Discussion Group, The zero-tax city

Filip Palda
The Next City
March 21, 1997

Discussion

SUBURBAN SPRAWL AND THE DECAY OF DOWNTOWNS SEEM LIKE NATURE’S way of saying that nothing lasts forever. The inner cities had their chance. Now they’re being eviscerated, and the action is in the suburbs. A closer look, though, shows nature had nothing to do with this decline — the collapse of the city is entirely manmade. For most of this century, Canadian cities, and most other cities of the world, have been growing out of a mistake. The mistake is that local governments charge for their services with property taxes.

Cities evolved because it makes sense for people in related businesses to work close to one another. It also makes sense to live close to markets. Being close means that you don’t waste time travelling, and cities don’t waste resources building an infrastructure to ship goods of all kinds. When a compact area with many people use a service with high fixed costs — roads, water distribution, police, most city services in fact — the cost of providing the service to each one is small. Housing becomes affordable, public transit viable, food distribution inexpensive.

With density comes diversity. Supermarkets and department stores that cater to common tastes can set up shop almost anywhere, but numerous niche businesses offering products that appeal to one person in a hundred — a newsstand carrying periodicals from around the world, a shop selling nothing but soaps, a video store limited to foreign language films, the inexpensive creations of small craftsmen and artisans or the fabulous offerings of a Tiffany’s — generally require dense street traffic amid pockets of high- and low-rent districts to deliver the varied clientele in numbers that can support their business. Cities solve the problem of distance because density annihilates distance.

Property taxes negate this natural advantage of cities by punishing high density and dispersing the population, dampening the diversity. They do this by requiring the artisans in a run-down part of town to pay Tiffany’s tax rate, even though the artisans might use a disproportionately small share of the city’s resources. The artisans become less competitive, drift off and lose their community; without tenants, the warren they’d been working in cannot be maintained and gets torn down to become a parking lot. So, too, with shoe stores, travel agents, bookkeepers, hardware stores and other purveyors of goods and services. Because municipal taxes can account for half to two-thirds of a business’s rent, merchants of all kinds give up their urban establishments and relocate in a suburban mall just outside the city limits, where the taxes are negligible. Property taxes also negate diversity by waking up inner-city workers to the fact that, by moving their family to the suburbs, they can save more on property tax than they’ll spend on gas to commute.

Though property taxes have been justified by the well-meaning belief that all city residents should have access to the same city services at the same price, property taxes — which do deliver universal access — in the process warp city development. If everyone within a municipal boundary must pay the same price and have the same services, inner-city dwellers will be overcharged and outlyers undercharged. When the outlyers reside in a different suburban municipality, the subsidy becomes more egregious still: Now the suburbanite pays nothing for the use of roads and other inner-city services. This subsidy from inner- to outer-city dwellers not only discourages society’s most efficient form of development, it also destroys wealth, just as it would if Ottawa taxed southerners to pay Canadians to move their industries to the Arctic tundra. The property owners down south would be paying for the folly of sending resources into a business void.

Property taxes are a crude exercise in redistributing wealth, and as often as not from the poor to the rich: from the frugal to the extravagant user, from the tenant to the landowner, from the public transit user to the automobile driver. Despite their good press, property taxes are the single biggest destroyer of inner-city neighborhoods, and they are highly regressive — as destructive as any municipal government policy to the interests of those who most need low-cost services.

Property taxes are also inherently unaccountable. To understand the many confusions a property tax spreads, consider a 1993 study by Harry Kitchen, a Canadian expert on local finances. Kitchen looked at who benefits from local spending and at who pays the price. In a survey of eight Ontario municipalities, he found that cities burden businesses with local taxes that, on average, amount to twice as much as the city spends on them. This burden falls not just on big banks and corporate head offices, where it represents a trifling proportion of their income, but on the most common of businesses in large cities — the rental business of duplexes and apartment buildings. When landlords pass on the property tax, tenants in a duplex or a three-storey brownstone can end up paying several times the property tax that their more affluent homeowning neighbors down the street pay. Other businesses, too, pass on their taxes. Your grocery bill is inflated by the taxes that business sends your way. The pensioner who gets his car fixed cannot know whether to blame the high bill on the mechanic or on the garage’s property taxes.

In the end, no one knows the true price of government services. The Canadian city is a fantasyland in which 40 per cent of services are paid out of general taxes, 45 per cent are paid for by subsidies from higher levels of government, and citizens — who in our democracy should be the ultimate check on public finances — haven’t the foggiest notion of the costs of maintaining roads, collecting garbage, plowing snow and running the police. Ignorance of the way city governments get their money makes us passive consumers of local public goods, making it hard to know what our tax dollar buys and hard to hold local leaders to account. Because we’re kept ignorant, Canadians put little energy into questioning our municipal leaders on value-for-money. Our lack of interest shows in municipal elections, where voter turnout drifts in the 30 per cent to 40 per cent range.

Canadians have been lobotomized by property taxes to the point where we have forgotten what cities are about: bringing people together. The tax lobotomy is a simple operation. First you make property owners pay, and ignore users. Then you make properties with equal assessments pay equal taxes, regardless of the cost of getting city services to the property owners. The result is absurdly high taxes for inner-city residents, absurdly low costs for suburbanites and a city that sprawls instead of rises.

