By Sarah Levy Sarfin

Typically when governments wish to raise revenue, they tax the population. One common tax is the federal and provincial fuel tax. The proceeds of this tax have funded municipal infrastructure needs across Canada. However, continuing to rely on a fuel tax to pay for infrastructure is not an eternal solution. According to a study commissioned by the Residential and Civil Construction Alliance of Ontario (RCCAO) written by Professor Harry Kitchen of Trent University, a number of factors will lead to a decline in fuel revenues. Kitchen offered alternatives to a fuel tax: road pricing and parking taxes or levies. 

While the RCCAO study focuses on the greater Toronto and Hamilton areas (GTHA), it has implications for the rest of the country. Kitchen pointed out that the push for energy-efficient vehicles, the proliferation of electric and hybrid vehicles, the decrease in the number of young adults (especially in urban areas) and Baby Boomer drivers will all negatively impact revenues from a fuel tax.

“Road pricing” refers to creating toll highways. Kitchen believes some form of road pricing in the GTHA might be an effective option to raise revenues that will fund infrastructure development and maintenance. He pointed to research that shows that road pricing can generate significant amounts of money. However, his recommendations about parking taxes and levies offer food for thought to the Canadian parking industry.

The Economics of Parking

Kitchen examines parking through the lens of economics. In his study, he asserted that parking is inefficiently priced. In economics, efficiency refers to the optimal allocation of resources. The economics professor explained that on-street parking in high-demand areas is priced far below its scarcity value. “Scarcity value” means that when something is in limited supply and high demand, there will be a mismatch of the desired supply and demand equilibrium. The economic principle of scarcity states that the price for something scarce should rise until supply and demand reach equilibrium.

On-street parking in high demand areas is fairly inexpensive. Therefore, it is usually full, and drivers spend a great deal of time searching for a spot. What Kitchen called “excessive” cruising leads to traffic congestion and pollution.  Moreover, the study’s author cited research that shows this activity contributes to economic inefficiencies and lost productivity. He also pointed to a study from the U.S. that estimates cruising for parking can account for approximately 30 percent of traffic in some cities at particular times of the day.

The economics professor suggested efficiently implemented parking levies or taxes. He believes they would accomplish several things: reduce the volume of traffic, lessen congestion, lower the costs of parking enforcement and policing, and generate revenue as well as demand for public transit. Generally, the terms “efficient” and “tax” do not belong in the same sentence. Taxes disrupt the optimal allocation of goods and services when the market operates efficiently.

In the case of parking in the GHTA, the parking market is quite inefficient. A parking tax or levy would correct the inefficiency and restore equilibrium.

Taxes and Levies

Kitchen suggested three policies that would correct the current market inefficiency and raise revenue for infrastructure development and improvement. The first policy is a commercial parking sales tax. It would be imposed on parking transactions as a percentage of the price that increases with parking duration. According to Kitchen, such a tax would motivate people who park in one spot for a long period of time, such as commuters, to change their behaviour. He emphasized the need to impose such a tax on a wide geographical area; otherwise, drivers will simply avoid areas with a parking sales tax and park someplace else.

The second policy is a parking levy. That is a special property tax applied to non-residential parking spaces. Kitchen noted that parking levies can be imposed in one of two ways: either as a fixed amount per space or based on the surface area. Moreover, they can be applied to all parking or limited to certain types of parking. Kitchen added that rates can be differentiated based on usage. For instance, a space used for vehicles that are part of a car-sharing service might be less expensive than one that is not.

Reforming Off-Street and On-Street Parking

Kitchen’s third policy involves reforming pricing for on-street and off-street parking. The economics professor argued that off-street parking pricing does not adhere to marginal-cost pricing principles. “Marginal-cost pricing principles” refer to the principle of setting the price of a product at or slightly above the variable cost to produce it. Although the monthly parking passes that garages and lots issue simplify transaction costs and guarantee parking spaces, they also cause people to drive around more than necessary because the incremental parking cost is nothing. “Incremental cost” is an economic term used to talk about the cost incurred by producing one extra unit of something. Kitchen recommended replacing passes with bulk purchases of parking lot hours that do not expire; rather, their value diminishes when drivers park.

