Uber, The City of Calgary, and Regulatory Charges

Uber, The City of Calgary, and Regulatory Charges

If you are not aware, the City of Calgary discussed and approved modifications to its livery by-law to allow ride-sharing services, such as Uber and Lyft. Without these changes, under the city’s existing by-law these services were ‘illegal.’

In essence, the city simply extended the current regulations to cover these new types of ride services. Specifically, drivers offering their ride-sharing services must have

  • regular (annual or every 50,000km) vehicle inspections,
  • proof of ability to work in Canada,
  • proof of valid commercial insurance as required by the Government of Alberta,
  • annual criminal background checks
  • a driver’s license
  • an annual operating license from the City

These are all very similar requirements for traditional taxi drivers. Immediately upon the passage of these modifications, Uber announced it will not resume operations in the City. Essential, Uber says the inspections, background checks, and annual license fee are “unworkable” for Uber drivers. This is because most ride-share drivers work part time and usually only for a short duration. That is, very few drivers drive regularly and on-going.

For me, the most interesting part of this whole discussion is that it really shines the light on a little known aspect of municipal public finance: regulatory charges. And an understanding of the case law surrounding regulatory charges can help shine light on the fee and possibly areas for Uber to consider for levying a challenge against the city.

Regulatory charges, historically known as license fees, are a revenue raising tool delegated to the provinces under section 92(9) of the Constitution Act. It is also a tool commonly delegated by the provinces to municipalities.

What is a regulatory charge? In legalese, it is an indirect tax found to be “ancillary or adherent to a regulatory scheme of regulatory or prohibiting trade.” What is a regulatory scheme? Well often at a municipal level it is a bylaw that provides a complete and detailed code for the regulation of trade. In the case of the trade in question, the complete and detailed code is contained in by-law 6M2007 called Livery Transport Bylaw. It includes the provision for the requirements to work in this industry (some of which are itemized above), obviously directed to ensure safety. According to the Alberta Municipal Act, regulating this trade is well within the jurisdiction of the municipality.

That leaves the charge, which in this case is the annual operating licenses, which for drivers in ride-sharing services is set to be $220 annually. This charge must satisfy certain legal requirements or otherwise be found ultra vires the municipality’s authorities.

First, the fee must be related to the regulatory by-law. Notably, the fee and how it is calculated must be clearly set out in the by-law. Since it is a flat fee, there is nothing to set out regarding its calculation and the fee is clearly itemized on page 23, satisfying this requirement.

Second, the line of cases that has developed related to the power of indirect taxation through a regulatory scheme is that the fee must either be used to dray the cost of regulation or be set as to modify behaviour. I am basing this discussion on the material outlined in my coauthored paper published in the Canadian Tax Journal.

The first case, dray the cost of regulation, seems to be the point of the proposed license fee on ride-share drivers. The supporting material for the revised by-law states twice that the by-law operates within a cost recovery model where license fees cover administration and enforcement costs.

However, there is no detail provided regarding the link between the regulatory costs incurred by the city and the fee. We only have the word of city officials that they will monitor these fees. This, I think, is a ground upon which Uber can push a little harder. In fact, the material notes specifically that the committee cited a lack of detailed financial information. The financial information is important because the revenues from the charge must only offset the regulatory costs and that intentionally designed surpluses are not permitted under this model, by law. I would note that the Supreme Court of Canada (in Westbank and 620 Connaught) has noted specifically that it expects actual or properly estimated costs of the regulation within the regulatory scheme and that the fee must be tied to the costs of the scheme. If I were Uber, I would push for the City to show that the fee satisfies this legal requirement.

I would note that there has been a lot of comparison between the City of Calgary’s flat fee and the City of Edmonton’s variable fee. If Uber can show that the costs of the regulation actually do vary by the amount a driver drives, then it could likely successfully argue that the flat fee set by Calgary does not reflect the relationship between the fee and the cost of regulating. However, given that the fee is established to offset the administrative and compliance costs of the regulatory scheme, I do not imagine these vary much with the amount a driver drives.

