The world unfolds in some crazy ways.  In January 2011, I addressed Canada’s first national infrastructure summit in Regina. 

My presentation to delegates was a bit off the cuff.  As part of that presentation, I tossed out the idea of a penny tax for infrastructure.  While I had noodled the idea a bit in some of our early research work, it was not well developed.

While the penny tax idea used less than a minute of my 30 minute talk, it unleashed a storm.  Following the inevitable media interviews, I went back to our Calgary offices and got to work on a study to flesh the idea: The Penny Tax: A Timely Innovation to Boost our Civic Investments. The Canada West Foundation released that report in the spring of 2011, and the penny tax proposal continues to bubble and percolate.

New Development

The latest development was a news story in yesterday’s Saskatoon Star Phoenix and an editorial published today.  Apparently, the mayor of Estevan supports the idea of exploring the penny tax further, Saskatchewan’s Minister of Government Relations says he’s willing to discuss it but is concerned about it, and the mayor of Moose Jaw is not personally a fan of the idea.

Saskatchewan’s Minister of Government Relations is the Honourable Jim Reiter.  In his comments, he said that he wants to listen and doesn’t want to prejudge the idea.  My hat goes off to Minister Reiter for being open to innovative ideas and to engage them.  As the crafter of the penny tax idea, I suppose I should toss my “two cents” into the conversation.

The Concern

The one thing that causes Minister Reiter concern is the impact of an infrastructure penny tax on the province’s business environment. “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,” says Minister Reiter.

I’d like to address that concern.

Point Number One

First, let’s be clear on the unique features of the penny tax:

  • The idea is to provide municipalities with the option of a 1% add-on to the GST.  This add-on, however, does not come about by a government decision to impose the tax.  No, the penny tax would only be imposed if taxpayers themselves decide to do so in a referendum.  It’s a voter-approved tax.  Government makes no decision to increase taxes.  Voters might.  Or, they might not.  The choice is theirs. 
  • All revenues from the penny tax would be used for a basket of specific infrastructure projects, announced in advance, and also subject to approval in the referendum.  It’s a dedicated tax.  Voters approve how the money is spent. 
  • The tax would be in force across two municipal electoral cycles, after which another referendum has to be held if it is to be imposed again.  It’s a temporary tax with an automatic sunset. 
  • The tax rate would be capped at 1%, any excess revenue would be returned to taxpayers via property tax reductions, and a separate annual report would report on tax collections and usage of funds.  It would be Canada’s most visible, transparent, and accountable tax. 

All of this is very important.  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.

Point Number Two

My second point is more substantive.  We need to unpack an assumption here.  Are taxes always bad for the economy, bad for the business environment, and bad for private investment?  A lot of us have bought into that assumption to the point where it is treated as axiomatic.  But, it’s not entirely correct. A lot depends on what tax is in view, how it is administered, and how the revenues are used.

What we have here is a local, voter-approved, and value-added 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 is a necessary and critical support for business.  Without infrastructure, private production is not even possible.  It also lowers the cost of private production.  It makes private production more profitable.  It increases the return to private capital and can stimulate even more private investment.  It gets private production to markets.  And it makes private production more productive—the fuel of long-term and 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 or not “cutting taxes” equals a competitive “business environment” is not the relevant question.

What is relevant, however, 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, frankly.

State of the Debate

Discussion over the penny tax is great to see.  Stimulating debate on important policy issues is what the Canada West Foundation is all about.  Prompting innovative solutions to pressing infrastructure challenges is what Communities of Tomorrow is all about.

It would be nice, however, if the debate could move past the “taxes are bad” mantra.

Does the penny tax idea have wrinkles?  Yes, it does.  Preventing potential local economic distortions is one such wrinkle.  How government can manage different GST rates across the country might be another.  We should do a little more talking about that.

Manitoba has a long history of innovative support for its municipalities.  While the Manitoba Premier is not in favour of a penny tax idea, Manitobans might well be.  The Association of Manitoba Municipalities polled Manitobans in January of 2012, asking whether they supported a “one-cent” municipal sales tax dedicated for infrastructure.  Almost two-thirds (64%) supported the idea. 

I got more than a few sideways glances and chuckles from colleagues at the Foundation about the penny tax idea.  Still do.  But, maybe it has more traction than we think.

By: Casey Vander Ploeg, Senior Policy Analyst