The idea of replacing the property tax may seem extreme. But pull back for a second and contemplate the decay of the Canadian city, with its growing taxes and declining services. We already live in an unpleasant extreme. Such a life cries out for an examination of itself.

The tragic urban commons

CANADIANS DO NOT THINK OF THEMSELVES AS DESTRUCTIVE PEOPLE, but by hiding the true cost of using city services we encourage man’s tendency to devastate common property. Tree companies hack public forests, and fishermen plunder oceans because unidentifiable others pay for their neglect. Why should I care that the fish I take today will spawn no young to fill the nets of fishermen I do not know? In fact, I had better actively not care, because when I harvest my living from a common property I face a dilemma mathematician John Von Neuman identified in his 1944 treatise, Theory of Games and Economic Behavior. My best strategy for fishing depends on the intensity with which I expect others to fish. If others restrain themselves, it makes sense for me to fish hard; I get a big haul today, and I also benefit next year from the restraint my colleagues have shown. If others fish hard today, I must also fish hard; otherwise my restraint today foolishly preserves a resource that others will plunder next year. In a world where I can make others pay for the consequences of my actions, my best strategy is always to plunder. Fellow fishermen, of course, have the same thoughts. The result is that the oceans are laid waste, a phenomenon known as the tragedy of the commons. Over the ages, small, stable communities have avoided the tragedy by building traditions that hold nature sacred. Members of the community who violate tradition get nasty looks from their neighbors and may even get the boot. Moral control is harder in today’s shifting world. How many people think twice about putting out an extra bag of garbage? It does not pay us to think, because the cost of whisking away a trash pile is spread over all taxpayers. If I am like most people, I will listen with a distracted ear to pleas about recycling and conserving, pleas that do not work because the gossiping tongues that held our ancestors in restraint cannot find their targets in today’s fast-moving, anonymous city. Without such restraints, the city becomes a factory of pollution and waste.

Cities that dish out free services financed from a central pot of money become soiled in other ways, too. Politicians with discretion over the pot are prey to local interests, generally the better organized ones in the more affluent parts of town. “We need new landscaping for our park!” “Our neighborhood needs wider sidewalks!” “Why don’t our buses in the suburbs come every 10 minutes, the same as busy urban routes!” The demands are loud because talk is cheap. The cost of running a transit line near my house is paid by property owners near and far. It makes sense to push my alderman to swing the line my way. And because of Von Neuman’s dilemma, it is suicidal not to push. My resignation allows another neighborhood to get the benefit of the transit line, in part, at my expense. A city financed from general taxes is like a hunting ground in which taxpayers are the hunters and the hunted. Their efforts to track one another and protect themselves rob the local economy of its vitality. Perhaps if we all saw the consequences of our demands on local government we would pull back. But money drawn from a central pot obscures the reality of who pays and who benefits. A local ratepayers association that wants money does not appeal to the taxpayers in less affluent districts who must pay the bill. It goes instead to the government that extracts the money. This detour removes those who must pay from the ratepayers association’s sight and conscience.

Swapping taxes for user fees

INSTEAD OF RUNNING ON PROPERTY TAXES, GOVERNMENTS SHOULD RUN on user fees. Under a user-fee system, the rich and the middle classes pay the full cost of their consumption, and the poor are helped out. Those who can afford user fees force no one else to chip in.

No Canadian city charges accurate and unsubsidized user fees, but fees with a user-fee element — for example, bus fares and water bills — do exist. In 1993, user fees accounted for 11 per cent of local government revenues in Canada. Though user fees have risen in the importance of local budgets (up from seven per cent in 1975), they are still a blip in the minds of citizens. To get a feel for what citizens miss when user fees are kept in the background, imagine what would happen if city life unfolded under a different accounting system. Under this system each city department would charge users for its service. Moreover, departments would be broken into neighborhood branches, with those more costly to service paying more. A family would get separate bills for its garbage pickup, the water it uses, police protection in its neighborhood and maintaining its street. Businesses, too, would pay only for services they use. In this new type of city there would be no confusion about who pays for whom. If the fee for garbage collection is low, this can only mean the solid waste department is running efficiently. With this accounting problem out of the way, citizens can begin to question their leaders on the value they get for money and demand that inner-city services — which by all rights should be phenomenally inexpensive — stop being phenomenally expensive. In this new city, the middle classes will not be forced to subsidize those better off. To make city life affordable for those unable to pay the user fees, citizens would arrange a “user-fee rebate” — a tax redistribution that goes in the proper direction, from rich to poor.

Today’s cities look after their poor in several ways. They hand out cash transfers, and they provide free or nearly free services, such as water, garbage collection, police and fire protection. These services help the poor. They also help the rich. A look around the Montreal subway, or the Cambie Street bus in Vancouver, turns up well-dressed professionals on their way to work. Are these the unfortunates who need subsidized travel?

A free service is inefficient because it is blind to distinctions between rich and poor. If it is the poor you want to help, target the poor. If you make handouts to everyone, you will make the rich pay not only for transfers to the poor, but for transfers back to the rich. The money that comes out of the rich man’s left pocket and is put back into his right pocket is not a wash: By some Canadian estimates, as much as 10 cents of the dollar is frittered as it passes through the government bureaucracy on its path back home. Taking a dollar out of the left pocket also discourages efforts. Why upgrade your real estate with the tax man crouching at the bank? Canadian studies estimate that every dollar raised in taxes discourages 30 cents of wealth creation. The damage that follows taxes is a warning. A government cannot be sloppy about the way it chooses to redistribute income.

