Fiscal Impacts
It was only a generation ago that cities in Canada and the US viewed expenditures on things like roads, water mains, sewers and other municipal infrastructure as ‘investments’ not ‘costs’. Some time in the 1980s, cities generally changed their view of these types of expenditures, around the same time as they brought in development charges (DCs) and ‘user-pay’.
The latter concept is best explained as having developers pay for the cost of new infrastructure within their proposed sub-divisions—all roads, sewers, water mains, storm works, cable, telephone, electrical and so forth must be installed by the developer and paid for by them. DCs, on the other hand, are levied on new residential and commercial construction to pay for other infrastructure outside the new sub-division but caused by the new sub-division such as a need for a larger waste water treatment plant or a new sanitary landfill or what have you.
DCs and user-pay were supposed to curb urban sprawl by creating a strong incentive for developers to make better use of these expensive investments by them in infrastructure. These economic incentives to densify new development largely met with failure due to three factors: a) cities continued to impose development controls that zoned new developments for (exclusively or nearly so) single family housing with large open space requirements, huge road rights-of-ways, large setbacks, etc., b) NIMBY activists resisting densification of their neighborhoods, c) the marketplace showing a continuing significant demand for single family housing.
Now what if someone made you the following proposition:
That sounds like quite a good proposition, doesn’t it? All you have to do in return is maintain the network*.
* And the City of Ottawa, in
a cost cutting move last year, reduced the number of times it cuts the grass
along public roads and in public areas, making Ottawa look like a third world
city. What the City may not realize is that neglect of the public room is an
important factor in the economic and social decline of cities around the world.
The Broken Windows Theory suggests
that it is attention to small details (like fixing broken windows, painting out
graffiti, removing garbage, cutting the grass, etc.) that cuts street crime,
invites tourists to return and creates a climate where people want to invest in
their own communities…
Basically, municipalities are in the enviable position where they can largely rely on the private sector to build their city-state economies for them. However, it has yet to be proven that this is sustainable in the long term. The day may well come when municipalities will again have to invest in their own infrastructure in order to do what was once known (in economic terms) as ‘priming the pump’.
Investing in infrastructure is one of the fundamental reasons why governments exist. What else are they there for if not to invest in public goods?
The classic (quasi) public good* is the construction of a bridge. The cost of the very first pedestrian or vehicle to cross the bridge is astronomical. But once the bridge has been built and paid for, the marginal cost for the next vehicle is practically zero. The other aspect of a public good is that once the good is produced, others can benefit from it without diminishing the utility to others—education is like that. The external benefits to society of an educated populace are very large—increased productivity, increased tax revenues, increased living standards for all, decreased crime, etc.
* Goods characterized by very low levels of subtractibility and excludability, by contrast with private goods above. Low subtractability implies that a good is available to all consumers at the same time, and consumption by one consumer does not use up or reduce the supply available for another consumer. Low excludability implies that if a good is provided to a consumer in a defined region then other consumers in that region cannot be easily excluded from consuming the same good. An example of a pure public good is national security, which is available to all citizens of a country simultaneously. Several other goods are quasi-public, having low levels of subtractibility and excludability. Public goods are generally provided under public ownership, although several can be provided, through contract and regulation, under private ownership. (http://www.adb.org/Documents/Guidelines/Eco_Analysis/glossary.asp)
So a proper role for municipal government is the provision of public goods but this is a critical mission that many municipalities have either partly or wholly retreated from. Their view is that almost everything is a ‘cost’ and costs should be avoided or cut. In fact, maintaining and expanding urban infrastructure including investing in ‘soft’ assets like education, the arts, festivals, recreation as well as hard assets like roads, high speed communication systems, sewer treatment plants, etc. is a must for cities to be able to compete successfully in the 21st Century. This doesn’t mean that municipalities have to actually build all of these things—they just need to provide the leadership and might well rely on the private sector to produce these goods efficiently for them…
Now it’s interesting that DCs on commercial development and commercial property taxes as well as the tax rate applied to residential rental apartments are generally significantly higher than those applied to, say, single family homes. The justification for this can only be that the former are taxed at a higher rate because they can be. It’s a fact that single family homeowners vote in higher percentages in municipal elections than do renters and they certainly far outnumber commercial property owners.
The fiscal impact of commercial development and apartment development is usually far more positive on city coffers than single family housing tracts. That is, the City takes in far more revenue from these sources than they spend in providing services or maintaining infrastructure for them.
For example, people in single family houses tend to have more children—hence, they need more library services, education and recreation facilities, garbage collection and so forth than do renters and, certainly, commercial property owners. In fact, the City of Ottawa does not even pick up garbage for large commercial property owners* and one would be hard put to think of anything the City actually does for them except collect huge realty taxes and DCs.
* In fact, the City of
Not only are the revenues generated for a city less in residential areas and the demands for services higher but the costs of installing services (and then maintaining them) there are much greater than for most commercial uses. The former are now absorbed by the development industry but the latter is clearly a municipal responsibility (except in gated communities where ‘private’ governments that on that role).
Commercial areas that produce FAR (Floor Area Ratios) of 0.5
to 0.8 yield much higher gross revenues than residential development. For
example, the
* Thank you to Ray Essiambre
from www.InfraCycle.com
for providing data from his city modeling program on fiscal impacts which we
use here.
Cities need to think hard about their mission—what should the city take responsibility for and how do they provide leadership? The above is not an argument against intervention by a city in its own economy; instead, it is an argument for doing what only a city can do—set the circumstances for success for its population by providing critical leadership in important areas of the city-state economy which naturally fall under its purview.
Dr. Bruce M. Firestone, B. Eng. (Civil), M. Eng.-Sci., PhD.,
http://www.dramatispersonae.org/ShortFormResumeParsed.htm
http://www.dramatispersonae.org/EnterpriseOfTheCity/HomePage/EnterpriseOfTheCityFrontPage.htm
http://www.dramatispersonae.org/