The case against municipal growth taxes

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This article was published 30/05/2024 (506 days ago), so information in it may no longer be current.

It’s looking like the beginning of a long-overdue conversation in our city.

Many of the people who used to think the city had a “spending problem” have come around. Our infrastructure deficit is now $8 billion, about $2 billion worse than five years ago.

Clearly, we’re not spending enough to keep up.

Unfortunately, many have simply moved over to the “revenue problem” camp. Intent on finding more money, they propose new municipal income or sales taxes. There are several key problems with these so-called “growth taxes.”

Proponents argue that funding local infrastructure from property taxes is inherently unfair, since they don’t automatically grow as the economy does, like sales taxes do. But there’s actually nothing preventing council from raising property taxes when the economy grows.

That’s a political problem, not an economic one.

So the real advantage of a sales tax is to hide tax increases from public scrutiny, since they happen automatically without any need for council discussion. In that sense, they’re just a more opaque local tax.

Worse, even, is that with less transparency comes less accountability. When city leaders don’t need to debate tax increases, they aren’t held to defend their spending decisions, leaving less incentive to ensure that infrastructure investments are positive-returning. Given how little attention has been paid to that already, that’s a step in the wrong direction.

Still, those might be trade-offs worth considering if sales taxes actually solved the problem. But when looking throughout North America, cities with a local sales tax fare no better than cities without. For example, the California cities of San Bernardino and Stockton both declared bankruptcy, despite having some of the highest municipal sales tax rates on the continent.

And if all that wasn’t bad enough, “growth tax” is actually a misnomer. Sure, they grow when the economy does, but they decline with the economy too. When a recession inevitably hits, sales tax revenues drop, sometimes precipitously, like during the COVID-19 pandemic.

Cities provide critical life-sustaining services to residents, like water, sanitation, and public safety. Should we be betting our ability to provide clean drinking water on the gyrations of the economic cycle, federal interest rate policy, and unpredictable world events?

Such critical services need a stable source of funds to ensure they’re never disrupted.

Rather than have the delivery of those services be reliant on the economy, a measure of community income that can vary wildly from year to year or even month to month, it would be more prudent to fund them from community wealth, which is much more stable over time.

And since more than three-quarters of Canada’s national wealth is held in real estate (77 per cent as of 2022), the best way to access that would be through some sort of tax on those properties. Like a … property tax.

That could be an argument for a “fairer” split between orders of government.

But the government is us. It doesn’t matter which order of government funds what. Ultimately, the money comes from our pockets.

Here’s where it becomes important to go further in our discussion. To not only recognize there isn’t enough money, but to ask, by how much? Can we even afford that? And if not, then what?

The city’s infrastructure deficit comes to $800 million per year over the next decade. For comparison, the provincial gas tax, which we’ve gotten a holiday from because we couldn’t afford it, only brings in about $330 million per year.

For the entire province.

There isn’t an extra $800 million per year in the local economy available to be taxed.

And that only includes infrastructure maintenance for projects over $5 million. Projects like Happyland Pool, needing $3.6 million in capital upgrades, still aren’t counted here.

But before we start closing more pools, we should note that 88 per cent of our infrastructure is just the roads and pipes, according to city reports. And the quantity of roads and pipes we need is entirely determined by how we grow our city.

A 2023 study of Metro Vancouver found that compact, walkable, mixed-use development requires five to nine times less infrastructure per person than low-density, single-use, car-dependent development.

And a 2021 study from the City of Ottawa showed that servicing low-density greenfield development costs the city $465 per person annually, while high-density infill development provides the city with $606 per person of net profit annually.

The issue we face isn’t a “spending problem,” nor is it a “revenue problem.” It’s an insolvency problem from decades of unproductive investment in a development pattern that returns less than it costs.

A new tax doesn’t address that. A different split between governments doesn’t address that. Making more productive use of our infrastructure investments by having more people walk, bike and take transit, and allowing a denser and more varied mix of uses in our neighbourhoods does.

Yes, it’ll be messy, imperfect and possibly uncomfortable. That doesn’t make it any less necessary, because the alternative will be much, much worse.

Michel Durand-Wood lives in Elmwood and has been writing about municipal issues at DearWinnipeg.com since 2018.