What the heck is tax withholding and why does it matter for whether maternity and parental benefits are ‘tax free’?

As you all may know, I recently wrote about the Conservative Party of Canada’s claim that they were making maternity and parental benefits (why for the love of all that is taxes, can’t they bring themselves to say parental benefits) tax free.

In a nutshell, no they are not making maternity and parental benefits tax free. They are simply created a nonrefundable tax credit that won’t be applied to the income until tax time. The credit will be paid out at 15% whereas someone women will, gasp, actually be paying a higher tax rate on the maternity and parental benefit income. In addition, we already have numerous tax credits in place that already make this income tax free or nearly tax free for others. Whether or not you, the beneficiary, actually derive any benefit from this tax credit depends on a host of complex factors, but overall to claim it is tax free when it is not tax free for everyone is just not factual.

The CPC has since made two claims related to my critiques. First, the nonrefundable tax credit will be allowed to be carried forward so that if you are unable to get the whole benefit in any tax year, you can try again in another. Great. It is unusual to treat nonrefundable tax credits in this way, but not unheard of. After all the tuition tax credit  has the same feature (but the tuition tax credit can also be transferred, and I don’t hear anything about a similar feature (yet) for the maternity and parental benefit tax credit). This stranded tax credit being allowed to be carried forward means lower income parents may eventually derive benefit from the tax credit, albeit not in the year in which they are actually, you know, on leave caring for an infant.

Does this change now mean their claim of making maternity and parental benefits tax free true? No, because it still ignores the complexity of a progressive income tax system and marginal tax rates.

My second critique has been that the existence of the nonrefundable tax credit does not change the fact that under the Income Tax Act, income from maternity and parental benefits are subject to withholding, meaning that when the benefits are paid, the payer (Services Canada) but, by law, withhold taxes on the income benefit. Withholding is set out in section 153 of the Income Tax Act.

This section requires anyone who pays the outlined forms of income must “deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General on account of the payee’s tax for the year under this Part or Part XI.3, as the case may be, and, where at that prescribed time the person is a prescribed person, the remittance shall be made to the account of the Receiver General at a designated financial institution.”

This means even with the nonrefundable tax credit in place, parents will still only receive the net of tax withholding amount at the time the benefits are paid. If the Conservative Party of Canada wants to exempt maternity and parental benefits from withholding they can’t just say “Hey CRA, don’t withhold taxes.” They have to actually change the Income Tax Act and any associated regulations, legislation, and prescriptions to make it so. They will have to be sure that they make these changes to apply only to maternity and parental benefits, increasing a host of implementation complexities. After all, you can in fact get both other EI benefits in the year you also get EI maternity and parental benefits. This what is behind my statements that in order for taxes not to be withheld, they need to modify the TD1 form.

And, just to be clear, for parent’s whose marginal tax rate on the benefit income is above 15% THEY WILL STILL OWE TAXES AT TAX TIME ACCORDING TO THE DIFFERENCE BETWEEN THE 15% CREDIT AND THEIR ACTUAL MARGINAL TAX RATE. While everyone wants to say well, wah, they are higher income people, they can afford it. I want to remind everyone that when it comes to an unexpected income tax liability when you are on reduced income and juggling a young family, that liability will come as a shock, especially since you were told by the party that brought in this regime that the income was supposed to be tax free.

It is simple. Don’t say you are giving maternity and parental benefits tax free status when you are not. The CPC are not doing this. They are creating a nonrefundable tax credit. Full stop. I am not saying anything about whether this policy is good or bad. What I am saying is their communication is not factual and is not consistent with the Income Tax Act. And any of their tweaks over the last few days does not change this.

 

No, the Conservative Party of Canada are not making maternity and parental benefits ‘tax free’

On August 20, 2019, the Conservative Party of Canada (CPC) announced that they will “make maternity benefits tax free.” I have so much to say here.

For starters, while all the communications from the CPC and Andrew Scheer focus solely on the word ‘maternity’, the proposal actually applies to both maternity and parental benefits. Maternity leave is a 15 week leave that only the birth parent can take and it is a period of time allotted solely for the birth parent to recover from the trauma of birth. Parental leave is a 35 week leave (or 78 week leave if you opt in for the extended benefits) that either parent can take to allow them time to care for and bond with their new child (whether the child be physically birthed by one of the parents or adopted). It is perplexing to me why they would only use the word ‘maternity’ in their highlights, but I expect that has something to do with political spin, something that is lost on me.

More importantly though, I am sorry to say the CPC are not making these benefits ‘tax free’. If we look in the Oxford dictionary tax free is defined as ‘exempt from tax.’ That is, people reading this statement will think, and rightfully, that the income will be free from tax, not taxed, that they don’t have to pay tax on the income received from maternity and parental benefits. That, my friends, is not the case. What they are offering is a 15% nonrefundable tax credit. Anyone saying that a nonrefundable tax credit is the same as something being tax free knows very little about the tax system.

Let’s look at this. First of all, benefits paid out under the EI system, including maternity and parental benefits, are taxable income. Premiums paid into the EI system are paid out of your pre-tax employment income. Benefits then paid out of these contributions are then taxable. That makes sense. Income should only be taxed once (in theory, yes there are examples where it is taxed more than once and there are examples where income is never taxed) so you don’t pay tax on the contributions to EI, instead you pay tax on the income stream derived from these contributions, the income you get when you make an EI claim.

Second, in order to qualify for maternity and parental benefits you must have had 600 hours of insurable employment in the period before the start date of the benefit period. You have to had worked and earned employment income from that work. That is, you must have earned income before the benefits are paid. The maternity and parental benefits are paid after that qualifying income is earned, meaning the applicant parent will owe their marginal tax rate on these benefits. That marginal tax rate will depend on their income earned in the period before they take maternity and parental leave which will also depend on what month the child is born.

Third, when you receive your maternity and parental leave benefits, tax is withheld (this is called withholding) on that income. You only receive the after tax amount. But our tax system does not work well for people with multiple sources of taxable income. The withholding on each source of income only factors in that source of income into withholding. The end result is most people with multiple sources of income do not have enough income withheld on their earnings and they owe money when they file their tax system. This is true for maternity and parental benefits. The amount withheld assumes that this income is the only income you have earned, ignoring the actual marginal tax rate that you will owe on these benefits. This is why most people who receive maternity and parental benefits tend to owe money when they go to file their taxes. Sadly, because few people understand the system, they are mostly quite shocked and annoyed by this.

Fourth, unless the CPC modifies the TD1 form to allow for their proposed nonrefundable credit to be applied directly to maternity and parental leave benefits then what is outlined in the previous paragraph would still hold if this credit comes to fruition. That is, anyone receiving maternity and parental benefits will still have taxes withheld from their weekly benefit payment and will not be able to able to apply to have this nonrefundable credit applied until tax time.

