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Tax increment financing touted as funding solution for Toronto’s SmartTrack

A controversial method of raising revenues for infrastructure is once again being recommended as a way for Toronto to finance projects like Smart Track, the transit plan proposed by John Tory in the 2014 mayoralty race. A report from the C. D. Howe Institute says that Tax Increment Financing, or TIF, is a better way of funding infrastructure because it better matches those who benefit from the infrastructure with those who use it.

TIF presumes that building infrastructure in a particular district will increase property values there and spur more development. This “uplift” in local property values will result in higher taxes for the municipality, which can then be used to finance that infrastructure. Its key virtue, the report argues, is its ability “to capture infrastructure-induced increases in land value without increasing general tax rates.” Using general taxes to finance infrastructure means that all taxpayers must pay for it while only some may derive benefits. It’s an argument sometimes heard in discussions about the allocation of taxes: why should non-drivers subsidize, through their taxes, the building of roads for drivers?

In general, tax increment financing is a method of using future incremental property tax revenues generated by the redevelopment of a property to offset the upfront costs of redevelopment. In other words, as a property or area is redeveloped, the increase in the assessed value of the property raises the amount of taxes payable by that property. The difference between the taxes paid by the property prior to redevelopment and the taxes paid following redevelopment is referred to as the “tax increment.”

Despite the C. D. Howe report’s calling it a “new and innovative” approach to financing, TIF has been debated in Toronto for more over a decade. A proposal to use TIF to finance a commercial office development in Etobicoke was defeated by city council in 2002. The policy report explaining the city’s decision about the proposal addresses that same issue of how taxes are collected and spent. Since a portion of the taxes that arise from new development in a TIF district are “redirected” in the form of grants to property developers, rather than to general tax revenues, the overall effect is to decrease the city’s share. For this and other reasons, mainly that there was no legislation in place to allow TIFs in Ontario, the city rejected TIF as an option in that instance.

TIF-Howe-Institute-Toronto-SmartTrack-infrastructure-tax-assessment-Condo.ca
Chart comparing natural and infrastructure-accelerated assessment in a hypothetical TIF District. Source: C. D. Howe Institute

Since then, the provincial government passed the TIF Act in 2006. This cleared the way for politicians like Toronto Mayor John Tory to declare, in a piece of campaign literature in 2014, that he would use TIF to finance his SmartTrack plan, then estimated to cost $8 billion. Tory claimed that TIF revenue of $2.5 billion or more would be leveraged over thirty years, based on development activity and assessed value increases along the new transit route. The C. D. Howe report is more optimistic, projecting that SmartTrack could generate as much as $9.9 billion in uplift value. The former finance minister who introduced the TIF Act at Queen’s Park said that Tory’s SmartTrack plan was “tailor-made” for TIF.

But others point out that even in best-case scenarios where TIF-funded infrastructure does spur new development, the city’s costs in providing necessary services to that new development would eat up the higher tax revenues, leaving the city in no better than a break-even position. So far, no TIF-funded project has been implemented in Ontario, so there are no precedents against which to measure its cost effectiveness.

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