By Edward Keenan
My column this week, which appeared in the print edition of The Grid today, deals with the increase in user fees as a way to pay for City of Toronto services. It’s an interesting topic that I started thinking about recently for a few different reasons.
First, a few weeks ago, after writing about how the growth in city spending under former mayor David Miller can be misrepresented by those who fail to make a distinction between the gross budget and the net budget, I continued thinking about how I’d presented the numbers. I realized that, in focusing on the operating budget, I may have missed something.
Because in 2009, Miller’s government moved the whole solid waste department out of the operating budget—the bins introduced a specific fee for garbage collection that would be used for funding the solid waste department. Which means that department now has its own “rate supported” budget, separate from the operating budget. This was significant, because prior to that, as you can see from this 2007 budget chart, about 6 per cent of the city’s property tax revenue went to fund solid waste management. When solid waste moved out of the property tax/operating budget realm and people now got a separate bill for it, property taxes did not go down and the operating budget did not shrink (see this budget backgrounder for 2009 to see taxes a little higher but the portion for solid waste no longer there). So any honest accounting of how much spending (and taxing) went up during Miller’s tenure will have to account for the new cost of the garbage bill, since it really was a new increased cost that pretty much all homeowners, landlords, and businesses had added to their tax-and-fee-burden. This is not to criticize Miller for that—as I’ve written before, I think the city needed to increase its budget to keep up with the costs of a growing city. It’s just when you’re trying to discuss how much more people of Toronto have been asked to pay, I’d like to try to keep the accounting as honest as possible.
As I was beginning to think about the way fees—including things like water and garbage and parking fees and transit fares—need to be included in any honest discussion of the tax burden, I stumbled across a discussion among US economics bloggers, and Matt Bruenig in particular, who were making the point (for their own reasons) that there’s really no conceptual difference between a fee and a tax. As has been pointed out to me since my column went online yesterday, there are technical definitions in the city bureaucracy (and elsewhere) that make a difference clear, and they certainly feel different (paying a fare when you use something is similar to how you buy food or anything else, whereas pooling money and then providing no-fee service feels like something else). But the point being made, which I find persuasive, is that essentially the government has a list of services and goods it wants or needs to provide, and it gets money from its citizens to pay for those things. Whether it taxes based on income or consumption, or taxes some specific activity or transaction (like parking, or registering a license plate) and calls it a fee, it is still doing essentially the same thing. You could think of income and sales taxes as user fees on the economy, if you wanted to. We make decisions as a group about which taxes seem most fair (some based on ability to pay, some based on use of a resource or service) and which serve our needs (whether we want to encourage people to use a service or discourage them from using it), but either way the government is doing the same thing: collecting enough money to meet its goals.
And for the rhetorical taxpayer we always hear about, the bottom line is what’s important: whether she pays fifteen different bills and then also pays registration fees and tolls and fares every day, or whether she gets one big tax bill a year, the important questions are what she is paying, in total, to live here, and what level of service she is getting in return. (Many of us would rather pay one bill than a million—it’s why we pay a monthly cable bill rather than having everything pay-per view or buy a Metropass rather than pay with tokens. You pay once and then go, rather than thinking about the cost every single time. That’s the same reason we might want a fee system for things we’re trying to discourage.)
Anyhow: I was trying to figure out how to actually chart the real cost changes to citizens of the city over time, rather than relying on one tax or another or one budget measure or another. So I pulled up the city’s consolidated financial statements since 2000 to look at revenue, which show actual revenue collected, and lump it all in together in one budget rather than having operating, rate-supported, and capital as separate documents presented in different ways. It does break it down into some different categories of revenue, which allowed me to exclude provincial and federal transfers (so I could isolate the decisions council itself was responsible for and that Torontonians were solely paying for as Torontonians). For several reasons—some simply having to do with ease of finding like data in various years—I ignored development charges and “other income” and business enterprise income and just focussed on revenue from taxes (property, land transfer, and vehicle registration) and user fees and charges (including the price of water and parking). Because we only have reports from years that are behind us, and I wanted to see how it compared to what we’re planning in the current budget, I called someone at the city and got them to guide me through the various budgets to get the projections for revenue from all the various sources for the 2014 budget. I included these in my charts, but it’s important to note that the 2014 numbers are a bit of a different beast for two reasons: they are projections which are intentionally conservative (tax revenue almost always exceeds the budgeted tax revenue projections) and the financial reports use a slightly different form of accounting (accrual rather than cash). For instance, even with a 2.5 per cent tax increase, the city is projecting lower property tax revenue than it collected in 2012. Still, with those provisos, I hope they provide a useful point of comparison next to the true numbers from the past, showing how we plan to continue next year.