UPDATE: It has since been suggested that these costs do vary with volume. If this is true, then they can levy a challenge

 

As a result, those suggesting that the City of Calgary enact a variable fee need to reconcile their preference with the reality of the costs the fee is designed to offset. And if a variable fee does not allow the City of recover the costs of administration, from what revenue source do they propose the shortfall be funded? I imagine the argument would be something like the substantial fee the City of Edmonton requires ride-share companies to pay annually, but as the City of Calgary noted, such a large fee then operates as a disincentive for other and smaller ride-share programs.

However, it may be the case that, while not stated, there is an intention by the city of modify behaviour, notably prohibit or limit ride-share drives in some way. If this is true, the city needs to tread carefully. First, even under this objective, there is still the requirement that there by a relationship between the fee and the objective. That is, the City must demonstrate how the regulatory charge intends to modify behaviour.

Second, it is not clear behavioural modification regulatory charges are permitted to be adopted by municipalities. And this is the direct results of the division of powers in the Constitution Act. The federal government is allowed to charge both direct and indirect taxes, pursuant to the Constitution Act, 1867, section 91(3). However, the provinces are only allowed to charge direct taxes, pursuant to section 92(2) and licence fees, pursuant to section 92(9). If the behaviour modification regulatory scheme were to be available to the provinces, it has the potential to allow indirect taxation without the limitation of cost recovery. Limiting the amount that could be recovered was the rationale for the origin of the cost recovery principle, as the Supreme Court sought to find a way for sections 92(2) and 92(9) to interact without creating unwarranted extensions. Section 92(2) allows for revenues to be raised without limitation to cost recovery. Section 92(9) allows cost recovery methods for indirect taxation, if ancillary to a regulatory scheme. However, if section 92(9) were to be read so as to allow behaviour-modifying regulatory schemes, it could render section 92(2) redundant as the same privileges would be available to both direct and indirect taxation.

In essence, the City of Calgary has operated within its authorities with the regulatory scheme; however, there are valid questions that could be asked by Uber and other ride-sharing service about the size and form of the license fee. The questions are valid and need to be answered clearly and definitively by the City to ensure the fee it a legal fee.

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The federal deficit

So today marked a fairly important day for those following government budgets. The federal government released its fiscal monitor and provided an update to its Economic Outlook. The basics are that Ottawa is running deficits.

  • There will be a small $2.3B deficit for 2015-2016, of which is $300M for Alberta Stablization.
  • There will be a larger $18.4B deficit for 2016-17
  • And a deficit of $15.5B for 2017-18

There are a few things to note to understand these figures.

First, the deficit figures for 2016-17 and 2017-18 include $6B in contingency funds, meaning the real deficits are $12.4B and $9.5B. Not exactly sky is falling territory. However, the forecasts underlying these estimates are still fairly ambitious. For example, the outlook is based on oil prices that are at about $10 than the futures market is predicting and economic growth of 1.4%. To the extent that these and other assumptions prove false, we will be eating into the contingency.

Second, before people run amok blaming Liberal spending for this, these figures are essentially the status quo and what, generally, we would be seeing whomever won the election in October. In essence about 82% of the deficit figure is due to the contingency being increased from $3B to $6B and government revenues being lower than expected due to economic conditions. The remainder can be ‘blamed’ on spending. That is, the deficits are due to lower growth, lower oil prices, the exchange rate tanking, etc, not a spendthrift government. At least not yet.

Third, even with these deficits the debt-to-GDP ratio is not moving much, oscillating between 31%-32%. The Canadian federal government is in the enviable position of having fiscal room because we tackled the debt-to-GDP problem back in the 90s. Our ratio is very low compared to our OECD comparators whose federal debt-to-GDP ratios are mostly above 70%. We want to keep an eye on this ratio because it tells us if we expect an income stream to come in that offsets the borrowing we are doing.

So overall my inspection of this outlook is that the sky is not falling, it is not time to panic, and it is not wise to blame the Liberals for this. However, looking forward, I would say you really should know where your towel is (a HHGTTG reference for those unaware).

This is because we are looking at a federal government budget coming down on March 22 and it  is in that budget where we will see how the Liberal spending will add to this deficit. We are most likely to see that 2016-17 deficit nearly double to $30B (including contingency).

