Development Charges in Ontario: Is Growth Paying for Growth?

This paper is part of the IMFG Papers on Municipal Finance and Governance series. For a full list of papers, please visit http://bit.ly/2ylAa2D.Ontario’s Development Charges Act (DCA) provides the legal framework within which municipalities recover growth-related capital costs from the new development giving rise to such costs. While the purpose of the DCA is to ensure that growth pays for itself, the way the DCA is designed prevents it from achieving its obvious goal. Because of its overly prescriptive and complex provisions, and because it forces municipalities to charge existing ratepayers for some of the costs of growth, the DCA undermines municipal efficiency, equity, and accountability. One barrier to legislative reform of the DCA is the absence in the literature of a rigorous economic rationale for funding growth-related capital works with development charges. This paper develops such a rationale by comparing development charges to alternative methods of cost recovery for growth-related capital works. A review of the shortcomings of the DCA leads to a recommendation that the DCA be replaced by a new development charges section in the Municipal Act and City of Toronto Act that would enhance municipal efficiency, equity, and accountability, and ensure growth really does pay its own way.Institute on Municipal Finance and Governanc

Development Charges in Ontario: Is Growth Paying for Growth?

This paper is part of the IMFG Papers on Municipal Finance and Governance series. For a full list of papers, please visit http://bit.ly/2ylAa2D.Ontario’s Development Charges Act (DCA) provides the legal framework within which municipalities recover growth-related capital costs from the new development giving rise to such costs. While the purpose of the DCA is to ensure that growth pays for itself, the way the DCA is designed prevents it from achieving its obvious goal. Because of its overly prescriptive and complex provisions, and because it forces municipalities to charge existing ratepayers for some of the costs of growth, the DCA undermines municipal efficiency, equity, and accountability. One barrier to legislative reform of the DCA is the absence in the literature of a rigorous economic rationale for funding growth-related capital works with development charges. This paper develops such a rationale by comparing development charges to alternative methods of cost recovery for growth-related capital works. A review of the shortcomings of the DCA leads to a recommendation that the DCA be replaced by a new development charges section in the Municipal Act and City of Toronto Act that would enhance municipal efficiency, equity, and accountability, and ensure growth really does pay its own way.Institute on Municipal Finance and Governanc

Development Charges and Housing Affordability: A False Dichotomy?

This is part of the IMFG Papers on Municipal Finance and Governance series. For a full list of papers, please visit http://bit.ly/2ylAa2D.With the release of More Homes, More Choice: Ontario’s Housing Supply Action Plan in 2019, the Province of Ontario embarked on a campaign to reduce barriers to housing supply in an effort to make housing in the province more affordable. Among the various barriers identified in the report are municipal development charges, which are one-time levies on property development. Over the past 30 years, Ontario’s municipalities have increasingly relied on development charges to recover growth-related capital costs as provincial grants for expansionary capital works have declined. At the same time, the development industry has strongly opposed development charges while academics and policymakers have focused considerable attention on these charges. Concern over development charges principally stems from their supposed negative impact on housing affordability. The literature, however, provides little in the way of sound theoretical foundations or robust empirical evidence for such an effect. The present study aims to address that gap by examining the connection between development charges and housing affordability in a municipal context. By considering the way in which municipal services are provided and financed, this paper shows that properly formulated development charges in fact improve housing affordability.Institute on Municipal Finance and Governanc

