Who is paying the Metro Vancouver CIT?

CIT stands for the Congestion Improvement tax submitted to a plebiscite
According to the last Mayors plan iteration, it is now like below:

Tourism share was originally quoted at 10% by the Mayors council, but this number has been proved erroneous. Credibility of other numbers have not been verified.

the CIT is expected to raise $250M/year

Is the CIT tax 0.34c a day or 258$/year per household?

In the Transit plebiscite campaign, people quote 2 different numbers:

• 0.34c a day (that is 124$ a year) if one counts only the direct CIT paid by metro Vancouver households
• $258 if one counts the CIT tax burden per household (direct and indirect)

The last number suggests people will support indirectly the businesses tax burden. Many on the “yes” side seem to argue that is wrong. For example, Brad Cavanagh at canspice.org, wants to believe that the gas price witnessed at the region border (Langley and Abbotsford) is proof of it:

Average gas price difference, between Langley and Abbotsford, is computed at 10.7c by Brad Cavanagh. The tax difference is 11c…

• The total tax rate is 32.17c in Langley (including a 17c Translink tax).
• The total tax rate is 21.17c in Abbotsford (no Translink tax but a higher provincial tax).

The 11c [1] tax difference is fully passed to the consumer ( The Brad Cavanagh’s error is to consider the Translink tax as the only difference between Langley and Abbotsford)

Do businesses pay taxes?

As economists know, businesses don’t pay taxes, people do. Businesses are an abstraction, people, be either the consumer, the shareholder, or the worker, are the ones paying the businesses’ taxes.
If that was not true, we would have transferred all of our tax burden on the businesses abstraction! In the meantime, studies tend to demonstrate more often than not, the workers support the businesses’ taxes burden (in the form of lower wages).

It is possible that the investments allowed by the CIT will allow productivity gains or a greater economic activity, making the real cost per household lower than assessed by the most pessimistic views. In the meantime a $258 CIT cost per household is no more wrong than 0.34c per household.

PS: We plan to write a post “debunking” the various claims done in the plebiscite campaign. As a primer, so far we can see, the CTF has provided mainly valid facts. I don’t discuss their significance and they could need to be replaced in a proper context (what Brad Cavanagh did in a previous post), but usually trying to dispute them is a losing proposition.

---

[1] BC motor fuel and Carbon tax

Advertisement

Metro Vancouver: A look at the Mayors’ plan Capital investment

In a previous post, we have examined the general financing of the plan, and noticed that half of the Congestion improvement tax could go toward operating the system. In this post we focuse deeper on the Capital plan

Capital cost and Translink contribution to the plan

When looking at the plan, it is important to make a difference between the capital cost of a project with the effective contribution paid by Translink:

If the Millenium line extension (Broadway subway) represents 30% of the capital investment over the first 10 yeras, it is expected to represents only 14% of the Translink financial contribution to the capital plan [1]. 77% of The broadway subway is expected to be financed by senior and municipal contributions.

The inner “cheese” represents the partition of the $7.5B capital investments of the plan.
The outer “cheese” represents the partition of the $3.5B of Translink contributionto the plan (difference come from senior government contribution)
(*) Surrey LRT is only partially financed by the current 10 years mayors’ plan: the capital cost is $2.5 billion, from which the current plan finance $1.9 Billions

Congestion Improvement tax allocation

The above represents only the capital cost, so not all the new CIT tax revenues will go toward it, but only the portion not used to fund the Translink expanded service operations. The allocation of the CIT tax to finance the plan will look like it:

CIT revenue allocation per project: half of it will be allocated to the new expanded transit operation. the TRanslink contribution to the Pattullo bridge is expected to be fully financed by tolls, and so is not financed by the CIT

the broadway subway end up to be only 10% of the total Translink plan extension cost to the tax payer. At the difference of other Transit investment, it doesn’t cost taxpayer money to operate, and could be able to generate revenue [1]. More tax $ will fund the roads network (and that doesn’t include the Pattullo bridge) than the broadway subway.