To prevent the poor from paying more in a zero-tax city than they now pay, the first step is to calculate the cost of a minimum acceptable standard of living. Economist Chris Sarlo has pioneered this style of calculation for Canada. He can count what it costs to feed, clothe, house and transport a person at an acceptable level, anywhere in the country. Using Sarlo’s method, a zero-tax city would decide what “acceptable level” means in a world where user fees are common. The city would then calculate the cost of living at this level and provide an income supplement to those who are below it. A simpler solution is to copy what Ottawa did to soften the GST for the poor. Of the $18.3 billion in net GST revenues from business in 1993-94, Ottawa gave the poor $2.7 billion, or 15 per cent, in tax credits. Using this as the rule of thumb, 15 per cent of total user fees would be refunded to the poor in a zero-tax city. But in either method, the user-fee rebate would be a lump-sum payment independent of how much the recipient used a city service to make sure that the recipient takes the true cost of the service into account and uses it sparingly. The lump-sum rebate both ensures that the poor are no worse off and gives them control over their subsidy budget: If they value other goods, such as food or books, more than some city services, they are free to shift their consumption.

To finance the rebate, a city should borrow a leaf from business and earn a return on its capital. In the same way that the landlord earns a return on his apartment building, a city would earn comparable profits on its roads and other properties. The profits from this city-owned infrastructure would be used to finance the city’s non-business activities, one of which is looking after the poor. The city could also raise money by charging for services such as fire safety inspections, and for consulting with landlords and businesses to help these groups comply with city regulations. To promote self-help and relief of poverty, cities could give charitable organizations access to their facilities. U.S. history shows that in the late 1800s, when city governments cut back on their welfare spending, private welfare contributions filled the gap. A poor box could be installed at subway entrances, the way poor boxes sit at the cash registers of restaurants and the entrances to places of worship. Your water and garbage bills could give you the option of paying a little bit extra. The needy will always be with us, but our property tax system has unnecessarily kept people needy by blocking off their business opportunities. Without property taxes, the number of needy will decline.

Eliminating municipal taxation is not a formula for bashing government or getting rid of politicians. It is a formula for re-establishing cities as creators of wealth to allow citizens to make their livelihoods in their city homes and not force them to become economic refugees in search of lower-cost living. It is a formula to empower citizens and provide for the needs of all. In a zero-tax city, the cost of government services becomes transparent, accurate and low. Keeping us anchored to reality will prevent follies such as the unbridled expansion of the suburbs. George Orwell might have been explaining the off-the-mark accounting that led to the decline of cities when he wrote in his novel Nineteen Eighty-Four, “In philosophy, or religion, or ethics, or politics, two and two might make five, but when one was designing a gun or an aeroplane they had to make four. Inefficient nations were always conquered sooner or later, and the struggle for efficiency was inimical to illusions.”

Solid waste

BECAUSE PROPERTY TAXES ARE SO COUNTERPRODUCTIVE and inherently unfair, governments of all stripes have tried for decades to reform this taxation system and move toward user pay. In Canada, one of the strongest proponents of this reform was the Ontario Fair Tax Commission, established by that province’s recent NDP administration.

In its 1993 report, the Fair Tax Commission advocated user fees for waste collection. The commission wrote that, “at present, municipalities cannot impose special levies for waste collection. The costs of collection must be recovered through general property tax revenues. As a result, there is little incentive either for individual taxpayers to reduce waste or for municipalities to provide higher-cost collection services to meet special needs. . . . Municipalities should be given the authority to charge for waste collection directly.”

The commission’s views are well founded. In 1993, local governments spent $1.4 billion on solid waste collection and disposal, perhaps a third to a half covered by businesses who pay solid waste tipping fees to municipalities, with property taxes covering the remaining cost. If these taxes were converted to user fees, property taxes would fall, garbage would shrink and citizens would have an idea of what their garbage dollar buys. The frugal family that purchases few consumer goods, avoids overpackaged materials and composts its kitchen wastes will pay next to nothing for garbage services. The spendthrifts who continually replenish their closets, keeping several garbage bins topped up, will begin paying for their profligacy, as they should.

Many cities have already imposed pay-per-bag systems for garbage pickups and found that up to 40 per cent less waste was generated. A 1995 study of solid waste disposal in Portland, published in the academic journal Land Economics, found that citizens reduced their garbage by 4.5 per cent for every 10 per cent increase in landfill disposal charges alone.

Further savings for citizens would come from contracting the job of solid waste disposal to private firms. In a 1985 study of 107 Canadian municipalities, economist James McDavid found that the public sector disposal cost 51 per cent more than the cost of contracting it out to the private sector. By 1993, that gap had increased: A study of Ontario by a team of economists at the University of Toronto found that, “for general waste collection and sewage, public operators experience costs as much as 75 per cent greater than private sector operators.”

