Economic vitality is the foundation for everything in our city. How to achieve that is less clear. Successive city councils have pursued economic development through different iterations. Each version reveals different, necessary aspects of economic development underscoring the complexity of the issue.
The previously city-funded, not-for-profit, Economic Development Alliance of Southeast Alberta, aimed to accomplish economic development through regional cooperation. Regional partnerships are needed because other regions (like Alberta’s Heartland Region) have had success attracting investment when cities and counties work together. But city council was challenged to find suitable performance measures for the EDA (now Verge Economic Development). It seemed that the EDA got paid regardless of performance.
The previous city council replaced the EDA with Invest Medicine Hat 1.0. It was hoped a for-profit company would have the natural incentive of private enterprise to demonstrate success. Unlike the EDA, Invest 1.0 was given clear, specific instructions—seek out new, large industrial investment. On this measure the small team of Ryan Jackson, Jon Sookocheff, Amanda Symynuk and Quentin Randall were hugely successful. From a yearly budget under $400,000 Invest Medicine Hat 1.0 returned an investment of $150 million by attracting the Aurora Sun cannabis greenhouse. While the short term hasn’t worked out as hoped as far as jobs, the longer term outlook is good—someone will eventually use this state-of-the-art facility. In the meantime Aurora Sun pays significant property taxes. The previous city council deserves credit for this approach in so far that it yielded the desired results. Whether you agree with this plan or not, this is the outcome that city council planned for and executed.
The current city council brought Invest Medicine Hat back in house and consolidated economic development with the land department (another department that is a lighting rod for controversy). These two functions are a complimentary fit. It has been invaluable to have the outside perspective that Invest Medicine Hat brings to streamline internal city processes. But the entrepreneurial spirit that made Invest Medicine Hat 1.0 a success is generally contrary to the bureaucratic way that governments must operate. So in an attempt to recapture the benefits of a more nimble economic development structure we looked to privatize Invest Medicine Hat again. Obviously, that didn’t go according to plan.
The recent controversy about contracting out Invest Medicine Hat again is understandable. I can see how it looks to the public. It also follows a long line of other controversies that dogs economic development decisions. The pattern relates to the underlying philosophy that Medicine Hat and all other cities follow.
Closing the deal
Much of the controversy that springs up around economic development decision isn’t about the process of attracting new investment into our city. In the case of Aurora Sun, this investment attraction was efficiently and strategically done. The controversy was due to what it took to close the Aurora Sun deal and other deals. In order to close Aurora Sun this city council forgave $6 million in development fees. That is what many residents object to. Why give one company subsidies, but not everyone else?
The rationale is that by subsidizing new development economic growth will catch fire in the rest of the city. This is how economic development is usually done nowadays. The brutal reality is that new companies are mobile. They could just as easily set up in Lethbridge, Red Deer or Calgary as Medicine Hat. Companies use this leverage to negotiate all sorts of sweeteners, after all these ventures are mutually beneficial to the company and the city.
Coupled with the intense pressure on politicians to demonstrate economic development and you get an incredibly competitive environment to land new companies. Healthy competition in a free market gives rise to creative new approaches and innovation.
However this type of competition is different. Competition between cities for new investment fuels a race to the bottom. The only innovation this type of competition spurs is creative ways to subsidize development while remaining within legal bounds. This dynamic plays out between countries as well. President Biden recently proposed a global floor for corporate taxes of 15% to avoid a similar race to the bottom.
Council’s recent investment policy formalized a subsidy framework around this principle. You bring a certain amount of jobs or investment and there will be incentives to match. This isn’t right or wrong, but this investment policy concedes this is the reality of economic development. I voted for the Aurora Sun deal and our current investment policy. I recognized the dangers of this type of economic development, but I wasn’t yet ready to articulate an alternative vision of economic development. It’s easy to criticize decisions that haven’t worked out as planned. But most people only disagree with whom to subsidize, not whether city council should subsidize at all. What are the alternatives options to this type of economic development?
I don’t like voting no without offering an alternative plan. I have one now.
Economic development by carpentry vs. gardening
Groups like the EDA and Invest Medicine Hat provide an important bridge between private enterprise and government. They help government understand deficiencies in service and regulation. They help coordinate joint investment attraction. They provide helpful system navigation for investors. These types of economic development specialists will always have a role whether structured as a not-for-profit, internal department or private for-profit contracted company.
