, Toronto City Council is debating the revenue tools for transit recommended in the city manager’s report, based on opinion polls and public consultations with Torontonians.
The results of the city’s consultations clearly articulate Torontonians’ frustration with gridlock and crowded transit — but they also reflect the growing support for revenue tools dedicated to the expansion of transit in the Greater Toronto and Hamilton Area (GTHA). The city’s polling found that 85 per cent of Toronto residents believe new sources of revenue are needed to fund transit, and 92 per cent support the introduction of dedicated revenue tools.
There is also a growing consensus on which tools to use. Three of the four revenue tools recommended by the city manager’s report — namely a dedicated sales tax, a fuel tax and a parking levy — were also recommended by the Toronto Region Board of Trade. These revenue tools have been successfully implemented in other jurisdictions, and they look to those who will benefit from the Big Move — residents, visitors, commuters and local businesses — to all contribute to the expansion of transit.
This blog answers some key questions regarding the report’s top four choices: a sales tax, a fuel tax, a parking levy and development charges.
Regional Sales Tax
Q: The sales tax is one of the most widespread tools. Why is it so popular elsewhere?
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. If Metrolinx introduces of tools, a sales tax could be kept low like the US examples, say under one per cent, it 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.
Fuel Tax
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 neighbouring 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-border 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.
Parking Levy
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.
Downtown businesses already pay higher relative parking taxes than suburban locations, where the cost of surface parking is significantly lower. In conjunction with a levy, municipalities could also consider reforming parking policies — for example, by making parking taxes more area-based — so they more fairly reflect the location and footprint of development.
Development Charges
Q: Why did the city manager’s report rate development charges so highly?
It may have to do with how they were framed. The report was based on the results of public consultations and opinion polls conducted by the city. During these consultations and polls, development charges were described as being paid by property developers, rather than by residents, property owners, drivers or all taxpayers. This framing, coupled with the fact that development charges aren’t a new tax, may contribute to their appeal.
Nevertheless, development charges can be passed on to buyers in the form of higher home and property prices (except during extreme market downturns).
Q: Will development charges raise enough funds for the Big Move?
Compared to big-ticket revenue tools such as a sales tax, a parking levy, a fuel tax or tolls, development charges will not raise significant funds. For a breakdown of the revenue potential of each tool, see the table below.
Although they may not be a main source of revenue, development charges have been effectively implemented for specific projects. One such example, which pertains to the transit funding debate, is the Toronto-York Subway Extension — it is being funded in part by development charges permitted under a special section of the Development Charges Act.
Source: City of Toronto Metrolinx Transportation Growth Funding.
Q: Aren’t development charges needed to fund other municipal infrastructure?
In Ontario, development charges are used to fund many capital costs and services resulting from growth such as sewer lines, road extensions and police stations — all of which are continually in need of funding.
Development charge increases could potentially pay for some of the costs of new transit infrastructure, but as discussed in my analysis of development charges earlier this week, the policy would need to be reformed to ensure that it supports smart, compact development rather than subsidizing low-density urban sprawl.
This blog contains research previously published by the Pembina and Sustainable Prosperity on revenue tools.
