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John Tory’s SmartTrack plan is an $8-billion proposal that would rely on tax increment funding, which has never been used in Canada on that scale.
John Tory’s SmartTrack plan is an $8-billion proposal that would rely on tax increment funding, which has never been used in Canada on that scale.

John Tory’s SmartTrack: Why his big bet on transit is a real risk Add to ...

Recent polls show John Tory leading the race for mayor. One big reason, his team says, is SmartTrack, his $8-billion plan to use existing rail track to create a 53-kilometre, 22-station “surface subway.” When he unveiled the idea back in May, illustrated with colour-coded transit maps, he said the system could be completed in just seven years and would “break the back of the city's congestion problems.”

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But anybody can draw lines on a map. The key question – frankly the only question, when it comes to transit in Toronto – is how to pay for it. A close look at his funding proposal suggests that the biggest, most costly proposal in his campaign for mayor is built on a shaky foundation.

The old-fashioned way to build rapid transit in Toronto is to borrow the money and pay it back by raising property taxes. That is how the city plans to cover most of its share of the proposed Scarborough subway extension, for example.

Mr. Tory proposes something different and, in Ontario at least, so far untried. He would avoid raising property taxes and instead use a method called tax increment financing (TIF). As he put in prepared remarks for a speech in June, this method “would help pay upfront capital costs by capturing ahead of time the increased tax revenues from development on lands near the new stations.”

One big plus for Mr. Tory is that he doesn't have to pitch tax increases during an election campaign and put a target on his back for Mayor Rob Ford and others. “I don’t propose to offer hardworking Torontonians transit relief in exchange for a financial headache that could last for years,” he said in his June speech. “Therefore, I will not raise property taxes to build the SmartTrack line. The city’s one-third portion will come from tax-increment financing.”

But it is far from clear that TIF could work here in Toronto, especially for such a costly project.

Three recent transit studies have looked at TIF and other forms of what experts call land value capture. None has recommended making it a pillar of a transit-funding strategy. City of Toronto officials say the concept is essentially useless to them in its current form. Some experts warn that by counting on a geyser of future property tax revenue that might never materialize, Toronto could be facing a serious risk.

One-third of $8-billion is $2.666-billion. That is a lot of money, however you raise it. TIF has never been used in Canada on anything like that scale. In fact, says former TTC chair Karen Stintz, who pulled out of the mayoral race this week, “there is no example of tax increment financing working to that degree anywhere.” The Tory campaign counters that TIF is sound, safe, backed by a pile of research and already in use around the world.

California pioneered tax increment financing in the 1950s. Since then, it has spread to most American states. Say a city wants to redevelop a rundown part of its downtown. The city creates a TIF zone there and makes plans for improvements. It borrows money, usually by issuing bonds, to pay for those improvements. It freezes regular taxes in the zone at existing, or base, levels and uses any tax money it reaps in excess of that – the increment – to finance the debt.

The Tory campaign says the tax increment from just three areas that will be served by SmartTrack stations – Liberty Village, the East Don Lands and the downtown core – could cover the city’s share of the cost.

But TIF relies on identifying new development that comes from a project. Liberty Village is pretty thoroughly developed already. So is the downtown core. It is one thing to rebuild a blighted area and claim that the bigger tax take is due to redevelopment. It would be trickier to claim that, say, a new cluster of downtown office buildings came from a new downtown transit station, considering that downtown is already well served by transit.

And what if the development never comes? TIF is a gamble that the property-tax income will rise enough to cover the money borrowed to build the project – in this case, the SmartTrack network.

“The real danger here is that those values don’t increase in the way it was predicted at the start,” says Enid Slack, director of the University of Toronto’s Institute on Municipal Finance and Governance. “How do you pay back the loan?” The answer, almost certainly, would be to raise property taxes, the very thing Mr. Tory has promised to avoid for SmartTrack.

New York is using a form of TIF to help pay for a $2.4-billion extension of the 7 subway line, part of a transformation of Manhattan’s Far West Side. A report last year showed that revenue from new development had fallen more than $100-million short of the $283-million expected by 2012. Tax increment financing is “a promising way of financing infrastructure but it’s not working out very well so far in New York,” says David King, an assistant professor of urban planning at Columbia University, who has studied the subject.

Mr. Ford proposed using TIF to fund a Sheppard subway extension before city council shot that project down. The Ontario government brought in legislation in 2006 to permit the financing method. It was to be used in a pilot project to help pay for the Toronto-York subway. But the government has yet to bring in regulations to put the legislation into practice.

Toronto and Queen’s Park are locked in a dispute over TIF. The city has asked the province over and over to allow Toronto to tap into the education portion of the local property tax, which goes to Queen’s Park to pay for schools. “If we don’t get the province to agree to waive their portion of the property tax, will this tax mechanism work? From our perspective, no,” says city manager Joe Pennachetti. "It really is going to be of no benefit from our perspective.” That is because, as the city sees it, it would only be tapping into its own future revenue stream, not gaining new resources.

Mr. Pennachetti hopes the discussion about TIF in the campaign for mayor will put pressure on Queen’s Park. But there is no sign of that so far. In an e-mailed statement, the Ministry of Finance said that “before considering programs to divert future revenues away from our education system to fund municipal infrastructure projects, the province will carefully study the implications.” The government, it said, was “taking a careful and prudent approach ….”

Even if the struggle over the education portion of the property tax could be worked out, the Tory campaign admits there is another hurdle. The Ontario legislation says municipalities must keep TIF spending in any given year below 1 per cent of their total property tax take.

The problem with earmarking any amount of future tax revenues for a particular project like SmartTrack is that those revenues won’t be available for other things like filling potholes, or creating new parks for the people who live in the redeveloped area.

Canadian transit authorities have been cautious about the idea of relying on TIF to fund big transit projects. An exhaustive report from Metrolinx, the Ontario transit agency, last year recommended raising hundreds of millions of dollars a year for transit through a five-cent-a-litre tax on gas and a one percentage-point rise in the sales tax. It estimated that various types of land value capture could reap only a modest $20-million a year, though the sum could be higher with the right policies in place.

A second panel, led by Anne Golden, recommended gas taxes, listing land value capture as one of its “smaller” revenue sources. In British Columbia, the mayors of greater Vancouver issued a report this spring calling for tolls, road pricing and a share of the provincial carbon tax. It recommended looking at land value capture, too, “although it doesn’t have the revenue potential of other sources.”

Mr. Tory once said that “transit plans without money are almost worse than no transit plans at all because they create nothing but false hopes.” Now he promises to produce $2.5-billion dollars at no cost to the ordinary taxpayer through the alchemy of tax-increment financing.

This leading candidate for mayor is just feeding more false hopes.

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