Fifth, not many people understand how nonrefundable tax credits work. Just because you claim it does not mean you get any benefit from it. The way it works is first you determine your taxable income which is on line 260 of the income tax form. Taxable income is your total income less deductions (like RRSP contributions, union dues, child care expense deduction, capital losses, norther residents deduction, etc.). This is the income to which the federal and provincial statutory tax rates are applied. As noted on this site, the federal statutory tax rates are as follows:

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So on the first $47,630 of income you pay 15%, income over that but under $95,259 is taxed at a higher rate of 20.5%, and so on. So if you earn $55,000 in annual income, your tax owing before credits are applied is 47630*0.15+(55000-47630)*0.205=$8,655.35. It is now that nonrefundable tax credits are then subtracted from the tax owing. They are applied in a particular order and the total of the nonrefundable tax credits cannot exceed the amount of tax owing, $8,655.35. That is the total amount of non-refundable tax credits can only reduce the amount of taxed owed to $0, any amount that remains is forfeited. Nonrefundable tax credits are almost always calculated at the lowest statutory tax rate of 15%. For example, there is the basic personal amount of $12,069. To determine the amount of this tax credit you multiply that amount by 15%=$1,810.35 and then subtract that amount from tax owing: $8,655.35-$1,810.35=$6,845. Now you only owe $6,845 in taxes!

OK, now that we have the basics of the system down, let start by looking at two otherwise identical people who claim EI maternity and parental benefits, but will owe a different amount of taxes on their benefits and see how this credit works. We will just work at the federal level here since that is what matters for the proposed credit. It is through this example that we will see more clearly how tax credits may not actually benefit you, despite you thinking they do.

Janice was working full time before she took her maternity and parental leave. She took her leave starting in July 1 and took the full amount of regular combined benefits. Before she took her leave she had already earned $55,000 and qualified for the maximum benefit payment of $562 a week, receiving then $14,612 in gross benefits (accounting for the one week waiting period) in the birth year and $12,926 in the subsequent year.

What tax does she owe on this income before credits are applied? 47630*0.15+(50000-47630)*0.205=$8,655.35 on her employment income (an amount reduced once she claims the personal exemption on the first $12,069 of this income, the tax credit for her EI and CPP contributions, and any other credits that she may qualify for) and, gasp, $14,612*0.205=$2,995.46 on the maternity and parental benefits she received. Notice she will have to pay the 20.5% tax rate on her maternity and parental benefits…wait, you say. Right here, right here exactly is where you should be able to see a punchline about the proposed tax credit.

She will owe $2,995.46 in tax on the benefits, but only get $14,612*0.15=$2,191.8 in offsetting tax credit AT TAX TIME on that income, for a net tax owing on her parental benefits of $803.66. But remember, when she received her benefits, the government already withheld taxes on the income, withheld at 15% so she only gets the benefit of the credit calculation in March or April when she files her taxes and will be shocked to see she still owes taxes on that income. Hmmmmm, that does not exactly sound tax free?

Now in the next year, however, things change. She earns $12,926 in parental benefits which she receives from January to June. She will then pay $12,926*0.15=$1,938.9. That seems to match up with the offsetting tax credit now, does it not? What if in June Janice decides not to return to work? In this case her total earnings for the year are $12,926. She owes $12,926*0.15=$1,938.9 in taxes before credits are applied. But because this is her only income, the personal exemption applies as well as the proposed tax credit. Her tax credits amount to $1,810.35 from the personal exemption, reducing her tax liability to $128.55. The tax credit from the proposed tax credit is $13,488*0.15=$2,032, but because the credit is not refundable she only gets $128.55 in additional benefit from this new proposed tax credit, not the full amount as advertised. That is, she derives most of her benefit from existing tax credit.  And this is rub with the tax credit for anyone with a low income. Most of the credit forfeited because the credit is non-refundable.

Let’s take instead Piper. Piper was also working full time in a government job before she took her maternity and parental leave. She took her leave starting in January 1 and took the full amount of regular combined benefits. Piper too qualifies for the maximum benefit payment of $562 a week, but because she timed her birth for the new year (her and her partner are really hoping that the child will become a professional hockey player) she has no employment income in her birth year, just maternity and parental benefits. She collects $27,538 in parental benefits, on which tax were fully withheld. Again, here her tax owing is $27,538*0.15=$4,130.7. Wait, you think, we now the proposed credit seems to work well. Except again, don’t forget that first we get the personal exemption of $1,810.35 for tax owing now of $2,320.35 to which the proposed tax credit is applied. The proposed tax credit is $27,538*0.15=$4,130.7. Again, her tax liability is reduced to $0 but she has $1,810.35 in forfeited tax credits from the proposed tax credit.

If we compare their various situations, we see that they differentially ‘benefit’ from this tax credit despite being otherwise identical. Both earned $27,538 in maternity and parental benefits. Janice ended up paying $803.66 in taxes on this income, whereas Piper paid no tax on this income. Janice forfeited $1,903.45 in value from the tax credit and Piper forfeited $1,810.35 in value from the tax credit. Two identical women differentially benefit because of how their births were timed. And this also shows how marginal tax rates matter for the application of the proposed tax credit.

You can do a whole host of different calculations and see who: (1) obtains absolutely no benefit from this proposed tax credit because existing tax credits already reduce their tax liability to zero; (2) who derives only a partial benefit from the proposed tax credit; and (3) who derives a full benefit from the proposed tax credit. The thing is not only does your income matter, so too does the timing of the birth. Births are not just randomly allocated. There is a pattern to births in Canada, called birth seasonality. This seasonality of birth in Canada sees more children born in the late summer and fall months, meaning more woman are like Janice, fewer women are like Piper. This pattern I’ve also shown is highly influenced by public policy. If this credit were to come to fruition, we might expect to see women changing their birth seasonality. There are costs and benefits to doing so.

But bottom line, the CPC’s advertising this scheme as making maternity and parental benefits tax free is not factual at all. And the other part they did not tell you is that for many women on maternity and parental leave, they already derive most of their tax benefits from existing tax credits and little from this new proposed credit.

UPDATE: The CPC have just uploaded a new backgrounder on their website here: https://cpcassets.conservative.ca/wp-content/uploads/2019/09/12094250/4d940e964f7d315.pdf

In what appears to be a direct response to my points above, albeit with no citation (said face), they are now saying that the stranded tax credit that I mention above for both Janice and Piper’s case, wait forward, will be allowed to be carry forward. That, to me, is new and was not there in the past. And sorry folks, but the only person who talked about public policy implications and month of birth is typing this right now.

That sort of gets at some of the criticism of the policy. It does not address the fact that someone like Janice has a higher tax liability on the income than 15% so will still owe money. It does not address the fact that those parents that self finance their leaves receive no benefit from this policy. And given that the carry forward provision is unusual for tax credits (tuition comes to mind) and requires you to have future income seems ancillary to support women make the choice that is best for them, including to, you know, stay home if they want. And, ironically, the fact that they had to make the carry forward provision actually reinforces the point that the income is not, you know, tax free. 

