Smart Track Fantasy: Tax Increment Financing

Back when SmartTrack was first announced as the centrepiece of John Tory’s mayoral campaign, the most obvious question was “how will you pay for this”. At the time, “this” consisted of very frequent service running over existing GO transit trackage plus a heavy rail extension to the Airport Corporate Centre, and it had a nominal price tag of $8 billion. On the presumption that each level of government, so overwhelmed by the obvious necessity of SmartTrack, would pony up 1/3 of the cost, the campaign then turned to the issue of how the City of Toronto’s share, $2.6b, might be financed.

Enter the tax wizards of Tax Increment Financing (TIF), a financial scheme not unrelated to pulling rabbits out of hats or making the attractive assistant float in mid-air with no visible means of support.

The premise of TIF is simple: If there is a piece of land that, but for public investment, would sit empty for all eternity, then any taxes that might arise from induced development there are “found money”. In other words, if we take a swamp, drain it, clean up the pollution, build roads and utilities and install a transit corridor, all with public money, then the development that follows can be used to finance the investment through its future property taxes.

It’s rather like investing in a pair of glass slippers and then charging Cinderella for wearing them. She’s going to marry into money, and her family can afford to pay you back.

In some cases, notably “brownfield” developments where substantial remediation of an existing site is needed to reduce developer risk and give the area potential as a future neighbourhood, it is reasonable to treat the investment and the future tax income as directly related. It might be a zero-sum game – the city could wind up with no new money directly – but the development could have spinoff benefits in other types of economic activity so everyone comes out ahead in the long run.

Most of the area served by SmartTrack cannot be called a “brownfield”, and indeed substantial development is already underway without ST operating a single train. Moreover, we now know that the originally mooted ST service is considerably greater than what Metrolinx now proposes to host, that fewer stations will be built, and that service will be provided both by ST and by GO Transit (which really will be one and the same thing by then).

Mayor Tory’s supporters, operating under the banner Friends and Allies of SmartTrack, have produced a report claiming to show how ST can be financed through TIF. This is the sort of pre-emptive planning and financial gobbledygook that skews public debate. It gives a patina of professionalism to the Mayor’s scheme even though City staff are much more guarded in their view of the subject. The problem quickly becomes one of debunking, or at least casting serious doubt on, a report that tells the Mayor what he wants to hear – transit development can be “free” – and fighting an uphill political battle against the Mayor’s allies on and off of Council.

In the interest of advancing public debate and knowledge, herewith is my own take on the miracle of TIF as it applies to SmartTrack.

By the way, I am not a financial or planning professional. I am merely a lowly taxpayer concerned that the City may buy into a scheme that is unworkable, and be stuck with a huge bill that I and my compatriots will have to pay for decades to come. Oddly enough, we don’t hear much about “hard earned tax dollars” when the flim-flam artists work their magic at City Hall.

What Development Would SmartTrack Stimulate?

Although a background study prepared for the City looked at 18 potential TIF zones, only three of these were held to have a benefit from the addition of SmartTrack: Liberty Village, the Unilever Site and the area around Lawrence East Station.

The first question one might ask is just how much development will occur whether SmartTrack is built or not?

  • Liberty Village, for example, is building out quickly and development there shows little sign of slowing down. How much, if any of this development, could reasonably be claimed to be the effect of new ST service?
  • The Unilever site differs from Liberty Village in that a new GO/RER (Regional Express Rail) station will be built there under current provincial plans, and it will also eventually be a stop on the Relief Line subway and an extended eastern waterfront streetcar network. Therefore, the only contribution of ST will be additional trains on the GO corridor that might otherwise not have operated.
  • As for Lawrence East, there already is a rapid transit station there on the SRT which has generated some residential density nearby, but the area is certainly not a major development node. Moreover, any move to direct development to this station (regardless of which type of line serves it) would compete directly with hopes for growth at Scarborough Town Centre (STC).

The background study estimated that there would be little potential for growth of commercial space without SmartTrack in these three areas, but a considerable residential growth even if ST did not exist. The ST potential increases are factored down by the TIF study’s authors to account for the fact that some of the “growth” is not new, seen on a city-wide basis, but is redirected from other sites by the increased attractiveness of lands around the ST stations.