Water and sewage

AN EARLIER ONTARIO ADVISORY COMMITTEE IN 1990 ESTIMATED THAT the province’s water and wastewater charges cover only 65 per cent of their true cost, the balance coming from property taxes, lot levies, transfers from other levels of government and debt. The 35 per cent subsidy allows heavy users of water — well-off people with swimming pools and large lawns — to enjoy their indulgence at the expense of light users. Even the 65 per cent that users pay is imposed in ways that do not restrain our excess consumption. Slightly more than half of Canadian municipalities (including large parts of Calgary, Toronto and Vancouver) make their residents pay for water with the very worst sort of user fee: the flat rate. The best form is a meter. Seven major studies of metering in Canada concluded that consumers use between 30 per cent and 50 per cent less water when they pay by the drop.

Installing meters is only half the battle in controlling the waste of this natural resource. The other half of the battle is to make waterworks more efficient. Metropolitan Toronto has embarked on a costly process to expand its wastewater treatment facilities, yet its own 1993 environmental assessment report shows that the shortfall springs from neglect: The sewer system is a sieve infiltrated by massive quantities of groundwater that flow into the system through cracked pipes and other openings. As a result, 28 per cent of the volume that the Toronto sewer system carries, and treats, is pure water. Yet brochures published by the government of Metropolitan Toronto matter-of-factly proclaim the efficiency of its public works department, a claim it has been able to make since the 1850s, when water fell under government control. The situation is the same throughout most of Canada. To see whether private or public water utilities are more efficient, we have to look to the U.S. In a 1978 study of 112 U.S. water utilities, economists Mark Crain and Asghar Zardookhi found that, when government handed the management of water to private firms, the output per employee jumped by 25 per cent. Today in the U.S., privately managed firms handle 20 per cent of the drinking water and two per cent of the wastewater, saving at least 20 per cent in water treatment costs.

Although waterworks are thought of as natural monopolies, tenders introduce an element of competition. Under tendering, the city franchises its water system to a private company that offers the most attractive water rates for citizens. In the U.S., the fiercest competitors for water contracts are the French giants Compagnie Générale des Eaux and Lyonnaise des Eaux-Dumex, which have $37.5 billion of revenue a year, with British contractors snapping at their heels. By refusing to admit competition to our water systems, we shut ourselves to the expertise of these international companies.

Roads

WILLIAM VICKREY, THE CANADIAN-BORN NOBEL PRIZE WINNING socialist economist, lamented that “in no other major area are pricing practices so irrational, so out of date, and so conducive to waste as in urban transportation.”

Unpriced roads are common property. This means that no driver thinks twice about how he affects overall traffic flow. I can jet from a feeder lane onto the crowded expressway, arriving like a hair that clogs the drain. If I slow two thousand cars behind me by 60 seconds each, I will have cost my fellows the equivalent of a work week, and I will not care. Pricing roads so that the cost is high during rush hour forces me to take account of the delays I may cause. With money in question, I will ask myself whether I should delay my shopping trip till after the busy people have come back from work. This is how peak-period pricing for road travel filters out serious users from casual ones.

The best road prices are like odds that shift constantly in pari-mutuel horse betting. Prices should vary with traffic volumes to keep roads unclogged. This is what happens on a 10-mile section of State Route 91 south of Los Angeles, where tolls vary between 25 cents at night to $2.50 during the rush hour, guaranteeing free-flowing traffic. In Ontario, this year, the first 36 kilometres of Highway 407, a 69-kilometre toll highway, opens north of Toronto. Cameras videotape licence plates to record when and where drivers get on and off the highway, and the system mails them a bill based on the rate that applies. Drivers who equip their cars with an electronic tag benefit from more convenient billing.

In a 1963 treatise that reads like science fiction, Vickrey proposed a method of combating urban congestion that would complement expressway tolls. He wanted to attach cars with an electronic identifier and surround the city with a ring of roadside scanners. The scanners in this “Vickrey Ring” could detect moving cars in the busy area. Roadside signals would indicate the current travelling fee, encouraging drivers to shift to less costly routes or simply to travel at off-peak hours. At the end of the month, each driver would receive an itemized traffic bill. The reality of traffic jams in the Norwegian city of Trondheim opened its citizens to Vickrey’s science fiction. In the late 1980s, they built a ring of 12 toll plazas around the city centre. The Trondheim Ring is the world’s first toll ring that collects tolls automatically. Ninety per cent of cars are equipped with an electronic identifier. Citizens pay by making a deposit on the city’s account or by allowing the city to withdraw money from their banking accounts. Money from the ring pays for 60 per cent of the expansion of the main road network, the construction of separate lanes for buses, and the construction of separate pedestrian and bicycle lanes. As a result, car use is down, and public transit use up.

The Trondheim Ring is not a perfect application of Vickrey’s ideal, but it points to a small change Canadian cities could make to ease their congestion. Vancouver is a candidate for the Trondheim Ring because only nine road bridges separate its inner municipalities from the surrounding area. Cities with many small access roads that cannot be contained in a ring, such as Toronto and Montreal, could use sophisticated new traffic-monitoring systems that have been recently developed in Europe.

