Wednesday, May 1, 2013

Winnipeg Police: The new municipal tax collectors & perhaps a future model for cash strapped municipalities around the world.

            Since the 2008 crisis, municipalities have been having a tough time financially speaking.  House prices cratered in many places, causing property taxes to plummet, which is the main pillar of income for local budgets.  Tax rates could be raised to deal with the problem, but too often; this has a counterproductive effect because individuals and businesses are ever more likely to consider tax rates when deciding on a place to live and operate.  Problem is that the same businesses and individuals also demand that proper infrastructure be in place, as well as maintaining a pleasant atmosphere for the urban area they inhabit and work in.

            In an effort to expand the tax base, many municipalities opt for tax cuts, or freezes, while costs still go up.  This approach too often backfires, because other competing municipalities are left with no choice but to follow suit in order to counteract the effects caused by the municipality, which opted for tax rate cuts.  A few years after, the realization sets in that the race to the bottom of the tax rates is not a solution.

Winnipeg’s approach:  Indirect taxation.

            The city of Winnipeg in Manitoba, Canada found ways to keep property tax rates low, spending on an increasing path, and a viable balance sheet.  It does not involve the usual left-right ideological argument on whether to increase or cut taxes.  It involves a strategy meant to increase the tax intake, through increasingly stringent and aggressive enforcement of traffic laws.  In 2012, there were 57,000 traffic violation tickets handed out, while in 2008, there were “only” 28,000[i].  At an average price of about 200 Canadian dollars each, the extra 29,000 tickets brought it an extra 5.8 million dollars, compared to 2008.  It may not seem like a whole lot, given the city’s 900 million dollar budget for 2012[ii], but it helps plug the gaps in a budget that continues to grow.  Winnipeg’s budget grew by almost 53 million dollars from the previous year.

System of checks and balances out the window.

            I should point out that in order to make it possible to achieve this increase in revenue in the name of “public safety”, there had to be one institution willing to play ball, and the worrying sign is that in the case of Winnipeg, they are perfectly willing to do so.  I’m referring to the courts, because after all, it would be hard to do this without the judges.

            The courts are supposed to be there to make sure that the state does not abuse its powers, among other things.  I speak from experience however when I say that when it comes to this tax collection scheme, the courts are in no mood to challenge the will of the city.  I myself became the victim of one of the photo radar operations in the summer of 2008.  I decided to challenge the ticket on the basis that the evidence collected by the photo radar was self-contradictory.  It showed that I made a right turn on red, in an intersection in a time interval of 2.1 seconds, which meant that my average speed was no higher than 6-7 km/h (4 mp/h), which is slower than walking speed.  At the same time, it showed that my initial speed was 26 km/h, which means that during the 2.1-second interval, I had to decelerate to a certain speed, and then accelerate again, as I was clearing the turn.  We also have to keep in mind that any normal driver starts accelerating about half way through the turn.  This would be impossible to achieve at an average speed of 6-7 km/h, without coming to a full stop, given the initial speed recorded by the radar at the start of the 2.1-second interval.

            So, I went down to the courthouse, convinced that I would have a chance to explain to the judge that it is unreasonable to give someone a ticket, which defies the basic laws of physics.   I was wrong, because as I took the stand, I was told that I cannot be my own “expert witness”.  In other words, they expected someone contesting a traffic ticket to get a physics or math professor to testify on something that anyone with basic understanding of the nature of things would understand that it does not add up.  Thus, I was not even allowed to present my case, but they did grant me a reduction in the fine.  During my time spent in the courthouse, there were about twenty others who came to challenge the validity of their ticket, none got away with it.  There was one particularly sad case of a person who received three tickets, three mornings in a row, because they reduced the speed on a road, for construction, even though there was no one actually working there at the time the supposed “crime” of speeding through a construction site took place.  His total bill came to 600 dollars, which is more than the average weekly wage of an average Winnipeg resident.  The system of checks and balances on our institutions is not always, what it ought to be.

Why we should expect institutions that are more abusive.

            It is important to point out that unlike many towns in the United States and elsewhere in the western world, Winnipeg and other Canadian towns were not affected in any way by the 2008 crisis.  Since 2008, Winnipeg home prices are up about 45%, which defies all logic, yet this is where we stand.  Higher home prices mean higher revenues, so unlike most towns in the US where home prices are down, thus so are local revenues, Winnipeg is looking solid as far as its budget goes.  I am frankly surprised that we don’t yet see widespread proliferation of this practice all around the western world just yet, but I am sure we will.  Following a few recent municipal bankruptcies in the US, I am convinced that many city councils and mayors will look more actively to new innovative ways of increasing revenues without raising the actual property tax rate applied on homeowners. 

Urban living, a nightmare coming to a neighborhood near you.

            There are some serious negative side effects to the practice of turning a municipal police force into tax collectors.  Winnipeg has been going into this direction for about a decade now, beginning with the decision taken to introduce photo radar machines.  The result is that Winnipeg is known as one of the highest crime rate cities in Canada.  In 2011, Winnipeg once again won the status of homicide capital of Canada, while it did not do all that bad in terms of keeping at the top of the list of most other crime categories either.  Overall, Winnipeg was ranked 9’th out of 100 cities in overall crime rates compared in Canada for 2011[iii].  Many people prefer to attribute this to the high percentage of Native Americans living there.  There is a definite correlation when also looking at other cities in Canada.  My counterargument to that is that especially given the high crime rate in Winnipeg, the police force should be used more wisely.  Now, if a city that is financially sound is willing to put aside public safety in order to collect taxes in the name of public safety, just imagine what a town nearing financial collapse might be willing to do.

            Many towns, which are short on funds, might resort to not only transforming their municipal public safety employees into tax collectors, they may also lay off a large proportion of them, as well as cut infrastructure and other spending.  Economic data for the last few quarters and years as well as near term growth forecasts, which are constantly being revised down, are an indication that the boom times will not come back any time soon.  Because of changes in economic dynamics in the last century, such as increased capital and human mobility, municipal governments have no chance of using their comparatively archaic and outmoded tools of income collection to redress the problem of increasingly larger gaps in the need versus the means to run their cities effectively.  Raising taxes does not lead to higher tax intake even for the short-run anymore, because individuals as well as businesses react rather fast.  It does not take long for people to start avoiding investing in such places, which has the opposite effect of reducing the tax base.  In the absence of proper funding of the local budgets, the Western World’s most important part of their infrastructure is now at risk.  It will lead to desperate measures, such as the one in Winnipeg, where it is not even an issue of desperation, as well as other cost cutting efforts which will make urban living an increasingly unpleasant experience.  It is even possible that this is the beginning of the end of the urbanization trend started centuries ago in the Western World.  More and more signs point to major shifts coming.  The best thing we can do is realize the shift in the trend so we can prepare ourselves.

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