Square Feet               Commercial       Residential

Without SmartTrack           510,000        40,930,000
With SmartTrack           22,040,000        71,085,000
Incremental Growth        21,530,000        30,155,000
Adjust for diversion     (10,080,000)      (25,000,000)
Net with Smart Track      11,450,000         5,155,000

The report does not subdivide the growth into the three TIF zones, and so we do not know the sensitivity of these numbers to changes in assumptions about each site. Moreover, the assumption that all of the growth is ST-related ignores the presence of GO/RER service that contributes substantially to the total capacity and network connectivity provided at each site. For example, a station at Unilever would benefit not just from the SmartTrack trains to Unionville, but also from service on the Lake Shore corridor. Similarly, a Liberty Village station could also be served by trains from beyond the Bramalea terminus of SmartTrack operations. Much of this service will exist whether SmartTrack per se runs or not.

What is evident in the table above is that SmartTrack is not expected to make much contribution to residential growth, but that substantial commercial growth is projected. To put this in context, Great Gulf claims that it will build 15 million square feet of new office space at the Unilever site. That is more than all of the commercial space attributed to SmartTrack by this study. Conversely, the Unilever site is a very large development, and one must wonder just how much potential there is at Liberty Village or Lawrence East to contribute on a comparable scale.

TIF New Development vs Uplift

Another aspect of TIF not yet recognized by provincial legislation is the capture of the increased value a new transit investment might bring.

In an October 2015 report, city staff noted that tax increments can potentially flow from two sources: development of new buildings; and “uplift” (defined as appreciation – caused by new transit – of vacant land and properties with existing buildings). Ontario regulations limit increased property tax revenue to revenue from new development and from tax increases announced in annual budgets – municipalities are not permitted to obtain revenue from appreciation. However, the staff report said amendments to provincial regulations and / or legislation could allow the city to obtain revenue from the uplift component of appreciation. [p 6]

The importance of this aspect of the scheme becomes clear in a summary table.


Over half of the total tax increment is due not to new development, but to the projected increase in value of existing properties presumed to flow from SmartTrack. As the City’s report notes:

The determination of tax increment from existing property value uplift is less straightforward and not easily measureable. Historically, all properties in Toronto, with few exceptions, have appreciated in value over time. Determining the tax increment is difficult because it assumes that the increase in value is greater than would have otherwise occurred, and is solely attributable to the creation of SmartTrack. This determination will inherently encompass a degree of subjectivity. [pp 5-6]

In the table above, 56% of the new revenue is due to “uplift”. Moreover, 40% of the additional tax revenue is the provincial school tax which in the TIF/ST supporters’ eyes is available to help finance the City’s share of the rapid transit project. The grand total of $2.3 billion is tantalizingly close to the required $2.6 billion City share, but much of this revenue may not actually be available, or be directly attributable to the SmartTrack project.

The report concludes:

The incremental cost of SmartTrack has been estimated in the City staff report “Developing Toronto’s Transit Network Plan to 2031” – on the Executive Committee agenda for the June 28, 2016 meeting. This incremental cost estimate, which includes upgrades to provincially-funded Regional Express Rail as well as the Eglinton West LRT, is in the $2.7- $3.1 billion range. The estimated TIF revenue in Table 2, along with the federal SmartTrack funding commitment (up to $2.6 billion) and potential revenue from Mississauga and York Region, appears sufficient to fund the estimated cost. [p 7]

That is a bit of a stretch. What is now called “SmartTrack” includes the Crosstown West LRT line to the airport, and this explicitly is not part of the ST project to which Ontario is contributing. Queen’s Park has been quite clear that its share of ST will be in kind contributions through expansion of the GO network for RER, and the Crosstown extension is not part of that project. Any added stations along the ST route that the City wishes to provide (over and above those GO/RER already includes) will be at the City’s cost. These factors combine to give the $2.7-3.1b range cited above. None of this is subject to provincial subsidy, and therefore the idea that the education tax might be available as an offset is, at best, an optimistic view of the situation.

Toronto Council must wrestle with a large collection of transit proposals and financial commitments in billions over the coming decade and more. Financial fictions provided by SmartTrack supporters do not help the situation, but perpetuate the something-for-nothing concept of transit financing that first infected transit debates under former Mayor Ford.

Diverting tax revenue seems attractive, but it ignores the fact that many other costs beyond rapid transit construction will be incurred to serve new developments. Money earmarked for one project is not available for the host of other demands on City resources, and ST advocates practice artful misdirection in the hope we will not notice them pickpocketing the City treasury. This is another way of saying “there is only one taxpayer”.

There might be some incremental revenues that Council could tap and dedicate to debt service for SmartTrack and other rapid transit projects, but they should do so with a clear understanding of just how much money is available and the tradeoffs this scheme will involve.

There is at most one rabbit, not a breeding warren of them, in that hat.