And for all that this means, why not just make the tax credit refundable so parents get the benefits earlier in the child’s life and while on a reduced income?

 

 

 

 

 

 

Conservative Party of Canada Conspiracy Theories: Statistics Canada Edition

Over the last few days, members of the Conservative Party of Canada (CPC) have floated what amounts to glorified conspiracy theories of the dreaded federal Liberals controlling Statistics Canada. It is important to remember that Statistics Canada is an arm’s length body that, under the Fundamental Principles of Official Statistics, must remain strictly neutral with regard to political matters. In particular, Statistics Canada’s operations are to be kept free of intervention from the political side of government and must be fully free to compile and publish statistics.

The first event occurred on Monday when the CPC Twitter account tweeted this doozy:

What is not true? All of it. What is true? Statistics Canada, under its own mandate with no meddling or direction from the Liberals, the Minister, or otherwise, had been working on a pilot, with the knowledge (though apparently not full) of the Privacy Commissioner, to collect better data to improve its statistics on spending and debt by obtaining the personal banking information of 500,000 Canadian households directly from the banks. The pilot was designed because Statistics Canada’s usual methods of obtaining information to develop its statistics are no longer yielding the rich and detailed data it needs, you know, to develop official statistics.

Was any data provided by the banks? No. The banks took their concerns to the Privacy Commissioner and the Privacy Commission paused the pilot in its tracks until the privacy concerns raised by the banks were addressed. This was also reported on by the media as well.

There was information provided to Statistics Canada by the credit agencies, information that was released under the permissible purposes rules of access to individuals credit reports. (Financial institutions, other lenders, and companies with what’s called “permissible purpose” can access a copy of your credit report in order to make certain types of decisions about you.) If you, like me, access your free credit report every year, you will see them listed on your report. I can say that my credit report shows that my credit information was given to Statistics Canada. I was more than pleased to be included in their sample because when it comes to data privacy, Statistics Canada has my full trust. The other companies listed as accessing my information under the permissible purpose rules do not.

Was the Minister of Industry, Minister Bains, involved? No. Was Cabinet involved? No. Was it at the expense of Canadians? No, it is for their benefit that we have accurate official statistics as they are used for policy design and implementation.

So there is literally nothing true in the CPC tweet.

The second conspiracy event came about on Wednesday when Lisa Raitt tweeted this:

Did the Liberals lowball costs like rent to move the poverty line lower? No. The Liberals did not. Did Statistics Canada on their own develop the measure and definition for the MBM? Yes. So let’s get into the history here, because it matters.

The ‘best’ measure we have a poverty right now is the Market-based Measure (MBM). The market-basket measure of poverty began to be developed in the early 2000’s due to concerns with the two existing measure of poverty: the Low income measure and the low income cutt off. The MBM, developed by Employment and Social Development Canada (ESDC), attempts to measure a standard of living that is a compromise between LIM/LICO, a compromise between subsistence/social inclusion. Here is a quote from Miles Corak’s piece:

The poverty rate derived from the Low Income Measure is the fraction of the population with an income lower than one-half of the median income in that year. If an individual has an annual income (appropriately adjusted for family size) that is less than half as much as someone half way in the income distribution, then that individual is considered to be in low income….

The Low Income Cut-off is a bit more complicated. It is different both in nature, and more crucially in the way it is updated. In this case the poverty line is tied to the proportion of income the average household spends on food, shelter and clothing. Like the Low Income Measure, it is adjusted annually for changes in inflation, but it has been updated only four times in a more fundamental way to reflect changes in family spending patterns.

These two measures though produce very different stories about poverty:

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As described by Miles:

The patterns in the two statistics can be understood in this way. The median income for an individual was relatively constant from the mid 1970s up to the mid 1990s. In essence the threshold associated with the Low Income Measure did not change that much, and was in the range of the Low Income Cut-Offs, which in turn was anchored at its 1992 base. So the two poverty rates moved together, but the Low Income Measure being less cyclically sensitive because the poverty threshold falls as median incomes fall during recessions.

After about 1996 the two poverty rates diverge because, on the one hand, the poverty line derived from Low Income Cut-Off stays fixed, but that derived from the Low Income Measure rises in step with the annual increases of the median income that started at this time, and more or less continued through to 2014.

Here is what Miles writes further in the piece about these two measures:

If you have a tendency to see poverty as being subsistence, tied to basic needs, and absolute or fixed in nature, then you will be inclined to believe that poverty has fallen, and that there really is not much need for public policy to do more. Though it still has to be explained why your notion of subsistence is tied to spending patterns of the average household in 1992. Why not 1986, 1969, or even 1959?

If you have a tendency to see poverty as an aspect of inequality in the lower part of the income distribution, tied to a continually evolving median income and relative or moving in nature, then you will be inclined to believe that there has been no progress in the battle against poverty, and a government strategy is desperately needed. Though it still has to be explained why your notion of relativities should be adjusted so regularly, and even during recessions when the income of the median household might also fall.

Both of these perspectives are based upon extreme judgements of what it takes to participate normally in society—something never changing, something always changing—and for this reason I would suggest that they are both wrong, have misled our understanding of how Canadians have lived their lives, and are likely to lend confusion to public policy discussion on the need for and design of a national poverty reduction strategy.

So if the LIM and LICO are so poor at measuring what we really want to know, what do we do. We create a new measure called the market-basket measure. The MBM involves costing out a basket of goods and services associated with a modest standard of consumption. The MBM then more closely reflect what those with lived experiences of poverty describe. The MBM was designed in close discussions with experts in the area, and experts are closely involved with updates to the MBM. The MBM was also chosen by the current Government to set legislative targets related to poverty reduction because of the expert advice they got not only from experts but also those with lived experiences in poverty.

And here is the previous graph reproduced with the MBM added. Here you see the MBM appears to be a compromise between the LIM and the LICO, as it was intended.

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Is the MBM perfect. No. Notice above that the word modest is bolded. What does it mean to have a modest standard of living? Statistics Canada does not define their modest standard of consumption based on Government direction. In fact, if it did, we could argue the CPCs were the ones who directed that since the MBM was first publicly released for the year 2006 Instead, this requires that expert Statistical agency choosing items in the basket that accord with that definition.

Well, in one category that Ms. Raitt focused on was housing.  Here the MBM uses a measure not everyone agrees with. Michael Bliss wrote this well circulated piece at the time last year about this topic. You will notice that other categories of costs are discussed, but with respect to housing, is the median rental price of a one bedroom posted on the chosen website by Bliss a modest standard of consumption? That we can discuss and, in fact, are discussing. Statistics Canada is just finishing off a comprehensive review of the MBM measure of poverty and all the details can be found here. It is not the first review of the MBM and it won’t be the last.

