Macro and Micro Economics: Transit Finance Project - Research Paper Example

Macro & Micro Economics: Transit Finance Project Number: Part Introduction All the societies set up organisations for responding to the specific requirements of the society. Municipal institutions are also a type of such organisations for responding to a wide range of specific needs of local communities. The geographical area of municipal institutions is generally very small, but they perform a wide range of functions. A municipal institution is a form of local government which, unlike provincial or central governments, is located at the heart of the society served by it. The Federation of Canadian Municipalities (FCM) is a national organisation of Canada, which represents the municipal governments in Canada. Within federal jurisdiction, it represented the policies and programs of the municipal governments of Canada since 1901. The FCM ensures that its 1200 members representing larger cities to small rural communities work sincerely for improving the quality of life of the communities they represent. The municipal institutions of Canada are efficient, strong and accountable and they ensure that their services are affordable, reasonable and beneficial for both the people and businesses in Canada. In fact, the municipal institutions of Canada reflect its character and they deliver their services to the citizens and play a key role in social cohesion and economic sustainability in Canada. The report aims to analyse the taxing and spending of public finance in Canadian municipalities in the backdrop of the province of Ontario. This research report is a part of the transit finance project, which is prepared by applying the theoretical discussion of taxation and analysing the politics of taxation. The background of this report is the province of Ontario, which created Metrolinx in 2006 for planning transit expansion and improving transit system integration, especially in two areas namely Hamilton and Greater Toronto. Metrolinx presented its report, The Big Move, in 2008. The Big Move is a 25-year plan, which required substantial investment in the subway, BRT, LRT, and GO Rail projects. As per estimates of the plan, it requires an investment of about $2 billion every year for a period of 25 years. These projects are justified on certain grounds such as the traffic congestion in Toronto is regarded as the worst in the North America. The people and businesses pay huge costs due this worst traffic congestion. Presently, it is estimated that the per year cost to the people and businesses is around $ 6 billion, which is expected to reach up to $ 15 by the year 2031. It is the general consensus that this well developed plan should be implemented at the soonest. There is no agreement among provincial and municipal governments about funding for the project. Though, the provincial government has agreed to pay $ 10 billion, the remaining fund has to be managed the local municipal government, which need to explore new revenue sources. Being hired as a consultant by Metrolinx for analysing and recommending the most appropriate mix of user fees and new taxes for raising $2 billion per year, it is appropriate to list the potential revenue sources, which are listed as follows: a) A dedicated increase to the HST. b) A dedicated increase in the municipal Property Tax c) Pay-by-distance tolls on the 400-series highways, the Gardiner, and the DVP (as are currently charged for use of the 407) d) A dedicated increase in the gas tax e) A payroll tax paid by employers f) Development Charges g) A daily levy on parking spaces Effective recommendations can only be made after analysing and evaluating the above options elaborately so that the most appropriate mix of user fees and new taxes for raising $2 billion per year can be made. Part 2: Analysis The analysis of the table below, which represents the local government revenue in Canada can be very effective in analysing available in order to recommend the most appropriate mix of user fees and new taxes for raising $ 2 billion per year: TABLE 1: Local Government Revenue in Canada (2004) Sectors Millions of $ CDN % Own Source Revenue 55,687.57 60.4 Consumption Taxes 96.17 0.1 Property and Related Taxes 37,296.37 40.4 Other Taxes 674.95 0.7 Sales of Goods and Services 14,335.80 15.5 Investment Income 2,479.31 2.7 Other Revenue from Own Sources 804.97 0.9 Revenue from Government Transfers 36,548.56 39.6 General Purpose Transfers 1,575.87 1.7 Specific Purpose Transfers 34,972.69 37.9 Total Revenue 92,236.13 100 Source: Statistics Canada: Public Sector Statistics, Financial Management System 2004-2005; Catalogue No. 68-213-XIE The above table presents all the revenue sources of the local governments in Canada. It is obvious that the two major revenue sources of local governments in Canada are the government transfers and own revenue sources. The provincial government has already committed $ 10 billion and the local government has to manage $ 2 billion per year from its own sources. Among the own revenue sources, the major contributor is the property and related taxes (40.4%), which should not be increased in favour of the people and businesses (Andrew, Graham and Phillips, 2012). The second major contributor to the revenue source is the tax on sales of goods and services (15.5%) and any further increase in HST (Harmonised Sales Tax) is not advisable. Besides these two major sources other revenue sources contribute negligibly to the local government. Hence, the local government is left with options like consumption tax, pay-by-distance tolls on the 400-series highways, the Gardiner, and the DVP (as are currently charged for use of the 407), the gas tax, payroll tax paid by employers, development charges, and daily levy on parking spaces. Out of these six options, the consumption tax and the gas tax seem quite irrelevant for collecting funds to address traffic congestion in Toronto. Hence, the most appropriate options are pay-by-distance tolls on the 400-series highways, the Gardiner, and the DVP (as are currently charged for use of the 407), payroll tax paid by employers, development charges, and daily levy on parking spaces. To some extent these options are related to traffic and related services in a way or another and the local government should increase taxes on the above mentioned options. All the options selected above are discussed individually for appropriateness of the report. Pay-by-distance tolls on the 400-series highways, the Gardiner, and the DVP Pay by distance toll is already levied by the local government on 400-series highways as it is currently charged for use of the 407 highway and the local government can increase its revenue source by implementing pay-by-distance tolls on the 400-series highways like the Gardiner, and the DVP (Andrew, 2011). This taxation will impact all the people representing different income groups, but a balance can be maintained between residents and businesses by making a difference in charges between residents and businesses. Residents can be charged lower than the businesses. It will be a progressive action, allowing people and businesses to pay in proportion to the benefits they receive. It will be an economically efficient action and it will hardly influence behaviour and reduce