If the size of the municipal infrastructure funding challenge is the daunting bad news, then the encouraging good news is that the tax burden in Canada has eased significantly over the past 20 years.
Personal and corporate income taxes have fallen since the mid-1990s, and so have sales taxes like the federal GST. All of this presents an opportunity today that did not exist yesterday.
One such opportunity is to consider a “penny tax” for infrastructure. The basic idea behind the penny tax is to give voters in Canadian cities the right to choose—through referendum—whether or not they want to impose upon themselves an additional 1% point of GST in their city to fund specific infrastructure projects.
The idea goes well beyond a new tax for infrastructure. Rather, the idea incorporates a number of features that would make the penny tax the most accountable, transparent, and visible tax in Canada. Not only that, but these features should increase acceptability and legitimacy of the tax, and make it an attractive alternative capable of enjoying popular support. In my mind, all of these features are non-negotiable.
Unlike taxes that are imposed by government from the top-down, the penny tax could only be imposed by voters themselves from the bottom-up through a local plebiscite or referendum. Thus, ultimate responsibility for the tax is left in the hands of the voters themselves. This enhances local decision-making and injects the idea with an inherently democratic flavour. Such referendums for the tax can be held at every other municipal election to keep costs to a minimum. An interesting side benefit is how such referendums could boost lagging interest in municipal elections.
Earmark the Revenue
Not only should the tax be voter-approved, but the specific projects to be funded should be voter-approved as well. Such “earmarking” of the revenue carries two powerful benefits for taxpayers. First, earmarking shields the revenue from being diverted elsewhere. Accountability is strengthened. Second, earmarking establishes a clear connection between a tax and a government expenditure. Transparency is enhanced. The reasons are obvious—taxpayers know where the revenue is going.
A Sunset Provision
The penny tax would only be in effect for a limited time—across two municipal election cycles or six years. After the time period is up and the project’s completed, the tax will “lapse” or “sunset.” If civic leaders want to implement the penny tax again, another set of projects will have to be identified and the voters will have to be asked again. Not only do the voters stay in control, the automatic sunset yields another huge benefit in the form of improved accountability. Governments that are confronted with the risk of losing a revenue source will work diligently to manage the tax wisely and spend the revenue prudently.
Cap the Tax Rate
The introduction of any new tax is often accompanied by fears that the tax will increase over time. This will not be possible with a local penny tax, as the tax rate would be capped at 1% by the enabling legislation that specifies how municipalities can use the tax. Voters could still choose their own rate of tax, however. For example, voters might be allowed to approve any rate of sales tax up to the 1% maximum.
Separate Annual Report
The penny tax should also be subjected to a comprehensive accountability and public reporting framework. A separate annual report on the tax could be produced annually, and would include valuable information such as the amount of tax revenue collected, the usage of the proceeds, and the status of various projects. This ups the accountability ante even further.
Piggy-Back off the GST
To keep administration simple and costs low, the penny tax should “piggy-back” off the existing GST. In other words, local jurisdictions in which the penny tax is implemented would pay GST at a 1% higher rate than jurisdictions that have not imposed the penny tax. This extra 1% would be collected by the federal government, and then returned to the provincial government much like the harmonized sales tax (HST). In turn, the province would hand over the revenues to the municipalities that imposed the penny tax.
Rebate Excess Revenue
This is my absolute favourite feature of the penny tax, because it is very unique and it really protects taxpayers. The penny tax, as I envision it, would be approved by voters only as a mechanism to fund a specific project or set of projects whose costs have been established in advance. But, it can be difficult to predict with certainty just how much revenue a tax might generate over time. If the economy grows faster than expected, tax revenues will exceed expectations. If the tax generates excess revenue, it should be returned to taxpayers. Excess revenues could, for example, be pooled in a reserve fund until the end of the tax cycle. This revenue would then be returned in the form of reduced property taxes. More than a few municipalities across Canada already have experience with such systems by employing mill rate stabilization reserve funds.
Conversely, it may also be the case that penny tax revenues are lower than anticipated. This would mean that not all projects could go ahead. Consideration should be given to establishing a rank order of projects—those with a higher priority would proceed while those with a lower priority ranking would be postponed.
Given the importance of infrastructure, the lower tax burden that we have today, and the right combination of features, there is no reason that the public should immediately rule out a penny tax for infrastructure. The US experience here is instructive. Since 2000, there have been almost 400 various tax and borrowing initiatives for infrastructure in the US. Surprisingly, 70% of these referendums succeed. We will explore the US and the broader international experience with these types of taxes next week.
By: Casey Vander Ploeg, Senior Policy Analyst