So now I have to ask, what measure of poverty would Lisa Raitt then suggest?

Ah I see, it would seem she wants the poverty line to be higher so that would be the LIM. Interestingly enough, when the CPCs talk about their own progress on poverty they do not use the LIM. If they did, you can see from the above, under the Harper Conservatives little to no progress on poverty was made. Actually, when talking about their own record on poverty, they use the LICO. Under the LICO, poverty was reduced from 11.5 to 9.2 under the CPC, compared to 13.4 vs 14.2 using the LIM.

But when it comes to looking at results regarding poverty in Canada since the Liberals took over, the trend is quite clear regardless of the measure used, poverty has been reduced regardless of which measure you pick.

LIM-AT LICO-AT MBM
2015 14.2 9.2 12.1
2016 13 8.1 10.6
2017 12.7 7.8 9.5

Poverty  in Canada is a serious matter. We need to do more for people to help them escape poverty. This should be a matter all parties agree on, but they don’t. Poverty has devastating affects on people and their children and it impedes our economic progress.

Further, the reputation of Statistics Canada as the best statistical agency in the world is at risk when politicians pretend that it faces interference by politicians. Stop it, stop using our expert statisticians and producer of our official statistics for your political fodder. After all, we would not want people to think we are, say, like China with regards to suspect official statistics.

 

An Open Letter to Calgarians and the City of Calgary

For those of you not actively following the news in Calgary or #yyccc on twitter, you might not know that the world of municipal public finance in our fair city has been, in a word, explosive of late. For someone like me, who is an expert in municipal public finance (yup, I said it, this gal is an expert, something which some dudes take exception to *eyeroll*) the excitement and attention to what is usually a boring topic has been unbelievable.

As a bit of a backdrop, you may know that due to the oil collapse that began to unfold about five years ago, Calgary’s downtown corporate core has been hollowed out due to fairly heavy layoffs, downsizing, bankruptcies, and the like in the home of the Canadian oil industries corporate headquarters. This has resulted in the assessment of the once shiny office towers to plummet (assessment or valuation of office towers is based on the income they generate and empty office towers do not generate much income). Plummeting assessments means that the City’s property tax spoils from the downtown core have collapsed.

You’d think that would leave the City with a large budget hole, but for reasons that have yet to be made clear, the City, rather than pegging its commercial mill rate to its residential rate as many municipalities do, instead insists on pegging its revenues from commercial properties to a portion of residential. Historically, that was as high as 60% (60% of property tax revenues came from commercial property tax revenues), but the City has since accepted that the revenue balance be 50-50.

Because property tax revenues must, in the City’s mind at least, be made up of 50% from commercial properties, the collapse of the contribution to property taxes from downtown commercial properties has meant the burden has shifted to commercial properties outside the downtown core. And because most commercial leases are what are called triple net leases, this means the leasee (small business owners) is responsible for the property tax bill, which in some cases went up an additional $10,000 or more.

This shocking increase in property taxes to small business owners resulted in a protest, City council scrambled, and is now dipping into the reserve fund $70M and cutting essential services $60M to put off these property tax increases and is forming a Financial Task Force (in addition to a number of other committees) to help it sort out its mess.

This seems like a good time for the City to pause, reflect, take stock, and get its proverbial poop together, does it not? Nope, the time apparently is right for the City to announce a proposed new deal that has it spending nearly $300M on a new hockey arena (sorry, event centre) and tearing down and remediating the site of the old hockey arena (you know, the one shaped like a hat). And because this proposal is so important and the details so complex, Calgarians are only being given until Friday to voice their opinion  before council votes on the deal.

While boosters (oddly the folks who usually rail on about how taxes are so friggin’ high, how public expenditures are stupid, and how governments should just get out of the way of business), are already flouting this deal as savy and the project on time and on budget, despite it being years before shovels hit the ground, your fellow resident and non-resident economists are screaming to say the numbers don’t add up and the details are thin.

To help Calgarians form their opinions to send to council, Trevor Tombe and I wrote a detailed piece that appeared in the Calgary Herald today to help you with some of the details. I am also making public what I wrote and sent to council. Here is what I sent:

I am writing to express my serious reservations regarding the City of Calgary arena deal.

First of all, citizens of Calgary are only being given six days to provide comment on a fairly complex deal, the details of which City staff do not seem to be able to themselves to appropriately develop and release for consideration. The sole rationalization for this timeline is to “capitalize on momentum” which seems like very weak rationalization. It does not seem unwarranted to give citizens to September to allow an appropriate time to weigh all the information, and for the City to correct the misinformation provided.

Second, in terms of the incorrect details provided, the City claims that the benefits of the arena amount to $400M over the next 35 years. Yet this amount is not put into its net present value. Future dollars are not worth the same as present dollars and this stream of payments needs to be properly presented to understand the true costs and benefits.

Third, the City is not properly representing the opportunity costs of this deal. The opportunity costs is the potential gain from other alternatives not chosen. Given that the City is currently considering putting on hold other important capital projects, pursuing budgetary cuts to core public services, needs to address the rebalancing of property tax revenues, and an uncertain economic future, the opportunity costs of these funds is of utmost importance. While some will want to argue that capital budgets are difference from operating budgets, we must consider the impact of capital budgetary decisions on operating budgets. This proposal does not do that.

Fourth, the financial returns are but one considerations. Three broader arguments are also being made by various parties. Do arenas bring economic growth? No, there is broad consensus that that neither the construction nor operation of professional sports facilities are important engines of economic growth. This does not mean that the impact is zero, just smaller than typical economic impact studies suggest. As said by Dr. Matheson, “some academic economists suggest, only partially in jest, that if one wants to know what the true economic impact of a stadium project will be, simply take whatever number the consultants project and then move the decimal point one place to the left.” Do areas contribute to localized revitialization? Perhaps, but it simply displaces economic activity elsewhere. Simply put, the arena shifts activity from one area of the City to another. There may be reasons to favour such a shift, but that justification may be bitter sweet to those businesses that lose out under this policy. Do arena bring public benefits like civic pride? Yes, but the benefits are very small and only support a small taxpayer subsidy.

The overwhelming evidence of limited benefits of arenas suggests the City’s proposal needs to be reconsidered. The fact that it also contains errors, more so.

UPDATE: At around noon July 25, 24 hours before public comments are due,the city FAQ about the arena was updated as reported by Robson Fletcher:

Note clearly that the direct rate of return of the project is -0.6% and 1.4% if both direct and indirect are accounted for. This reflects verbal comments made by the CFO at council Monday night. The benefits are not $400M as original stated but rather a $47M loss assuming all the embedded assumptions are right (and they are probably still overstated the benefits).

