Municipal Mythologies: Infrastructure wish lists aren’t actual deficits

Commentary, Taxation, Frontier Centre

Budget season has arrived at the municipal level, with the usual financing myths being repeated over and over again. The refrain goes as follows. Canada has an immense infrastructure deficit. Property taxes, the major source of municipal revenues, are the worst of all taxes and cannot be increased. Municipal governments need manna to fall from heaven (manna being federal and provincial dollars). It is a tiresome refrain. Let’s first start with the supposed $120-billion infrastructure deficit (continuously repeated for almost a decade, even after $40-billion of committed 2007-14 federal infrastructure spending).

Canadians well understand the concept of a fiscal deficit, which is the observed difference between public spending and revenues. A public infrastructure deficit is a fictitious concept comparing what is spent on infrastructure (an observable number) with what “ought to be spent” (an unobservable number).

In a world with scarce resources, people want more money spent on something than what is available. But that is not a “deficit.” Otherwise, we have health, education and social deficits, to name a few. In principle, optimal spending would be based on a benefit-cost calculus and programs rejected if benefits are less than cost.

In the public sector, infrastructure spending is not only determined by economic considerations but also by political whims. Some projects like opera houses and sports stadiums are viewed as necessary “infrastructure” by some, but not others. Even if the public agrees that some projects are critical, costs become out of line with what is really needed due to poor planning or unnecessary rules (such as artwork on structures).

For example, Calgary’s tunnel-visioned city council voted for a $414-million project including road upgrades to link the northeast part of the city with the airport. Maybe this makes economic sense, but one cannot help wonder whether the money could have been better spent elsewhere (like LRT expansion). And even if everyone agrees this is a good spend, maybe it could have been built at less cost (Naheed Nenshi suggested $150-million on a website before becoming Mayor).

The so-called infrastructure deficit can be as big or as little as politicians and their voters seek.

Another myth regards the much-maligned property tax. Property taxes reduce the incentive for improvements, so they impose some economic cost. These taxes are also heavily criticized as being unfair to low-income residents, even though several provinces provide a property tax credit and allow tax increases to be deferred for the elderly until property is sold.

Despite these criticisms, the property tax is one of the least harmful taxes in today’s world. Land and structures do not move, so property taxes tend to fall on the owners and can therefore be mildly progressive (as the rich tend to spend more on housing than the poor). At the municipal level, the property tax operates as a surrogate user charge, albeit only in a rough way, when municipal infrastructure spending on sewers, bridges, transit, parks and roads increase property values.

This is not to say that property taxes are well designed. As I have shown with Tom Roberts in a 2004 C.D. Howe Institute study, property taxes discriminate against rental housing. Business property taxes have been in excess of municipal spending benefits, thereby hurting competitiveness. Singleoccupied housing is under-taxed since the levies are less than the value of municipal services provided to residents, especially so in Alberta.

This gets to the final myth: Federal and provincial governments need to provide more infrastructure money to fund municipal infrastructure spending. Certainly, federal governments should fund border and interprovincial linkages (airports, ports, and some highways and roads). Similarly, the provinces should fund inter-city linkages, since only they can co-ordinate infrastructure spending at this level. On the other hand, municipalities should fund local infrastructure, such as residential roads and bridges, local urban transit and cultural institutions, etc.

This lesson gets lost, which becomes rather unfortunate. Municipal politicians, crying that they have little money to fund infrastructure, seek other levels of governments to raise taxes to fund their infrastructure whims. They typically argue that residents pay most of the taxes in Canada and get little in return (as if federal and provincial spending does not matter to city residents).

However, by breaking the bond between taxes and spending powers, we mess up political accountability. Upper-level governments become responsible for municipal decisions, even though their voters span a much larger geographical area. Residents of one city end up paying for another’s local infrastructure, yet cannot vote for its municipal mayor.

It is far better for municipal governments looking to spend money on their infrastructure programs to raise their own public funds. Municipal property taxes and user fees are quite appropriate levies to fund infrastructure.

Where municipal councils are correct is in arguing for more flexible financing tools for local infrastructure. The most efficient and fair revenue source is tolling to better price major roads and bridges (technology is now making this easy). Unlike air and rail travel infrastructure (excessive for air and subsidized for VIA Rail), roads are poorly priced.

As a second-best alternative, some municipal excise taxes would make sense, such as levies on fuel, amusement tickets and hotels to cover infrastructure that benefits users, including tourists. A gasoline tax is less effective in pricing roads for use and congestion compared with tolls — increased toll levies should therefore result in some reduction of fuel taxes for this reason.

Regardless, it is time to put to rest the infrastructure-financing myths propagated by municipalities that look for someone else to subsidize their dreams.