The Subsidy Cascade

Let’s play a game.

I’ll write about municipal taxes and utility fees, and you try to stay awake. Yes, It’s that season again, in which a tale of two certainties, Death and Taxes, should be revised to Death by Thinking about Taxes, Followed by Taxes. Notwithstanding, we will now add our contribution to the subject by writing about writing about taxes. Insane, I know.

If ever a column risked banishment to the bottom of the bird cage, I think this is it.

So, dear reader, why can’t this architect and designer resist dragging the pond for the putrid evidence of tax rate imbalances, development charge cross-subsidies, and the evils of postage stamp pricing that we will shortly discuss? Well, maybe three reasons.

First and foremost, we’ve somehow got to maintain the communities we’ve built, and to hand them over to our children in a fiscal and physical shape that’s actually affordable and sustainable. The evidence is fairly clear that for decades we’ve not been doing this, and the reckoning is nigh. Understanding how we fund our municipal costs, and the actual price of the services we so take for granted, is critical to the public discussion of decisions we face for the future of our communities.

Second, it seems that planning and environment departments at every level haven’t been paying attention to what the finance departments are doing, and vice versa. In a classic case of silo thinking, the planners and environmentalists have been busy promoting and regulating compact, sustainable communities that we can afford, while our system of revenue and expenditure continues to subsidize urban sprawl that we cannot. This has got to stop. A critical first step is to get the conversation and the evidence out into the open, and out of the hands of the experts.

The last and most important reason to talk about these issues is to link them to our responsibilities as citizens. Not as taxpayers. Citizens. A healthy discussion of the common good involves some fundamental principles that are sorely lacking when we make everyday choices. Where subsidies are hidden from us, or where others foot the bill for lifestyle preferences, we make poorer decisions.

Pamela Blais, an urban planner and principal of Toronto-based Metropole Consulting, has recently published a book detailing the many ways we encourage sprawl through cross-subsidy and the mis-pricing of taxes and services, Perverse Cities: Hidden Subsidies, Wonky Policy, and Urban Sprawl. Blais’ work is based on a simple truth often overlooked: that our communities are shaped not by policy, but by the repetition of a few key location and density decisions made by developers, builders, homeowners, business owners, employees, families and institutions every day. “These decisions are shaped in no small way by prices – both absolute price levels and the relative prices of different types of development in different locations – and of different modes of transport.” Plans don’t make urban form. Everyday choices do.

When the true costs of our decisions are clearly reflected in the prices we pay for housing, transport, and utilities, we make informed decisions and finance our own preferences. Blais chronicles the many ways that taxes and fees work against this principle, and more seriously the ways that inefficient choices are subsidized by efficient ones.

Chief among the culprits for Ms Blais is the concept of Average Cost Pricing, which might also be called Feet in Oven, Head in Icebox Pricing. For example, public finance departments take large swaths of cost (like the cost of new infrastructure to support community growth) and divide these costs by the number of new residential units and amount of non-residential floor space that is anticipated in this growth. This creates an average development charge of many thousands of dollars that is assessed against each new unit, regardless of where that unit is located and how that unit affects costs! Although the total amount of required funding is thereby collected, this approach means the creation of a unit at the periphery of our communities, in a sprawling suburb, with its heavy cost burden on density-sensitive service networks, is not only given a price break, but actually subsidized by the pricing of units built in compact urban form and central locations. Buyers, unaware of these factors buried in pricing, are given a discount in the first case, and a penalty in the second.

Much is made of “free market choice” by advocates of laisse-faire planning approaches, but with cross-subsidies like the example above the market is anything but free. Blais sides with most economists in arguing for marginal cost, rather than average cost pricing. This determines the public cost of growth and network upgrades as the actual cost of adding more units both at the periphery and also within the existing network, as well as the effect of density on the cost of services. In each case the appropriate price is charged.

Municipalities are starting to tailor development charges to reflect these large differences in development costs imposed by growth, but the little done to date looks more at where growth is located, rather than equally critical factors of density and mix of use.

Once initial housing and business choices are made, using the assistance of cross-subsidies that reinforce inefficiency, the situation gets rapidly worse.

Perverse Cities does an admirable job of setting out the myriad of ways that the initial subsidy is reinforced, through our tax and utility bills. At each step the application of Average Cost Pricing subsidizes the operating and maintenance costs associated with sprawl, using dollars collected from people who have made more sustainable choices. Blais uses a term coined by others to describe this system: “Postage Stamp Pricing”. The postal system is a classic network distribution system, with highly variable costs to deliver letters along a far-flung street of 60 foot wide single family lots rather than by standing in an apartment or office mailroom stuffing slots. The cost of the first is many times that of the second, yet the price of a stamp is equal for letters to both locations and densities. Repeated not once or twice, but millions of times a day across all our service systems, the subsidy for inefficient growth is enormous.

But can we establish efficiency in our low density ex-urbs? A common well, perhaps? In snow plowing? Road repair? Sewers? No. Can we ignore all the vehicle kilometers generated by new subdivisions, retail strip malls and fast-food restaurants, and simply ask downtown condominium owners to pay the average operating cost of these networks through their property tax and utility bills? Yet we do. Each day we pay bills, and each spring we debate property taxes, with little thought to the massive transfer of money from efficient and sustainable areas of our communities to those areas that create very high costs, from areas where the transit system covers its costs through revenue to areas hopelessly subsidized.

The effect of subsidized location, building, and transportation decisions made again and again and again is played out in a cascade of network services, billings and taxes, all reinforcing last-century’s utopian dream: the sprawl that we know is economically and environmentally unsustainable.

For Pamela Blais there are clear solutions to price distortions that require changes in how development charges, property tax, and utility bills are calculated. The solutions involve data that in many cases is already collected. She advocates that subsidies should be identified, debated, and consciously applied, rather than hidden. Only then will our choices begin to tackle the sprawl that is as rampant as ever, and the future civic costs that leave our children in an economic and environmental straightjacket.

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2 thoughts on “The Subsidy Cascade

  1. Mary Ann Wasilka

    Hello John,

    I have been volunteering with a local community group and we looked at this issue last year and spoke to Regional staff. We also had some volunteer time from some U of T students – from a program called Public Good. They did a brief report . If it is available to the public are you interested in reading it?

    Mary Ann

    Reply

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