Wednesday evening (July 24) Councillor Jeff Davison tweeted out an annotated bibliography on the public and non-economic benefits of event spaces, developed by Councillor Jyoti Gondek and her team:

It was quickly noted by Dr. Brad Humphreys, a key academic expert in this field, that the annotated bibliography provided was incomplete and did not discuss the most important papers that quantify the intangible benefits of pro-sports. He provided an much more complete list here:

It has also been reported that Councillor Evan Woolley has delivered a letter to the City Manager asking for the vote by Council to be delayed until September.

UPDATE: Councillor Jeromy Farkas has joined the call asking for an (not rushed) open and transparent review of the deal

The impact of the first round of City budget cuts ($60M) has now been approved with 115 city staff losing their jobs. I say first round because further budget reductions will be needed in the next budget cycle and we should start seeing these being proposed in November. While some are rejoicing at public servants losing their jobs pointing, to this as evidence that there is fat to trim, such views are, in my opinion, disgusting. I don’t recall there being any such similar commentary as the private sector cut jobs and these are jobs that families in our city, much like private sector jobs, rely on to live. Many more families are now scared and stressed, applauding that is just vile.

Municipal governments continue to be directly responsible for many of the services that are necessary for the daily lives of Canadians. These services that municipalities provide that keep people healthy and safe and happy include roads and transit infrastructure, police and fire services, water distribution, garbage and recycling, land development, recreational facilities, libraries, street lights, and snow clearing, to name just a few. This first around of cuts results in cuts to 48 services areas and 233 fewer city jobs (115 direct job lay offs). It won’t be long before we begin to feel the direct impact of these cuts.

The key questions that the City and boosters have yet to respond to in an adequate fashion are as follows:

  • Given that the real benefits of the arena/events centre are tied to intangibles that the scholar evidence has shown are positive but small, why are the taxpayers expected to front 50% of the costs?
  • Given that the majority of the benefits accrue to the fan and the team and that scholar evidence indicates that the price elasticity of demand for sporting events tickets are relatively inelastic, why is not a larger portion of the cost being put onto a ticket surcharge? After all, since users mostly benefit, shouldn’t users mostly pay? Oh, and who benefits for concession sales and how are these being used to fund the arena/event centre?
  • What capital infrastructure projects are the true opportunity cost of this deal? One of the most important things cities do is move people. The City of Calgary has transit link gaps, a key one of which was to be filled with the Green line. The economic benefits of public transit and moving people are far more solid than from an arena/event centre. And the Green line also brings construction, jobs, and indirect benefits. Why is the Green line being debated yet again with far more attention and focus than the arena/event centre deal and why are we not evaluating the opportunity costs against each other. That is, what are the trade-offs?
  • Now that Council has finally come to grips with the fact that the property tax situation that the City is in is, in fact, structural, and that structural problem will in part need to be addressed with a shift of property taxes to residential property owners as well as consideration of other revenue tools including user fees, regulatory charges and proprietary charges, how will the public react in November when this becomes part of the discussion when the event centre/arena is being discussed in isolation to the overall budgetary situation of the City and the long, long list of capital project.
  • Why is the arena/event centre so vital to the Rivers District revitalization plan?
  • Why now? The current arena was a key part of the Olympic bid and the IOC gave its blessing that the arena was perfectly acceptable for the Olympics. Why is it essential that this deal be signed, sealed and delivered now?

Update July 29: Councillor Jeromy Farkas has publicly announced he will not support the arena.

Councillor Jeff Davison seems to have doubled down and called those of us asking questions about the details of the deal and why this deal (and not, say, a deal that puts more of the costs on the direct beneficiaries of the the arena) as using the same tactics as pipeline opponents and you all should be under no illusion as to our motives.

For shame, Councillor, for shame. It is council that is not providing clear answers to fairly important questions and by not doing so is showing a lack of respect to those footing half the bill. Conflating questions of those seeking information to understand what is being proposed and, importantly, why with opposition is how the public loses trust in public bodies. Something that seems to be happening quickly with Calgary council these days, according to opinion polling.

Councillor George Chahal has now also called for the arena deal to have more time to be considered

 

Putting an End to Leak Week

Everyone now and then in the policy debate world some amazingly stupid things get said that sets my hair on fire. Right now, my hair is on fire from….blood. If blood makes you squeamish then you should stop here. If talking about *whispers* lady problems makes you uncomfortable then you should also stop here. For the rest of you, let’s take on a taboo.

PERIODS! Many girls (yes, girls as young as 9 or 10) and women (often well into their 50s) (and people) get them. Then can be regular or irregular. Even regular periods do not start and stop like a well timed clock. It is not like every 28 days at 10am there it is. They can start with spotting or they can start like your water breaking. They trickle down and then suddenly spurt in a dying gush. You can be late, you can be early. They can even suddenly stop for a few months, and start back up again with no notice. They can come with advance symptoms, they can come with little other change, they can be lived with with little effort, or you can be in complete pain from the cramps for days on end. They can signal a pregnancy, a pregnancy loss, and come like a MOFO after you’ve given birth. They can last 2 days, they can last 8 days. You can have medical conditions that make them worse. The variations on these things is a much as women themselves.

Periods mean for upwards of 40-45 years of a person’s life with their uterus, they will need to sop up the flow (Did you know that women are one of the few mammals that continue to live after the reproductive years end? Mostly, we are just allowed to die when we stop being useful to the dudes. So there is that). There are many products available: tampons, pads, cups, disposable, reusable, home made, store bought, the list is endless. All this variation means how much a woman needs in products, when, and for how long is a bit of a mystery, sometimes to the person themself.

Despite periods being, well, normal, talking about periods is still considered taboo. It is like miscarriages. Many people experience them, they are completely normal, yet we are forced into the Red Tent when they come. We have to skulk around work and school with tampons and pads stuffed up their sleeve, we have to whisper to our friends if they can hook us up, we have to deal with embarrassing leaks, may have to leave work and school if we can’t obtain proper supplies. We have laws that mandate toilet paper, soap, and related products in washrooms, but there is nothing similar about a product that many people with a uterus need. And so it has been since the beginning of time. If a machine is even present in a washroom, we are required to put a quarter or more (I’ve seen as much as $2 needed) into the tampon machine in the washroom and if we are really lucky (they are often empty with no notice, leaving you high and not dry) it will spew forth a tampon worth about 10 cents. This is the cost of being a menstruating person.

There has, however, been a growing movement around the world and in Canada about period products. In 2015 the tampon tax movement culminated in the federal government (Conservatives nonetheless) removing the GST/HST from menstrual products. Many provincial PST systems already had removed it or have since also removed it (The debate in Manitoba included Gary Marshall of the Manitoba Party spending a weekend on Twitter mansplaining periods and menstrual product use to menstruators. Yes, it was as delightful as it sounds).