Charging drivers would do more than relieve congestion — it would guarantee that drivers do not force the costs of their transportation on people who can’t afford cars; it would relieve car-related environmental problems; and it would spare the suffering of the many people with respiratory problems who are now hospitalized during spells of severe smog. The current method of making drivers pay — through high gasoline taxes — cannot relieve congestion because it does nothing to discourage driving during peak hours, when stop-and-go conditions create the bulk of economic and environmental problems.

Public transit

IN CANADA, THE NUMBER OF TRANSIT TRIPS PER CITIZEN HAS DECLINED since the 1980s. They’ve declined in both Edmonton and Calgary, despite the opening of light rail lines, and in Vancouver despite the opening of Sky Train. In the U.S., the federal government in the 1980s helped to finance more than $20 billion in new urban rail systems in 14 cities. Yet transit’s share of work-related trips declined in all but one city and traffic congestion increased in all the urban areas.

Nevertheless, signs are emerging that urban rail and buses can hold their own against the automobile. In London, two private entrepreneurs have bought a remote section of the Underground closed recently by the city of London. They plan to restore the Epping-Ongar line, an old commuter service, and run it on diesel instead of electricity. They are betting that its annual costs will fall from £12 million to £2.5 million, and that they can bring back former customers who were dissatisfied with the government-run service. Britain’s buses are also fighting back. In the 1980s, Britain privatized, deregulated and desubsidized most bus services. In spite of subsidies that fell from £772 million a year in 1981 to £279 million in 1995, bus fares have only increased at 1.7 per cent above the rate of inflation because privatization and competition improved efficiency: Bus costs have fallen by 25 per cent (inflation adjusted) since deregulation began. Meanwhile, service, as measured by kilometres logged, has soared by 20 per cent, and passenger use has recently been rising in London, as well as on many routes in smaller cities.

In a 1992 study of transit in Ontario, economist Harry Kitchen found that privately run transit firms kept their costs significantly lower, their buses busier and the mechanical health of their fleet better than public firms. Most Canadian cities are missing out on these benefits because their transit systems are not under private operation. This helps explain why, between 1970 and 1990, transit vehicle operating costs per kilometre rose by an average of 36 per cent, after taking inflation into account. The solution to high costs and poor service — the answer to reviving the public transit that diverse cities so desperately need — is to follow the British example, by deregulating both buses and rail.

Police

POLICE IN SOME CITIES HAVE BEGUN TO CHARGE A USER FEE. Montreal police got 78,745 emergency calls from homes and businesses equipped with security systems in 1995, 95 per cent of them false. Property taxes paid for every needless call triggered by the security systems so prevalent in affluent neighborhoods. To combat this police abuse, the Montreal government recently passed a law that allows police to charge a $55 fee for a second false alarm — less than the cost of sending police to the rescue, but enough to make many homeowners remember to call off the cavalry in case of a false alarm. Toronto now has similar fees, and it also charges for police who maintain calm at games and entertainments. These charges make the policing system fairer: Those who make demands on the police force — and they tend to be people with something of value to protect — are beginning to pay directly for their use of police services, more equitably sharing the costs. But much more could be done.

A user-pay police force could be organized around precincts in which all citizens receive a monthly bill to pay for protection. But dues are not the same for everyone. People with a great deal to protect — those with expensive cars, art treasures or fancy stereo systems — pay accordingly, just as insurance companies charge higher premiums to protect more valuable property. In addition, citizens can control the policing fee. Those who lighten the policing load receive discounts for installing a home alarm system and safety lights around household entrances. Those who register in courses that provide common sense tips for keeping houses and cars safe will obtain extra discounts. Fees can go up, too, just as insurance premiums do. Sloppy homeowners who leave their homes unlocked, or basement windows open, will find their police fee rises with every burglary.

Fees are also geared to the costs of patrolling a district. It costs more to patrol 40 people living in 10 suburban houses than 40 people living in a two-storey apartment building. User-pay police forces would reward citizens who live in dense, inexpensive downtowns — no longer would they be subsidizing the policing of low density areas out of general property tax revenues.

Prices send consumers a signal. In selecting a new home, citizens would look at a neighborhood’s policing costs along with the home’s other carrying costs. A high policing fee sets off the alarm of a risky community. To avoid scaring off their potential “customers,” police would seek new ways to improve their effectiveness and keep down costs. A market-oriented police would be more willing to innovate by putting officers on bicycles instead of in cruisers to patrol bustling shopping areas, or by enlisting volunteers to help in crowd control for the Easter Day Parade and similar events.

Fire

DIVERSITY IMPROVES FIRE PROTECTION. IN CANADA, James McDavid recognized that the true cost of fire protection is the value of property lost to fire plus the cost of maintaining fire departments. He found that fire departments that relied on a mix of full-time and part-time workers had 38 per cent lower costs than departments that relied entirely on full-time workers. His study does not examine whether private fire departments are more efficient than public fire departments. But it shows that flexible fire departments are efficient. Governments allow some flexibility, but privatization would allow even more. Evidence on the benefits of private fire protection comes from Denmark. In a 1983 study, Ole Kristensen found that the private nationwide fire-fighting company run by the Falck family had costs one-third those of public fire companies.

