Better control of government spending, not tax hikes could fund regional transit plan

This spring’s mail-in plebiscite will essentially ask Metro Vancouver voters if they’re willing to pay $250 million more in sales taxes each year to fund the $7.5 billion expanded transit system proposed by a council of the region’s mayors. If approved, the mayors will increase the provincial sales tax (PST) from seven per cent to 7.5 per cent and the higher rate will apply only in Metro Vancouver.

Putting aside the important fact that higher sales taxes will increase the region’s already high cost of living, consider two critical issues. First, a higher PST will worsen existing competitiveness problems in Metro Vancouver by making it more costly to do business and invest. And second, it’s not clear that higher taxes are even needed to fund transit expansion.

Start with the competitiveness problems from hiking the PST, which already makes Metro Vancouver less attractive to investment compared to out-of-province regions.

The reason is that the provincial sales tax applies not only to items bought at the register, but also to the cost of doing business. That includes capital goods, materials, energy, and other goods and services that entrepreneurs purchase and use to produce what they sell to their customers.

The higher cost of capital goods is by far the most detrimental feature of the PST, since investments in machinery, equipment, and technology are the foundation of a stronger and more productive economy. A higher PST rate will increase the cost of doing business in Metro Vancouver, leaving entrepreneurs with less money to operate, expand, innovate, hire people, and pay higher wages.

The higher tax rate will also make it harder for some Metro Vancouver businesses to attract customers, particularly in municipalities on the region’s border. Indeed, the president of the Greater Langley Chamber of Commerce has already expressed concern that people would drive to Abbotsford to save on big ticket items.

With all the potential harm from a regional PST increase, it isn't even clear that governments in Metro Vancouver need the extra revenue. A recent Fraser Institute study found that, collectively, municipal revenues in Metro Vancouver have grown faster than their provincial and federal government counterparts. Specifically, collective municipal revenues grew by 86 per cent from 2002 to 2012.

With growth like that, it’s hard to see why governments need a new revenue source.

The real issue is a collective lack of spending restraint by municipal governments in the region on day-to-day operations (including the salaries and benefits of government employees). Over the same 10-year period, Metro Vancouver municipalities increased operating spending by 74 per cent, again faster than spending increases by the provincial and federal governments.

Increases in municipal operating spending also outpaced inflation and population growth in Metro Vancouver (34 per cent). In 2012, Metro Vancouver municipalities spent $1,384 per person.

If the municipalities had increased their collective operating spending per person in 2002 ($1,088 in 2012 dollars) at no more than the rate of inflation and population growth, together they would have spent $4.0 billion less on their operating budget over the decade or $714 million less in 2012 alone. That is nearly three times the $250 million that the council of mayors is claiming would be raised by the PST increase and it is money that could have been reprioritized on transit or other infrastructure initiatives.

Before requiring Metro Vancouverites to pay higher sales taxes, municipal governments would do well to more heavily scrutinize their operating spending choices.