Taxes and public services help build a better city

TheStar.com – Opinion/Editorials – Successful industries and the economies they support need positive inputs, not an absence of taxes
Published On Wed Sep 08 2010.  Jim Stanford Economist, Canadian Auto Workers

Any homebuilder knows that a house has two important parts. You start with the foundation, which situates the house and keeps it stable. Then you build the rooms on top. That’s where the people live.

Every house needs both parts. You can’t have nice living rooms, with no foundation underneath. But you can’t live in the foundation, either. You need the edifice on top.

The same dichotomy is true of the economic structure of a city. The foundation is the set of core, tradable industries that create the fundamental raison d’être for the city. Tradable industries are those which generate revenue for the city and its denizens from markets further afield. These sectors provide essential injections of spending power, allowing the city or region to pay its bills — and in turn they generate spinoff jobs many times over, as purchasing power is spent and re-spent in the civic economy.

Toronto’s key tradable sectors are manufacturing, finance and business services, specialized high-value public services (higher education and health care) and tourism and travel. City leaders absolutely must pay attention to nurturing and growing those economic pillars because the city’s whole economy depends on them.

A word of caution: just cutting taxes won’t do the trick in this regard. That rote advice reflects a deep, old-fashioned misreading of the determinants of competitive success in modern, high-value industries. If low taxes guaranteed success, then Alabama, Arkansas, Oklahoma and Louisiana would be the economic hot spots of the continent (since they have the lowest property taxes of anywhere in Canada or the U.S.). In reality, they are depressed backwaters, which can’t even fund good schools.

Successful industries need positive inputs, not an absence of taxes. Skill. Quality infrastructure. Clusters — so specialists can meet and learn from each other. Strategic supports for investment. And markets. Big markets.

Toronto must do more to nurture its key tradable clusters. Focused sectoral strategies (optimally implemented in cooperation with provincial and federal governments) are the best way to do it. The city has made some efforts in this area (with its biotech initiative, the finance industry task force, efforts to leverage the attractor power of hospital row, and some too-tentative steps toward nurturing green manufacturing). But it could be more ambitious and aggressive in its efforts to leverage city assets to attract jobs in these key, foundational sectors. I’d like to see city officials be as entrepreneurial in sparking private industrial investments as they were, say, in leveraging the Dundas Square project.

But remember, the foundation is just one part of the house. It’s essential. But it’s not where we live. We can’t forget the rest of the building.

After all, those strategic, tradable industries employ only a small share of the total workforce: perhaps a fifth. Most of us work in a very different set of industries: sectors (public and private) which are fully oriented around serving domestic customers and consumers. These local or “non-tradable” industries don’t get as much attention. But they are equally crucial in determining employment, incomes, standard of living and quality of life.

Above ground level, then, what are Toronto’s assets? Tremendous diversity — that’s a no-brainer. Street life that in most parts of town is vibrant and safe. Ease of getting around. Size.

But those assets don’t tell the whole story. Toronto’s “living rooms” are under pressure. They are being dragged down by social and economic pressures and unaddressed needs.

Collectively, we need to invest more in the things that make Toronto a great place to live (like transit, parks and culture). And invest more in addressing the growing problems that threaten to undo that successful civic recipe (like concentrated poverty, underhousing and precarious, low-wage employment).

So at the same time as city government works proactively to nurture high-value clusters in the tradable sector of the economy, it needs to invest in quality, productivity and accessibility on the non-tradable side, too. Public-sector jobs help to lift benchmarks through the rest of the labour market (which is exactly why private employers complain endlessly about them). Public services help to stabilize and support the neighbourhoods that make up the city — instead of watching some thrive, and others sink, according to the market’s logic of polarization. And private non-tradable businesses ride on the coattails of those investments, relying on factors like transit, safety and local buying power to maintain their own businesses.

Here, too, conservative business lobbyists have exactly the opposite path in mind. They’ve pushed forward loudly with yet more calls for spending cutbacks and corresponding tax reductions. But when your house is showing signs of wear and tear, it is time to invest more in it — not less.

In 2007 and 2008, our blue-ribbon fiscal panel carefully reviewed the empirical evidence regarding Toronto’s taxes and spending. Property tax rates are significantly lower than other municipalities. Compared with other big cities, the cost of running Toronto is relatively low. And city spending has increased no faster than in other, much smaller Ontario municipalities. The loud hue and cry about the city’s “out of control” spending reflects political ambitions, not empirical reality.

In determining how we are going to live, above ground level, in the house that we build together, public spending (and the taxes that pay for it) is important for two reasons. First, they determine how much of our consumption consists of public services, rather than private goods. Second, and related, they determine how well our consumption is shared across the many different people who live in our house with us. A city with low taxes, and correspondingly minimal public services, is a city where most consumption consists of private stuff — but where public spaces are intolerable, where many are left out of consumption altogether, and where business (ironically) is dragged down with the general malaise of underdevelopment. (Think Alabama and Arkansas again.)

A city that pays its taxes, and then uses them to sponsor a broader array of public goods and services (everything from first-class transit to neighbourhood clinics to parks to community housing), is a city that will be economically successful. And it’s a city where I want to work, and live.

Jim Stanford was a member of the mayor’s independent Fiscal Review Panel. This essay is one of a series prepared for Toronto Debates 2010, a special project sponsored by four of Toronto’s major community organizations that will include three major mayoral debates. The first debate is tonight at 6:30 p.m. at the MaRs Centre, 101 College St.

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