13 thoughts on “Smart Track Fantasy: Tax Increment Financing

  1. TIF is dependent on property values which have significant risk of fluctuation over the long term. Given Tory’s business focus on pilot projects leading to evidence based decision making (bike lanes on Bloor) perhaps TIF can be proven with some other much smaller project. A strong business leader would never accept the amount of risk he is proposing. At no point in the FAST report is an examination of the possible downside – what does bad look like? How can risk be mitigated? What is at risk?

    Steve: When you are a true believer, there is no such thing as risk.


  2. When I was in University a friend of mine used to mock research of this nature with the phrase “neglecting the effect of the sun, the earth is in darkness”. This is really no more unrealistic than “neglecting the fact that Provincial Law does not allow the City to realise a benefit from Uplift, we will add it to the calculation”

    Stripping away all the “bumph” what the Mayor’s Team is really planning is to finance ST by debt and pay it back with future tax income. This is hardly a revolutionary form of funding for a transit line. What remains unexplained – though I am repeating from your analysis here – is who pays for the roads, water, sewers, police, fire, ambulance etc. for the new developments if the property tax is diverted to servicing debt. It seems that burden will fall to other taxpayers. Those “others” will pay a higher tax to cover the unfunded services. The fact that the additional tax is only paying for services where the appropriate tax has been displaced to in turn pay for the debt, does not change the fact that ultimately this is a debt arrangement repaid by higher taxes.

    I think even in the case of a brownfield or a swamp, TIF is really nothing more than a shell game. However, in the your explanation of how the model is reputed to work by its supporters, the City remediation was necessary to attract the development. It seems to me that the problem with our moribund transit system is that the development already exists (or at Unilever the potential exists) and the problem is that the transit infrastructure is inadequate to support the existing or coming demand. Even if one believed in TIF, it seems in this case that the concept does not apply.


  3. Since ST now consists of no extra trains, only extra stations, it is hard to attribute much development to ST at all, and therefore there is hardly anything to tax.


  4. SmartTrack supporters do not help the situation, but perpetuate the something-for-nothing concept of transit financing that first infected transit debates under former Mayor Ford.

    Ford merely followed a well established ‘free transit’ ruse that has been used around the world, generally for pushing dubious projects to the front of the queue.

    Locally, as the rare folks with long memories are well aware, projects like UP Express were pushed for years as a project that wouldn’t cost taxpayers “a dime”. Lastman & allies claimed the Shepherd line would to be paid for by a billion dollar development levy. The York subway extension’s municipal (York region, TO) cost share was proposed to be recouped by a new TIF law which the Province created for it.

    Backroom operator Tory and pals are no doubt aware of how successful the ruse is for getting dubious projects to the front of the line. They appear much less concerned that none of the promised money sources delivered a dime towards these, or Ford’s projects (SNC, project specific localized development charges/ TIF).


  5. Cinderella never had it so good! The question John Tory should be pondering is: “Will she vote for me next time?”


  6. On the note of a TIF pilot project, I’ve always thought the Portland’s redevelopment, especially the flood protection, renaturalization and parkland components of it, were particularly suitable. Might even be able to roll in something for getting the Bay tunnel finished.

    Steve: The flood protection project and related works will come it at around $1 billion, and that’s a lot to recoup from future taxes, especially considering that so much of the future development will be residential which brings the need for infrastructure, schools and transit. As for the Bay Street tunnel and the East Bayfront LRT, that’s half a billion in total, but there is hope for other funding sources that can help with this. The worst problem is getting Council’s (and the Mayor’s) attention that the eastern waterfront desperately needs attention on the transit file.


  7. “…the Bay Street tunnel and the East Bayfront LRT, that’s half a billion in total, but there is hope for other funding sources that can help with this.”

    There are jurisdictions elsewhere in the world where “other funding” is the norm, where developers – in return for development rights of various kinds – are required to build transit stations and ancillary facilities as part of their project and hand them over to the municipality when complete. No imaginary future city revenue calculations are necessary and the infrastructure goes in at the same time as the development. No Liberty Village situations.

    Steve: Actually developers have been paying already for the East Bayfront line through Development Charges and are getting a bit annoyed that the service is not already in place. The DCs won’t pay the whole bill, but the machinery for this has long been in place. Because DCs are city-wide, any new construction has contributed to the EBF LRT as well as the future Scarborough Subway. Most of the development is downtown, and that’s where most of the DCs are collected.

    There is talk of an additional developer contribution, but nothing is settled on that score yet, and there is an obvious question of equity versus projects that don’t ask developers to pony up extra cash to get their transit systems.