As with police, user-pay fire departments would end hidden subsidies to low density areas. Most city standards require that no house nor business be more than a few minutes away from fire rescue. These standards are not arbitrary. Rather they have evolved from consultation between insurance underwriters, firemen and city administrators. These reasonable standards, though, mean that it costs more to protect the suburbs than it costs to protect the downtown. The number of suburban dwellers in a four- or five-minute radius from a fire station often amounts to 5,000 or fewer. In a dense downtown, 100,000 would live within the same time radius, making it many times less expensive to protect a downtown citizen against the risk of fire.

Libraries, parks and cultural events

SHOULD CHILDREN BE MADE TO PAY FOR READING BOOKS OR PLAYING on grass? Most people would answer “No” and would rightly be offended at the thought of user fees for such services. To nourish our children’s minds and bring them joy, philanthropists such as Andrew Carnegie built “public” libraries and parks with their own money, and less affluent philanthropists throughout the populace donate mountains of private books to students in developing countries.

Recent evidence from the U.S. suggests that public funding for these sorts of services chases out private funding. Economists Elisabeth Becker and Lindsay Cotton found that for every dollar that people contributed to state schools, government withdrew almost a full dollar of state funding, leaving total funding for the schools the same. If the logic worked in the reverse direction and could be applied to parks, libraries and culture, we would not need to fund these items with a property tax.

The logic of giving would be strengthened, our generosity would be spurred and the amount needed would be diminished if we confined charity to the needy. Businesses, for example, are big users of city libraries and unseemly recipients of charity. Libraries should cash in on their corporate customers, by charging commercial clients hefty, market-based fees. These fees can then cover the libraries’ most vexing burden, its high fixed costs. Non-commercial users, who represent a minimal additional burden on libraries, could carry on using them without an access charge.

Getting prices right

IN A SURVEY OF 55 STUDIES THAT EXAMINED ELECTRIC UTILITIES, REFUSE, water, health services, financial services, airlines, fire services and non-rail transit, economists Anthony Boardman and Aidan Vining found that publicly owned companies had significantly higher costs than private companies.

But privatization is no guarantee that low costs will be passed on to consumers. Private firms may be efficient, but given the chance they will gouge their customers. Gouging is best practised in a market without competition. If you privatize the sewer system or public transit, but give it a monopoly, most of the savings won’t be passed on to consumers. Costs are lowest when consumers have choices. Economist Evsey Domar explains that “the power exercised by consumers over producers requires no police, no compulsion, and no letters to the editor of the New York Times. It works silently, like gravity. All the consumer has to do is not come back to the store, not buy the same product ever again.”

Competitors who have no powers to plunder the tax base must use persuasion. Perhaps this is why, in a 1993 study entitled Managing with Market-Type Mechanisms, the Organisation for Economic Co-operation and Development found that the move to some form of competition on average lowers the costs to users by 30 per cent. That 30 per cent is the dividend that overburdened citizens can expect from a city that moves toward the zero-tax plan I have proposed here.

Toward an empowered citizenry

WHERE CITIZENS ARE EMPOWERED THROUGH DIRECT DEMOCRACY, THEY tend to prefer user fees to property taxes. Professor John Matusasaka of the University of Southern California is a world authority on direct democracy. In a study of the 50 U.S. states, he found that the 23 states with citizen initiatives finance more of their services from user fees than non-initiative states, and that citizens overall pay less for government.

Politicians should have good reasons for liking user fees, too — user fees give them instant feedback on how much citizens value a public service. When citizens pay the true price of driving a vehicle, and traffic congestion eases, politicians will know it is time to stop clearing districts for expressways. If suburbanites are not willing to pay for expressways, politicians will learn that life in the suburbs is a mismatch between the needs of citizens and their means. Once users pay for all forms of transportation, the central insight of the men and women who invented the city thousands of years ago — that it costs little for people to live close to one another — comes shining through. Cities will get back on the track they followed for centuries; suburban living will again become a costly distraction for the rich, and ordinary citizens will make their lives downtown.

The full range of benefits that come with a zero-tax city will appear once cities start experimenting with the idea. As Canadian economist Albert Breton has documented, good ideas tend to spread from community to community in a pattern that resembles the contagion from infectious disease. Breton is an international authority on local government. He bases his ideas in part on his own study of local governments, and in part on the path-breaking work in the 1930s of U.S. sociologist Ada Davis. In analyzing how new policies make their way from one U.S. state to another, she found that successful policies “diffuse” across states at similar rates: slowly at first, while the policy seems untried, then quickly, as the benefits dawn on most states, then slowly again, while the most resistant states begrudge the truth. When graphed against time, the rate of spread of ideas looks like an “S” (statisticians call this a “logistic” curve). The spread of the Internet is following a similar curve.

Nothing, of course, says that the zero-tax city has to spread like an “S.” Provincial governments could impose the idea from above. But they should resist this temptation and instead liberate their cities and their citizens: their cities by removing existing restrictions on their ability to charge user fees; their citizens by removing the ability of cities to impose monopolies. Ideas that spread by example spread because they pass the test of each community. As the evidence builds, the risks fall.

Communities will then be able to judge whether to inoculate themselves, or whether the zero-tax city is an idea worth catching.


