Off the track: Transit funding and the low carbon transition

By: Pedro Antunes, Roger Francis

This Op-Ed was originally published by The Hill Times on February 24, 2020. It is written by Pedro Antunes, Chief Economist, and Roger Francis, Director, Energy and Environment.

Municipalities in Canada are on the front lines of climate change mitigation. Decarbonizing cities through greater transit use and more efficient transportation systems is key to transitioning to net zero carbon emissions by 2050. This is especially true because the federal government is pursuing a policy of allowing resource and energy development, while cutting carbon pollution in the transportation, building, electricity and other sectors. The burden of reducing emissions will then fall more heavily on cities. But is the funding available proportional to the task at hand, or are municipalities off the track in meeting these requirements?

The public infrastructure magazine ReNew Canada recently published it’s top 100 infrastructure projects list. According to the list, planned transit expansions and transportation projects total $118-billion in investments—accounting for roughly half of over $240-billion in projects that make up the list. Of the $240-billion in projects, $154-billion in funding is forecast to come from the provincial governments, $36-billion from the federal government, $31-billion from private sources, and about $20-billion from municipalities.

The Canadian Urban Transit Association’s (CUTA) most recent Infrastructure Needs Report found transit systems require in excess of $133-billion over the next 10 years, nearly $60-billion of which remains unfunded by government.

These estimates of planned and future requirements for transit and transportation infrastructure provide only a portion of what may be needed to ensure future economic growth while transitioning to a low-carbon future.

Transportation and transit are critical to Canadian’s economic and social well-being. Today, Canada’s cities account for 74 per cent of our economy and typically contribute more than 85 cents to every $1 of growth in real GDP. Moreover, productivity growth in Canada has been driven by infrastructure investment primarily in urban centres or their catchment areas.

Transportation is also the second biggest expenditure for Canadians, at $202-billion in 2018. In 2018, about 3.3 million daily trips took place on Canada’s light, commuter and transit rail systems. But transportation also accounts for about 25 per cent of emissions. As such, if climate change mitigation is to begin in cities, we should be discussing how municipalities can access additional and predictable revenue sources to support required investments and in turn, support our national economy.

Municipal and provincial governments own the lion’s share of local and regional transit infrastructure. Despite the fiscal burdens associated with delivering health care, education and social services, provinces have the capacity to tax a growing revenue base. On the other hand, revenue sources for cities are limited—largely constrained to new development and land values, and the gasoline tax.

The federal government has recently provided additional funds albeit through current transfer and budget mechanisms. Budget 2016 made $3.4-billion available over three years through the Public Transit Infrastructure Fund for upgrades and improvements to public transit systems across Canada. Budget 2017 added $25-billion over the next decade, including $5-billion from the newly minted Canada Infrastructure Bank—whose source of funds will include private investors. While those are big numbers, the math gets challenging.

Municipalities directly fund about 50 per cent of government infrastructure that is not educational services, hospitals, defence, or nursing care facilities. The Conference Board of Canada has calculated that local governments collect 11.5 cents of every tax dollar collected. But over 83 per cent of municipal funding is spent on operating expenditures outside of infrastructure. One of the most important tools available to augment that source revenue challenge is the Gas Tax Fund (GTF).

Budget 2019 announced a one-time increase to the GTF from $2.2-billion to $4.4-billion in 2018–19. While that additional revenue is positive, we would argue a permanent expansion of the GTF is needed to help keep transit on track in Canada. The GTF is already effectively administered, provides flexibility for municipal investment in transit and transportation expansion and maintenance, and is predictable which remains the most important consideration for mid- and long-term capital projects. Municipalities need permanent solution that can accommodate the current multi-billion gap in infrastructure funding.

Municipalities also need to act. Municipal leaders need to ensure that taxes rise with inflation. They should also avoid promises of no tax hikes during elections. Facilitating public private partnerships, by encouraging projects with user fees, would also help some municipalities invest in the assets they need, even if user fees can sometimes be unpopular. Investments financed by the Canada Infrastructure Bank have been slow to take off in part because of the lack of proposed projects that provide returns on investment that help bring private funders to the table.

We’re asking a lot of our cities. They are being asked to balance Canada’s mobility and transportation needs with a growing economy within a low-emissions future. Do we increase the GTF and target more investment to transit and transportation? It’s worth evaluating as one avenue to help put municipalities back on track.