Can you afford the subway increase?

Toronto has a subway system. It used to be a pretty decent subway system. Clean, modern, fast, and reasonably priced. These days it's dirty, has not kept pace with Toronto's expansion, break downs are common, and the fare box price has been seeing big jumps in price, well above annual inflation rates. When prices jump way above inflation, that sounds pretty counter intuitive.

[caption id="attachment_1295" align="aligncenter" width="300" caption="The subway only gets you about half way across the city these days"][/caption]

What's going on?

Let's start at the beginning. A brief history lesson for the American readers and an even more needed history lesson for Canadian readers. The USA and Canada both started as (largely) British colonies. American independence was predicated on a desire to kick the British out. Canada was founded on a desire to keep British people in Canada. Canada feared American armies would come marching north to forever drive the British influence out of North America. The various provinces that now make up Canada -- like Ontario, Quebec, Nova Scotia, and Manitoba -- banded together in the belief only a united country could repel an American invasion.

[caption id="attachment_1296" align="aligncenter" width="300" caption="Damn dirty Fenians!"][/caption]

Constitutionally, two levels of government were created: a federal level and provincial level. It was decided the federal level would get all the expensive stuff like maintaining a standing army. The provinces got the responsibility for the cheaper stuff like health care and public education.¹ Of course back in 1870, health care was pretty cheap. No one had invented MRIs. Since few people ever got beyond grade 10, education wasn't that much of a burden on the provincial coffers either.

Times have changed.

The federal government takes the largest portion of income tax and the provinces then tax you a percentage of what you pay federally. Health care, education, welfare, etc. are massively expensive and keep on growing. Canada's standing army keeps shrinking. Canada spends about 1.1% of GDP on its military. America spends about 4% of GDP.

The solution to this odd imbalance has been for the Federal government to transfer money to the provinces to help them pay for health care and education. Unlike the USA where there's a direct transfer of federal funds to cities, there is no such transfer of funds. Cities mostly raise funds from property tax. The provinces have, in turn, helped out cities.

During the boom years of the late 1990s, Canada was losing a lot of its best and brightest to the USA. Doctors, engineers, etc. were all heading south to enjoy a more favorable income tax regime. To stem the flow, both the federal and provincial levels of government drastically cut income taxes.

For example, if you were a middle income earner in 1998 you paid 38% of your income to the Federal and Provincial government. Today a middle income earner pays 30%.

Even to this day, they keep cutting taxes as it has proven to be politically expedient. For example, we used to have a national sales tax of 7%. Now it's 5%.

I returned to Canada in 2008, having been abroad for 8 years, and was quite impressed with how much of my pay I was able to keep in 2008, as opposed to 1999 when I last paid Canadian income tax. My take home % was comparable to my take home in Washington State (a state without a state income tax).

Good times.

But no country's economy is ever run by one-armed economists. There's always a "on the other hand".

[caption id="attachment_1297" align="aligncenter" width="188" caption="Yes, yes, we get the picture!"][/caption]

The federal government cut taxes but also cut tax dollars it gave to the provinces. The provinces cut taxes but then cut tax dollars it gave to the cities. The cities. Well. The cities. Alas, Babylon. Now we're back at the start of the story.

Used to be the Ontario government funded 50% of the Toronto subway's operating expenses. Today, it's zero. Today, 80% of the day-to-day operation is funded at the fare box. The end result is fares have risen above inflation to make up for the lost provincial injection.

The same thing has happened with university tuition (pretty much all universities in Canada are public and comparable to American state universities). Government cut funding to university education and students were forced to pay more of the actual cost. The list of things that used to be "free" and now come with a user fee is endless. Garbage collection which used to be free now has a per bag rate. Spots in public daycare and public camp grounds now have user fees or increased user fees. It cost more to get a driver's license and renew your license plates. Even our free health care system now makes you pay for certain tests, like eye exams.

Back to the subway. A monthly subway pass (which gives you unlimited rides) in 1997 was $83. I know this because I found an old spread sheet from 1997 with my monthly budget. In 2008 the price was $109. The price went up 31% in a decade. According to the Bank of Canada's inflation calculator, it should cost $105. That's not too far off, although percentage wise it looks worse. The average annual rate of inflation over the decade was 2% and the average rise in the subway price was 3%.

January 1, 2010 the price will be $121. One doesn't even have to do any math to see that jump in price is rather well above inflation.

Naturally, people are complaining.

[caption id="attachment_1298" align="aligncenter" width="300" caption="Is that a whaaaaaaabit?"][/caption]

But wait. In 2010, the Ontario government is cutting the marginal rate for the lowest tax bracket. It will mean people earning up to $41K a year will have an extra $26 in their pockets each month. That more than covers the $12 increase in subway fare each month.

Ultimately, I have to keep reminding myself that on pay day I get to keep a lot more of my money. But I have to pay more for public services that used to be highly subsidized by tax dollars. This is probably a better arrangement. I'm not paying via my taxes things I'm not using like daycare or camp grounds. I can recycle more to avoid garbage fees. The problem is many people in the work force today, many of the people who take the subway, weren't in the work force in the 1990s when taxes were high. Since there's a lag between a tax cut and then when various levels of government figure out they can't hold the line and need to levy a user fee, people don't make the connection between the take home pay they've quickly grow accustomed to and the sudden jump in fees for public services.

-- Karl Mamer

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¹ Each province also had interesting little "ear marks" written into the constitution, guaranteeing some peculiarity. For example, Ontario didn't want to lose the support of the Catholic church for confederation so it had a right to government funded Catholic schools written into the constitution. Ontario has publicly funded religious Catholic schools but no publicly funded schools for other religions.