Is this a prudent thing to do? Well, I am not sure I understand this fixation on $0 deficits on a yearly basis. After all, fiscal policy is meant to play a stabilizer role. As said by Stephen Gordon, cutting back in bad times means that fiscal policy becomes a source of business cycle instability, which does not really help matters. Think of it this way, we want to smooth spending and taxes over time. We really don’t want taxes and spending to be a guessing game, being adjusted upwards and downwards year after year with no ability to predict one way other the other. So smoothing requires deficits and surpluses.

However, will spending play a stabilizer role in this downturn given the causes of it? Unless the spending is targeted specifically at those sectors/areas that are most vulnerable during this downturn, we are unlikely to see the positive stabilizing effects. How targeted the spending will be will be a matter to watch in the budget.

And will the spending just increase debt or will it also increase GDP? Think of it this way, if we borrow to invest in an asset that produces a stream of income that covers our borrowing costs (which are at an historical low and not going anywhere in the near future) then this is good. However, it can take time for an asset to produce that income so we might see an increase in the debt before we see the increase in income, meaning the ratio goes up before it goes down.

More importantly then is what is the plan to ensure that we see an increase in revenues in a reasonable time frame to ensure that the spending pays for itself and does not get us back into the debt and deficit cycle we were in throughout the 70s, 80s, and 90s. That, IMHO, is the more important thing to focus on. Making sure government spending makes sense and there is plan to avoid the dreaded cycle that our competitors are still dealing with.

I eagerly await the budget on March 22, but in the meantime, I will not be blaming anyone for this situation. It is what it is, and it is what it would be regardless of who was in power. March 22, however, ends that story.

UPDATE: I was alerted to this CPC video about the deficit announcement today and all I can say is that this is just political horseshit. The Liberals have not ‘spent’ $18.4B and it is disappointing to see the opposition not reading the economic outlook

Further, the deficit numbers are equally not the result of the CPCs cooking the books when they were in power before the election. Get a grip folks and life is better when you stick the facts and not the political spin.

 

IVF Funding, Obstacles, and unhelpful contributions to an important discourse

(or why the Quebec Minister of Health should take a flying leap)

On Tuesday Feb. 16, Quebec’s much anticipated Bill 20, first tabled in 2014, was finally passed into law. For those unaware, Bill 20 ended coverage of IVF under the provinces health care system.

The province of Quebec does have an interesting history related to funding of fertility treatments. First, since 2000 and until November 2015, Quebec had a special refundable tax credit for the treatment of infertility. The tax credit was equal to 50% of all eligible expenses to a maximum tax credit of $10,000 (meaning you can claim up to $20,000).

Second, beginning August 5, 2010 Quebec covered, through its provincial medical plan, all medical procedures related to artificial insemination and three cycles of IVF provided through public clinics and some, but not all, private clinics. This coverage was in tandem with a limit on the number of embryo transferred: in exchange for public coverage, a single embryo transfer was required. The goal of this policy was to reduce the incidence of multiple births.

Third in tandem with the public medical coverage Quebec required that all public and private drug insurance plans had to include coverage for associated fertility medications (all private insurance plans must correspond to that of the public plan administered by the Regie de l’assurance maladie due Quebec (RAMQ)).

How successful was Quebec’s coverage of IVF related to the policy goals? The main findings of studies of Quebec’s ART coverage under its medical plan are that: the incidence of multiple births in ART pregnancies declined from 25.6% to 3.7%, the number of ART cycles increased by more than 200%, cost per ART cycle increased by 23%, and the one year post-delivery health costs decreased by $6,155. So the objective of decreased multiple births was indeed observed, but this resulted in increased demand and increased the costs. The end result was the Quebec did not observe the expected savings from the policy and the reduction is multiple births can be more cheaply obtained by simply mandating single embryo transfers.

Part of the cost story relates to age. Quebec did not have an age limit for access and as it turns out that is absolutely essential for controlling costs. A study of the program showed that the cost of a live newborn for women under the age of 35 was only $18,000, but this rose to $43,000 for women over 40 and was more than $100,000 for a 43 year old woman. Not unexpectedly, there are no recorded live births to women any older than that, but the average cost of providing IVF to women over 43 was $600,000. When Quebec first started talking about modifying coverage based on age, there was general moral outrage but you can see why it is important. This was possibly a lesson learned by Ontario, which when it recently announced coverage of one round of IVF, it chose to limit access to women under 43.

