Thank you very much for inviting me to speak.
I'm going to speak about the public transit tax credit. In the past couple of years, I've conducted research to try to understand the effectiveness of the public transit tax credit. Based on this research, as well as research conducted by others, I'd like to make three points.
The first point is that the public transit tax credit has failed to achieve its goals of substantially increasing public transit usage, reducing congestion, or reducing air pollution and greenhouse gas emissions from transport. This conclusion is based on statistical evaluation of the policy that I've conducted with one of my students. The study used data from the 2006 census and the 2011 national household survey and focused on responses to questions asking individuals how they travel to and from work. We established the effectiveness of the policy by comparing travel patterns of individuals who were and who were not eligible for the tax credit. Because the tax credit is non-refundable, only individuals that pay income tax are eligible to receive the tax credit. Individuals who don't pay income tax can therefore serve as a control group, while individuals who did pay income tax and are therefore eligible for the tax are the treatment group. Our study compared changes in public transit usage in the treatment and control groups from before and after the tax credit became available. We statistically controlled for a large number of other factors that could impact transit ridership in order to isolate the effect of the tax credit.
The results of the study suggested the tax credit had only a very small effect on public transit ridership, raising the proportion of individuals regularly using public transit by about 0.25 to 1 percentage point in comparison to a baseline transit ridership of about 12%. While this increase in transit ridership is desirable, it is not a substantial change from the status quo. Importantly, our study finds that the great majority of individuals who claimed the public transit tax credit, between 92% and 98% of all claimants, made no changes to their behaviour. They would have used public transit regardless of whether or not the tax credit was available.
This brings me to my second point, which is that, despite not achieving its goals, the public transit tax credit is expensive. The Canada Revenue Agency reports that in 2011 the tax credit cost about $170 million in foregone revenue. Based on the findings in my study, this suggests that between $1,200 and $4,800 is required to induce one additional person to take public transit. It is also possible to calculate the cost of reducing carbon dioxide emissions using the public transit tax credit. My study suggests that reducing one tonne of carbon dioxide emissions using the tax credit costs between $1,000 and $22,000 in foregone government revenue. This is much higher than the cost of other carbon mitigation opportunities. It leads me to conclude that the tax credit is not cost effective.
The final point I'd like to make is that the public transit tax credit is regressive. Because it is a non-refundable tax credit, many low-income individuals are excluded from the tax credit by design. Further, higher-income households likely have more access to tax planning advice than lower-income households and are more likely to receive the tax credit if eligible. Studies by the Department of Finance as well as studies by academics published in the journals Canadian Public Policy and the Canadian Tax Journal, show that the public transit tax credit is disproportionately claimed by middle or high-income households to the exclusion of low-income households. Overall, the tax credit likely had a small regressive effect on the distribution of income.
For the three reasons I have described, I support the elimination of the public transit tax credit. In doing so, I'd like to make two additional points. First, while I have studied the public transit tax credit and have concluded that it is expensive and ineffective, I have no reason to believe it is uniquely so compared with other tax credits. There exists research that suggests that several other tax credits in the federal system are expensive, ineffective, and regressive. I support the continued examination of tax credits in the federal tax system undertaken by the federal government with a view to improving the transparency and efficiency of the tax system.
Second, while I don't think that the public transit tax credit is a well-functioning policy, I do strongly support the objectives under which it was developed, including reducing congestion and reducing transport sector emissions. Research suggests that the best way to achieve these objectives involves imposing distance-based fees on road users or emissions-based fees on emitters, such as road pricing, congestion pricing, or greenhouse gas pricing. I strongly encourage the further implementation and study of these options by governments in Canada.
Thanks very much for the chance to address the committee.