Municipal finance ideas
You can't beat something with nothing
Originally posted as a Twitter thread, including some longer quotes as screenshots.
The need for municipal funding
Part of the reason housing is so scarce and expensive in Metro Vancouver is that we tax new housing like it's a gold mine, instead of raising property taxes, because property taxes are highly visible and thus unpopular.
The MacPhail Report identifies this as a key problem. There's a number of ideas floating around for alternative ways to finance municipal needs.
Incentives for local governments are backwards. Any major project requires a rezoning, and they negotiate to get 70-80% of the increase in land value. This means that local governments benefit from keeping land prices high. The report recommends finding some other way to finance local governments.
A similar observation by Michael Manville and Paavo Monkkonen: Unwanted Housing.
There’s strong incentives for municipal governments to tax new housing heavily. They have to deal with major social problems at the local level, and they have limited sources of revenue. The most economically efficient local tax, taxing land value, is highly unpopular with property owners.
So new development is an opportunity for municipal governments to raise funds, even if it means higher prices and rents for homebuyers and renters.
Senior governments in BC, Ontario, and at the federal level have been pressuring municipal governments to freeze or reduce development charges. But you can't beat something with nothing. Municipal governments have very strong incentives to raise development charges.
Convincing them to rely less on taxing new housing like a gold mine will require having some kind of workable alternative that they can use instead.
So what are some alternatives?
Incentives tied to housing starts
Mike Moffatt and Cara Stern suggest that the federal government provide a flat $10,000 per housing start, at a cost of about $2 billion per year. It’s simple and easy to understand, which is a huge advantage.
The MacPhail Report has a similar recommendation for a housing incentive program (although it sounds more complicated than Moffatt and Stern's proposal), plus some others recommendations that are less specific.
Pay for water/sewer infrastructure through full-cost usage fees
Frank Clayton (at TMU’s Centre for Urban Research) has a detailed proposal: instead of paying for water and sewer infrastructure through up-front charges (requiring larger mortgages), use long-term bonds paid down by full-cost water fees, similar to electricity infrastructure. New Direction for Funding Growth-Related Water and Wastewater Infrastructure in the Greater Toronto Area and Hamilton, December 2014.
Benjamin Dachis at the C. D. Howe Institute also argues for this approach. Stop Hosing Homebuyers with Water-Related Development Charges, August 2018.
A recent article by John Michael McGrath describes a similar recommendation included in the Blueprint for More and Better Housing. Want to boost housing affordability? Then start thinking about sewers, March 2024.
Former Calgary city councillor Brian Pincott says that Calgary followed this approach from 2000 to 2010, although they subsequently moved away from it. It sounds like Calgary now charges new greenfield housing for the initial infrastructure cost, but not the life-cycle cost. Trevor Howell, Proposed levy agreement sees developers pay full cost for water, sewer infrastructure in new, established areas, Calgary Herald, January 2016.
Local sales or income tax
Another idea: a municipal or regional sales tax. Toronto to explore municipal sales tax as part of plan to tackle 'unprecedented financial crisis.' Lucas Powers, CBC News, August 2023.
David Macdonald at CCPA proposes a municipal income tax.
The advantage of a sales tax is that it's more economically efficient - this is why the Nordic countries have value-added taxes around 25%. Stephen Gordon explains.
Local sales taxes and income taxes are used in a number of US cities. Introduction to local income taxes by Jared Walczak, Janelle Fritts, and Maxwell James at the Tax Foundation. They note that property taxes are economically efficient but unpopular.
In BC, Tom Davidoff suggests raising property taxes and lowering income taxes.
Eleanor West and Marko Garlick point out that local governments in the US and elsewhere typically use a fixed property tax rate, instead of lowering it as total property value increases, as BC municipalities and New Zealand councils do.
Unlike local governments in the US, Denmark, and Australia, which tax a fixed percentage of a property’s value, New Zealand councils tax via a rating system. Councils determine the total amount of revenue to collect each year, and then each homeowner pays in proportion to their share of total property value. In other countries, more housing automatically brings in more revenue; in New Zealand, new housing only slightly reduces the burden on existing properties.
More
Federal government ties $6B infrastructure funding to housing reforms
Federation of Canadian Municipalities urges governments to develop new fiscal plan for cities. Lily Dupuis, CBC News, June 2024.
Twitter thread by Carolyn Whitzman
Hi Russell , still enjoy your daily food for thought thank you