Letters

, Scarborough, Ontario, responds: April 27, 1997

, Hartland, New Brunswick, responds: May 3, 1997

, Editor, Air Health Strategy, London, England, responds: June 5, 1997

, Toronto, responds: June 30, 1997

, Richmond, British Columbia, responds: July 6, 1997

  1. James Clark
  2. Justin Hyslop
  3. Dr. Peter Hughes
  4. David Vallance
  5. Jeffrey Patterson

James Clark, Scarborough, Ontario, responds: April 27, 1997

It’s hard to imagine that being billed separately for water, sewage, garbage collection, police protection, and so on would lead to greater economy than One Big Bill to cover everything. The real problem is that politicians are fundamentally dishonest! Private enterprise can be dishonest too, but not for long . . .

I was recently in a Third World country with a privatized, unmonopolized bus “system,” and it was an ecological disaster. Diesel buses are neither people-friendly nor environmentally-friendly. By far the best form of inter-city public transport is the electric rail surface streetcar. We are fortunate in Toronto that we still have a few, but 60 years ago you could hop on a streetcar outside Union Station and ride all the way to Lake Simcoe! It took about as long as it takes by automobile today (on a bad day). For my money, the best city for public transit is Zurich, Switzerland — right from the moment you step off the plane. (Imagine: luggage buggies designed to go up and down the escalators!) It is shameful that we have no electrified train service from our airport to the city, when the tracks are already there to within 1km of Pearson. I seriously doubt the private enterprise wisdom of de-electrifying the Epping-Ongar line in London.

I question whether you can extrapolate the European experience in urban transit to North America for the following reason: European (old) cities are designed on the hub system, whereas our cities are largely grids. Hubs are good for public transit but discourage automobiles (because of parking). Grids accommodate cars better, but public transit doesn’t work well along surveyors’ lines because people tend to move in a straight line from A to B, and not in a series of zigzags. In North American cities only trains and hydro lines are directed hubwise.

There’s a great opportunity for new interurban public transit along Hydro corridors — electric of course!

The best way to get cars out of the downtown core is to put back all the streetcars we had in the ’30s — before Detroit seduced our City Fathers!


Justin Hyslop, Hartland, New Brunswick, responds: May 3, 1997

Yes. Exactly. Your statement of the economic sense found in the denser, urban core neighborhoods is the same argument which I have used when debating the issue of urban decay and dying communities (especially with my suburbanite friends). Thanks to you, I now have at least one source to back up my ideas.


Dr. Peter Hughes, Editor, Air Health Strategy, London, England, responds: June 5, 1997

Filip Palda’s thought-provoking essay, “The zero tax city,” needs to be corrected on one score. He is right to say that in London, unlike elsewhere in Britain, the use of buses has recently been rising. But Mr. Palda — inadvertently or otherwise — fails to mention that London is the only place in Britain where bus services escaped the 1985 deregulation axe.

In my view, London’s unique arrangement of privatization without deregulation is a near-ideal way of running things. Services are planned and scheduled by the experts at London Transport, but then put out to tender among private operators. London Transport, as “client,” is able to call the shots on such things as punctuality, cleanliness, reliability, exhaust emissions, and so on.

In the rest of Britain, the contrast could hardly be greater. It’s now almost universally accepted that the unregulated on-street competition that has prevailed since 1985 does the passenger no favors at all. Scruffy, dirty, old buses chasing each other around cities like Sheffield and Oxford may look good on paper. As Mr. Palda points out, “Bus costs have fallen by 25 per cent (inflation adjusted) since deregulation,” and “service, as measured by kilometres logged, has soared by 20 per cent.” But Mr. Palda fails to mention the most important trend of all — a relentless downward drift in passenger numbers.

Few people in Britain believe a return to old-style deregulation and publicly-owned bus companies would be a good idea. Yet a consensus is emerging that total deregulation simply hasn’t worked. The most promising alternative now appears to lie in the embryonic concept of “quality partnerships” between bus operators and local authorities. These are a kind of “soft” regulation, in which operators who meet certain standards of service are rewarded with priority bus lanes, comfortable bus stops, and other goodies to help them tempt passengers back on board.


David Vallance, Toronto, responds: June 30, 1997

The analysis of the advantages of the central city on the first two pages of this article is superb. However the analysis of the cause of the problems of the inner city is much more complicated. The cost of physical services provided by the municipality are a relatively tiny part of the taxes paid by the residents through their property taxes. In Toronto, which I know best, the cost of servicing streets and parks, to name the most prominent, only comes to 15-20 per cent of the city’s budget. (Water and sewer systems are already on a crude form of user pay.) Most of the rest is for fire protection, government itself, and culture. All of the city’s share of the tax bill comes to about 18 per cent of the total paid in property taxes. The other 82 per cent is for schools (55 per cent) and Metro services (27 per cent).

Most of Metro’s budget is also for services unrelated to physical infrastructure, i.e., police and government itself. The solution of user fees for these major items is not established. Most of the services provided by police, fire protection, and government operations are there to provide a structure to society to allow us to operate in a civilized manner.

The real problem is not the property tax itself. It is the assessment system that taxes the most efficient and therefore the most valuable at the highest rate and allows the least efficient and most costly to pay the least. Market Value Assessment (MVA) is the cause of the destruction, not only of inner cities, but also of the older parts of villages and towns everywhere it is used. The older established section of any municipality has always been the most valuable. MVA dictates that it should pay the highest property tax, while allowing new development at the edge to pay the least tax. At the same time the new development is very expensive for society because of the costs imposed on the environment, on transportation infrastructure, and the loss of valuable farmland.

