Wednesday, July 04, 2012

Re: 10 Flaws in the 0% Tax Increase Plan

Last night I read a blog post written by Susan Toth entitled 10 Flaws in the 0% Tax Increase Plan (AKA Why Taxes Should Not Be a Bad Word). I engaged Susan in a discussion about some of the points in her argument. This lead to a deeper discussion about basic underlying principles.

While we had different views on many ideas, I felt Twitter's 140 character limit wasn't enough to fully explain my argument. I promised her a more detailed response, including why I disagreed with her 10 points, as well as an explanation of why I feel private competition is more efficient than government monopoly, and why private delivery of services can result in higher quality services than governments provide. I'll provide the latter in later posts.

Susan took a lot of time researching her points, and even provides sources for each. I commend her for that. Some of her points I even agree with, but others I feel the need to either present a counter argument or at least point out where Susan may have overlooked some details.

Flaw #1:

"A 0% tax freeze, when taking inflation into account, is actually a tax decrease. So lets start referring to it as such. In 2011, inflation was at 2.9%. So to actually maintain a 0% “increase”, we would have to start at 2.4% (using a 0.5% projected assessment growth- more on this later)."
The CPI increased only 1.2% in the 12 months up to May. Susan touches on projected assessment growth being only 0.5%. While this may be true, my own property taxes increased by 1.03% last year due to increased property assessment. City revenues also come from growing the tax base as new properties are built.

Using her own figures, assessment growth was 1.5% in 2009 but is projected to fall to 0.5% in 2011. Just as with households and businesses, we all needed to tighten our spending as the economy cooled. There's no reason the city should expect their revenues and spending to continue to grow at the same rate while everyone else tightens their belts.

Flaw #2:

"0% will result in needing to find $25 million. Essential services or not, there will be cuts."
As Susan pointed out in Flaw #1, she's expecting the city to increase real expenditures by roughly the rate of inflation she stated, or 2.9%, while revenue grows by only the projected assessment growth of 0.5%. This isn't a cut. This is choosing not to increase spending to match inflation. Most people wouldn't call it a cut when the city gives a department $10 million in 2011, then gives them another $10 million in 2012. Similarly, when employees see their pay cheques increase 2.9%, they'd call that a raise.

I also disagree that there needs to be cuts to maintain services without raising the tax rate. Many of our services could be delivered more efficiently by fundamentally changing how they are delivered. Many services which are currently handled by city staff could be delivered more efficiently by introducing private competition. As a hypothetical example, instead of having city staff maintain city parks, let local lawn care companies compete in a bidding process for that work. This can reduce the city's costs to maintain parks while maintaining the exact same quality of service and also supports our local economy.

Lastly, I like to ask this of everyone who is opposed to cutting services. Is there not a single city service or other area where you would support cutting spending? Is there not one thing you would cut from the city budget if it were up to you? Not one? Metal trees? Light shows? Thames River fountain upgrades? If you can't come up with a single item to cut, you're just not trying.

Flaw #3:

"None of this is to say that finding efficiencies isn’t a goal. It should always be a goal. If we impose a tax raise, and find efficiencies, we can use the surplus to invest back into the city."
I agree with the first half of this point. Finding inefficiencies should be the goal. We won't find long term efficiencies by nibbling around the edges. If we only cut spending on an inefficient program, we'll just have a slightly smaller inefficient program. We need to "ReThink" how services are delivered in order to find true savings over the long term.

However, if we simply raise taxes, there'll be no need for departments to find efficiencies. They'll just carry on doing things just as inefficiently as before and we'll only be draining more money out of the economy.

Flaw #4:

"Going into debt will cost us more in the long term through interest payments on loans. Toronto’s tax “freeze” in the late 90s is generally understood to have contributed to the financial hole it now finds itself in"
Again, I agree with the first half. Borrowing money to run the city is not a solution. Debt is simply a tax on future taxpayers. However, I'd argue that Toronto's financial hole is largely attributable to the city kowtowing to their overpaid and overemployed public sector unions under a union-friendly NDP mayor.

Flaw #5:

"Maintaining a 0% tax increase will just mean a larger (and much harder to take) increase in taxes down the road."
This assumes that city spending continues to outpace revenue growth. We need to change this expectation if we're to maintain taxes at this level in the long term. Winnipeg managed to freeze taxes at 0% increase for 14 consecutive years and only this year are they looking at a 3.5% increase -- a relatively moderate increase after 15 years.

