City of Toronto User Fee Policy

I am just back from Toronto where I was presenting my work on a User Fee Implementation Guide for Canadian Municipalities at the annual Tax Policy Symposium: Perspectives from Law and Accounting. The Guide is not yet available publicly as we are just entering into the peer review process. I will keep you advised on when it will be available from our publisher, the Canadian Tax Foundation. One of the discussants for my work was Dr. Marion Steele from the University of Guelph. Marion advised me that the City of Toronto has a User Fee Policy which, while no where near as comprehensive or accurate as our guide, does contain interesting information about discounts, exemptions, and subsidies.

The City of Toronto Policy indicates that user fees should be used to finance goods and services that provide direct benefits to specific users as a way to promote equity (which they appear to define based on the benefits received principal) and that fees should be set to recover the full cost of services, conditional on concerns regarding a user ability to pay. The policy notes it “is designed to ensure a consistent, transparent approach to setting user fees in compliance with best practices” and sets out a policy regarding reviewing and updating of fees.

These are all elements that we discuss in much more detail in our Guide, though we are much more comprehensive regarding the requirements of these technical requirements and also consider policy and political aspects of user fee implementation, issues overlooking by the City of Toronto Policy. In short, I am not worried about the City of Toronto Guide being a substitute for ours.

The Policy though does uncover some interesting things. First, City of Toronto user fees have likely been set too low, not allowing for full cost recovery and meaning the property taxes have had to cover the gap. That said, the Policy notes that in many cases the basis for setting the fee was not even know. How does it feel to know that municipal officials were willy nilly setting user fees? This is exactly the type of behaviour that would open the City up for a legal challenge of their user fees. Oddly, the Policy later states that a fee can be more than 100% of full cost, but this is not true. A user fee set to purposefully incur a surplus is against the legal requirement of a user fee. The City of Toronto needs to ensure that it is knowledgeable of the legal requirements, and its User Fee Policy is consistent with those requirements. This is also a concern with its classification of some fees as being market-based. The market is permitted to earn a profit on its prices, a municipality is not.

Second, the City of Toronto has an amazing array of user fees, with over 3700 individual fees, most in the field of park, forestry, and recreation. That makes me wonder why they don’t have a dedicated shop for creating, monitoring, administering, and reviewing their user fees. It would likely pay off for them. That is probably true actually for any large municipality.

Third, the City of Toronto needs to be very careful about waiving user fees. For example, it considers waiving fees for “not-for-profit” organizations, yet CRA has been on a huge review of these organizations and is finding that many of them are, in fact, not “not-for-profit” and very much pro-profit. It is also equally difficult for municipalities to truly identify ‘low-income’ individuals. Instead, groups are targeted, like seniors and students, yet these groups are not, on average, low income. Or they may  be low income, but high wealth. And why should we waive fees for groups who disproportionately benefit from the service for which the fee is being waived? I think greater thought needs to be put into the waiving and reduction of user fees.

Otherwise, it is nice to see a municipality taking the setting of its user fees seriously. I can also see that my User Fee Implementation Guide is greatly needed in the municipal community and I look forward to its impending publication date.

Students, booze, police, and tax policy

When you mention that you live in Victoria, BC, many people have visions of a quiet sleepy town, where the dinner rush begins at 4pm and scooters driven by aging seniors dominate sidewalks. While those things are true, Victoria is also home to a large university (University of Victoria) and college (Camosun College). During the September to April months, nearly 40,000 students overrun our sleepy region.

While there are many benefits of this large student population, one of the negative side effects of this large student population is the swarming of our downtown bars. That many drunken, young, and hormonal students in a very tiny geographic area always leads the requirement for an increased police presence in the downtown core during the fall and spring terms (we don’t have winter terms, because we don’t have a winter) to deal with fights, public intoxication, vandalism, and related problems.

The problem is that the City of Victoria shoulders the burden of the associated police costs yet most of these students live in adjacent cities, notably Saanich and Oak Bay. Therefore those imposing the costs are not contributing towards the provision of those services. Instead, City of Victoria property tax payers are the ones bearing the cost.

And with the province set to loosen up the provinces liquor policies, the City of Victoria is concerned that these police costs will only escalate, especially since the new laws allow drinking at public events and many public events are held, you guessed it, in the downtown core.