City council must also ensure that a variety of commercial and industrial serviced land is ready and available. Brownfield incentives are also necessary because infill development is more complex than greenfield builds. Economic development groups provide useful advice in these areas. There are many ways to support new investment short of offering resources not available to all.
It is the use of subsidies in particular comes with downsides.
First off—it’s risky. We’re using taxpayer money to make a bet. Even educated bets don’t always work out.
Second—on paper these incentives are available to all. Indeed most businesses that avail themselves of City of Medicine Hat incentives are small and medium enterprises. However, accessing these incentives requires navigation of complex bureaucratic systems. That is a skill not every business possesses, creating an uneven playing field. Larger investors also receive higher levels of customer service in navigating City Hall’s bureaucracy. City Hall even has a name for it—concierge service. If you’re a small business or investor, this is a courtesy not all are afforded. These are both forms of privilege. In reality the distribution of incentives is rarely equal. City council, both intentionally and unintentionally, picks winners and losers.
Finally, the amount of subsidies available is limited. So not everyone can get it.
Targeting specific sectors for attraction or tailoring incentives in exchange for development is akin to carpentry. We are intentionally building our community after specific types of development. We are molding and controlling a community.
But what if economic development is more like gardening than carpentry. I borrowed this analogy from a popular parenting book. It’s interesting to conceptualize our economy in organic terms. What if we instead focused on "creating a rich, nurturant but also variable, diverse, dynamic ecosystem."
Instead of trying to control the economy, what if we focused on ensuring that local economic markets are working more smoothly and free of distortion.
On this front we have work to do. I believe that two key parts of our local government regulation distort our local economic market. Reforming our system of commercial property assessment and our municipal tax policy would spur economic growth in a widespread, healthier way that doesn’t depend on only helping council’s favourites.
Economic development through tax reform
Municipal taxation operates in a different way than provincial and federal governments. Your elected representatives on city council agree on an overall budget for city services, then we recover exactly this amount through property taxes. No more, no less. Municipal taxes are based on the principle of neutral cost recovery.
The increase or decrease to the overall budget gets the public’s attention, but the overall budget has no bearing on what your individual tax bill is. The next step is distributing the tax burden between different types of properties in Medicine Hat.
City council can create any number of property categories to better target tax rates, but we’ve chosen three broad categories instead:
Single family residential: single detached residential, individually owned condos
Multi-family residential: rented apartment suites
Non-residential: commercial and industrial properties
Though the principle of neutral cost recovery is at the heart of municipal tax philosophy most cities make no effort to ground property type tax rates with any rationale or connection to servicing costs. It is my belief that to be consistent with this principle tax rates should match (as is reasonably close as possible) our servicing costs. Matching tax rates to servicing costs creates the basis for a free market—where costs are properly accounted for. Only then can residents make rational decisions about development.
To my knowledge city council has never educated the public on this vital decision. These questions seem obvious, but city council never asks them:
What are fair tax rates for each property type?
Is there any information to help us decide?
Should commercial properties pay more in taxes than residential properties?
Should all types of residential properties pay the same in taxes?
Should city council create further, more specific property categories to better match tax rates with servicing costs?
What information do we have regarding servicing costs?
Over the past twenty years there has been a consistent bias towards single family detached housing at the expense of commercial and higher density development. This has skewed residential development in unsustainable ways and placed an unnecessary drag on business (and small business in particular) for decades. The negative cumulative impact can hardly be overstated.
I believe we need to:
Continue to close the gap between residential and commercial taxes towards parity. Currently, businesses pay more than double (2.25x) the taxes that residential properties do. I believe I can show that there is no basis for this tax rate.
Create more specific types of residential property classes. Higher density housing is cheaper for the city to service, yet low density housing pays the least in taxes. Our tax rates subsidize the most resource intensive type of housing, while making cheaper forms of housing artificially more expensive. By creating more categories for housing we can more closely match taxes with servicing costs. There is nothing inherently unsustainable about low density housing. It only becomes unsustainable when its costs are not properly accounted for. People should be free to live in any type of housing they want. But that lifestyle choice comes with costs. I don’t see why anyone else should carry the burden of your choice.
