Pricing mechanisms

Pricing plays a significant role both in influencing travel demand and in helping shape urban development. Among the many possible pricing mechanisms available to governments, some of the more important current or potential instruments include the following.27

  • Fuel taxes. The provincial and federal governments already tax Ontario fuel sales at moderately high rates (at least by North American standards). Fuel taxes tend to be a very blunt policy instrument for influencing travel demand, and, in particular, tend not to have much short-run effect on modal choice (Soberman and Miller, 1997, 1999). In the long run, higher fuel prices should encourage consumers to purchase more fuel-efficient vehicles and/or reduce auto travel in favour of less expensive modes of travel. For many trips, however, the out-of-pocket cost of auto travel is still very low relative to transit, and so fuel costs would probably have to rise considerably before appreciable changes in travel behaviour would occur, especially in the absence of significant improvements in transit service levels and significant changes in land use patterns.
  • Road/congestion pricing. Road pricing involves charging tolls for the use of a given roadway. Tolls can be charged simply as a means of generating revenue from the facility (as in the case of Highway 407) or as a means of regulating travel behaviour. In particular, it is feasible to adjust the toll charged as a function of the time of day and/or the level of current congestion on the road to influence trip-makers choice of route, mode and/or trip start time. Road pricing is generally preferable to fuel taxes as a policy instrument, since it can be focused on specific trips, roads, or times of day. The sensitivity of Ontario drivers to road pricing is not completely clear, although anecdotal evidence from the 407 experience implies that the price elasticity of many drivers is very low.

Road pricing is most likely to be effective when viable travel alternatives (for example, high-quality transit services) are available for the trip-makers who are "tolled off" the roadway to use. This may be why road pricing is often associated with travel to and from central cities. In the Central Ontario Zone, however, some of the most severe congestion is not necessarily associated with central city-oriented travel (which already captures a high transit modal share), but rather with cross-town or interregional travel that may be difficult to influence through road pricing unless a comprehensive tolling system (that is, one involving nearly all roads) is implemented. Further, if a centrally oriented pricing scheme were to be implemented while suburban activity centres were not tolled, this could have detrimental impacts on central area employment, and, hence, undesirable long-run impacts on urban form.

  • Parking charges. Parking charges can have a significant impact on travel mode choices, particularly when long-term parking is required, such as for the journey to work. Indeed, one of the important factors influencing the high Toronto central area transit mode shares is the relatively high cost of parking in the central area (Miller, 1993). In most locations in the Central Ontario Zone, parking is either free or at a nominal charge. Parking lots and garages represent a significant land use in their own right. "Free" parking obviously comes at some cost to someone, since provision of this parking involves both capital and operating costs, as well as an opportunity cost associated with the land uses that have been forgone in favour of the parking facility. Elimination of free parking in office parks and other suburban land uses could potentially have a significant impact on travel mode choice, with the usual caveat that viable travel alternatives need to exist.
  • Vehicle Purchase/Licensing Taxes. It has been observed that cars tend to be relatively cheap to operate, at least in terms of the short-run perceived cost of an individual trip. Cars are, however, relatively expensive to purchase, representing for most households the second biggest investment (with housing being the first) that they are likely to make. One option for controlling the size and fuel efficiency of automobiles would be to impose a significant tax on new and used vehicle purchases that is graduated to reflect the environmental footprint of the given vehicle.
  • Development charges. It is clear that current development charges in many municipalities play a major role in influencing the type of development that occurs. In particular, it is generally maintained that these charges, as currently structured, actively encourage low-density, single-family housing, even in situations in which developers believe a market exits for higher-density designs. It is also often argued that the income generated by development charges is a major stimulus for municipalities to encourage growth, at times without due regard for its long-term implications. Any smart growth strategy will require a detailed assessment of the past and current roles that development charges have played, as well as clear and careful decisions about how such charges should be levied in the future so that they can represent a positive force for smart, sustainable growth.
  • Property taxes. Similarly, property taxes play a role in land development and, more directly in the location choices of firms and households. The importance of property taxes in firm location choice varies with firm type, but certainly, all else being equal, any firm presumably would prefer to pay lower property taxes.28 Thus, to the extent that a level playing field does not exist across Central Ontario Zone municipalities, this may introduce distortions into the evolution of urban form.
27. We have made no attempt to discuss the political feasibility of any of these pricing schemes, most of which are, in fact, quite contentious.
28. In location choice, all things are rarely equal, since, in principle every location is unique in its advantages and disadvantages. Thus, for example, major employment centres such as the Toronto Central Business District can, up to a point, have higher tax rates (as well as, of course, higher land rents) since firms are willing to pay (again, up to a point) for the location advantages they offer.