While some women rejoiced at saving 30 or so cents a month in tax, they seemed, and continue to be oddly unphased, by the tariff on menstrual products (9619.00), a tariff that the federal Liberals should be well advised to look at (oh and the tariff on bras for boobs, which is higher (yes, higher) than the tariff on bras for cars) or that fact a piece of cotton on string costs 15 cents a piece when bought in bulk. Of course removing the tax is simply about gender consumption tax equity, an argument that I actually had and still have some issues with, but then like most economists, life with a consumption tax would be much easier if we just taxed everything and addressed equity with an income transfer. Make the tax codes easier and the revenues could be used to address, dunh, dunh, dunh, period poverty.  With the GST in place on menstrual products, the government is estimated to have collected over $36M in revenues A YEAR. Over the life of the GST, this means the federal government alone collected more than $1B in blood money. Imagine if that had been redirected to low income menstruating women. But I digress, I lost that battle. (sad trombone for the menstruating tax economist).

We have now, however, moved on to the issue of access, long ignored. Even with the products being tax exempt (well, zero-rated), they are unaffordable AND inaccessible to some people, girls (yes, girls, remember this can start when a girl is 9), and women. Yes, affordability and access need to be separately considered. Not all people can afford these products on a regular basis, not all people can access these products when they need them, and a person should not have to reveal private information about their body in order to obtain access to a needed product at the exact moment they need them. Imagine, having to go to the security desk at work or the office at school asking for a wad of toilet paper and having to say “can you double that, because you know.”

And so enter the United Way Period Promise Research Project. This project is looking at ways to best provide services and products to people who menstruate. The men, yes, men, in the BC legislature on March 7, 2019 had an amazingly respectful conversation about period poverty in the province that lead to a commitment from the BC government to provide start up funds to help all BC public schools provide free pads and tampons to their students by the end of 2019 (they were already free, actually, but this is about access, not making the people go the office and beg for a pad). It was, as it should be, a fairly uncontroversial act.

Enter the federal government, which recently committed to a regulatory process to make free menstrual products available in federally regulated workplaces. It includes a 60 day consultation period and will help about 500,000 people with uteruses (uteri?) who are employed in the federal labour force. The federal Labour Code already requires that employers provide toilet paper, soap, warm (gasp) water, and a means to dry ones hands. This would simply add menstrual products.

Oh Boy, the audacity. Apparently some men took to twitter to talk about personal responsibility, as though menstruators do not already take significant personal responsibility for their periods. We keep products at home, at work (come visit me for my stash), in our purse, in our cars, our backpacks, coat pockets (assuming it has, you know, pockets). We tuck them up our sleeves and in our bras so you don’t have to watch us walk with them out in our hands as we sneak off to the washroom. What the federal government is addressing is not some sort of communist hand out line for government grade pads (you know, like the ones you get in the hospital), is it about, if you will, a federal backstop. Despite hoarding menstrual products in every nook and cranny possible, we all get caught from time to time without access to products. This is about helping women who are caught be able to finish their day without bleeding through their pants. It is about dignity FFS.

The consultations are unlikely to result in a smorgasbord of options, a complaint that some people seem to be levying, laid out in a fan like they do in, gasp, high end restaurants, spas, and even dentists. I would be, in fact, unsurprised if what we are left with is the machines in the washrooms will no longer need a quarter.

There are other interesting reactions, like won’t women steal them? Is this a problem with toilet paper? Soap? Those brown bags to deposit our bloody wares? Paper towels? No, and anyone stealing these items probably really needs them. Is this just about virtue signalling and vote getting? Ummmm, removing the GST on menstrual products did not seem to help the Conservatives win re-election. Should we just leave well enough alone? After all, employers can offer these products if they wish. Here is the problem, they don’t and they seem in no rush to do so.

Will this be the end of the debate? Not bloody likely.

 

 

Saskatchewan loses first battle with Ottawa over Carbon Pricing

Since my car accident, wherein I sustained a concussion, I have been unable to have the focus and where-with-all to blog, but I am going to give it a try as today is an important day.

Today was a big day in the policy world, as the Saskatchewan Court of Appeal released their decision on the constitutionality of the federal carbon backstop. The decision is here and is actually a fairly easy read. The decision was a 3-2 split decision that upheld the constitutionality of the backstop. We know that Saskatchewan will appeal the decision to the Supreme Court of Canada (SCC). We will simply have to see if the SCC will hear the appeal and, if so, what will be its decision. That is, the is not the end of this battle, more like the middle of it.

While there were lots of arguments over whether the backstop was sustainable under the national concern branch of the Peace, Order, and Good Governance clause of the constitution or a general trade and commerce matter, and so on, the one most interesting to me (and to my readers, I am sure) was whether the carbon levy imposed by the carbon backstop was a tax or a regulatory charge.

The federal government argued/argues that the carbon levy under the backstop is a regulatory charge. I’ve written about regulatory charges before here. I find it easy to compare them to user fees, a concept that more people understand. A user fee is a levy for a publicly provided good or service, the revenues for which must be solely used to fund the provision of that good or service, and the fee charged is dictated by the cost of providing the good or service. Further, payment of the fee is a necessary condition for consuming the good or service. There are many examples of user fees, particularly at the municipal level, including public transit fares, recreation fees, and refuse collection payments.

While a user fee is a charge related to a publicly provided good or service, a regulatory charge is a charge related to a right or privilege granted by a government. Regulatory charges are a broad category of charges imposed by governments and include such levies as development charges, local improvement charges, removal and dumping charges (e.g. sand, gravel, water, landfill, electronics, and beverage containers), fines, inspections, environmental protection, and licenses (e.g. liquor, animal, and business).

There are four key components to a regulatory charge: (1) a specific regulatory purpose: (2) a detailed code of regulation; (3) actual costs incurred; and, (4) a relationship between the regulation and the person being regulated (Farish and Tedds 2014, p. 658; Althaus and Tedds 2016, p.53). Under a regulatory charge, the revenues must be used to recover the costs of the regulatory scheme, in whole or in part. That is, much like a user fee, a regulatory charge is a cost-recovery tool and the conditions described above that a user fee must meet must also be met by a regulatory charge. This means that regulatory charges and user fees differ only in purpose. Both are cost-recovery tools: a user fee is a charge for a good or service, whereas a regulatory charge is for a right or privilege (e.g. serving liquor, owning a dog or cat, the disposal of specific products, or, based on this ruling, the right to pollute).

Saskatchewan argued/argues that the carbon levy under the backstop was a tax. What is a tax? The key distinction between a tax and a user fee/regulatory charge is that the former is a payment for the purpose of raising revenue not connected to the activity being taxed, whereas the latter is a payment connected to the activity being charged. Notably, tax revenues can be used to fund any government activity, whereas user levies are constrained in this area. For example, revenue from income taxes can be used to fund the RCMP, the Canadian Space Agency, and Parks Canada. Tax revenues may be earmarked for specific purposes, for example the revenues from a fuel tax may may be earmarked for the purposes of providing roads, but that earmarking is a political choice rather than a legal constitutional requirement.