Here’s how city revenue from taxes and fees looked over time (compared, for the sake of it, to inflation as calculated on the Bank of Canada inflation calendar):
At a glance, we see city revenue growing higher over time, diverging from the rate of inflation dramatically after 2006. We don’t see quite as much of a levelling after Rob Ford takes office at the end of 2010 as you might expect, but revenue growth does indeed slow a bit (but only a little bit in his first two budget years, for which we have accurate year-end data). And as you might instinctively expect, total revenue from taxes and fees jumps in Miller’s second term—after all, that’s when he introduced the new revenue tools that so enraged his successor. So I looked at a breakdown of the sources of revenue in the above chart over the same period:
A couple things jump out at me here. One is that, yes, the new revenue from the LTT and VRT appears and grows, but for the amount of time we spend talking about it, it’s still relatively tiny compared to the others. The other is that the gap between property tax and user fee revenue closes as we move through the years. That becomes more apparent if you just look at the ratio of property taxes to user fees (where user fee revenue in any given year equals one):
You can see that the trend line is pretty pronounced in the entire period since 2000. Indeed, in virtually every financial statement, it is remarked upon by staff in their comments accompanying the long term consolidated revenue charts. In the 2003 statement, on page 18, it says, “The table below demonstrates that property taxes have been the slowest growing revenue source for the City…. As a result, more reliance has been placed on user fees, government grants and other sources of revenue to meet the City’s expenditures.” And, plus ça change, in 2012 here they are on page 70: “As a result of the slow growth of property tax revenue, more reliance has been placed on user fees….”
Now, this information on its own doesn’t tell us a lot about whether the shift is good or bad. Our total revenue should probably come from a blend of different sources, collected in different ways, to attempt to be fair and reasonable. Even looking at things from the service-delivery end, there are very good reasons to want to charge fees for some services, and good reasons to want to not charge for others (leading you to rely on property and other pooled tax sources to fund them). Again: we have a limited amount of parking downtown, and we have gridlock caused by too many cars trying to enter, drive around in, and park in the central city during the day. So we want to manage demand for parking, and perhaps dissuade people from driving into the city and parking there if they don’t need to, or if they have another means of getting around. So charging a fee for parking makes sense on the parking-delivery-end, and is a handy source of revenue at the same time.
This was the logic behind moving the solid waste budget off the property tax base: we have limited space in landfill, we want to encourage people to recycle and compost, so we’ll charge them directly for garbage pickup (while providing recycling and compost pickup for free) and fund the whole thing out of the fees we collect from that. (Now, I think Miller and his crew kind of botched this up by introducing the bin system. The idea is that the bigger bin you choose, the more you pay, so people have an incentive to go with a smaller bin and therefore produce less garbage. But because you choose your bin once and pay once a year, there’s no week-to-week incentive, and many people who know they’ll sometimes need a bigger one will automatically choose the larger size so it’s there for those big-garbage occasions like parties—better safe than sorry—and then have no incentive to keep it empty on other weeks. Plus the bins themselves are unwieldy and ugly. I think we’d be better off with a tag system, where people pay a couple bucks for each tag and have to put one on every bag of garbage they put out. Anyhow: Encouraging conservation was the thinking.)
Similarly, water rates were jacked up in the Miller years to encourage people to waste less water, and to fund much-needed (like, really needed) investment in our water and sewage infrastructure. This has created a bit of a problem because they’ve been successful—people have reduced their water consumption so much that we’re short the money we need for that infrastructure budget.
Anyhow, you can see looking at the chart how the ratio closed sharply in the middle of the second term, which I think is probably largely a result of those measures. But that doesn’t explain all of the closing ratio, and it doesn’t explain the sharp drop-off from 2010 projected for the 2014 budget.
There are some obvious things contributing here: the price of a Metropass has gone up 12 per cent since 2010, for example. Here’s a case where the increase in user fee revenue seems to run contrary to what we’d want. I mentioned above that a reason to charge for parking is gridlock—you want to encourage people to avoid driving into the city and clogging up the roads. One obvious way to do that would be to make transit cheaper and more attractive. But we’ve been doing the opposite, raising fares. The TTC in 2014 will fund about 80 per cent of its operations from the farebox (up 10 per cent since 2009)—a level unprecedented in North America (New York City and Chicago both have recovery ratios of 55 per cent, for example). These are the kinds of user fee increases that hit people in Toronto in their wallets—especially, people who are poorest and rely on services like transit—and discourage things we don’t necessarily want to discourage.
