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One province is asking for Ottawa to chip in for subways. Another is asking the federal government to pay for flood protection infrastructure. The federal government can't be a bottomless pit for provincial and municipal demands, so how should it decide which projects to support?

Take flood protection infrastructure, for example. The federal government is on the hook for up to 90 per cent of flood disaster cleanup costs in Calgary, for example.

It makes sense for the federal government to pay for a share of new flood protection infrastructure, if only to avoid the bill for a future disaster that would mean taxpayers in, say, Toronto, once again having to help pay repair costs for homes in Calgary.

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But should the federal government acquiesce to Ontario's request for money for a subway? Would that mean taxpayers in, say, Calgary helping pay for a Toronto subway?

The answer to who should pay depends in large part on who benefits.

The direct beneficiaries of new infrastructure are the people who use the new trains or roads and the lucky homeowners who see their property values rise because they own property nearby newly installed stations or better roads. They should pay for infrastructure based on the amount they benefit.

But transportation infrastructure has a wider social benefit that can't be captured through the fare box, tolls or property taxes.

New transportation options make it easier for people to meet face-to-face, enable new types of businesses or make employees more productive. The benefits of transportation infrastructure extend beyond those who use it – and directly pay for it with fares – and spread throughout an urban region as a whole.

Around the world, and here in Canada, the evidence shows that the urban-wide benefit that transportation infrastructure enables is reflected in higher incomes.

Higher incomes mean more income taxes for the provincial and federal governments. Thus, the benefits of municipal and provincial transportation investments can spread to the federal government.

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But when should Ottawa step in to provide funding, or step aside?

In general, governments should pay for projects that have the largest return to society as a whole, but are not sustainable on user fees alone.

The federal government should chip in to transportation infrastructure based on how much increased income tax it will receive from higher incomes resulting from easier travel. When the benefits entirely accrue to local and provincial governments, Ottawa should step aside.

But government funding for infrastructure has inevitable limits. Each dollar of government tax revenue comes at the expense of someone not working an extra hour, someone not buying something they otherwise would or a business not hiring a new worker.

Provinces should leave projects that can be self-sustaining on user fees to private investors. It would be a waste of federal and provincial funds to put money into projects that could be privately financed.

The federal government advertises that it is investing in water and sewage systems and electricity projects. But users – not the federal, provincial or municipal governments – should be paying the full cost of such services when they get all the benefits.

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Mayors and the premiers may not get everything on their wish lists that the federal government tooth fairy might bring them. But if they are more careful in selecting the kinds of projects that have the widest social benefits, they may find a few more dollars beneath their pillows.

Benjamin Dachis is a senior policy analyst at the C.D. Howe Institute and author of Cars, Congestion and Costs: A New Approach to Evaluating Government Infrastructure Investment.

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