Economic analysis

Will Metro Vancouver voters agree to higher taxes for transit?

Residents will vote this Spring on a new transit package, funded by a half point increase in the provincial sales tax
A Canada Line rapid transit train crosses over the Fraser River from Vancouver to Richmond, B.C., as Grouse Mountain is seen in the distance on Sunday August 16, 2009. The train linking Vancouver with Richmond and the Vancouver International Airport officially opens to the public on Monday. It will be a key part of the transportation during the Vancouver 2010 Winter Olympic Games. THE CANADIAN PRESS/Darryl Dyck

Another referendum on sales taxes is coming to British Columbia, but, this time, it’s different. Unlike 2011’s referendum on the harmonized sales tax, this spring’s vote will determine whether regional transportation agency Translink can undertake a $7.5-billion package of transit improvements funded by a half-point increase in the provincial sales tax. The regional mayors last week suggested the wording for the referendum, and the provincial transport minister Todd Stone (who has final say on the referendum question and timing) seems to like the mayors’ work and is set to approve the referendum details by the end of December.

The mayors propose an increase in the provincial sales tax from seven to 7.5 per cent, but only for businesses in Metro Vancouver. This kind of regionally differentiated sales tax is very common in the United States, where counties in most states can raise revenue by piggy-backing on the state sales tax. In Canada, the only similar case I’ve come across is in Lloydminster, Sask., where businesses have been exempt since 2001 from Saskatchewan’s usual sales tax. Within B.C., the special sales tax rate on accommodations also has a municipal add-on option of two per cent, which some municipalities choose not to take.

I’m a public finance economist, so I will leave the politics of the referendum and the worthiness of the transit package to other experts to dissect. As a tax choice, I see two potential concerns with the 0.5 per cent sales-tax increase.

The first concern raised by this move to regionally differentiate the sales tax is the potential rise in inter-regional shopping. Will people drive out to Abbotsford or up to Squamish to avoid the higher sales tax? University of Georgia regional sales tax expert David Agrawal gave a lecture at the Vancouver School of Economics last week. Prof. Agrawal told me there is a good deal of evidence of shoppers’ sensitivity to sales tax differences across borders.

The evidence tells us that two factors are important. First, it matters how far one must travel to save the tax. Second, the size of the tax difference between regions matters. I don’t think either of these factors in the B.C. case will lead to a large surge in inter-regional shopping.

Let’s walk through an example. Say someone in Burnaby is considering the purchase of a $1,000 television. Driving out to Abbotsford is about 60 km and would incur tolls of $3 each way using the most direct route. So, with $6 in tolls and maybe $15 in gas for the round trip, you would save $5 in provincial sales taxes on that big TV purchase. Of course, those living closer to the regional boundary might find the calculations more amenable to making the trip outside the higher tax zone. As well, items bigger than a TV (such as new cars) might make the trip worthwhile. However, making these kinds of trip for everyday shopping won’t pay off.

Even if there were a big effect on cross-boundary shopping, some of the financial impact would hit commercial landlords rather than the retailer tenants. Imagine retail locations on either side of a road that were subject to different sales tax rates. Commercial lease rates on the higher tax side might adjust downward in order to continue to be attractive to retail tenants. In this way, the owners of commercial land might bear some of the burden for the new, higher tax rate.

The other main economic concern about the 0.5 per cent sales tax hike is that alternative taxes might be better choices. For example, annual vehicle levies, or an increase to the regional gas tax, would remove more cars and congestion from the road, which would reinforce the positive impact on congestion of the new transit capacity. That might seem attractive to an economist, but the mayors were reportedly worried about losing referendum support from car drivers who might feel overburdened. As each of these mayors won an election but weeks ago, it would take a brave economist to challenge the mayors’ keen sense of what will motivate voters.

The opposition is organized, and my sampling of talk radio over the past few days reveals an electorate grumpy about Translink’s financial management. On the other hand, the Better Transit Coalition organizing in favour of the mayors’ package has a diverse and well-funded base of support. Three short months from now, Vancouver and the rest of Canada will find out if voters are willing to put up with a tax increase to improve public transit.