Flaw #6:

"Taxes are the price we pay for civilization. Given that much of London’s infrastructure is decades behind in maintenance and repairs, (as evidenced by sink holes!) the cost to fix problems will be far more than the cost of ongoing repairs and maintenance."
Taxes are the price we pay for government services, not civilization. Infrastructure upgrades are infrastructure maintenance are two separate expenses. Upgrades are capital expenses which add value to the city for future benefit, while maintenance is an ongoing expense to maintain those assets are current levels. Capital expenses can be funded by selling off assets which is not longer makes sense (in some cases, never made sense) for the city to own, such as the London Convention Centre or our city-owned golf courses which compete against the privately-run courses.

Flaw #7:

"It’s entirely inaccurate to say no one wants a tax raise."
Reference to the left-wing Toronto Star notwithstanding, I don't disagree that there are people who want taxes to rise, such as Susan, an no doubt the many staff employed by the city. There are also many people who want taxes to remain the same, or even be cut, such as many businesses or lower income families struggling to get by in today's economy. Property taxes are a regressive tax which affect lower incomes the most.

To everyone who "wants a tax raise," I'd ask if they'd be willing to personally pay extra money to the city -- above and beyond whatever taxes they already pay? Have they ever donated extra money to the city before in this fashion? If there's a segment of Londoners who are so gung-ho about wanting to pay more tax, let's give them the option. Provide a method for people to donate extra money to the city. Even give them the option of "earmarking" their donations to go towards certain services, such as subsidized housing. If there is truly a broad desire to pay more taxes, let's see these people put their money where their mouths are.

Flaw #8:

"A report written by tax expert and economist Hugh Mackenzie ... For most Canadians, the benefit they receive from tax cuts is outweighed by a significant margin by their losses from accompanying cuts in public services."
I didn't take the time to read the full report written by Hugh Mackenzie for the left-wing think-group, the Canadian Centre for Policy Alternatives. However, I'd point out that much of the benefit from lower taxes isn't directly realized by taxpayers alone. While taxpayers will have more money, they'll also spend more money on goods and services, which helps boost businesses, which creates jobs, which lowers unemployment, which raises people out of poverty, which grows the tax base. The Laffer curve illustrates how lowering taxes can actually raise government revenue and how raising taxes can reduce revenue. At one point, Britain had such high taxes that it was suffocating their economy and drastically reducing total tax revenue. They've since lowered their taxes and revenues have increased.

Flaw #9:

"User fees that often result from tax cuts/freezes disproportionately impact low-income families."
User fees proportionately affect the users of services. User fees can help to reduce waste caused by frivolous use of services. As an example, take health care, even though this is a provincial responsibility. If patients had to make a small co-payment, say 10% of the cost, whenever they went to a doctors office or to a hospital, it would reduce unnecessary visits, such as taking your child to the emergency room because they have a cold. Many European health care systems, such as the Swiss, use a co-payment system to great effect.

Getting back to the municipal level, the city already charges user fees for services, such as at the city's swimming pools. It's $2.50 for outdoor pools and $3.50 for indoor pools. Kids can go swimming for the cost of a bottle of pop. This seems reasonable, and could even be raised. (Better yet, privatize the pools and let businesses set the price and compete for customers -- bet I won't convince you of that one.)

Flaw #10:

"Even assuming individual households save up to, say, $500 per household. This extra $500 will not stimulate economic growth. The staff cuts and service cuts will deepen the economic crisis."
This last one was quite a bit longer, so I only quoted the part I disagree with the most, and by most I mean 100%. The assertion that reducing taxes by $500 per household will not stimulate economic growth is just plain wrong. It follows this assertion that increasing taxes by $500 per household will do not economic harm, which is also wrong. If it were true, we could just increase taxes indefinitely without any harm to the economy.

Staff cuts will deepen the economic crisis? Let's differentiate between makers and takers. Makers are the people working in the private sector to add to the productivity of our economy, such as manufacturing, resource extraction, sales, tourism, etc. The private sector grows the economy and generates wealth, from which governments take a percentage to provide public services. Fire protection, police services, subsidized housing, vehicle licensing, gun registration, human rights commissions, may be important services, but they generally do not directly add to the productivity of economy.

