"Tax-increment Financing" for Toronto Transit

tax-increment financing toronto transit

Toronto's mayor is on the right track with his suggestion to use "tax-increment financing" to pay for new transit. The best way to finance transit is indeed by collecting the upkick in land values (economic rent) so that the unearned increment generated by the new infrastructure goes to pay for that infrastructure, rather than financing it out of general revenue by taxing distant taxpayers who won't benefit from it.


Three problems, however, with Ford's approach:

Municipal taxes amount to roughly 1% of property value, so the amount collected will be insufficient to cover the cost of the subways over their lifetime. The unearned increment to land (economic rent) is 4-5% annually, which if collected would be sufficient to amortize the new asset. (Economic rent is revenue without a corresponding cost of production, it is unearned, so collecting it does not jeopardize business or residential viability.)

Secondly, only warranted infrastructure generates land value upkick equal to its costs, and subways are probably not warranted in these low density areas, which are served cost effectively by LRT.

Thirdly, taxing buildings discourages construction just when and where it is desirable, so the municipal tax should be moved onto land alone which will not punish construcution but will incent efficient land use.

But Toronto should pursue this idea, because if planned properly, new transit can be self-financing without increasing taxes throughout the city.

Here is five minute portion of a new film produced by Fred Harrison that looks into the anomaly whereby taxpayers finance infrastructure investments that create high value, that are captured not by the public as a whole but by the lucky individual landowners whose real estate values rise, often hugely, as a result of these public investments.