The other major problem is school financing. MVA does not solve this problem either. Older homes are frequently occupied by seniors who are often least able to pay the rapidly increasing cost of education. As long as senior governments use MVA and are unwilling to deal with the real problem of school funding in a rational manner, property taxes will cause irrational development and the destruction of inner cities.


Jeffrey Patterson, Richmond, British Columbia, responds: July 6, 1997

Palda’s observations about the need to increase the levying of user charges for urban services represents a positive contribution to the discussion of Canadian municipal finance and embraces two generally positive benefits of such a substitution. Those using specific services would be accountable for their cost. The total demand for some services would decrease, conserving the real resources and mitigating many harmful impacts of real resource use. Palda also correctly emphasizes that many current service charges employed by municipalities neither account for the full cost of the services nor allocate charges to users, flat water use rates often being a prominent example.

However, Palda also does a disservice to current municipal management practice. He understates the current extent of user charges. He fails to provide any normative guidelines for services or aspects of services for which property taxes may be appropriate, implying the substitution of user charges always provides a superior basis for charging the cost of municipal services. His focus is too broad, extending to more flexible labor arrangements and private sector service provision as ways to reduce municipal service costs and often confusing ends and means, not to mention the reader.

Palda’s facts on the extent of user charges may mislead those readers not familiar with current municipal practice. At page 42 Palda asserts that transfers from senior levels of government and property taxes comprise 45 and 40 per cent respectively of municipal revenues. His facts are more than marginally wrong. According to Statistics Canada’s Public Sector Finance, 1995, federal and provincial grants were 27 per cent of municipal revenues. He says that user charges are 11 per cent of revenues. A 1989 study by Sproule-Jones and White estimated that user charges were 20 per cent of total municipal revenues, varying from 12 per cent in Newfoundland to 29 per cent in British Columbia. Property taxes are thus slightly in excess of half of total municipal revenues.

Part of Palda’s error undoubtedly lies in confusing municipal and local government finance. The latter includes local education finance. Of course, the use of property taxes, whether levied by school boards or provincial governments, to finance schools is an entirely different and contentious issue not directly related to municipal finance. There are a plethora of studies that support the assertion that the property tax is not a sound or proper basis for financing local education services.

Palda may take his argument for increased user charges too far in the cases of fire, police, libraries, and parks and recreation services. He correctly points out that there are aspects of these services that should properly be financed from user charges — traffic direction at entertainment events, business services at libraries, and so forth. Palda’s proposal that police and fire services be financed on the basis of total property ownership is almost an argument for a broader property tax base that would include personal property in addition to the real property that is conventionally taxed. He ignores the reasons why Canadian jurisdictions have largely moved away from taxing personal property in favor of limiting property taxation to real property. He also ignores the historical fact that the limited public slum clearance that has occurred in Canada was legitimated on the basis of the extensive deployment of both of these services in inner-city slums. His assertion that responsibility for providing cultural and park and recreation services could be transferred to the charitable sector is almost ludicrous. It needs to be noted that adequate park provision in Canadian cities began to occur only as parks became a municipal function. While he correctly notes that charities such as the Carnegie Foundation have indeed made major contributions to library services, many of your readers will know that his particular contribution by Mr. Carnegie was based on a promise by recipient municipalities to provide free public access thereafter.

While not disagreeing that such services, as well as protective services, might capture larger portions of their costs from users, they may be “public” services in a very true sense. Palda’s failure to subscribe to any normative values whatsoever reduces the useful contribution which he otherwise makes with respect to other services whose benefits are perhaps both largely private and more divisible.

Palda’s greatest shortcomings are perhaps with respect to the supply cost of public services. Although far from comprehensive, he appears to make the case at every point possible that private sector supply of services is superior to public sector provision. In doing so he ignores the fact that the present pattern emerged slowly following World War I and reflects a far greater concern for preventing graft and favoritism that may currently prevail. He also systematically ignores current examples of private sector shortcomings. For instance, owners of Britain’s newly privatized water companies have largely failed to address new investment that would reduce the estimated 30 per cent of waste resulting from ancient, leaky mains. Nor have they tended to metre use, although flat rate charges have often been subject to very large increases. A recent study in Surrey, British Columbia, documented that over the period 1990-1996 contract garbage collection costs increased by over 20 per cent annually, while population increased by less that four per cent and the can/bag limit per household was reduced by 60 per cent. The city’s own staff costs increased by six per cent annually in the same period. Numerous similar examples abound.

Your journal is nevertheless to be congratulated for addressing the issue of user charges in the overall revenue structure of municipalities and as part of a strategy to manage demand for scarce and costly services and to reduce cross-subsidies that appear to largely benefit suburban home owners. Palda’s main shortcoming is that he approaches the topic with the same promises provided by the snake oil sales person. Such a shift is not a panacea. It will likely not cause Hamiltonians or Winnipeggers to move back to their respective north ends. It might slow the rate of suburbanization. It might also reduce the consumption of space by suburbanites and result in denser, more easily served suburbs.

Discussion group on . . .

Without civilizing the financing of city services, cities are doomed to decline

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