The high costs and lack of savings then lead to Bill 20 in Quebec. Bill 20 ends coverage of IVF, though interestingly maintains coverage of artificial insemination. I say interestingly because artificial insemination is still associated with super ovulation and the associated risk of multiple births, it is a very poor treatment choice for many infertile couples, and its efficacy over timed intercourse is questionable.

That aside, Bill 20 continues the requirement of a single embryo transfer for most patients (which is a good thing!), though allowing for the transfer of two embryos if the woman is 37 years of age or older and the quality of embryos suggests the risk of a multiple birth is low. It also modifies the tax credit. The tax credit is still refundable and has a maximum claimable amount of $20,000. But there are some very important changes. First it is now based on family income, providing an 80% tax credit to those with family income under $50,000, and falling thereafter to a minimum of 20% for those with family incomes of $120,000 or more. Second, only those families who have never had a child before the start of the IVF treatment can claim the tax credit. Third, costs claimable are limited to the costs associated with one round of IVF if the woman is under 37, increased to two rounds if the woman is older. All these limitations will limit the cost of this tax credit, further curtailing costs.

However, there were two interesting events this week. First, Quebec’s health minister signaled he was contemplating eliminating the requirement that insurance plans include coverage of fertility medications. Outside of Quebec, few insurance plans include the coverage of fertility medications. In fact, in my search of plans, only the employer plans offered by the federal and select provincial governments extend coverage to fertility medications. As a result, it would not be unexpected to see employers in Quebec eliminating this coverage if the requirement was lifted.

Second , the Quebec health minister said

“The IVF is one thing. To raise a child is another thing. The costs that are involved to IVF are, at the end, closely similar to the cost of raising a child, so if the IVF in itself is an obstacle – the cost is an obstacle to have a child, well, I have something to say, which is raising a child is also a cost.”

This statement is a very unhelpful contribution to the discussion about fertility treatments and coverage. IVF involves large and significant upfront and lump sum costs. Each round of IVF costs, on average, $10,000, meaning that three rounds of IVF, the number of rounds that are needed to garners a 70% success rate, cost an average of $30,000. Outside of private school tuition and catastrophic drug costs, I know of no other case where, as a mother of a young child, I would be expected to shell out that kind of money over a period of several days for one IVF round or several months for three rounds.

Yes, kids are not cheap, but they do not require the same stock of cash as IVF. As it was aptly by an economics student, the minister is confounding income stock with income flow:

In addition, if what the minister says is true then why can’t we expect those with kids to suck it up and pay for them. Why are we paying to publicly provided day care? Why are we paying benefits to offset the costs of children? Why do we even bother to recognize kids through the tax and transfer system? Kids are expensive and we acknowledge that and provide public support to help offset the costs. Why then not, the costs incurred by some couples to even have them in the first place?

This is not to say that I think IVF should be provided through the public health system. As an economist, I know that something being expensive does not make it worthy of public provision. But we need to have reasonable and rationale discourse about the topic. This is because

  • the reported prevalence of infertility has risen from 5% in 1984 to 16% by 2010 (I was unable to locate any newer figures).
  • The average age of a first time mum in Canada is nearly 30, the magic age by which female fertility begins its swan song.
  • the number of assisted reproduction technology clinics in Canada increased by 50% between 2001 and 2012 (the latest year for which figures are available),
  • and the number of ART cycles reported by these clinics increased by nearly 250% over the same time frame.
  • Canada has the second highest incidence of multiple births in the world, second only to the U.S.

Fertility treatments are not going away and Canada is, so far, either choosing to bury its head in the sand or fanning the flames with very unhelpful discourse.

Teachable moments and dissing in the BC SFT

As many of you know, the BC Speech from the Throne occurred on Tuesday and this sets an interesting scene for BC budget which will be announced next Tuesday (16 February 2016) at 2pm PST.

There have been some things well discussed in the media, like BC dissing Alberta for spending like drunkin’ sailors and how this SFT paves the way for the 2017 Election which will focus on the BC NDP having spent that drunkin’ sailors in the past. To be fair, just about every province and every party can be accused of spending like drunkin’ sailors, including the proverbial poster child of fiscal prudence: none other than Paul Martin himself. So I really don’t take these digs very seriously at all, and find them annoyingly juvenile. After all, we never have the counterfactual that demonstrates that any party that was not in power would have been any different. But, hey, that is just me.