Saskatchewan went this route for two reasons. First because taxes must be imposed by the legislature, whereas a regulatory charge only needs to be approved by Governing–in-Council, if the levy under the backstop was a tax, and not a regulatory charge, than the federal government did not obtain proper approval (this is what is behind that saying “no taxation without representation”). This is not a fatal flaw, it would just mean that the federal government would have to follow a different process to have the levy be valid, namely it would have to be approved by the legislature. Second, governments and government property do not pay taxes. This is important in Saskatchewan where power and energy are governed by crown corporations. A regulatory charge would apply to them, whereas a tax would not.

The interesting aspect to this is whether or not the levy was found to be a tax or a regulatory charge, the federal government has the authority either way. The difference simply being that the levy would not apply to governments and the levy would need to be approved by the legislature. The latter is a simple process matter to correct, the former impedes the effectiveness of the levy.

What was the decision? Well the majority went through the case law and found the levy is a property enacted regulatory charge. The minority decision did not go into as much of a detailed analysis of the case and finds the levy is a tax. Overall, I find the majority decision much more convincing in its finding, but I look forward to the SCC review on this matter.

However, I am also a little sad as an aspect in the case law I was hoping would get settled didn’t. Not alluded to above, there is a second permitted use of a regulatory charge. One where the size of the charge levied on persons is set to proscribe, prohibit, or encourage a specific behaviour. If the purpose of the regulatory charge is to change behaviour, then a surplus of revenues may be a permitted outcome. However, the presence of a behavioural modification aspect has been found by the courts to mean the regulatory charge meets the criteria of an indirect tax. The authority to charge indirect taxes, however, is not delegated to the provinces and but is in the wheel house of the federal government. What we do not have definitive ruling on is what are the constraints on the behavioural aspect of a regulatory charge. This is important to me and to the Ontario Government, who argued that the carbon levy as part of the backstop was not a proper regulatory charge BECAUSE it has a behavioural component. I can’t find any discussion on this in the current decision. That may be because Ontario was just an intervener and not the petitioner.

So there you go, that is the tax vs regulatory charge explanation related to the carbon levy and the Saskatchewan court case. Hope it make sense!

 

Stairways, ladders, and LIFTs: Ontario unveils its minimum wage worker tax credit

On Thursday Nov. 15 the Ontario government released their economic outlook, which included spending measures meaning it was a mini-budget. As always there is a lot of interesting stuff in the outlook, but a main measure that jumped out at me was the low-income individuals and families tax (LIFT) credit.

You may remember back in the election that Ford promised to eliminate taxes for minimum wage workers which was in exchange for halting the next planned minimum wage increase from the current $14 to $15. That is, Ford promised to leave the minimum wage at $14 but to compensate, it would ensure anyone earning minimum wage would not pay Ontario taxes. In this way they would get some benefits, just not all that they would get from the $15 increase.

I blogged at the time about how this all could unfold here.  I also made a proposal in detail here. Of course there were lots of debate about how Ford could possibly target minimum wage workers. I knew that this was not at all possible and said so. He only has the tools to target income, not wages. While some poo-pooed my thoughts on this, I now smugly point to an income targeted tax credit…for whatever winning such a technical tax implementation argument is worth.

For those of you interested in this tax credit, the full benefit (elimination of Ontario personal income taxes not including the Ontario Health premium) applies to individual income under $30,000 (equivalent to income of full-time full-year minimum wage worker) or family net income under $60,000. The tax credit is phased out at a rate of 10% for income above these thresholds.

There are a few things to note or question with the LIFT tax credit.

First, Ontario already has the Ontario Tax Reduction (OTR) credit which fully eliminates taxes for those with income above the basic exemption and below $~14,840 and is fully phased out at an income level of $~19,500. It is unclear how the LIFT works with the OTR. Is the OTR being replaced or is the LIFT applied just above the OTR thresholds? I’d hate to see the tax system made even more unnecessarily complex.

Second, the OTR is factored into withholding, meaning that a low income workers obtains the benefit on each pay cheque as opposed to waiting until tax time. There is not indication of if the LIFT will be similarly factored into the withholding and if so, how, since it is based on family net income. If the LIFT is not factored into withholding then individuals or families will have to file to obtain the benefit, yet filing rates among low income Canadians is problematic. How does the LIFT work with withholding and what plans does the Ontario government have to increase filing among the group targeted by this tax credit? Will the LIFT be automatic or does the tax filer have to check a box to ask to apply?

Third, both the existing OTR and the proposed LIFT are household based. The OTR is such that only the spouse with the higher net income can claim the OTR, with no requirement that the benefits from the application of the OTR be shared within the  household. The LIFT applies to adjusted family net income, meaning that a low income worker may not derive any benefit at all from the LIFT, depending on their household income. While many advocate for household based system, such determination makes serious assumptions about power and sharing within a household assumptions which are becoming more like dinosaurs in terms of their actual practice. It also means that the LIFT has serious gender concerns and is at odds with achieving economic independence. Of course, some of you tell me that considering gender in designing and delivering policy is pandering, but those of you telling me that know what I have to say to you.

Fourth, the LIFT and similar programs mean that low-income worker keeps more of their income through tax reduction. This means that, because the actual income is not increasing, they continue to qualify for existing benefits like the Trillium Tax Credit or the GST/HST tax credit. However, a wage increase means that worker gets more actual income while reducing their reliance on tax benefits. And therein lies a real  tension with public policy. Do we want workers to be more independent and able to live off their income or do we want workers to be more dependent and only able to live off their income plus their benefits? This is a ill-discussed tension, though a point in a recent interesting paper. Those who lobby against wage increases, highlighting potential economics costs, point to the tax system to make up the difference instead. But those we make up the difference are the tax payers in the province through higher taxes which have efficiency concerns as well. There are costs and benefits to either approach, yet the costs of the minimum wage are discussed to great fan fare without considering the costs of the alternative.

Fifth, the LIFT does nothing for those we already do not pay tax due to the OTR, earn below the basic exemption, or who are unable to work (notice how I did not use the word unwilling). These folk are already reeling from the sudden cancellation of the basic income pilot and are probably concerned about the direction this government will go with their needs. These folk will have to wait the outcome of the social assistance review, the results of which are, I think, being announced next week.

Overall, since the government was hell bent on cancelling the planned minimum wage increase, it is worthy to note that this did not come without benefits. However, the LIFT is no panacea either, more so with the implementation path chosen by the Ford government.

 

 

 

Who Pays for Municipal Governments?: Pursuing the User Pay Model for Solid Waste

Today the , of which I am a Commissioner, released a report today called Cutting the Waste: How to save money while improving our solid waste systems.

The full report is here, or you can read a shorter blog here, we also wrote an Op-ed in the Calgary Herald here. Robson Fletcher with the CBC also wrote a nice overview piece here which focused on the model for the City of Calgary here. You might even catch one of us talking about it in the news.