There’s a lot more of it going on: for a clue to what’s driving the rise in user fees now, we can just look again at that page in the 2012 financial statement: “The City undertook a User Fee Review in 2011 which allows the City to set user fee prices with the objective of full cost recovery, where appropriate.” This review is responsible for a big boost in revenue coming into the city from the people of Toronto, but perversely, the mayor and City Manager do not consider it a form of tax, or a burden on the taxpayer. Indeed, even as the mayor includes cutting the vehicle registration fee of $60 as among the billion dollars in savings he’s delivered (he does this over the objections of the city manager), he also includes $24 million in “savings” from hikes in user fees (he does this with the endorsement of the city manager). This includes new and increased user fees in places like recreation and parks and licenses and permits. This all came after a user-fee hike in 2010 that saw fee revenue at community centres jump by $16 million. Again, these fees act as a disincentive to use community parks and recreation programs, and will be a burden the most on the people who don’t find themselves with easy private-sector alternatives: that is, the poor.
Leaving aside then, for a moment, those rate-supported budgets for water and garbage and parking: In its 2006 operating budget, the city expected to fund 14 per cent of its operations from user fees. In 2014, the percentage, again just for the operating budget, is up to 17.1 per cent. That’s significant—the increase alone is almost as much as the percentage the land transfer tax brings in.
I think there’s a lot to talk about here—especially at the level of specific programs where fee hikes are proposed. But mostly, as I wrote in my column, I just think we should be talking about it, period. I think it’s entirely fair that people should consider their tax rates and whether they are going up and by how much when they talk about government—especially if they also talk about service levels at the same time. But I think we need to include user fees of all kinds in that discussion, because they really are a meaningful form of taxation that hits our pocketbooks just as hard. We don’t yet collectively recognize that—we’ve got it so twisted that our leaders think of fee hikes as a “savings” for taxpayers.
And once we do recognize that these fees are a form of taxation equally worthy of debate, then I think we should talk more meaningfully about what the thinking is behind how we get the money—some things we charge for directly because we want to discourage them or regulate demand, some things we charge for indirectly (through broader taxes) because we think they are more valuable to all of us as an open community resource. In some cases, administering a charge becomes a huge bureaucracy and cost centre in itself. In other cases, it seems unfair to ask those relying on a service to pay the full cost of it. In still other cases—parking, road tolls, I’m looking at you—we may want to introduce new or higher charges. Or maybe we don’t. But it’s not really a debate that’s happening in any significant way outside the walls of City Hall.
As it stands, I think taxes that cause sticker shock are the ones we obsess about—and ones populists most want to cap or eliminate. You get one property tax bill every year, and it hurts to write a cheque, so people want to brag about keeping increases below a certain percentage. Most people don’t pay the land transfer tax in a given year, but if and when they do, a bill for $8,000 on an average house—or $15,000 on a bungalow in Willowdale—is the kind of thing you remember, even if you’ll save that money back over five years compared to the property taxes on a similarly-priced house in Vaughan. Meanwhile, the ones we pay in small increments are ones that are less controversial. A Metropass user will pay $1605 to use the TTC next year—$153 a year more than they paid in 2010. But it’s a few extra dollars a month, and we don’t call it a “tax,” so who notices? Somehow I don’t think we’ll see this chart in Rob Ford’s re-election materials next to his claims about eliminating the vehicle registration tax:
But perhaps we could have a more interesting conversation about the cost of things to the people of Toronto if we did.
Above graphs made with a resource made for children (so, about my speed) at NCES Kids Zone.
Some notes: To get my projections for consolidated revenue for 2014, I followed the directions of city staff to add together the revenue projections in staff-recommended budgets—the operating budget, and the rate-supported water, solid waste, and parking budgets. This is what I came up with: OPERATING BUDGET: Property tax: $3.765 billion MLTT: $0.342 billion User fees: $1.637 billion PARKING: User fees: $.138 billion SOLID WASTE: User fees: $.270 billion WATER: User fees, including water sales: $.990 billion TOTAL FEES, OPERATING AND RATE-SUPPORTED: $3.035 TOTAL REVENUE FROM FEES AND TAXES: $7.120
As noted above, the other information for past years comes from financial annual reports, where I looked at consolidated annual revenue charts that broke revenue down by category fairly neatly. You can find them all on the city’s website.
UPDATE: I have tweaked two of the graphs—the one showing the ratio, which essentially shows how much property tax revenue is as a multiple of user fee revenue in any given year, has been simplified (removing the line showing user fee revenue) to be (I hope) easier to understand. The final graph has had the label on the red line labelled properly—as it was pointed out in the comments below, it initially had a confusing error.