To help cover these police costs, the City of Victoria is considering charging a drink levy, namely five cents a drink. While this article calls this levy a tax, it is not. Well, I should say, it cannot be. Municipalities in BC do not have the authority to charge taxes, other than property taxes. Instead, the levy would either have to be a user fee or a regulatory charge. Since it is clearly not a user fee, I assume that Victoria councilors imagine it as a regulatory charge.

What is a regulatory charge? As set out in 620 Connaught:

Regulatory charges are not imposed for the provision of specific services or facilities. They are normally imposed in relation to rights or privileges awarded or granted by the government. The funds collected under the regulatory scheme are used to finance the scheme or to alter individual behaviour. The fee may be set simply to defray the costs of the regulatory scheme. Or the fee may be set at a level designed to proscribe, prohibit or lend preference to a behaviour, e.g. [a] per-tonne charge on landfill waste may be levied to discourage the production of waste [or a] deposit-refund charge on bottles may encourage recycling of glass or plastic [citing Westbank].

However, as my research clearly shows, municipalities cannot enact a regulatory charge which purpose is to change behaviour. Only the federal government has that authority, because a regulatory charge that changes behaviour is an indirect tax and only the federal government is granted the authority to charge indirect taxes. This means that regulatory charges enacted by the province and, by extension, municipalities can only be “imposed in relation to rights or privileges awards or granted by the government.” In that case, the funds have to be used to finance the regulation, a similar condition that is imposed on user fees.

And that is where it is not clear to me that this per drink levy is within the authority of the City of Victoria. The City of Victoria is limited to regulatory charges that offset the costs of the regulatory scheme. For example, liquor licenses are a regulatory charge, the revenues from which can only be used to offset the regulatory costs associated with providing liquor licenses. Notice there is a tight link between the costs of the regulation and the regulatory charge.

In the case of the per drink fee, it would seem that the City will use the fees to offset the costs of policing. I don’t immediately see the link between the right or privilege granted (providing liquor), the charge (per drink charge), and the revenues being used to fund police services. While I will noodle this over a little more, it would appear that the City of Victoria is contemplating a tax for which is does not have the authority to implement.

 

Measuring income under-reporting by the self employed.

As I have discussed before, there is significant interest in attempting to quantify the tax gap (the difference between the taxes that should be paid and those that are paid). Many countries produce such measures, including the US, the UK, and the EU. Canada, however, has not yet jumped on this bandwagon so we have no official measures of the tax gap.

In order to get a sense of the tax gap, we need to know how much income goes unreported to the tax authority. A method that has been developed to measure income under-reporting is called the expenditure-based method, first popularized by Pissarides and Weber. The basic principle of this Expenditure-based method is that true household income can be imputed from expenditures. This is not that extreme of an assumption. After all, the income that is not reported for tax purposes must be used for something. Saving it can create to much of a paper trail for the tax authorities, whereas spending it can be harder to trace.

The basic premise of the method is that actual income can be imputed by comparing expenditure levels of household that under-report their income to expenditure levels of households that do not under-report their income. Of course, this is controlling for households characteristics to ensure that you are comparing like households with like household.

So how do you know if a household is under-reporting their income? You don’t. Instead you have to come up with an identifiable characteristic that is associated with the incentive and opportunity to engage in income under-reporting. One group that has both the incentive and opportunity to engage in income under-reporting for tax purposes due to the lack of third party reporting is the self-employed. Since the self-employed are readily identifiable, they make an interesting group to study for these purposes.

In practice, the method is implemented by estimating reliable expenditure functions (i.e. Engel curves) for households without self-employment income that are then inverted to estimate true income for the self-employed. This is what is shown in the diagram below:

CaptureThat is, the given expenditure level E is associated with an income of Y* in a household without self-employment income. That same expenditure level though is only associated with an income of Y in a household with self-employment income. Therefore, the household with self-employment income is under-reporting its income by the amount given by (Y*-Y).