Capital cash flow and project timing

A bit of “reverse accounting” suggests the following [4]:

(*) the Surrey LRT line 2, is only partially accounted in the 10 years plan, an additional $600 million will ne needed in 2025 and 2026

Debt

The CIT generating more revenues in the first 10 years than considered in the original Mayors’ plan, the debt in 2024 could be around ~4Billion instead of $6Billion as published in June 2014 [2].

borrowing and debt repayment (assume a 4.5% interest rate)

As we have seen before, the transit operating costs are expected to increase at a much higher rate than the revenue sources (taxes + farebox revenues), revenues allocated to service the debt will be depleting over the years. ~2023, Translink will be unable to service its debt, it will be missing ~$50 Million to be able to service the debt interest only.

In fact that was considered in the original plan, expecting ~$390 Million of new revenue by 2026: the current CIT will be actually $50 Million short of it.

At this time, it is unclear how the $50 Million gap will be closed [5][6], but it is fair to say that the plan or at least part of it- that is certainly the Fraser Hwy LRT (Surrey to Langley)- is not financed. Unless the financial forecast is significantly erring on the conservative side:

The Fraser Hwy LRT would only go ahead if a new source of financing is agreed by 2022.

By this time, the technology choice could need to be reviewed, so one should not worry too much on this line [3]

Removing the Fraser Hwy LRT from the plan could not be enough to keep the Translink financial sheet on sound basis by 2024: scale back of some bus operations could be required. Though that a more cautious ramp up of bus services could be preferred, that is a normal and reasonnable risk. Otherwise, significant saving could be found in the Expo line upgrade program as we have suggested before.

As for the previous post on the Mayor’s plan financial, one will find my “sandbox” worksheet in Google doc

---

[1] Ideally one would like to consider the full life cycle cost of a project: the Operating cost of the Broadway subway is expected to be more than recovered by fare revenues, and it will allow saving on bus operations too. It is the only Transit project of the plan able to do so. Other transit projects are expected to have a fare recovery ratio of ~17%, involving reccuring costs for taxpayer. Concentrating on the sole cpaital cost is more often than not, misleading

[2] In 2014, the Translink assumption (Translink 2014 baseplan and outlook), was 6.8% interest rate for long term debt, and 5% for the short term debt. Translink has lately emitted bond at 4.5%: we use this last number accross the board but our number could be too optimistic

[3] It seems a bit silly to commit on a technology for a project not expecting to hit the ground in the next 8 years.

[4] Surrey LRT line 1 and line 2 are considered to have the same price per km. the ful cost of the LRT is $2.5Billions. The 10 years plan finance $1.9 Billions of it, ~$600 Million need to be provided in years 2025 and 2026. cash flow model come from the Surrey raid transit phase 2.

[5] The Mayors’ plan implictly suggests a mobility pricing tool to generate additional revenues.

[6] We didn’t have accounted an apparently “exceptional” “partnership” funding toward operation ($50M in 2023 and $35M in 2024) which could slightly delay the time when Translink could not generate enough revenue to service its debt.

Transit funding: The Bateman’s plan and Charles Marohn

Jordan Bateman, from The canadian tax payer federation has released an alternative funding plan to fund the Mayor’s plan, let’s have a look at it:

The CTF funding plan

The CTF notes that the aggregated local revenues (all municipalities and the regional district) growth at an average rate of 5.7% annually. It is well above the ~2.5% combined inflation and population growth rate in Metro Vancouver, and also significantly above the GDP growth rate (~3%). So, the CTF suggests that future local spending could be certainly restrained, to earnmark 0.5% of them toward Translink.

Below is the projected local revenues according different hypothesis.

historical and projected aggregated GVRD revenues. The CTF’s plan suggests to earnmark 0.5% of the revenues growth to Translink. if the growth is 4.7%, it could be enough to fund the 10 years Mayors’ plan.

The CTF report [5] assumes an aggregate regional revenues growth of 4.7% which seems reasonable and below the 5.7% historical trend. Given this assumption, earnmarking 0.5% of these revenues growth to Translink could generate $2Billion on the next 10 years. That is enough to finance the mayors’ plan [7].

What is kind of baffling, is that the mayors, especially the tax addicted ones, have not only implicitly endorsed the out of control taxation growth, but becomes apoplectic at the mere suggestion to put rein on it. The narrative is worded by Bill Tieleman like it:

“To suggest that you can make savings out of growth when you need more schools, when you need more roads, when you need more sewer lines, when you need more garbage trucks — that doesn’t make any sense”

It is time to introduce Charles Marohn:

“No More Road”
“no more sewer line, and no more garbage truck…keep the school thought!”