To say cutting public sector jobs would deepen the economic crisis is false. Cutting these jobs would reduce the tax burden on the makers and allow the economy to grow, creating more jobs for these recently cut public workers. If city staff were what's keeping the economy going, then wouldn't the solution be to give everyone a government job? Who would be left to pay for it?

3 comments:

  1. Many proponents of the tax freeze have used Winnipeg as a "success story" with their 13 year tax freeze. Yes, they did accomplish it, but with severe cuts to services and by several one-time windfalls achieved by selling off city assets. Their infrastructure is crumbling, and they are leeching capital in order to cover operating expenses. The end result - are people flocking to move to Winnipeg?

    I think it needs to be emphasized - There is nothing wrong with being more efficient, but the attitude of Fontana and a majority of councillors is that it must be achieved at any cost, because they're afraid of looking foolish in front of their constituents.

    Also, regarding "Makers" vs. "Takers", I don't agree with using economic prosperity as the only yardstick with which to judge a city's success.

    What about (IMHO, still important, but admittedly less tangible) items such as quality of life and civic pride? You can't say that laying off Parks & Rec employees and forcing them to be hired by a contractor at the minimum wage they're permitted to pay by law to do, in many cases, the exact same work fosters that.

    I do not agree with forcing a few people below the poverty line (incidentally, making social services more appealing to them) just to put a pittance in the pockets of city taxpayers.

    ReplyDelete
    Replies
    1. Hi Jamie,

      From 2006 to 2011, Winnipeg has grown 5.1%, while London has only grown 3.7% in that same time, so yes, people are flocking to move there, at least relative to London. The sale of assets isn't necessarily a bad thing. The London Convention Centre has only just started to show profit, but is still a pitiful return on investment. The city's golf courses are competing with privately owned ones, and some have been run at a loss in the past few years. Two easy sales in my books.

      If Parks & Rec employees are being employed by the city at a higher cost than they would be in the private sector, why are we subsidizing their high salaries and benefits? It isn't the city's responsibility to provide high paying jobs, it's to provide efficient services. Allowing private businesses to compete in providing those services would save money.

      Raising taxes pushes more people towards poverty. Property taxes are regressive, impacting low-income households the most. Renters aren't immune either; property taxes get passed on to them through their rent.

      Thanks for reading.

      Delete
  2. The London Free Press is reporting on a fight over your money...
    http://www.lfpress.com/news/london/2012/07/09/19966456.html

    There is a fight raging at city hall over the issue of raising taxes.

    City employees want more of your money! They are threatening to claw backs services to those most in need.

    Watch the reports in the paper and how they seem to be a trade off between raising taxes or slashing programs for those most in need:

    Cuts to library, arena and pool hours
    Cuts to homeless programs and bus service
    Reductions in sidewalk snow removal
    The end of the Green Bin pilot project.
    Reductions in dozens of other programs and services

    What is lacking is a discussion around the fastest rising cost and the largest expense at city hall, employee compensation. The cost of salaries, benefits and pensions is skyrocketing.

    Here are a few facts about the city's payroll:

    The Top 10 earners at city hall will take home over $40 million in pensions if fully qualified for pensions when they retire. See the facts here:
    * Top Ten Pensions in London
    * It costs the city almost $100,000 annually on total compensation for each employee including salaries, benefits and pensions
    * You owe your employees $80.1 million in sick payouts and vacation payouts at retirement along with health benefits after they retire.
    * There are over 280 employees earning over $100,000 a year in 2005 that number was 49
    * There are 17 employees on track to earn pensions in excess of $100,000 the first year.
    * The average age of retirement is 59 for the pension plan most employees belong to OMERS.

    It is unacceptable that the discussion around taxes is focused on major reductions in services and does not address the single largest cause of financial distress at the city employee compensation.

    The unions at the city collect millions in dues every year. This allows them to mount to a massive PR and media campaign the tells you and other voters how they deserve this outrageous compensation.

    Send your Councillor a Book

    We outline all of these issues in the book Pension Ponzi.

    You can help us get the message out by sending us a donation. Each donation in the amount of $25 will provide a book for your local politician. Please consider a donation and help bring your favorite politician up to speed on this important issue and Stop The Tax Grab by your employees.

    Send us $350 and we can send each councillor a copy of the book.

    Fair Pensions For All

    ReplyDelete