Transit funding should focus on increasing productivity and prosperity

Transit funding should focus on increasing productivity and prosperity

The Institute for Competitiveness & Prosperity has always centred its transit position on the economic benefits for the Toronto region. The Toronto Census Metropolitan Area (CMA) contributes 45 percent to Ontario’s GDP and 19 percent nationally, both of which are proportional to its population.

If the province and country want Toronto to remain its economic engine, then both levels of government need to consider the region’s infrastructure needs, especially in the area of transit.

Transit must be built to increase productivity and to decrease the negative externalities of congestion by changing driver behaviour. The cost of congestion on productivity is touted at $6 billion a year, according to Toronto Region Board of Trade estimates, and recent research by CD Howe raises this amount by $1.5 billion and up to $5 billion once agglomeration costs are factored in. As a result, Ontario is missing out on 1.1 to 1.6 percent of lost GDP because of transit problems plaguing the Toronto region. If the province was able to capitalize on this rise in GDP, Ontarians inside and outside of Toronto would greatly benefit from increased prosperity.

Ontario politicians of all stripes understand the importance of transit for their constituents. However, the financing solutions to building The Big Move, the $50 billion plan by Metrolinx, which requires $2 billion of dedicated funding every year, are not always economically sound. They also overlook the impact on the competitiveness of the region, which in turn has adverse consequences to the province and nation. Most of these ideas reflect the reality of government spending: governments can only pay for programs using debt, lowering expenses, or increasing taxes. The Institute’s Working Paper 16 reminded Ontarians of this truth.

The notion of using a trust fund to house any generated funds is a good one because it guarantees that transit has a dedicated stream of revenue, and has been used in the United States for decades.[1] An increase in the gas and fuel tax is also economically sound because it taxes drivers who are contributing to the congestion and pollution of the city, ensuring that the negative externalities of driving are accounted for. Furthermore, leveraging debt based on expected revenue at a 2.5-to-1 ratio is another financially – and politically – safe way to raise funds without taxing individuals. Using debt to increase economic productivity is a topic of debate among academics but the returns on operating and capital transit expenses will be in the province’s favour.[2] 

On the other hand, selling provincial land and buildings, while an acceptable method of lowering expenses and finding monies within provincial assets, is not a long term solution to the problem. Furthermore, an increase in HST by one point to reverse the efforts of the federal government’s decrease in GST should be a last resort because consumption taxes such as a sales tax are regressive and place undue burden on low income Ontarians, unless transfer mechanisms are strengthened.

Finally, taxing corporations in lieu or addition to individuals hurts competitiveness. Ontario has worked hard to lower its corporate income tax rate to attract businesses and ensure their growth. It would be remiss to reverse this progress. Instead, the provincial government should look to phase out the small business income tax rate earlier. Ontario’s tax expenditure for small businesses costs the government $1.5 billion annually and incentivizes businesses to stay stagnant. This money could be redirected towards transit.

The Institute recognizes that a mix of revenue tools and government funding is the only optimal solution forward on transit. Monies from the provincial and federal governments have been wholly lacking and sporadic, leaving the cities within the Toronto CMA to fend for themselves. Governments need to find room in their budgets for the region’s infrastructure and significantly increase spending in transit, if not to compensate for the years of neglect, then to at least to recognize the economic importance and potential of Toronto. For too long, transit has been left untended in the Toronto region and it is time that everyone steps up to contribute so that all can reap the increased prosperity that comes with an expansive and effective regional transit system.


[1] Todd Goldman and Martin Wachs, “A Quiet Revolution in Transportation Finance: The Rise of Local Option Transportation Taxes,” Transportation Quarterly, 2003, Vol. 57, No. 1, pp. 19-32.

[2] Daniel Baldwin Hess and Peter A. Lombardi, “Government Subsidies for Public Transit: History, Current Issues, and Recent Evidence,” Public Works Management & Policy, 2005, Vol. 10, No. 2, pp. 138-56.

Photo Credit: JacobH, Getty Images 

Category: Infrastructure, Public Transit, Productivity