The Downside Of Decentralization

Decentralization, in a lot of situations, rocks. With 13 provinces and territories, we have the opportunity to, at any given time, experiment with 13 different approaches to providing the goods and services we rely on government to provide. Health care, roads, etc... there's plenty of room for argument on what we should or shouldn't provide centrally (or de-centrally in the case of things under provincial jurisdiction), but whatever we decide on, we've got this great framework that lets us iterate, share information between provinces, find best practices and use them to keep getting better and more efficient at doing things. Maybe I'm an optimist, but that's how I see things.

However, that kind of variability can have consequences. In particular, I'm referring to the recent proposal by the Toronto Board of Trade to raise money for transit expansion by introducing a number of new taxes and levies.

First off, I think it's a good and necessary idea. Congestion in the GTA is brutal and transit expansion is long overdue. Investments made will more than pay for themselves if they're done intelligently. Casino revenues and P3's aren't going to be sufficient to cover what needs to be done. So the question becomes what taxes to charge and how to implement them. The idea of a GTA sales tax makes me nervous for a number of reasons.

I'm not a believer that businesses will only open shop where taxes are lowest, or that a sales tax in an urban area will trigger an immediate and permanent exodus to lower tax areas. Capital typically isn't that liquid, so a 1% rise in sales tax that causes a 2% drop in sales won't drive a business to move if their moving costs are 5% of sales. Nor is a wildly complex system of credits and deductions ideal. If one jurisdiction charges a flat 12% and another charges 15%, but with creative accounting and tons of legwork to document everything and applying for every credit you can get that down to 10%... if getting down to 10% costs 5% of revenue to pay for the accountant, the business will just as soon go for the 12%. Business owners have a ton of stuff on their plate. In my experience, they care about cost certainty a great deal. My assumption is that it's psychology - you want to be presented with a choice and make it once, and know that it's not going to change. Because you've got a billion other things to focus on. It's why one of the most frequent gripes I hear from Shopify customers is that we charge a transaction fee (not that we get many gripes, but it's one of the more common ones). I don't think it's because it makes our prices unreasonable (after all, we only earn that fee when you're making money) but because it introduces an element of uncertainty.

Different sales taxes in different cities introduce that uncertainty. Sales taxes don't change often on the provincial or federal level, but they do from time to time. That's 14 governments. Giving sales taxation powers to municipalities means we've suddenly got hundreds of governments, all with the autonomy to make whatever changes they like subject to the support of voters... things can get tricky fast. If I ship a product outside the GTA, does my customer in Ottawa pay that tax? If I order something into the GTA from Ottawa, am I expected to report and pay that use tax? It's a nightmare from a paperwork standpoint. It's why the federal government was willing to pay the provinces to move to HST, which is easier to deal with than separate taxes.

I don't think it's a bad idea to raise taxes to invest in infrastructure for cities at this particular time in Canada's history. The need is there, as is the payoff. But the devil is in the details, and the more detailed and complicated we make our taxation framework, the more difficult we make life for the small business that generate so much of our economy's growth.


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