3 questions need to be answered before Metro Vancouver approves tax hike
Over the next two months, residents of Metro Vancouver will vote “Yes” or No” in a transit tax plebiscite, but the proposed tax hike to finance what are mostly public transit projects is at best questionable from a transportation economics perspective. At worse, it could cause more harm than good.
If properly designed, built, maintained and operated, public transit systems can serve a vital role in enhancing mobility and accessibility in dense metropolitan areas. Unfortunately, the overwhelming international evidence suggests that many public transit systems are, in fact, improperly designed, built and operated, with disastrous results manifested in gross under-utilization and enormous costs overruns, requiring further infusion of capital funding.
In general, the efficiency and effectiveness of public transit systems is location-based. While highly effective in densely populated areas, its accessibility and economic efficacy effects are reduced significantly in sparsely populated, suburban-type locations, which typifies some communities located at the outskirt of central cities, such as Vancouver.
The tenet that public transit is always superior to other forms of transportation, mainly highways, is simply wrong. In fact, it has been shown that outside the central city, save for targeted transit services, the capacity and quality of the road network provide superior accessibility and economic growth effects than public transit.
Before approving the proposed tax hike, residents should ask:
1) Is this capital spending of $7.5 billion, over three quarters of which is on public transit projects, justified?
2) Do all of the planned public transit projects outlined in the plan offer the best value to residents?
3) Were they shown to be superior to other less-expensive alternatives?
The merit of the plan largely hinges on the answers to these questions.
Even if we assume that the proposed investments totalling $7.5 billion are indeed justifiable and will transpire over the next decade with no cost overruns, this amount still does not represent the true cost.
First, on an annual basis, experience elsewhere suggests that, once completed, we should expect at least an additional 10 per cent of the total capital costs to go to maintenance and operating costs, entailing an extra $750 million per year over the effective life span of the projects (which, incidentally, is more than the amount the proposed tax hike will fetch).
Second, transit systems require periodical upgrading and use of new technologies, suggesting additional upgrading costs each year. Then, depending on how the projects are financed, debt service costs must also be accounted for. Presently, the annual coupon rate on a 10-year government bond for British Columbia municipalities is 2.45 per cent, which means an additional annual cost of almost $184 million.
But these expenses still do not cover the entire cost of the proposal since taxation carries real efficiency and equity costs to the region and its residents. Put simply, the additional tax entails less revenue to commercial enterprises, less purchasing power for consumers and a less attractive economy for out-of-region businesses and tourists.
So these losses to the economy in the form of reduced sales, lost income and a less-competitive regional economy cannot be overlooked as they impose additional real costs caused by the proposed tax hike. Likewise, the regressive impact of an increase in a sales tax cannot be ignored; it means that low- and middle-income groups will pay a higher share of their income than more affluent groups. These intangible social costs cannot be disregarded.
Given the expected revenues from hiking the PST, on the one hand, and the true total costs to the economy of the proposed transportation projects combined with the economic and social costs of the tax, on the other, one cannot escape the impression that it’s a poor deal.
There are better ways to pay for capital-intensive transportation projects. This includes eliminating unnecessary and wasteful projects, a more rational pricing of transportation services (highways included) and rationalized user fees, the use of less distortive taxes, capitalizing on the positive impacts of the transportation projects such as an increase in property values, and the use of private-sector financing in the form of public-private partnerships.
All of these options should be carefully considered before approving the proposed dubious tax hike in Metro Vancouver.
By Joseph Berechman
Joseph Berechman is a Marvin Kristein professor of economics at CCNY, The City University of New York, and formerly the CN Chair Professor in Transportation and International Logistics at the Sauder School of Business (UBC). He has also published policy studies with the Fraser Institute.