aggregate efficiency. Its compliance will also be an easy process and the administration costs will be quite negligible. It is a quite a cost-effective move for enforcement and maintenance and it will enable the local government to collect extra funds required for the subway project. The efficacy of the pay-by-distance toll is quite visible as it has been already used for the 407 highway. People are used to the pay-by-distance toll and they realise that these facilities are costly and built for their convenience and a sooner implementation of the project might be politically beneficial for the local government as it will prove their efficiency. Payroll tax paid by employers Another tax which is advisable for collection of the required fund is dedicated increase in the payroll tax paid by employers. This tax will only affect the businesses and not the residents. Though, payroll tax also seems irrelevant, to some extent, but it can be justified as solving the problem of traffic congestion will help employees in reaching to their respective workplaces on time without much trouble and wastage of time. It will improve the performance of the employees and increase their efficiency. Hence, the businesses will be benefitted indirectly. Another justification of the payroll tax is that it will be proportionate to the size of the business as it will be levied on the payroll of the employers which varies according to the size of the business. The businesses will have to pay in proportion to the benefits they receive. It can be considered as a progressive action as it not only improves the efficiency of the employees and the businesses, but it also improves the economic efficiency as a whole. The compliance, administration and maintenance of dedicated increase in payroll tax will be negligible. There will be no any extra cost involved in increasing the existing cost and the visibility of the increase in the fund is quite obvious. Payroll tax paid by employers will not affect common residents directly and building new facilities will provide political advantage to the government as it might impress people about the timely action taken by the government for solving one of the major issues which affects almost all. Development charges Development charges are quite justified as the increase in the problem of traffic congestion is the outcome of development and further development is required for solving the problem. Development charges will affect both residents and businesses and in order to maintain a balance between them, it can be charged in proportion to the benefits they receive from the facilities built for their convenience in order to solve the problem of traffic congestion. This progressive action will increase the aggregate efficiency of people and businesses, which will ultimately increase the economic efficiency. Compliance, administration and maintenance of development charges might cost between 10 to 20 per cent of the revenue collected, but an efficient implementation development charges might contribute substantially to the collection of desired fund. Imposing development charges will affect the people and businesses equally, but the efficacy of the new project will satiate their unrest and the government might gain political advantage for initiating a big project for addressing to the urgent need of the community (Christopher, 2005). Daily levy on parking spaces The prime reason of traffic congestion is substantial increase in number of vehicles and imposing daily levy on parking spaces will be quite relevant action in connection to the vehicles as congestion is created when they are either on the road or common parking places. Daily levy on parking spaces will affect all representing different income groups. In order to create a balance between residents and businesses an arrangement can be made for them who use the same parking place quite often, for example, employees who go to their workplaces daily and paying daily levy might be costly and inconvenient for them. Hence, they can be given the option of paying daily levy on parking spaces for a week or a month as per their convenience. This is a progressive action and people or businesses will be paying in proportion to the benefits they receive. Daily levy on parking spaces is, to some extent, irritating and annoying and it might alter the behaviour of people and businesses in ways that reduce aggregate efficiency. This reduction in aggregate efficiency might also influence the overall economic efficiency to some extent, but in the long run, after the project is implemented and traffic congestion is removed it will compensate the reduction in aggregate efficiency. The compliance, administration and maintenance of daily levy on parking spaces is not a very costly affair and it can be outsourced to private sector by paying 20 to 30 per cent of the collected amount. Implementation of daily levy on parking spaces might not be a good experience for the people and businesses and it can politically affect the local government and it will be required to educate people and businesses about the objective of daily levy on parking spaces (Graham and Phillips, 2008). Part 3: Recommendation On the basis of the analysis done above the appropriate mix of revenue sources include the following options: Pay-by-distance tolls on the 400-series highways, the Gardiner, and the DVP (as are currently charged for use of the 407), A payroll tax paid by employers, Development Charges, and A daily levy on parking spaces These taxes are justified as they are relevant to the traffic system and aim to address the growing need of solving the problem of traffic congestion in Toronto. The need of $ 2 billion per year for coming 25 years, increasing responsibility and administration costs leaves no option to the local government than to add new sources of revenue. The objective of the extra fund is to address the traffic congestion, which has become the most crucial problem and the above mentioned options are related to traffic in a way or other and implementing these taxes will not affect people and businesses much as they are already bearing $ 6 billion due to traffic congestion and if the problem is not solved now, the situation might become worse costing people more in the future. There is need to educate people and businesses that these taxes, in fact, will save their cost which they bear indirectly due to traffic congestion. Though, elected officials of the local governments avoid addition of financial burdens to residents and businesses, this act will, in fact, reduce the burden and they might gain political advantage. References Andrew, C., Graham, K. A. and Phillips, S.D. (2012) Urban Affairs: Back on the Policy Agenda, Montreal and Kingston, McGill-Queen’s University Press. Graham, K.A., and Phillips, S.D. (2008) Urban Governance in Canada, Representations, Resources and Restructuration, Toronto, Harcourt Brace & Company. Christopher, L. (2005) “The State and the City: a Political Economy Perspective on Growth and Decay”, in James Lightbody. Canadian Metropolitics, Mississauga, Copp Clark Ltd. Andrew, S. (2011) “The Municipal Role in the Governance of Canadian Cities”, in Trudi BUNTING, Pierre Filion (Eds.) Canadian Cities in Transition, Toronto, Oxford University Press. Read More