User-pay approach a part of fairness review of property taxes
There’s an economic maxim that says those who benefit from a particular good or service should pay the cost of said good or service.
When it comes to taxes, that credo is largely thrown out the window. That’s particularly clear in looking a rapidly increasing property taxes.
To be sure, there are government service that provide a benefit to everyone – at least in theory – and therefore should be paid by everyone. That’s a list that includes emergency services, roads and associated infrastructure.
Where things start to stray is in the realms of recreation, transit and a host of non-essential – and often non-productive – services. There, seemingly uncontrolled costs are being passed on to all taxpayers, majorities of whom often don’t use the services.
Given the mounting costs, user fees may be the way to fund such programs after, of course, some are eliminated in face of cost-benefit analyses.
At a time when taxes are increasing at a rate that would see them double in less than decade, hard choices lie ahead.
Last year’s 14 per cent tax hike to fund a new recreation complex in Wellesley is a case in point. The increase was not well received, understandably. The ensuing debate called into question the rationale of increasing everybody’s taxes despite the fact many residents would never use the facility.
Such is the conundrum of so-called soft services at a time when costs are rising well beyond sustainable levels.
“The municipal funding decision, in essence, boils down to who should bear the burden for the costs of their goods, services, and privileges. Should it be users, through some form of user levy, or local taxpayers, through property taxes? Public finance experts generally agree that governments should prefer to solve their funding problem by using revenue instruments that minimize distortions (in the language of economists, revenue tools that are efficient) and maximize fairness,” writes University of Calgary economics professor Lindsay M. Tedds in a paper entitled Who Pays for Municipal Governments? Pursuing the User Pay Model, making note of the those-who-benefitshould-pay maxim.
“This leads to the argument that governments’ approach to solving this problem should generally be ‘wherever possible, charge!’ That is, where possible, the direct users, the beneficiaries, of the goods, services, and privileges should pay the price of providing the goods, services, and privileges. By charging beneficiaries directly, this ensures that the goods, services, and privileges are consumed by those who value them the most and the government obtains direct feedback as to whether citizens really desire the provision of the goods, services, and privileges at the cost incurred to provide that good or service. This is what economists call an efficient outcome. Efficiency is achieved when goods and services are produced at the lowest possible cost to the producer and the quantities that are provided are of the greatest possible benefit to the consumer.”
Achieving such efficiencies isn’t always easy, however, as she noted in an interview this week.
“Municipalities are the most complex of all the governments that I work with, provide advice and guidance to. It's because they're providing everything from stormwater drainage… to fitness classes in a recreation centre. It's very complex,” she said.
To deal with the multitude of services, municipal governments have few financial tools, essentially property taxes and user fees, Tedds adds. (That’s prompted municipalities to push for more sources, from sales taxes of their own to increased shares of existing federal and provincial taxes, such as those on fuel.
The funding of any particular service – whether by general taxes, user fees or some combination of both – comes down to a political decision based on preferences and objectives.
Transit, for instance, could easily be funded 100 per cent by user fees, from an accounting perspective. On the operating side, it would make sense for those who use the service to pay for it, but even in a place like Toronto, fares cover just 70 to 80 per cent of operating costs, whereas here that number falls to just a fraction of that, less than 20 per cent.
“That (transit) is a traditional sort of service where you can fund it off of user fees. How much you want to fund it off as user fees depends on other objectives, which will include things like wanting to cut down on congestion, wanting to achieve emission targets, and things like that. So it might not make sense to fund 100 per cent off of user fees, because you have all of these other objectives that you're trying to achieve,” Tedds explains.
Given that fares don’t cover operating costs, users are in essence paying none of the capital costs, which even in this region reaches into the billions of dollars, money that will never be recouped.
With a service such as recreation, user fees are the norm, but they don’t typically cover all operating costs. Capital costs pose something of a dilemma, as in the Wellesley case. Massive building costs – prices have increased dramatically in recent years, increasing the burden – are paid for by everyone over, say, 20 years, but not everyone uses such facilities. But once the building is paid for, those who come after are essentially getting a free ride.
Figuring out what’s actually fair – i.e. not the current system – is the job of politicians, who are tasked with finding the right balance. That’s now more essential than ever given runaway costs and unsustainable tax increases.
Shifting to user fees makes the system more equitable. It’s also a way to gauge the value of the service: if people find it worthwhile, they’ll pay for it. If not, then it may be time to review whether to reduce or eliminate that service.
Such information is useful to municipal governments, says Tedds.
“People vote with their feet. That's the feedback that you get. Elections are another way where you get feedback,” she notes. “There’s no easy way [to make funding choices].
We all have different preferences. We all have different values and perspectives. Through all of that mess, the municipalities and the politicians are supposed to get a signal from the public.”
If change is going to come, it’s going to come when residents apply pressure to municipal politicians.
“Get involved. Get yourself informed and make sure you know what's going on.”