In Kitchen’s opinion, on-street parking has “severe deficiencies.” He acknowledged the ease of operating conventional mechanical parking meters, but pointed to the difficulty in servicing and maintaining them. Furthermore, collection and enforcement costs are a significant portion of the revenues. Another problem with conventional meters is that they cannot vary fees according to the time of day, the duration of the stay and demand. Kitchen deemed this lack of flexibility economically inefficient. The time limits on conventional meters may encourage parking turnover, though they lead to people searching for parking.

The economics professor advocated the use of electronic meters. Such meters allow for variable pricing, which is more economically efficient. Parking fees can be set to maintain a particular average occupancy rate within a certain area so that all the parking spaces are utilized and people do not spend very long looking for them. Kitchen proposed programming them so that parking fees either change in real time to meet demand or are adjusted periodically for optimal economic efficiency. There are several different kinds of electronic meters: autonomous, multi-space, pay-by-phone and modernized single-space.

Autonomous meters use a receiver on the vehicle’s dashboard to record the time it spends in a spot, and then bills the driver’s credit card automatically. Multi-space meters are used in lots and garages to charge customers for parking. Pay-by-phone meters rely on smartphone technology that allows users to pay for parking and add more time to a meter using their mobile devices. Today’s single-space meters no longer just accept coins; customers can use credit cards as payment.

Another reform Kitchen endorsed is occupancy-based pricing. This idea takes advantage of spot meter technology. Spot meters work with automated parking counters in large garages or they help cities provide parking finders for on-street spots. In addition, municipalities can use occupancy maps to determine demand pricing. With demand pricing, cities charge more for parking in high-demand areas and less for parking in-low demand areas. This system forces drivers to park in low-demand areas instead of circling where parking is scarce.

Kitchen’s final suggested reform for on-street parking pricing is a relatively new idea called “progressive pricing.” It has been deployed in Albany, New York. The city has programmed its existing meters to permit longer stays at increasing prices. Kitchen believes that progressive pricing addresses the problem of inefficient parking rationing. The progressive parking system can be calibrated easily to increase revenue, achieve desired turnover and reduce enforcement expenses.

In his report, Kitchen pointed out that Toronto is set to deploy pay-by-phone parking. He counseled the city to use demand and progressive pricing systems in order to increase its revenue. The City of Toronto would not even need to reprogram existing meters. Kitchen added that these moves would be valuable because it would speed up the attrition of curb-side equipment.

The Experts Weigh In 

Kitchen’s report raises a number of important questions. The economics professor shared some of his thoughts on the content with Parker Magazine.

Although he believes levies and taxes to be perfectly reasonable, Kitchen sees politics as being a barrier to their implementation. He also strongly believes that taxes are more desirable than levies, as long as they varied by the time of day, levels of occupancy and other mutable factors. While he cannot predict the impact of his policy recommendations on the Canadian parking industry, Kitchen does hold that they will reduce congestion and improve the economic efficiency of parking prices.

Bern Grush, the principal consultant at the road use pricing consultant firm Bern Grush Associates, served as an advisor to Kitchen during his research and writing of the report. He provided valuable additional insight into Kitchen’s conclusions.

Grush emphasized the importance of economically efficient parking policies. “For example, a few years ago Toronto Council discussed a parking fee increase of $0.50 across the board,” he commented. “While ‘efficient’ in the sense of ‘easy to understand’ or ‘easy to implement,’ this would not be economically efficient.” Such a small increase would not be commensurate with the demand for parking in the city. While it would have raised revenue, the amount would be small compared to what it could be if Toronto’s city council implemented the law of supply and demand in determining parking prices.

Why would Toronto’s city council recommend such a small increase, if it is not economically efficient? It is the least painful solution for both the parking industry and the public. “An ‘across the board’ increase can sometimes hurt an industry sector, such as what happens to the housing industry when mortgage rates go up,” Grush remarked.  “In the case of parking, an across the board increase of $0.25 or $0.50 per hour would have little effect because the preference for automotive use among automotive users is far greater than the preference for transit or cycling among automotive users.  In other words, the portion of motorists ‘on the margin’ that would switch modes or forgo a trip altogether is very much smaller than the portion who would simply shrug and accept such an increase. I am talking about 1% or 2%.”

A tax, on the other hand, would garner a very different reaction. “A flat tax is easy to understand, easy, describe to councillors, easy to calculate, easy to implement, easy to hate, and easy to label a ‘tax-grab,’” Grush asserted.