Business taxes should decrease significantly, single family detached housing taxes should increase signifcantly, but all other forms of housing taxes (condos, medium density) will get cheaper.
Conservatives should love this plan because it creates the basis for fair, sustainable tax rates (at significantly lower rates) that benefit all businesses, not just council’s favorites. Liberals should love this plan because it aims to properly account for the true costs of low density residential development. One of the main drivers of climate change is resource consumption and single family detached residential development uses the most land, materials, transportation, and ongoing municipal servicing costs. Everyone should like this because it establishes the framework for sustainable development. When each type of development carries its own weight the long term sustainability of Medicine Hat is strengthened.
We have a residential/commercial tax burden imbalance. We have a low density/higher density tax burden imbalance. Assuming a majority of Medicine Hat agrees, this rebalancing will take at least a decade to accomplish. The benefits are well worth it.
Click here for the in-depth column on tax reform.
Economic development through assessment reform
Every spring city council hears from commercial business owners with consistent complaints about their fluctuations in assessed value. The assessment department follows provincially set guidelines for assessing commercial properties. It is my belief that city assessors are following provincial guidelines correctly. Even so each year the assessment system does produce large fluctuations for commercial properties. Whether these fluctuations are justified is a matter of dispute among city council.
This chart from the Assessment Department illustrates the level of assessment value fluctuation. The tail ends of high increases gets the most media attention, but as you can see a large number of businesses see their assessment significantly fluctuate up and down.
Justified or not, the fluctuations are unpredictable. We know that business confidence depends on long term planning and predictability. On this criteria our present system of assessment fails because these fluctuations are a difficult factor to account for. Utilities and property taxes are the unavoidable overhead for any business. A property tax bill that varies widely is challenging for a business to deal with.
There may be options to reduce these fluctuations and unpredictability. City council can direct staff to study the issue and return with options. However, this requires five council votes and at this point, a majority of council does not currently agree with this view.
Separating land value from improvement value
We can tweak the assessment system to minimize fluctuations. We can also undertake a deeper reform to correct a misalignment of assessment philosophy.
Even Blondie understands the conceptual problem behind our assessment tax policy.
Municipal taxes operate on a progressive scale. Two houses sitting next to each other on the same sized lot costs the city the same amount to service. But a million dollar home will be taxed more than a $100,000 home. I don’t have a problem with this. We can understand this difference in taxation as a principle of fairness. People in more expensive houses pay more taxes.
But you can see how it creates a disincentive for development. Go ahead and build a big house, but your ongoing costs (ie taxes) are going up too. For residential development I think this type of progressive taxation system is appropriate. For commercial development this system has serious problems.
Separating land value from improvement value (the building) levels the playing field between owners who invest in their properties and those who don’t. We can choose to not tax commercial improvements. For example, the owners of the Beveridge building downtown Medicine Hat undertook an extensive renovation that saved this historic building. Exactly the type of development that our community wants to see. Their reward is substantially higher taxes when their renovated building is reassessed. That increased overhead ironically makes it more likely that this business might fail.
Contrast the Beveridge owners to the owners of the Assiniboia Inn, the Town Theatre, and the Tramps building who have done little to no improvements to their buildings. They can sit on crumbling buildings for years—paying little in tax because of the poor condition of their buildings. In many ways this is a rational decision because of our current tax incentive structure.
Under this suggested policy change City Hall would collect the same amount of taxes for commercial properties overall, but the tax load is redistributed within this sector. This policy change would incentivize investment in commercial properties by removing the disincentive of progressive taxation. It solves the problem of derelict buildings that plague every downtown.
Click here for the in-depth column on commercial assessment reform.
Two systemic reforms
Both of these suggested reforms would take many years to implement. It will take successive city councils. That means that these ideas require widespread agreement in our community. That’s going to take time, but the rewards are huge. Tax reform would alleviate the tax burden for small businesses. It would more accurately capture the costs for the more resource intensive housing, while making other forms of housing cheaper. Assessment reform would incentivize development instead of penalizing it. We want people to make money. If commercial investment doesn’t increase the city’s servicing costs why penalize it?
Ensuring a fair framework for competition would unlock development in more interesting, healthier and sustainable ways than forcing economic growth through artificial subsidies. Subsidizing some in the hopes that economic benefits will trickle down to everyone else has not created the widespread economic impact we want. Let’s try something new.