    It should be noted that DCs apply only to the degree to which new development benefits from and drives the need for a project as opposed to existing buildings and riders who would benefit from, say, a new subway line. Proportionately there is far more new development in EBF than in Scarborough, and so a higher proportion of the EBF project is chargeable to DCs as opposed to general tax revenue.


  8. As a professional Accountant, there is just so much wrong with the Tory snake oil that has already been pointed out. I will just add one more not-so-little point: Timing.

    For example, it is possible to claim that the Sheppard Stubway provided vital stimulus to the current Shane Baghai development scheme at Bayview and Sheppard.

    But it is now almost 14 years after the Stubway was opened in November 2002.

    Similarly, looking though the Tory plan, I am not finding a lot about just when the tidal wave of new development is going to be providing these bags of gold to pay for ST. Since the money is being borrowed, I suspect that the lenders are going to want their interest payments ponied up pronto. The new development to pay for it? That will happen. Maybe. Eventually.


  9. Thanks again, and it’s nice to have further ‘mathemagics’ deflated. How $crewed have we been over the decades from forecastings that were used to justify many projects and outlays (arenas, stubways, etc), only to have realities not resemble rosiness? And who picks up the costs of the shortfalls?

    While the TIF might seem a bit logical for the EBF, maybe, the Liberty Village area it seems largely built out, and they’ve already paid many millions in to the system, and are still awaiting far better connectivity. Sadly, due to the ineptitude and non-vision of many of the politicians and the City, the linkage being touted is the local Front St., which survived the killing of the Extension project, which never looked at transit option on this vital land, because we don’t do transit-first thinking, even though the 1985 Downtown Relief Line clearly showed use of this direct route out to as far as Roncesvalles. If we’d thought/done transit in logical places like in to a dense core from a pinch point, there’d be robust transit to relieve the King/Queen TTC cars and offer options to Etobicarians. Odds are very high that we’ve allowed even more BIG buildings to reduce options further so great is the rush to the bottom here, and I gotta be grumpy at both Councillors Layton and Perks for supporting this road – so much for principles!

    So is the function of doing transit to lead development, and go ahead of demand, or is it to be in response to real demand? And if it’s leading, then who is benefitting from the pump-priming?

    In the case of the STC, they’ve already had a large cooperation let’s call it, and when Ms. Keesmaat talks about how the STC now needs a street grid to urbanize it too, along with the SSE, I gotta worry about who is paying for this street grid, or who might be asked to pay for it, and shouldn’t it entirely be Oxford (and any other owners) vs. the public? Unless we get an in-kind donation of enough land for a bus garage, as I’m sad about good farmland being paved over for that bus garage, but there’s soo much momentum in the McNicholl garage, though maybe not the millions.

    We do need to worry about how much ‘help’ is given as we’re seeing a LOT of budget squeeze looming this year, and will we see under-performing subway routes on the block? Or a Vehicle Registration Tax of $100?


  10. I’m surprised the East Bayfront developers are not taking a more aggressive stance as the longer there is no plan for East Bayfront the more obvious it becomes to potential owners that the line may never be built (which will impact sale as well as resale value) as well as their plans with regards to space spent on parking.

    While it’s likely impossible for them to do something truly aggressive like slow or stop development it may be possible for them to do the following:

    – media campaign against the mayor
    – work to rule/increase costs to the city for meetings and planning (including burying the city in paper work, submitting stuff at the last minute, schedule changes etc)
    – legal challenges
    – increase OMB challenges
    – working with partners/unions on other ways to make the city look like it’s not being faithful to the plan

    Liked by 1 person

  11. John Tory’s SmartTrack financing fantasy is a real mess and he has gotten himself in it deep. Now if he renounces his fantasy after two years of crying TIF, TIF, TIF; then Ford will pounce on it in the next election.

    Steve: But Ford will claim that “the private sector” will give us anything for free.


  12. The SmartTrack service into Markham plan should be restored because Unionville GO is a busy hub and the Markham’s population is about to breach 350,000 people.

    Steve: The Unionville SmartTrack service remains in the plan, but the service level (as with all of ST) will not be at “subway” frequency as claimed in Tory’s campaign. Also, it will not be at TTC fares outside of the 416.


  13. Steve:

    The Unionville SmartTrack service remains in the plan, but the service level (as with all of ST) will not be at “subway” frequency as claimed in Tory’s campaign. Also, it will not be at TTC fares outside of the 416.

    But, will it be TTC fares inside the 416 and if it is will it be a TTC fare system that we want?

    Steve: That we do not know.


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