Kitchen’s report focuses on making changes to the current parking system that would reduce congestion and raise money for provinces. “Reforming parking pricing as done in San Francisco, LA and Albany is harder on all counts,” Grush acknowledged. “Developed and marketed, correctly and honestly, as a congestion abatement measure is the best way, but few cities have a council with the requisite attention span. The managers of the Toronto Parking Authority understand demand management, their overlords, the Toronto Council, do not.”

Grush sees the biggest obstacle to implementing taxes and levies as being the political will of elected officials. “The primary barrier (in Toronto) is the political will to discuss any tax (low), the patience to consider the serious price reform that Kitchen hints at (a far superior approach to “taxing”, zero) and the political capital to spend on seeing something this through (zero),” he declared.

The Possible Effects of Taxes and Levies on the Parking Industry

What would be the potential impact of Kitchen’s proposals on the Canadian parking industry? Grush looked at the probable ramifications of reforming parking prices from a number of different angles.

Municipal parking revenue, collection and enforcement would benefit from Kitchen’s recommendations as long as the city was allowed to keep the fees, Grush said. However, the benefits would be diminished if the province levied the city’s profits and did not return them to the city.

Commercial lots would be at a disadvantage of Kitchen’s suggestions were implemented, Grush remarked. For this segment of the industry, taxes and levies would be another hassle. “They collect more, but keep none,” he explained. “Every extra dollar collected is worth zero, and will dampen business.” Grush offered two reasons for this. “First, commercial lot parking sessions are longer than used on-street sessions and if the tax is prorated, parking all-day parking could take a jump that would encourage a small percentage of parkers to change parking location, circle more for cheap street parking (making congestion worse!), or God forbid, shop in suburban malls instead. Perhaps a dozen parkers would resort to transit and three might try biking. Kidding aside, what some lot operators would do is partially absorb the tax to keep the cars coming. Good for the tax agency, not for congestion.”

Institutions, such as universities and hospitals, would also be affected negatively. The only situation in which these parking operators would gain would be if they were given what Grush called a “gentler” schedule, they were mandated to collect it rather than absorb it and they could keep half.

Grush foresees that equipment vendors, such as those who supply meters, gates and enforcement services, would likely not feel much of the pinch. “If audited correctly, any parking authority taxed by space rather than by use would want to tighten up their revenue control systems, so maybe there would be a minor spurt, but commercial parking is so valuable in Toronto, that few operators are so lax as that,” he opined.

A Win-Win Situation? 

Will Canada’s parking industry benefit from Kitchen’s proposals regarding taxes and levies? Grush advised abandoning the terms “taxes” and “levies” and instead adopting different terminology. “It’s better to use ‘demand-based” or ‘market-based’ pricing,” he counseled.

“Demand-based pricing goes up and down in time and place based on user demand at said time or place,” Grush said.  “Progressive pricing allows us to manage turnover for fairness and access and to greatly reduce ticketing — this means less enforcement expense and more revenue. Ticket revenue is replaced by fair payments for overstaying, such payment gauged to maintain 2-hour
average stays.”

Grush pointed out that the discussion should move away from whether a certain industry or sector derives benefit from Kitchen’s proposal and towards a big picture view of the situation. That requires asking a different question. Instead of asking, “How will the Canadian parking industry benefit?” we should be trying to answer this query: “How beneficial to transportation funding and congestion reduction in the GTHA might Kitchen’s parking reform suggestions be?”

The consultant believes that Kitchen’s ideas about parking reform would significantly reduce congestion in the GHTA while dramatically increasing transportation funding. He offered the caveat that these recommendations work only if they were demand-based and progressive, not if they were simply taxes and levies. “It’s what 99% of people, and councillors, I fear, think when they read about Kitchen’s report in the papers,” Grush added. “They need to read and understand the original text.”

He emphasized the purpose of Kitchen’s report: to find a way to fix the infrastructure budget shortfall. Grush remarked that he has been asked to provide a solution for parking shortages. His response has been, “Charge the correct amount for parking.” “These are two very different subjects,” he pointed out.  “Very few people, especially politicians, see the difference. That is one reason we keep talking about this for some 10 years now and no progress has being made.”