One of the main recommendations of the report is that we should pay for waste through user fees as opposed to through property taxes. It is not about paying more, instead it is about aligning municipal revenues to its expenditures. I want to talk about, first the issue more generally, and then move more specifically to the issue as it relates to solid waste. Suffice to say that the views expressed here are my own, and are based on my own research on municipal user fees as well as on the Ecofiscal report.

User Fees as a Municipal Funding Tool

In municipal public finance, we talk a lot of linking expenditures to revenues, which is a method to ensure that the costs of providing a good or service is borne as directly as possible by those benefiting from the goods, services, and privileges. Where *possible* (I’ll come back to this), 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 services 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. 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.

When goods and services are instead funded through property taxes then the implicit price of using a particular service is zero. When something is *free*, people tend to use more than they would otherwise, imposing higher costs on everything through increased property taxes. Another side effect of paying for residential services through property taxes is that these costs can also be imposed on businesses, since in many municipalities non-residential property taxes are a multiple of residential property tax rates. That is, when things are paid for through property taxes, businesses end up paying for a service that they do not benefit from or consume and may even end up paying twice for a service since many business services are not provided by a municipality. If we care about the business property tax burden then we care about user fees.

User fees also have accountability embedded in them. By law, user fees are a cost recovery tool, the revenues for which must be solely used to fund the provision of the service, and the fee charged is dictated by the cost of providing the good or service. Accountability related to property taxes, on the other hand, is weak. Taxes are a form of payment for the sole purpose of raising revenue with no connection to the activity being taxed. Property tax revenues can be used to fund any activity and the size of the tax is unrelated to costs.

User fees are important municipal tools, especially when compared to provincial and federal governments, as municipalities are increasingly likely to be involved in matters where the direct beneficiary, the user, is well defined and it is a simple process to extract payment from the user.

The criteria, easily identifiable individual beneficiary from whom payment can be extracted (or, more importantly, can be excluded from benefiting if they do not pay for the service) are essential characteristics for determining if a user levy is appropriate. This is why user fees are good for say garbage, but not, say, sidewalks, fire, police. So user fees cannot and should not be used to fully fund municipalities, but instead be deployed strategically.

The main concern with user fees is regressivity. This means that the cost of user levies is a heavier burden on lower income individuals. Here are a few considerations on that. User fees are equitable on a benefits received basis, one measure of equity. They may not, however, be equitable based on ability to pay. With user levies, all consumers pay for the cost of the good or service regardless of their income, a key measure for ability to pay. It is this concept, ability to pay principle, where the most frequent, and likely the strongest argument against user levies lie.

The literature, however, is not conclusive regarding the regressive nature of user levies. In fact, the evidence suggests three main arguments against user fee’s regressivity. First, upper-income households benefit disproportionately from free public services. For example, upper-income households are more likely to live in large households and consume more than their share of sewage, water, and refuse collection than lower income households when these services are funded through property taxes and not user levies. Second, user levies allow low-income consumers to adjust their consumption to lower levels, thereby paying less than they would under a property tax system. Third, any regressive or disproportionate effects can be minimized or even reversed with careful design, revenue uses, and compensation mechanisms, particularly discounts and exemptions for readily identifiable groups. For example, the City of Calgary has a fairly unique Fair Entry program that responds directly to this concerns.

But it is also important to understand that property taxes also suffer from similar arguments of regressivity. Property taxes are tied to the assessed value of a property which is only loosely tied to the income of the property owner. This incongruence has led to property tax circuit breaker programs that provide property tax relief to low income residents and cancellation of property tax increases. Suffice to say, while user fees dominate on efficiency concerns, both instruments carry concerns regarding equity on the ability to pay side of things, but user levies at least gain some credibility on the benefits received measure of equity.

 User Fees for Solid Waste

Managing solid waste is a significant expense for municipal governments. In addition, the cost of managing waste is rising. Landfills are expensive to build and maintain and many of our landfills are nearing their capacity. For example, the City of Calgary landfill has about 30 years left at current disposal rates and it will cost $1.5B for a new landfill. If, however, we can deploy a model whereby we can both pay for solid waste management AND reduce the amount we are sending to the landfill, we can achieve multiple objectives of cost recovery and cost reduction/avoidance.

Embedding the costs of managing solid waste in property taxes means that there is no alignment of expenses with revenues and there is no incentive to consider the costs you are putting onto the system.  The amount an individual pays for waste management under this system has no connection to the quantity or composition of the solid waste they generate or the external costs they impose on others due to their waste generation. A properly designed waste management fee that recovers the cost of waste management and aligns the costs to the waste generation of the individual is an important step towards reducing the amount of waste we send to the land fill.

While some municipalities, like the City of Calgary, have or are moving to a fully cost recovery user fee system, in many cases the user fee is a flat monthly fee that is unrelated to the amount of waste. While a fixed portion to a waste management fee will be a necessary part of any waste management user fee system, since a portion of waste services is unrelated to use, in order to incentivize waste reduction, the fee must also contain a variable portion. Such a system is commonly referred to as a Pay-as-you-throw (PAYT) system.

PAYT systems can be as simple as a model where the City makes different bin sizes available and your monthly fee is based on the size of bin you select, with smaller sized bins incurring a lower fee than larger sized bins.Variable bin sizes allow households to chose the bin size the best works for them, as opposed to forcing all households into using the same bin. Variable bin sizes increases the options and even allows a household to opt for a bigger bin than a one-sized-fits all model that the one bin size model imposes.

However, it can also contain other features. For example, there can be an additional fee that is levied whenever the bin is emptied into a waste truck. Many waste bins, including those in the City of Calgary, include RFID technology that can be used to apply a fee to households only when they actually set their bin out for collection. It may come as a surprise that annual operating costs can be significantly reduced simply by redrucing the number of times your household has their bin collected. Another example is to have weighing technology that allows for a fee that is based on the weight of the waste a household produces. However, weight-based models can suffer calibration challenges that may make the costs greater than the benefits and should be pursued with caution.

A key concern that comes with PAYT models is illegal dumping. It is essential that appropriate policies with respect to illegal dumping are considered along with PAYT. Such policies include a basic allotment, tag a bag policies, financial relief for low income households, scheduled large waste item pick up, encouraging the use of the second-hand economy, and the like. However, we note in the Ecofiscal report (p. 27) that the evidence surrounding concerns with illegal dumping associated with PAYT may be overstated.

Summary

Moving to a PAYT model is not about paying more for something, it is about paying differently. PAYT models put the control for costs into the hands of the household, where they should be. And PAYT models offer more choice and extends the life of our landfills and helps us avoid future costs.

And if you want to learn more about user fees and funding municipal governments, check out our upcoming School of Public Policy Current Affairs lunch on that topic on October 31 in Calgary.