Essays in Municipal Finance

Chapter 1: I analyze economies of scale for fire and police services by considering how per-household costs are affected by a municipality’s size. Using 2005-2008 municipal data for the Province of Ontario, I employ a partial-linear model to non-parametrically estimate per-household cost curves for each service. The results show that cost per household is a U-shaped function of municipal size for each service. For fire services, these costs are minimized at a population of about 20,000 residents, while for police services they are minimized at about 50,000 residents. Based on these results, implications are drawn for municipal amalgamation policy. Chapter 2: I review how the literature has continued to exclude the business property tax (BPT) from the marginal effective tax rate (METR) on capital investment for over 25 years. I recast the METR theory as it relates to the BPT and compute 2013 estimates of the METR for all 10 provinces in Canada with provincial BPTs included. Building on these estimates, I compute the METR inclusive of municipal BPTs for the largest municipality in each province. I find the BPT to be substantially damaging to municipal, provincial and international competitiveness. With the business property tax representing over 60% of the Canadian METR, among the various capital taxes it is by far the largest contributor to Canada’s investment barrier. Chapter 3: I estimate the responsiveness of structure investment and the tax base to commercial property taxes, taking a new step toward resolving the “benefit view” vs. “capital tax view” debate within the literature. Using a first-difference structural model to analyze 2006-2013 municipal data for the Province of Ontario, I improve upon past studies and build onto the literature in a number of ways. I find that commercial structure investment and tax base are highly sensitive to the property tax with Ontario’s assessment-weighted average tax elasticity (and tax-base elasticity) ranging from -0.80 to -0.90 at 2011 taxation levels. The results support the capital tax view of the business property tax, building onto the growing consensus that business property taxes substantially impact investment in structures and the value of the tax base.Ph

Essays in Municipal Finance

Chapter 1: I analyze economies of scale for fire and police services by considering how per-household costs are affected by a municipality’s size. Using 2005-2008 municipal data for the Province of Ontario, I employ a partial-linear model to non-parametrically estimate per-household cost curves for each service. The results show that cost per household is a U-shaped function of municipal size for each service. For fire services, these costs are minimized at a population of about 20,000 residents, while for police services they are minimized at about 50,000 residents. Based on these results, implications are drawn for municipal amalgamation policy. Chapter 2: I review how the literature has continued to exclude the business property tax (BPT) from the marginal effective tax rate (METR) on capital investment for over 25 years. I recast the METR theory as it relates to the BPT and compute 2013 estimates of the METR for all 10 provinces in Canada with provincial BPTs included. Building on these estimates, I compute the METR inclusive of municipal BPTs for the largest municipality in each province. I find the BPT to be substantially damaging to municipal, provincial and international competitiveness. With the business property tax representing over 60% of the Canadian METR, among the various capital taxes it is by far the largest contributor to Canada’s investment barrier. Chapter 3: I estimate the responsiveness of structure investment and the tax base to commercial property taxes, taking a new step toward resolving the “benefit view” vs. “capital tax view” debate within the literature. Using a first-difference structural model to analyze 2006-2013 municipal data for the Province of Ontario, I improve upon past studies and build onto the literature in a number of ways. I find that commercial structure investment and tax base are highly sensitive to the property tax with Ontario’s assessment-weighted average tax elasticity (and tax-base elasticity) ranging from -0.80 to -0.90 at 2011 taxation levels. The results support the capital tax view of the business property tax, building onto the growing consensus that business property taxes substantially impact investment in structures and the value of the tax base.Ph

Economies of Scale in Fire and Police Services in Ontario

This paper is part of the IMFG Papers on Municipal Finance and Governance series. For a full list of papers, please visit http://bit.ly/2ylAa2D.This paper analyzes economies of scale for two municipal services by considering how per-household municipal costs are affected by a municipality’s size. An econometric model is used to estimate costs associated with fire and police services using data for 445 municipalities in the Province of Ontario. The results show that the costs per household of fire services are minimized for municipalities with a population of about 20,000 residents. For police services, costs are minimized with a population of about 50,000 residents. Based on these results, implications are drawn for municipal amalgamation policy.Institute on Municipal Finance and Governanc

Economies of Scale in Fire and Police Services in Ontario

This paper is part of the IMFG Papers on Municipal Finance and Governance series. For a full list of papers, please visit http://bit.ly/2ylAa2D.This paper analyzes economies of scale for two municipal services by considering how per-household municipal costs are affected by a municipality’s size. An econometric model is used to estimate costs associated with fire and police services using data for 445 municipalities in the Province of Ontario. The results show that the costs per household of fire services are minimized for municipalities with a population of about 20,000 residents. For police services, costs are minimized with a population of about 50,000 residents. Based on these results, implications are drawn for municipal amalgamation policy.Institute on Municipal Finance and Governanc