A rarity in the field, Charles Marohn believes in fiscally responsible urban planning. The main theory developed in his blog is that municipalities are generally engaged in a Ponzi scheme:

• Cities invest in new infrastructure disregarding of the return on investment, which generally tend to be bad: Capital cost can be paid by Development charge, but the generated property taxes are not enough to cover the maintenance cost of it.
• Cities then invest in more new infrastructure, to increase their tax base. The new constituents’ taxes pay to maintain the older infrastructure in the city, but then again there is no revenue to maintain the newly built infrastructure…

Thought things here could not be as bad as in US, we still have a financially unsustainable development model as illustrates the graph above.

Charles Marohn solutions

• A full accounting of all short and long-term financial obligations local governments have assumed for maintaining infrastructure.
• A stop to infrastructure projects that expand a community’s long-term maintenance obligations.
• The adoption of strategies to improve the public’s return on investment and improve the use of existing infrastructure.

Charles Marohn often reminds us: More ≠ Better :
Bus 430 lining up at Knight Bridge: more buses will not make the bus any faster than the bike

How much room we have to make better use of our existing infrastructures?

Most city’s “liabilities” can be correlated to its street network length:

• basic road maintenance, including snow plowing and cleaning
• lampposts and other urban furnitures
• police presence, number of fire stations,…
• sewer and water mains underneath
• garbage truck running on it
• …

The list obviously includes transit. The shorter the road network is, the more efficiently a city can be ran. The meters of road per capita is a good proxy to estimate how efficiently a city can be ran or not. Below some comparisons

meters of road per capita
transit rich cities are not road rich

As suggests the graph above: We have already more than enough roads! Growth without no new roads, and all the service liabilities they implies, is not only a very reasonnable proposition, but should even be a requirement.

How make that happens?

As witnessed by the cold reception of the CTF plan, many municipalities show no intention to take a more fiscally responsible route for future development. However, using the municipal revenue sources to finance Transit creates an impetuous to control spending (“there is so much water a faucet can deliver”).

Notice that financing transit by municipal revenue sources is also of nature to encourage municipalities to adopt development pattern enabling efficient transit, to effectively maximize revenue sources room for other municipal services [6].

For those reasons, the CTF plan has significant merits.

How good is the CTF plan?

Some have criticized the form of the message, Many other have critized the messenger [4]. some are eventually trying to spin misinformation, but we still have to see an argumented rebuttal of the plan content. It is that good!

However, it is not what we are asked to plebiscite or not. What we are asked to vote for is a tax, which contours are still not specified. This to finance a plan which so far has not been audited, and has still to allocate $700M of tax revenue [7]. Without Bill of law insight to clarify all that, it effectively sounds like we are asked a blank check. Strangely enough the proponents of the plan don’t seem much concerned about that… That is concerning.

What come somewhat as a surprise: The CTF plan doesn’t question the mayors’ plan, and accept all of it, so they are not framing the debate as a “yes or no to Transit” as “yes” advocate try to do. Do they will be succesfull ? time will tell.

---

[1] CTF unveils alternative to Metro Vancouver transit sales tax, Jen St. Denis, Business in Vancouver, Jan 15th 2014.

[2] Cities, TransLink should scrimp to avoid new transit tax: No campaigner, Jeff Nagel , Surrey North Delta Leader, Jan 15th 2014.

[3] Number for Hong Kong from “Hong Kong: The facts”, for Vancouver, from 2014 Capital and operating budget, from “Transportation Inventory” for surrey, from Bureau of street service for LA, Greater London authority for London and from wikipedia for Paris

[4] Jordan Bateman could have many defaults, but it is not an election to put Mr Bateman in an office. In a referendum, at the difference of an office election, the message trumps the messenger whoever he can be. We will have opportunity to explain more about that point in another post

[5] No Translink Tax: A better plan http://www.notranslinktax.ca, January 15th 2015.

[6] In that regard the current translink levy on property is a good thing, but because it is not directly correlated to the cost to serve a city, it is not good enough to encourage policies optimizing Transit efficiency: A more direct contribution from the city coffers tied to the Transit subsidies in it, could be an improvment.

[7] The mayor plan is originally based on $2B revenues of a “new tax” over 10 years, while the “Congestion Improvement tax” will bring ~$2.7B in the Translink coffers. See our December 22nd post for more detail. The hereby discussed CTF plan conclude basically the same.