As someone who trains current and future public servants and critics, there were a few gems in there that relate to that work. Like the BC SFT noting that they have “the courage to get to yes.” Indeed, negotiation, consultation, and dispute resolution are all core competencies in our Master’s programs, including our MPA. Highlighting these necessary competencies in moving any agenda forward reinforces, for me, the hard work we have done to incorporate this material into all our programs. I, therefore, look forward to the BC government turning to us to further hone these skills among its public servants and politicians alike.

The SFT also indicated that we must “end the culture of blame that exists for those public servants…” While this phrase was targeted directly to MCFD staff who have been embroiled in what seem to be never ending scandals, it really should extend writ large. After all, it was this BC Liberal government that summarily and improperly fired BC Health researchers working on pharmaceutical research for alleged improprieties that never occurred. The damage and mistrust that now exists because of these actions can’t be ignored.

The SFT also ends by stating that “British Columbia is entering Canada’s 150th birthday as leaders in Confederation.” Leadership is, of course, a core course in all our Master’s programs and we all know that leadership is not a simple, one-size fits all construct. There are many in BC who would not view BC as a leader, especially related to addressing poverty, inequality, education. Hence, I believe this quote will make for an interesting discussion in our leadership course which takes place this summer (students take note).

Beyond the teaching ‘moments’ in the BC SFT, there are also a few policy gems, all based on dissing. The BC government took direct aim at municipalities, something that is happened a number of times over the last few years. The BC government seems to finally be concerned with housing affordability, but seemed to lay part of the blame at the feet of municipalities. Notably, that BC municipalities are ‘driving’ up the costs of homes by levying development charges.

Development charges are used across Canada by municipalities. These charges are regulatory charges which means their primary purpose is not to raise revenue to be spent willy nilly, but must be used specifically to finance the regulatory scheme or dissuade behaviour. (If you are interesting in learning a bit more about regulatory charges, read my CTJ piece.)

Development charges are fees based on granting the privilege to developers to build housing and the fees used to provide municipal services to those housing. Roads, transit, sewers, water, fire, police, community centers, licensed day care spots, etc. are not free. These are all provided by the municipality and the more building that occurs the more costs the municipalities take on. Do these fees raise the cost of housing? To the extent that the price elasticity permits these fees to be passed down to the buyer, yes. Is that bad? I don’t see why. By buying a new house, you are imposing costs on the municipality and I don’t see why the price of the house should not reflect these costs. And it is not like the province is just giving money to municipalities for these costs. I can’t imagine the BC government suggesting that these costs be funded via taxes paid by taxpayers who are not contributing to these costs.

I also notice that the BC government took aim at those dissing the mining sector. While I am agnostic about what economic sectors exist, I am not agnostic about subsidies that direct taxpayer funded support specific sectors. By supporting one sector, you are, in fact, supporting it over another sector. You are saying this sector is more important than these others ones and you are impeding economic diversification and economic development.

The BC SFT suggests that this support is important, after all consumer products are based on the minerals. This suggests a strategic reason for subsidizing the industry, but I am not big on that argument. There are endless debates about what materials might be considered critical and by whom and for what purpose. And, I might add, innovation more often occurs when constraints permit that innovation to happen.

It also ignores the opportunity cost of the subsidy. It is not as though there is no cost to supporting an industry. The biggest cost is to other industry who benefit from the same labour and capital, of which there is, in fact, only so much to go around. If it does not go to mining, it will go to another sector, likely tech which is a sector that demands similar skilled labour and capital investment. Why is mining so much more important than tech? In a nutshell, I am much happier when we have policies that are neutral and allow the chips to fall where they should. However, that will not win me votes in Elkford, BC.

Finally, the BC SFT also took direct aim at the Liberal government in Ottawa. The BC SFT said specifically that “Controlling spending does not mean failing to invest in the future. There is currently more than $7 billion dollars’ worth of ongoing infrastructure projects. This economic stimulus is happening right now – without pushing B.C. into deficit.” I am not going to go into the pros and cons of the Ottawa approach to deficits, but I will note that the CPC party itself was a bit stunned by Canadians frustration with endless austerity. While the election in the BC is a long way off, this may come back and bite the BC Liberal party in the butt.