Comment
Carrot management
What do you do when the market doesn’t produce what you need? It’s not a trick question. We— speaking mostly of governments here— bump up against the limitations of the marketplace regularly. We invest in drugs, research and climate change mitigation because the market can’t see a viable return. We fund a social safety net to ensure the most vulnerable among us aren’t left behind.
It is our social contract—our collective agreement to lend a hand. To fix the things the market can’t. Sounds easy. But it is really hard. Governments and social agencies wander into treacherous waters when they wade in where the markets will not go. With the noblest of intentions, they can, and often do, make matters worse.
This week, Council will be asked to subsidize rental housing in Prince Edward County. (Set aside for this comment that Council and Shire Hall bear some responsibility for the state of housing unaffordability in Prince Edward County, which this column has documented on many occasions.)
The choices before them this week include a) exempting the rental building owner from property taxes, b) exempting development charges, c) creating a new, lower rate of property tax for such property, or d) providing a cash grant. In exchange, the owner-operator must agree that the rental unit rate must remain 20 per cent below the market for 15 years, among other conditions.
Only one of the options ought to be on the table. A cash grant is the only choice that gives Council and Shire Hall the flexibility to address the need at any given moment. Only a monetary grant can be shaped for the precise demand in an everchanging dynamic market.
Programmatic solutions—those with longterm, systemic implications—won’t work. Worse, they risk creating more problems. Put the smartest folks in a room, meticulously estimate all the permutations, variables and outcomes, and there would still be no assurance that exempted property taxes, development charges or a lower tax class will do what we want them to. It is simply the nature of a dynamic market. Once we’ve given them away, it is tough to claw back.
Nor does a programmatic solution give Shire Hall the ready ability to dial back the programmatic sweetener if it is working too well, not well enough, or a sudden uptake creates overcapacity. Just as we see with STA regs, once investors and entrepreneurs are granted a market advantage, they are opposed to giving it up (and litigious in their claim).
The County has only a few sources of revenue— most of it from property taxes, a smaller bit from user fees (garbage, planning, and such), as well as handouts from other levels of government. In fact, 65 per cent of the money Shire Hall will spend in 2022 comes from property taxes. It must be mindful of treating this money with respect. Property taxes are intended for government business—not to subsidize developers or other property owners.
The same arguments apply to creating a new class of property tax at a lower rate. Establishing the rules, requirements, and enforcement mechanisms seem a nest of wasps. Once granted, it seems unlikely it would ever revert to a full property tax generating status—whether or not the need still existed.
The municipality has a shorter experience with development charges—introduced in 2008. It has used a reduction in development charges as an incentive to encourage new home building in areas serviced by municipal waterworks to mixed success. Certainly, given the one-time nature of these fees, they are more suited for timely or select market intervention than discounts to the County’s primary revenue stream.
Yet, DC reductions are a clumsy tool. They don’t consistently deliver the expected outcome— and Shire Hall may have to come back with more sweeteners. Then there is the problem of precedent. Once granted to one developer, the next one will want it. It may seem a good problem now, but it can—and could quickly—become a mess from which Shire Hall would find itself challenging to extract.
Should Council decide it must go down this path, it must do so warily and in a tightly restrictive and time-limited way.
Cash, however, is king. Grants can be fine-tuned to fit the precise need—right now. It doesn’t require a lot of assumptions, forethought or dithering over precedent. If it proves a mistake—too generous, too market skewing, not effective—it is a one-off. Live and learn.
Programmatic solutions, by contrast, require policymakers to see with absolute clarity how the market will respond tomorrow and into the indefinite future. It is too big an ask. And the costs could be staggering.
We have smart folks at Shire Hall who can look developers in the eye and make a judgment call about the level of incentive needed to make the project in front of them happen. If it proves a mistake, there isn’t a long trail of mess and litigation to clean up.
The County is unaffordable to a great many folks. We may have to induce developers to make it happen. But we must do it prudently. And any incentive must come with an expiry date.
There are risks to subsidizing our way to an affordable future
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