In my work, I have taken this method and modified it to relax many of the assumptions and make the method more flexible. I applied it to Canadian data and found that

  • reported self-employment income is a poor measure of total household income
  • the gap between true and reported self-employment income is larger for households at the lower end of the reported self-employment income distribution.
  • the GST increased tax noncompliance by those with larger amounts of self-employment income and unaffected tax noncompliance by those with small amount of self-employment income.
  • Total amount of Income Under-Reporting (in real terms) by the self-employed more than doubled after the implementation of the GST
  • The average income under-reporting by self-employed households in Canada is about $14,000.

Of course, what this amounts to in terms of the tax gap depends on the households marginal tax rate. Using only federal statutory tax rates, it equates to between $2100 and $4060 in unpaid taxes. While on a per household basis, this does not seem like a lot, assuming 2.6 million self-employed households and the lowest federal statutory tax rates it amounts to $5.5 billion in unpaid taxes or about 5% of federal personal income tax revenues. Imagine the difference this money could make in terms of education, health, or other publicly provided services.

 

NDP’s job tax credit giveaway

The Ontario NDP recently released it election platform. Part of that plan is to create jobs. Unlike the million dollar jobs plan of the Ontario PCs, the NDP plan lacks any real detail in which to evaluate their plan. As has been discussed in economic circles of late, what is worse: a plan with details where the details show that the plan is based on math worthy of a constructivist math teacher or a plan with no details so that there is nothing to critique? Most of us involved in policy analysis would probably rank the plan with no details worse than the plan based on faulty math.

For example, the NDP plan to “stop corporate tax giveaways.” What does ‘tax giveaways’ mean? While most economists abhor corporate welfare programs and would applaud a stand against these policies, in the same breath the NDP are pledging to reward businesses that create jobs with what can, in fact, be interpreted as a ‘tax giveaway.’ In particular, just a few lines down in the ‘platform’, the NDP says it will reward businesses that create jobs with the Job Creation Tax Credit. Without any details of their plan, I can’t for the life of me reconcile these two competing pledges. Let me explain why.

Let’s consider this tax credit proposal. All we know about this pledge is that apparently it will be a two year tax credit (cough, bullshit, cough). It will cost $250 million a year for each of the two years it will be in existence. And it will create an astounding 170,000. Assuming these are real jobs and not job years, this implies 85,000 new jobs in year one that will be ongoing and then another 85,000 new jobs the next year that too will be ongoing. Now I also assume these 170,000 jobs are jobs that are solely attributable to the tax credit. After all, why would the NDP, who are pledging to stop corporate tax giveaways, give away tax money to businesses for doing what they would do otherwise.

And that my friend is indeed the rub. My colleague Kevin Milligan, writing for Macleans, has done a great analysis of this tax credit. And I encourage you to read his work. I would like to add the following to the discussion.

  • What assurances do we have that we are not simply subsidizing jobs (i.e. providing corporate welfare) that would be created otherwise? In fact, the research from the US studying job creation under job tax credits shows that only 20-30% of the jobs created under a tax credit scheme would not be created otherwise (here, here, and here). If that is the case, then all we are doing is transfering money from employees ( in the form of tax payers) to employers. Kevin goes into much more detail about this niggling detail if you want more information.
  • An earlier study made note of the fact that many firms did not even know about the job credit resulting in knowledgeable firms being given a competitive advantage over those that did not. What plans will the NDP put in place to make sure the all businesses that create jobs will know about and be eligible for the tax credit?
  • I also wonder about the compliance burden. What additional regulatory burden are they going to place on firms to get access to this tax credit? What is the cost on businesses of this additional burden and does the tax credit compensate for that burden? Will we be in a situation like with the SR&ED tax credit where nearly half of the tax benefit from the credit goes to experts in the field to help firms get access to the credit?
  • As someone who is knowledgeable about the underground economy, will this tax credit overcome the desire to hire workers off the books? If so, great but then are these really new jobs or just old jobs that were not previously counted?
  • If these jobs would not exist without the tax credit, why would they continue to exist without the tax credit when it expires in after the 2015-2016 fiscal year?

So without any detail forthcoming from the NDP, I am left with very little positive to say. I am skeptical of the job tax credit creating many new jobs at all and philosophically I am unable to reconcile various element in their plan. In fact, I am left thinking the left hand does not know what the other left hand is doing.