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My two cents on penny tax

As the senior policy analyst at the Canada West Foundation who crafted the idea of a municipal "penny tax" for infrastructure, two recent pieces in The StarPhoenix grabbed my attention - Cities require funding help on Aug. 23 and Minister waryabout penny tax proposal, on Aug. 22.

Government Relations Minister Jim Reiter is concerned about the effects of a tax increase on Saskatchewan's economy, saying: "Our government has been about cutting taxes and creating a competitive business environment. I'd be somewhat reluctant to look at a situation where we'd be increasing taxes."

I have a couple of thoughts that might help address Minister Reiter's concerns.

First, we need to be clear about how the penny tax would work. Our proposal is to provide voters with the option of adding one percentage point to the GST in their municipality for local infrastructure. This add-on does not come from a government decision. The penny tax is only imposed if taxpayers themselves decide to do so. It's a voter-approved tax.

All revenues from the penny tax would be used for specific infrastructure projects, announced in advance, and also subject to voter approval via referendum. The penny tax is a dedicated tax.

The tax would be in force across two municipal election cycles, after which another referendum has to be held if the tax is to be imposed again. It's a temporary tax with an automatic sunset.

The tax rate would be capped at one per cent, and any excess revenue collected over and above projections would be returned to taxpayers. A separate annual report would monitor revenues collected and spent. Such a tax would be Canada's most visible, transparent and accountable tax.

What we're talking about here is providing voters and taxpayers with a choice that drives from the bottom up, and not the top down.

Second, we need to unpack an assumption. Are taxes always bad for the business environment? A lot of us have bought into that assumption to the point where it's almost axiomatic. But, it's not entirely correct. A lot depends on what tax is in view, how that tax is administered and how the revenues are spent.

The penny tax is a local, voter-approved and valueadded sales tax that lands on consumption and exempts personal savings, business investment and business inputs. Economically, that's the best tax going. Also, the revenues are tied to a specific purpose - infrastructure.

That's key.

Public infrastructure supports business. Without infrastructure, private production is not even possible. Infrastructure lowers the cost of private production and makes it more profitable. Infrastructure increases the return to private capital, and that can stimulate even more private investment. Infrastructure gets private production to markets.

In short, infrastructure makes private production more efficient and more productive. And it's those very types of productivity gains that fuel sustained economic growth.

So taxes are only one side of a larger equation. Sure, taxes impose a cost to the economy, but those taxes also provide critical services like infrastructure that benefit the economy by providing a valuable input for businesses.

Whether cutting taxes equals a competitive business environment is not the relevant question. What's relevant is whether the infrastructure funded by a specific tax has economic benefits that exceed the economic costs of the tax. In other words, what's the net benefit? That's what we ought to be talking about.

Discussion over the penny tax is great to see. It would be nice, however, if the debate could find its way past the "taxes are bad" mantra.

Catalyzing debate on important policy issues is what the Canada West Foundation is all about. Together with Regina-based Communities of Tomorrow, we've established www.letstoc.ca, a web portal devoted to developing and discussing innovative infrastructure ideas like the penny tax.

The penny tax idea continues to raise eyebrows. That's good. What's even better, the idea may have more traction than we all think.

Casey Vander Ploeg is Senior Policy Analyst at the Canada West Foundation. Canada West Foundation is the only think tank dedicated to being the objective, nonpartisan voice for issues of vital concern to Western Canadians.